U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003.
Commission file number: 0-22208
QCR HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 42-1397595
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(State of incorporation) (I.R.S. Employer Identification No.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Preferred Securities of QCR Holdings Capital Trust I
Securities registered pursuant to Section 12(g) of the
Exchange Act:
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Common stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ x ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on The
Nasdaq SmallCap Market on June 30, 2003, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$51,600,000.
Documents incorporated by reference:
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Part III of Form 10-K - Proxy statement for annual meeting of
stockholders to be held in May 2004.
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. Until September 24, 2003, Bancard
continued to process transactions for iPayment, Inc., and approximately 32,500
merchants. Since iPayment, Inc. discontinued processing with Bancard, processing
volumes decreased significantly. Bancard does, however, continue to provide
credit card processing for its local merchants and agent banks and for
cardholders of the Company's subsidiary banks.
On March 29, 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), to generate merchant
credit card processing business. Bancard owned 100% of Allied. 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. Allied was liquidated on December 31, 2003.
QCR Holdings Capital Trust I ("Trust I") was formed in April 1999 and
capitalized in June 1999 in connection with the public offering of $12 million
of 9.2% trust preferred capital securities due June 30, 2029, which are callable
on June 30, 2004. As a wholly owned subsidiary of the Company, Trust I's assets
had previously been included in the Company's balance sheet consolidation. A
U.S. Securities and Exchange Commission (SEC) ruling, made on December 19, 2003
based on the Financial Accounting Standards Board Interpretation (FIN) No. 46,
required bank holding companies to deconsolidate trust preferred securities from
the balance sheet as of December 31, 2003 for calendar year end companies.
Therefore, the Company's equity investment in Trust I at December 31, 2003, of
$390 thousand, was included in other assets on the fiscal 2003 year-end balance
sheet. A detailed explanation of FIN No. 46 and its impact on the Company is
presented in the "Impact of New Accounting Standards" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Additional information related to the Company's adoption of FIN No. 46 is
included in Note 1 to the consolidated financial statements.
In February 2004, the Company issued $8.0 million of floating rate capital
securities and $12.0 million of fixed rate capital securities (together, the
"Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II")
and QCR Holdings Statutory Trust III ("Trust III"). The securities represent
undivided beneficial interests in Trust II and Trust III, which were established
by the Company for the purpose of issuing the Trust Preferred Securities. The
Trust Preferred Securities were sold in a private transaction exempt from
registration under the Securities Act of 1933, as amended (the "Act") and have
not been registered under the Act.
2
The securities issued by Trust II and Trust III mature in 30 years. The floating
rate capital securities are callable at par after five years and the fixed rate
capital securities are callable at par after seven years. The floating rate
capital securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the initial rate set at 3.97%, and the fixed rate capital
securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly. Both Trust II and Trust III used the proceeds from the sale of the
Trust Preferred Securities to purchase junior subordinated debentures of QCR
Holdings, Inc. The Company incurred issuance costs of $410 thousand, which will
be amortized over the lives of the securities.
The Company intends to use its net proceeds for general corporate purposes,
including the possible redemption in June 2004 of the $12.0 million of 9.2%
cumulative trust preferred securities issued by Trust I in 1999. If redeemed,
the trust preferred securities issued in 1999 carry approximately $750 thousand
of unamortized issuance costs, which will be expensed as of 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 Trust I. In addition to such
ownership, the Company invests its capital in stocks of financial institutions
and mutual funds, as well as participates in loans with the subsidiary banks. In
addition, to its wholly -owned subsidiaries, the Company has an aggregate
investment of $307 thousand in three associated companies, Nobel Electronic
Transfer, LLC, Nobel Real Estate Investors, LLC, and Velie Plantation Holding
Company, LLC. The Company had previously held an investment in Clarity Merchant
Services Inc., which was liquidated on December 31, 2003.
The Company and its subsidiaries collectively employed 233 individuals at
December 31, 2003. No one customer accounts for more than 10% of revenues, loans
or deposits. In August 2002, the Company's board of directors elected to change
the Company's fiscal year end from June 30 to December 31. Due to this change,
the Company filed a Form 10-K for the transition period from July 1, 2002 to
December 31, 2002 and now holds its annual meetings in May of each year instead
of October. The 2003 annual meeting will be held on May 5, 2004. The Company's
subsidiaries have also changed their fiscal years aligning their financial
reporting with that of the Company. Throughout this document references to
fiscal 2003 are for the year ended December 31, 2003. References to the
transition period are for the six months ended December 31, 2002. References to
fiscal 2002 and fiscal 2001 are for the years ended June 30, 2002 and 2001,
respectively. In most instances, results are shown for the fiscal year ended
December 31, 2003 along with the six-month transition period and the two
previous fiscal years ended June 30.
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").
3
Business. The Company's principal business consists of attracting deposits from
the public and investing those deposits in loans and securities. The deposits of
Quad City Bank & Trust and Cedar Rapids Bank & Trust are insured to the maximum
amount allowable by the FDIC. The Company's results of operations are dependent
primarily on net interest income, which is the difference between the interest
earned on its loans and securities and the interest paid on deposits and
borrowings. Its operating results are affected by merchant credit card fees,
trust fees, deposit service charge fees, fees from the sale of residential real
estate loans and other income. Operating expenses include employee compensation
and benefits, occupancy and equipment expense, professional and data processing
fees, advertising and marketing expenses, bank service charges, insurance, and
other administrative expenses. The Company's operating results are also affected
by economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
Lending. The Company and its subsidiaries provide a broad range of commercial
and retail lending and investment services to corporations, partnerships,
individuals and government agencies. Quad City Bank & Trust and Cedar Rapids
Bank & Trust actively market their services to qualified lending customers.
Lending officers actively solicit the business of new borrowers entering their
market areas as well as long-standing members of the local business community.
The subsidiary banks have established lending policies which include a number of
underwriting factors to be considered in making a loan, including location,
loan-to-value ratio, cash flow, interest rate and the credit history of the
borrower.
Quad City Bank & Trust's current legal lending limit is approximately $7.2
million. Its loan portfolio is comprised primarily of commercial, residential
real estate and consumer loans. As of December 31, 2003, commercial loans made
up approximately 81% of the loan portfolio, while residential mortgages
comprised approximately 8% and consumer loans comprised approximately 11%.
Cedar Rapids Bank & Trust's current corporate lending limit is approximately
$2.5 million. Its loan portfolio is comprised primarily of commercial,
residential real estate and consumer loans. As of December 31, 2003, commercial
loans made up approximately 92% of the loan portfolio, while residential
mortgages comprised approximately 3% and consumer loans comprised approximately
5%.
As part of the loan monitoring activity at both subsidiary banks, credit
administration personnel interact with senior bank management weekly. The
Company has also instituted a separate loan review function to analyze credits
of Quad City Bank & Trust and Cedar Rapids Bank & Trust. Management has
attempted to identify problem loans at an early stage and to aggressively seek a
resolution of these situations.
As noted above, both subsidiary banks are active commercial lenders. The areas
of emphasis include loans to wholesalers, manufacturers, building contractors,
developers, business services companies and retailers. Quad City Bank & Trust
and Cedar Rapids Bank & Trust provide a wide range of business loans, including
lines of credit for working capital and operational purposes and term loans for
the acquisition of facilities, equipment and other purposes. Collateral for
these loans generally includes accounts receivable, inventory, equipment and
real estate. In addition, the subsidiary banks often take personal guarantees to
help assure repayment. Loans may be made on an unsecured basis if warranted by
the overall financial condition of the borrower. Terms of commercial business
loans generally range from one to five years. A significant portion of the
subsidiary banks' commercial business loans has floating interest rates or
reprice within one year. Commercial real estate loans are also made. Collateral
for these loans generally includes the underlying real estate and improvements,
and may include additional assets of the borrower.
Residential mortgage lending has been a focal point of Quad City Bank & Trust
and Cedar Rapids Bank & Trust as they continue to build their real estate
lending business. The subsidiary banks' real estate loan portfolios were
approximately $35.6 million at December 31, 2003. The subsidiary banks currently
have eight mortgage originators.
The subsidiary banks sell the majority of their real estate loans in the
secondary market. They typically sell the majority of the fixed rate loans that
they originate. During the year ended December 31, 2003, the subsidiary banks
originated $268.8 million of real estate loans and sold $241.6 million, or90%,
of these loans. During the six months ended December 31, 2002, the subsidiary
banks originated $145.1 million of real estate loans and sold $121.5 million, or
84%, of these loans. During fiscal 2002, the subsidiary banks originated $175.5
million of real estate loans and sold $144.3 million, or 82%, of these loans.
Generally, the subsidiary banks' residential mortgage loans conform to the
underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary
banks to resell loans in the secondary market. The subsidiary banks structure
most loans that will not conform to those underwriting requirements as
adjustable rate mortgages that mature in one to five years. The subsidiary banks
generally retain these loans in their portfolios. Servicing rights are not
presently retained on the loans sold in the secondary market.
4
The consumer lending departments of each bank provide all types of consumer
loans including motor vehicle, home improvement, home equity, signature loans
and small personal credit lines.
Appendices. The commercial banking business is a highly regulated business. See
Appendix A for a brief summary of the federal and state statutes and
regulations, which are applicable to the Company and its subsidiaries.
Supervision, regulation and examination of banks and bank holding companies by
bank regulatory agencies are intended primarily for the protection of depositors
rather than stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative
statistical information required pursuant to the industry guides promulgated
under the Securities Act of 1933 and 1934, relating to the business of the
Company. Consistent with the information presented in Form 10-K, results are
presented for the fiscal year ended December 31, 2003, along with the six-month
transition period ended December 31, 2002, and the two previous fiscal years
ended June 30. A second presentation shows comparative financial information
restated in calendar year periods for 1999, 2000, 2001 and 2002 consistent with
the Company's current fiscal year.
The Company maintains Internet sites for 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 www.qcbt.com 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 that facility which is located at
4500 Brady Street in Davenport, Iowa. The two-story building is in two segments
that are separated by an atrium. Originally, Quad City Bank & Trust owned the
south half of the building, while the north half was owned by the developer.
Quad City Bank & Trust acquired the northern segment of this facility in August
2003. Each segment has two floors that are 6,000 square feet. In addition, the
southern segment has a 6,000 square foot basement level. In the southern
segment, Quad City Bank & Trust occupies the first floor and utilizes the
basement for operational functions, item processing and storage. At December 31,
2003, approximately 1,500 square feet on the second floor of the southern
segment were leased to a professional services firm, and approximately 4,500
square feet were occupied by various operational and administrative functions,
which prior to January 2003 had been located in an adjacent office building.
Renovations are nearly complete on both floors of the northern segment of the
building, which will be utilized by additional operational and administrative
functions of Quad City Bank & Trust and the Company.
Renovation of a third full service banking facility was completed in February
1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near
the intersection of 7th Street and John Deere Road in Moline, Illinois near the
Rock Island/Moline border. The building is owned by a third party limited
liability company, in which the Company has a 20% interest. Quad City Bank &
Trust and Bancard are the building's major tenants. Quad City Bank & Trust
occupies the main floor of the structure. 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.
Plans were announced in October 2003 for Quad City Bank & Trust to add a fifth
full service banking facility. The facility is to be located in the Five Points
area of west Davenport, Iowa. Demolition of existing structures on the site has
been completed, and construction of the new facility is scheduled for completion
in late 2004 or early 2005.
5
The Company announced plans, in April 2001, to expand its banking operations to
the Cedar Rapids, Iowa market. Initially, from June until mid-September 2001,
the Cedar Rapids operation functioned as a branch of Quad City Bank & Trust
while waiting for regulatory approvals for a new state bank charter. On
September 14, 2001, the Cedar Rapids branch operation was converted into the new
charter and began operations as Cedar Rapids Bank & Trust Company. Cedar Rapids
Bank & Trust leases approximately 8,200 square feet in the GreatAmerica
Building, 625 First Street, S.E. in Cedar Rapids, which currently serves as its
only office.
In February 2004, Cedar Rapids Bank & Trust announced plans to build a four
floor building in downtown Cedar Rapids. The bank's main office will be
relocated to this site when construction is completed, which is anticipated to
be early in 2005. Cedar Rapids Bank & Trust will own the lower three floors of
the facility, and an unrelated third party will own the fourth floor in a
condominium arrangement with the bank. The bank is also considering the
construction of a branch office in Cedar Rapids during 2004.
Management believes that the facilities are of sound construction, in good
operating condition, are appropriately insured and are adequately equipped for
carrying on the business of the Company.
Quad City Bank & Trust and Cedar Rapids Bank & Trust intend to limit their
investment in premises to no more than 50% of their capital. The subsidiary
banks frequently invest in commercial real estate mortgages and also invest in
residential mortgages. Quad City Bank & Trust and Cedar Rapids Bank & Trust have
established lending policies which include a number of underwriting factors to
be considered in making a loan including, location, loan-to-value ratio, cash
flow, interest rate and credit worthiness of the borrower.
No individual real estate property or mortgage amounts to 10% or more of
consolidated assets.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of the Company for a vote
during the fourth quarter of the fiscal year ended December 31, 2003.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities 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, 2003,
there were 2,803,844 shares of common stock outstanding held by approximately
2,400 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
Fiscal 2003 December 31, 2002 Fiscal 2002
Sales Price Sales Price Sales Price
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High Low High Low High Low
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First quarter ............... $18.150 $16.830 $15.500 $13.620 $12.500 $10.100
Second quarter .............. 20.000 17.450 17.000 14.560 10.800 10.800
Third quarter ............... 25.000 19.810 NA N/A 13.450 11.180
Fourth quarter .............. 29.080 22.500 NA N/A 15.150 13.000
On May 8, 2003, the board of directors declared a cash dividend of $0.05 payable
on July 3, 2003, to stockholders of record on June 16, 2003. On October 23,
2003, the board of directors declared a cash dividend of $0.06 per share payable
on January 5, 2004, to stockholders of record on December 15, 2003. In the
future, it is the Company's intention to continue to consider the payment of
dividends on a semi-annual basis. The Company anticipates an ongoing need to
retain much of its operating income to help provide the capital for continued
growth, but believes that operating results have reached a level that can
sustain dividends to stockholders as well. The Company has issued junior
subordinated debentures in two private placements and one public offering. Under
the terms of the debentures, the Company may be prohibited, under certain
circumstances, from paying dividends on shares of its common stock. None of
these circumstances currently exist.
6
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.
There were no repurchases of the Company's own stock during the fourth quarter
of 2003.
7
Item 6. Selected Financial Data
The following "Selected Consolidated Financial Data" of the Company is derived
in part from, and should be read in conjunction with, our consolidated financial
statements and the accompanying notes thereto. See Item 8 "Financial Statements
and Supplementary Data." Results for past periods are not necessarily indicative
of results to be expected for any future period.
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
Years Ended June 30,
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Year Six Months
Ended Ended
December December
31, 2003 31, 2002 2002 2001 2000 1999
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Statement of Income Data
Interest income ........... $33,378 $16,120 $28,520 $28,544 $24,079 $20,116
Interest expense .......... 11,950 6,484 12,870 16,612 13,289 11,027
Net interest income ....... 21,428 9,636 15,650 11,932 10,790 9,089
Provision for loan losses . 3,405 2,184 2,265 889 1,052 892
Noninterest income (1) .... 11,168 8,840 7,915 6,313 6,154 5,561
Noninterest expenses ...... 21,035 11,413 17,023 13,800 11,467 9,679
Pre-tax net income......... 8,156 4,879 4,277 3,556 4,425 4,079
Income tax expense ........ 2,695 1,683 1,315 1,160 1,680 1,614
Net income ................ 5,461 3,196 2,962 2,396 2,745 2,465
Per Common Share Data:
Net income-basic .......... $1.96 $1.16 $1.10 $1.06 $1.19 $0.98
Net income-diluted ........ 1.91 1.13 1.08 1.04 1.15 0.93
Cash dividends declared ... 0.11 0.05 - - - -
Dividend payout ratio ..... 5.61% 4.31% -% -% -% - %
Balance Sheet
Total assets .............. $710,040 $604,600 $518,828 $400,948 $367,622 $321,346
Securities ................ 128,843 81,654 76,231 56,710 56,129 50,258
Loans ..................... 522,471 449,736 390,594 287,865 241,853 197,977
Allowance for estimated
losses on loans ........... 8,643 6,879 6,111 4,248 3,617 2,895
Deposits .................. 511,652 434,748 376,317 302,155 288,067 247,966
Stockholders' equity:
Common .................. 41,823 36,587 32,578 23,817 20,071 18,473
Preferred ............... - - - - - -
Key Ratios:
Return on average assets .. 0.83% 1.13% 0.64% 0.62% 0.82% 0.86%
Return on average
common equity ............ 13.93 18.41 10.07 10.95 14.17 13.69
Net interest margin (TEY). 3.55 3.68 3.74 3.38 3.56 3.42
Efficiency ratio (2) ..... 64.53 61.71 72.20 75.64 67.68 66.07
Nonperforming assets to
total assets ............. 0.70 0.83 0.44 0.44 0.20 0.51
Allowance for estimated
losses on loan to total 1.50
loans .................... 1.65 1.53 1.56 1.48 1.46
Net charge-offs to
average loans ............ 0.34 0.34 0.12 0.10 0.16 0.26
Average common
stockholders' equity to
average assets ........... 5.94 6.12 6.38 5.69 5.77 6.26
Average stockholders'
equity to average assets . 5.94 6.12 6.38 5.69 5.77 7.05
Earnings to fixed charges
Excluding interest on
Deposits .............. 2.51 x 2.90 x 1.95 x 1.90 x 2.29 x 2.81 x
Including interest on
Deposits .............. 1.66 1.73 1.32 1.21 1.33 1.36
(1) 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 twelve months ended December 31, 2003 and 2002, the six
months ended December 31, 2002 and 2001, and the fiscal years ended June 30,
2002 and 2001, and financial condition at December 31, 2003, December 31, 2002,
and June 30, 2002. In August 2002, the Company's board of directors elected to
change the Company's fiscal year end from June 30 to December 31. Due to this
change, the Company filed last year for the transition period from July 1, 2002
to December 31, 2002. Throughout this document, reference to fiscal 2003, the
transition period, fiscal 2002 and 2001 are for the year ended December 31,
2003, the six months ended December 31, 2002, and the years ended June 30, 2002
and 2001, respectively. 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 $710.0 million in consolidated assets as of
December 31, 2003. 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 $5.5 million or $1.96 basic earnings per share
for fiscal 2003 as compared to $4.8 million or $1.75 basic earnings per share
for the twelve months ended December 31, 2002, $3.2 million or $1.16 basic
earnings per share for the six-month transition period ended December 31, 2002,
$3.0 million or $1.10 basic earnings per share for fiscal 2002, and $2.4 million
or $1.06 basic earnings per share for fiscal 2001. In October 2002, the Company
sold its ISO-related merchant credit card portfolio to iPayment, Inc., however
Bancard continued to process the portfolio's transactions through September
2003. The Company's earnings for fiscal 2003 were positively impacted by the
continued processing of these ISO volumes. This continued ISO processing
resulted in additional net income in fiscal 2003 of $900 thousand or $0.32 per
share. The sale in October 2002 resulted in a gain of $1.3 million, after income
tax and related expenses, or $0.47 in diluted earnings per share, and 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.
Excluding both the one-time gain from the sale of the ISO portfolio in October
2002, as well as the non-recurring revenue from the continued processing through
September 2003, net income for the twelve months ended December 31, 2002 would
have been $3.5 million, or diluted earnings per share of $1.24, and net income
for the twelve months ended December 31, 2003 would have been $4.6 million, or
diluted earnings per share of $1.61. This represents a 30% improvement in
adjusted diluted earnings per share year to year. Although excluding the impact
of these events is a non-GAAP measure, management believes that it is important
to provide such information due to the non-recurring nature of this income and
to more accurately compare the results of the periods presented.
When compared to the same period in 2002, the fiscal year ended December 31,
2003 reflected significant growth in both net interest income and gains on sales
of loans, net, for the Company. For fiscal 2003, net interest income and gains
on sales of loans, net, improved by 19% and 40%, respectively, for a combined
increase of $4.4 million when compared to the twelve months ended December 31,
2002. 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 fiscal 2003. Bancard's continued processing
through the first nine months of 2003 of the ISO-related merchant credit card
portfolio that was sold, contributed $1.3 million of noninterest income.
Partially offsetting these revenue contributions for the Company was an increase
in noninterest expense of $845 thousand. The primary contributor to the increase
in noninterest expense was salaries and employee benefits, which increased $1.3
million from the same period in 2002. Stock appreciation rights (SAR) expense
was $915 thousand for the year, as the Company's stock price grew from $16.90 to
$28.00 during 2003. For the fiscal year ended December 31, 2003, net income for
Cedar Rapids Bank & Trust was $192 thousand as compared to a net loss of $753
thousand for the same period in 2002. Management is pleased with the outstanding
progress that Cedar Rapids Bank & Trust has made in only its second full year of
operation.
9
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 0.80% for the
twelve months ended December 31, 2003 as compared to the same period in 2002.
With the same comparison, the average cost of interest-bearing liabilities
decreased 0.74%, which resulted in a 0.06% decrease in the net interest spread
of 3.21% at December 31, 2002 compared to 3.15% at December 31, 2003. Resulting
from the prolonged low rate environment, the relative stability in the net
interest spread from year to year did not carry over to the net interest margin.
For the fiscal year ended December 31, 2003, net interest margin was 3.55%
compared to 3.72% for the like period in 2002. Management continues to closely
monitor and manage net interest margin. From a profitability standpoint, an
important challenge for the subsidiary banks is to maintain their net interest
margins. Management continues to address this issue with alternative funding
sources and pricing strategies.
The Company's operating results are also affected by sources of noninterest
income, including merchant credit card fees, trust fees, deposit service charge
fees, gains from the sales of residential real estate loans and other income.
Operating expenses of the Company include employee compensation and benefits,
occupancy and equipment expense and other administrative expenses. The Company's
operating results are also affected by economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. The majority of the subsidiary banks' loan portfolios
are invested in commercial loans. Deposits from commercial customers represent a
significant funding source as well.
The Company has 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 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 merchants of a single
independent sales organization or ISO. This ISO was sold in 1998, and the
purchaser requested a reduction in the term of the contract. Bancard agreed to
amend the contract to reduce the term and accept a fixed monthly processing fee
of $25 thousand for merchants existing at the time the agreement was signed, and
a lower transaction fee for new merchants, in exchange for a payment of $2.9
million, the ability to transact business with other ISOs and the assumption of
the credit risk by the ISO. Approximately two thirds of the income from this
settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of
$732 thousand being recognized during fiscal 1999. Bancard terminated its
processing for this ISO in May 2000, eliminating approximately 64% of its
average monthly processing volume. Prior to this ISO's termination, Bancard's
average monthly processing volume for fiscal 2000 was $91 million. During both
fiscal 2001 and 2002, Bancard worked to establish additional ISO relationships
and further develop the relationships with existing ISOs successfully rebuilding
and expanding processing volumes. Bancard's average monthly dollar volume of
transactions processed during fiscal 2001 was $76 million. During fiscal 2002,
the average monthly dollar volume of transactions processed by Bancard increased
36% to $104 million. Monthly processing volumes at Bancard during fiscal 2002
climbed to a level above that existing prior to the termination of all
processing with the initial ISO.
10
On October 22, 2002, the Company announced Bancard's sale of its ISO related
merchant credit card operations to iPayment, Inc. for $3.5 million. After
contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a net gain of $1.3 million, or $0.47
per share, which was realized during the quarter ended December 31, 2002. Also
included in the sale were all of the merchant credit card processing
relationships owned by Bancard's subsidiary, Allied. Bancard will continue to
provide credit card processing for its local merchants and cardholders of the
subsidiary banks and agent banks. The Company anticipated that the termination
of the ISO-related merchant credit card processing would reduce Bancard's future
earnings. Bancard continued to process transactions for iPayment, Inc. through
September 2003. As anticipated, the reduced processing volumes that Bancard
experienced during the fourth quarter of 2003 resulted in a decline in quarterly
merchant credit card fees, net of processing costs for the Company. The fourth
quarter of 2003 generated $416 thousand of merchant credit card fees, net of
processing costs, as compared to $784 thousand for the third quarter of 2003.
Regardless of this decline in processing volumes and fees and the resulting
reduction in operating results from prior quarters, the Company believes that on
a smaller scale Bancard will remain profitable with its narrowed business focus
of providing credit card processing for its local merchants and agent banks and
for cardholders of the Company's subsidiary banks.
During fiscal 1998, Quad City Bank & Trust expanded its presence in the mortgage
banking market by hiring several experienced loan originators and an experienced
underwriter, and now has eight loan originators on staff. Quad City Bank & Trust
and Cedar Rapids Bank & Trust originate mortgage loans on personal residences
and sell the majority of these loans into the secondary market to avoid the
interest rate risk associated with long-term fixed rate financing. The
subsidiary banks realize revenue from this mortgage banking activity from a
combination of loan origination fees and gains on the sale of the loans in the
secondary market. During the twelve months ended December 31, 2003, the
subsidiary banks originated $268.8 million of real estate loans and sold $241.6
million, or90%, of these loans resulting in gains of $3.7 million. During the
six months ended December 31, 2002, the subsidiary banks originated $145.1
million of real estate loans and sold $121.5 million, or 84%, of these loans
resulting in gains of $1.9 million. During fiscal 2002, the subsidiary banks
originated $175.5 million of real estate loans and sold $144.3 million, or 82%,
of these loans, which resulted in gains of $2.0 million. The depressed interest
rates during these periods have caused a significant increase in the subsidiary
banks' mortgage origination volume. In fiscal 2001, Quad City Bank & Trust
originated $97.6 million of real estate loans and sold $92.9 million, or 95%, of
these loans resulting in gains of $1.1 million.
Trust department income continues to be a significant contributor to noninterest
income. Trust department fees contributed $2.2 million in revenues during fiscal
2003. In the six months ended December 31, 2002, trust department fees
contributed $1.0 million in revenues. Trust department fees grew from $2.1
million in fiscal 2001 to $2.2 million in fiscal 2002. Income is generated
primarily from fees charged based on assets under administration for corporate
and personal trusts and for custodial services. Assets under administration at
December 31, 2003 increased to $673.5 million, resulting primarily from the
development of existing relationships and the addition of new trust
relationships. 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 as a 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. In February 2004, the Company formed two additional trusts,
which, in a private transaction, issued $8.0 million of floating rate capital
securities and $12.0 million of fixed rate capital securities. The Company
intends to use the net proceeds for general corporate purposes, including the
possible redemption, in June 2004, of the $12.0 million of capital securities
issued in 1999.
11
Critical Accounting Policy
The Company'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 both December 31, 2002 and 2003 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
Fiscal 2003 compared with the twelve months ended December 31, 2002
Overview. Net income for the twelve months ended December 31, 2003 was $5.5
million as compared to net income of $4.8 million for the twelve-month period
ended December 31, 2002 for an increase of $640 thousand or 13%. Basic earnings
per share for fiscal 2003 were $1.96 as compared to $1.75 for the comparable
period in 2002. The increase in net income was comprised of an increase in net
interest income after provision for loan losses of $3.4 million, partially
offset by a decrease in noninterest income of $1.5 million, and increases in
noninterest expenses of $845 thousand and federal and state income taxes of $327
thousand. Several specific factors contributed to the improvement in net income
from 2002 to 2003 for the twelve-month periods. Primary factors included a 19%
improvement in net interest income prompted by increased volume, and a 40%
increase in gains on sales of real estate loans.
Interest income. Interest income grew from $30.8 million for the twelve months
ended December 31, 2002 to $33.4 million for fiscal 2003. The increase in
interest income was attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable, partially offset by a
decrease in interest rates. The average yield on interest earning assets for the
twelve months ended December 31, 2003 was 5.50% as compared to 6.30% for the
twelve-month period ended December 31, 2002.
Interest expense. Interest expense decreased by $770 thousand, from $12.7
million for the twelve months ended December 31, 2002 to $11.9 million for
fiscal 2003. The 6% decrease in interest expense was primarily attributable to a
reduction in interest rates, which was almost entirely offset by greater average
outstanding balances in interest-bearing liabilities. The average cost on
interest bearing liabilities was 2.35% for the twelve months ended December 31,
2003 as compared to 3.09% for the like period in 2002.
12
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.65% of total gross loans at
December 31, 2003, as compared to approximately 1.53% at December 31, 2002,
1.56% at June 30, 2002 and 1.48% at June 30, 2001. The provision for loan losses
remained stable at $3.4 million for fiscal 2003, as it had been for the twelve
months ended December 31, 2002. During both periods, management made monthly
provisions for loan losses based upon a number of factors, principally the
increase in loans and a detailed analysis of the loan portfolio. During fiscal
2003, the $3.4 million provision to the allowance for loan losses was attributed
35%, or $1.2 million, to net growth in the loan portfolio, and 65%, or $2.2
million, to downgrades and write-offs within the portfolio. For the twelve
months ended December 31, 2003, commercial loans had total charge-offs of $1.8
million, which resulted primarily from a single customer relationship at Quad
City Bank & Trust, and there were $192 thousand of commercial recoveries, due
primarily to this same relationship. The net write-off of this relationship
accounted for 17% of the provision for loans losses during fiscal 2003 and was
in addition to a $1.1 million charge-off, which occurred during the quarter
ended December 31, 2002. The additional losses were a result of environmental
issues associated with the collateral for the loan, which were identified during
the first quarter of 2003. The Company believed that these environmental issues
negatively impacted the value and salability of the business and determined that
it was appropriate to take a conservative approach and write down the loan
balance to reflect no value in the real estate and equipment collateral. During
the second quarter of 2003, all of the collateral, including the real estate and
equipment, was sold resulting in a $120 thousand recovery. In the third and
fourth quarters, there were recoveries of $50 thousand, as Quad City Bank &
Trust realized gain from the sale of other real estate, which had been deferred
in accordance with current accounting rules. Consumer loan charge-offs and
recoveries totaled $298 thousand and $242 thousand, respectively, for the twelve
months ended December 31, 2003. Real estate loans had no charge-off or recovery
activity during fiscal 2003. The ability to grow profitably is, in part,
dependent upon the ability to maintain asset quality. The Company is focusing
efforts at its subsidiary banks in an attempt to improve the overall quality of
the Company's loan portfolio.
Noninterest income. Noninterest income decreased by $1.5 million from $12.7
million for the twelve months ended December 31, 2002 to $11.2 million for
fiscal 2003. In the twelve months ended December 31, 2002, the largest component
of noninterest income was the gain on sale of the ISO related portion of the
merchant credit card portfolio of $3.5 million, which accounted for 27% of the
total. Noninterest income for both periods consisted of income from the merchant
credit card operation, fees from the trust department, depository service fees,
gains on the sale of residential real estate mortgage loans, and other
miscellaneous fees. Making significant improvements from year to year in the
noninterest income category were increases in gains on sales of loans and other
miscellaneous fees.
During the twelve-month period ended December 31, 2003, merchant credit card
fees net of processing costs, decreased by $172 thousand to $2.2 million, from
$2.4 million for the comparable period in 2002, reflecting little effect of the
sale of the independent sales organization (ISO) related merchant credit card
activity to iPayment, Inc. In October 2002, the Company sold Bancard's
ISO-related merchant credit card operations to iPayment, Inc. for $3.5 million.
After contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a gain of $1.3 million, or $0.47 per
share, which was realized during the quarter, ended December 31, 2002. Also
included in the sale were all of the merchant credit card processing
relationships owned by Allied. Bancard continues to provide credit card
processing for its local merchants and cardholders of the subsidiary banks and
agent banks. Through September 24, 2003, Bancard also temporarily continued to
process ISO related transactions for iPayment, Inc. for a fixed monthly fee
rather than a percentage of transaction volumes. Built into the sales contract
with iPayment was an agreement that the fixed monthly fee would increase as the
temporary processing period was extended. Extensions to the processing period
and the resulting growth in the fixed monthly fee mitigated the drop in
Bancard's earnings that was expected to occur. The transfer of this ISO
processing to another provider occurred in September 2003, just prior to the
close of the third quarter. As the Company anticipated, Bancard's monthly
earnings were reduced significantly in the final quarter of 2003. For the three
quarters through September 30, 2003, Bancard's net income was $741 thousand, and
for the fourth quarter of fiscal 2003, Bancard's net income was $125 thousand.
While future operating results are anticipated to be reduced, the Company
believes that Bancard will, on a smaller scale, remain profitable with its
narrowed business focus of continuing to provide credit card processing for its
local merchants and agent banks and for cardholders of the Company's subsidiary
banks.
13
For the twelve-month periods ended both December 31, 2003 and 2002, trust
department fees were $2.2 million. The $33 thousand, or 2%, increase from year
to year was primarily a reflection of the further development of existing trust
relationships throughout 2003 and the addition of a significant volume of new
trust relationships occurring late in the fourth quarter, which were almost
entirely offset by the reduction of approximately $50.0 million during the first
quarter of a single trust account and its resulting impact on the calculation of
trust fees for the remainder of the year.
Deposit service fees increased $377 thousand, or 33%, to $1.5 million from $1.1
million for the twelve-month periods ended December 31, 2003 and December 31,
2002, respectively. This increase was primarily a result of the growth in
noninterest bearing demand deposit accounts of $41.3 million, or 46%, since
December 31, 2002. Service charges and NSF (non-sufficient funds) charges
related to demand deposit accounts were the main components of deposit service
fees.
Gains on sales of loans were $3.7 million for fiscal 2003, which reflected an
increase of 40%, or $1.1 million, from $2.6 million for the same period in 2002.
The increase resulted from the lower mortgage rates that originated in calendar
2002 and continued throughout 2003. This situation created significantly more
home refinances during the period and the subsequent sale of the majority of
these loans into the secondary market. Because the gains on sales of loans
typically have an inverse relationship with mortgage interest rates, it is
unlikely that the subsidiary banks will continue to maintain this level of
activity in the long term. During the fourth quarter of fiscal 2003, refinancing
volumes slowed dramatically from the pace that had existed in the three previous
quarters.
For the twelve months ended December 31, 2003, other noninterest income
increased $700 thousand, or 82%, to $1.6 million from $857 thousand for the same
period in 2002. The increase was primarily due to a combination of improved
earnings on the cash surrender value of life insurance, gain realized on the
sale of foreclosed property, increased earnings realized by Nobel Electronic
Transfer, LLC, one of the three associated companies in which the Company holds
an interest, dividends earned on Federal Reserve Bank and Federal Home Loan Bank
stock, and increased fees generated from investment services offered at the
subsidiary banks.
Noninterest expenses. For the fiscal year ended December 31, 2003, the main
components of noninterest expenses were primarily salaries and benefits,
occupancy and equipment expenses, and professional and data processing fees. For
the twelve months ended December 31, 2002, the main components of noninterest
expenses were primarily salaries and benefits, compensation and other expenses
related to sale of merchant credit card portfolio, occupancy and equipment
expenses, and professional and data processing fees. Noninterest expenses for
the twelve-month period ended December 31, 2003 were $21.0 million as compared
to $20.2 million for the same period in 2002 for an increase of $845 thousand or
4%.
The following table sets forth the various categories of noninterest expenses
for the twelve months ended December 31, 2003 and 2002.
Twelve Months Ended December 31,
----------------------------------------
2003 2002 % Change
----------------------------------------
Salaries and employee benefits ........................................... $12,710,505 $11,379,110 12%
Compensation and other expenses related to sale of .......................
merchant credit card portfolio ......................................... -- 1,413,734 -100%
Professional and data processing fees .................................... 1,962,243 1,498,819 31%
Advertising and marketing ................................................ 786,054 658,452 19%
Occupancy and equipment expense .......................................... 2,640,602 2,517,047 5%
Stationery and supplies .................................................. 460,421 469,458 -2%
Postage and telephone .................................................... 632,354 548,328 15%
Bank service charges ..................................................... 454,367 391,886 16%
Insurance ................................................................ 444,947 356,529 25%
Other .................................................................... 943,759 957,202 -1%
---------------------------------------
Total noninterest expenses ................................. $21,035,252 $20,190,565 4%
========================================
14
For the fiscal year ended December 31, 2003, total salaries and benefits
increased to $12.7 million or $1.3 million over the $11.4 million for the
comparable period in 2002. Stock appreciation rights (SAR) expense was $915
thousand for the year, as the Company's stock price grew from $16.90 to $28.00
during 2003. Also contributing to the increase in salaries and benefits were
increased incentive compensation to real estate officers and processors
proportionate to the increased volumes of gains on sales of loans, and the
addition of employees at both subsidiary banks. Compensation and other expenses
related to the sale of the ISO-related merchant credit card portfolio of $1.4
million accounted for 7% of the $20.2 million total in noninterest expenses for
the twelve months ended December 31, 2002. Contractual bonus and severance
payments were based on the gain realized from the sale of Bancard's ISO-related
merchant credit card operations to iPayment, Inc. in October 2002. Occupancy and
equipment expense increased $124 thousand, or 5%, for the period. The increase
was due primarily to increased levels of rent, property taxes, utilities,
depreciation, maintenance, and other occupancy expenses, in conjunction with $46
thousand in losses on disposals of assets. Professional and data processing fees
increased $463 thousand, or 31%, when comparing fiscal 2003 to the comparable
period in 2002. The increase was primarily attributable to a combination of
additional data processing fees incurred by the subsidiary banks and other
professional fees incurred by the parent company. When comparing fiscal 2003 to
the comparable period in 2002, advertising and marketing expense grew $128
thousand, insurance expense increased $88 thousand, postage and phone expense
grew $84 thousand, and bank service charges increased $62 thousand. These
increases were all proportionate reflections of the Company's growth during the
year.
Income tax expense. The provision for income taxes was $2.7 million for the
fiscal year ended December 31, 2003 compared to $2.4 million for the comparable
period in 2002, an increase of $327 thousand or 14%. The increase was primarily
attributable to increased income before income taxes of $967 thousand or 13% for
the twelve-month period ended December 31, 2003, in combination with a slight
increase in the Company's effective tax rate for the 2003 period to 33.0% from
32.9% for the same period in 2002.
Six months ended December 31, 2002 compared with six months ended December 31,
2001
Overview. Net income for the six months ended December 31, 2002 was $3.2 million
as compared to net income of $1.3 million for the six-month period ended
December 31, 2001 for an increase of $1.9 million or 139%. Basic earnings per
share for the six-month period ended December 31, 2002 were $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 income prompted by
increased volume, and a 51% increase in gains on sales of real estate loans.
Interest income. Interest income grew from $13.8 million for the six months
ended December 31, 2001 to $16.1 million for the comparable period in 2002. The
increase in interest income was attributable to greater average outstanding
balances in interest-earning assets, principally loans receivable, partially
offset by a decrease in interest rates. The average yield on interest earning
assets for the six months ended December 31, 2002 was 6.13% as compared to 7.05%
for the six-month period ended December 31, 2001.
Interest expense. Interest expense decreased by $150 thousand, from $6.6 million
for the six months ended December 31, 2001 to $6.5 million for the same period
in 2002. The 2% decrease in interest expense was primarily attributable to a
reduction in interest rates almost entirely offset by greater average
outstanding balances in interest-bearing liabilities. The average cost on
interest bearing liabilities was 2.90% for the six months ended December 31,
2002 as compared to 3.89% for the like period in 2001.
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 1.53% 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.
16
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%
Bank service charges ..................................................... 211,873 177,535 19%
Insurance ................................................................ 186,308 193,458 -4%
Other .................................................................... 467,779 425,406 10%
----------------------------------------
Total noninterest expenses ................................. $11,413,051 $ 8,244,914 38%
========================================
Compensation and other expenses related to the sale of the merchant credit card
portfolio of $1.4 million accounted for 45% of the $3.2 million increase
experienced in noninterest expenses in aggregate. Contractual bonus and
severance payments were based on the gain realized from the sale of Bancard's
ISO related merchant credit card operations to iPayment, Inc. in October 2002.
For the six months ended December 31, 2002, total salaries and benefits
increased to $6.1 million or $1.3 million over the $4.8 million for the
comparable period in 2001. The change was attributable to increased incentive
compensation to real estate officers and processors proportionate to the
increased volumes of gains on sales of loans, in combination with the addition
of employees at Cedar Rapids Bank & Trust and a slight increase in the number of
Quad City Bank & Trust employees. Occupancy and equipment expense increased $185
thousand, or 16%, for the period. The increase was predominately due to
increased levels of rent, property taxes, utilities, depreciation, maintenance,
and other occupancy expenses. Professional and data processing fees increased
$88 thousand, or 11%, when comparing the six months ended December 31, 2001 to
the comparable period in 2002. The increase was primarily attributable to the
additional data processing fees incurred by the subsidiary banks. From 2001 to
2002, postage and telephone expense for the six months ended December 31,
increased 27%, or $62 thousand. The growth at Cedar Rapids Bank & Trust
accounted for $40 thousand, or 65% of this increase. For the six-month period
ended December 31, 2002, bank service charges increased $34 thousand, or 19%.
Growth at Cedar Rapids Bank & Trust contributed $20 thousand, or 59% of this
increase.
Income tax expense. The provision for income taxes was $1.7 million for the six
months ended December 31, 2002 compared to $630 thousand for the comparable
period in 2001, an increase of $1.1 million or 167%. The increase was primarily
attributable to increased income before income taxes of $2.9 million or 148% for
the six-month period ended December 31, 2002, in combination with an increase in
the Company's effective tax rate for the 2002 period to 34.5% from 32.0% for the
same period in 2001. The increase in the Company's effective tax rate was due to
a much lower percentage of the Company's income coming from federal tax-exempt
securities, (primarily tax-free municipal bonds) in 2002 versus 2001.
17
Fiscal 2002 compared with fiscal 2001
Overview. Net income for fiscal 2002 was $3.0 million as compared to net income
of $2.4 million in fiscal 2001 for an increase of $567 thousand or 24%. Basic
earnings per share for fiscal 2002 were $1.10 as compared to $1.06 for fiscal
2001. The increase in net income was comprised of an increase in net interest
income after provision for loan losses of $2.3 million and an increase 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.
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%.
18
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%
Bank service charges ................................... 357,550 293,012 22%
Insurance .............................................. 351,873 328,405 7%
Other .................................................. 926,633 736,928 26%
----------------------------------------
Total noninterest expenses ............... $17,022,428 $13,799,953 23%
========================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2002, total salaries and benefits
increased 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 $190 thousand, or 26% 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. For fiscal 2002, postage and telephone expense grew $76
thousand and bank service charges increased $65 thousand. Both reflected the
growth of the subsidiary banks during the period.
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.
Financial Condition
Total assets of the Company increased by $105.4 million or 17% to $710.0 million
at December 31, 2003 from $604.6 million at December 31, 2002. The growth
primarily resulted from an increase in the loan portfolio funded by deposits
received from customers and by proceeds from short-term and other borrowings.
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. During this period
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.
Cash and Cash Equivalent Assets. Cash and due from banks decreased by $461
thousand or 2% to $24.4 million at December 31, 2003 from $24.9 million at
December 31, 2002. Cash and due from banks increased by $6.5 million or 35% to
$24.9 million at December 31, 2002 from $18.4 million at June 30, 2002. Cash and
due from banks represented both cash maintained at the subsidiary banks, as well
as funds that the Company and its subsidiaries had deposited in other banks in
the form of noninterest-bearing demand deposits.
19
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
decreased by $10.4 million to $4.0 million at December 31, 2003 from $14.4
million at December 31, 2002. Federal funds sold increased by $13.6 million to
$14.4 million at December 31, 2002 from $760 thousand at June 30, 2002. These
fluctuations were attributable to the Company's varying levels of liquidity at
the subsidiary banks.
Interest-bearing deposits at financial institutions decreased by $4.2 million or
29% to $10.4 million at December 31, 2003 from $14.6 million at December 31,
2002. Included in interest-bearing deposits at financial institutions are demand
accounts, money market accounts, and certificates of deposit. During fiscal
2003, the certificate of deposit portfolio had 35 maturities totaling $3.4
million and 30 purchases totaling $2.8 million. Interest-bearing deposits at
financial institutions decreased by $502 thousand or 3% to $14.6 million at
December 31, 2002 from $15.1 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. As the result of lower short-term
interest rates and a strong loan demand during 2002 and 2003, the subsidiary
banks reduced their deposits in other banks in the form of certificates of
deposit and increased their utilization of Federal funds sold.
Investments. Securities increased by $47.1 million or 58% to $128.8 million at
December 31, 2003 from $81.7 million at December 31, 2002. The net increase was
the result of a number of transactions in the securities portfolio. The Company
purchased additional securities, classified as available for sale, in the amount
of $91.7 million. This increase was partially offset by paydowns of $4.0 million
that were received on mortgage-backed securities, proceeds from calls and
maturities of $39.2 million, the amortization of premiums, net of the accretion
of discounts, of $788 thousand, and the recognition a decrease in unrealized
gains on securities available for sale, before applicable income tax of $549
thousand.
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.
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, 2003, December 31, 2002, and June 30, 2002. The
balance at December 31, 2003 was $400 thousand, which was a decrease of $25
thousand from the balance of $425 thousand at both December 31, 2002 and June
30, 2002. Market values at December 31 2003, December 31, 2002, and June 30,
2002 were $417 thousand, $451 thousand, and $437 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 $47.2 million, or 58%, to $128.4 million at December 31, 2003,
from $81.2 million at December 31, 2002. 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. The amortized cost of such securities
at December 31, 2003, December 31, 2002, and June 30, 2002 was $125.6 million,
$77.8 million, and $73.7 million, respectively.
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk and as of December 31, 2003 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 $72.8 million or 16% to $522.5
million at December 31, 2003 from $449.7 million at December 31, 2002. The
increase was the result of the origination or purchase of $691.1 million of
commercial business, consumer and real estate loans, less loan charge-offs, net
of recoveries, of $1.6 million and loan repayments or sales of loans of $616.7
million. During the fiscal year ended December 31, 2003, Quad City Bank & Trust
contributed $536.3 million, or 78%, and Cedar Rapids Bank & Trust contributed
$154.8 million, or 22% of the Company's loan originations or purchases. The
majority of residential real estate loans originated by the subsidiary banks
were sold on the secondary market to avoid the interest rate risk associated
with long-term fixed rate loans. As of December 31, 2003, Quad City Bank &
Trust's legal lending limit was approximately $7.2 million and Cedar Rapids Bank
& Trust's legal lending limit was approximately $2.5 million.
20
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.
Allowance for Loan Losses. The allowance for estimated losses on loans was $8.6
million at December 31, 2003 compared to $6.9 million at December 31, 2002, for
an increase of $1.7 million or 26%. 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 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.
Net charge-offs for the years ended December 31, 2003 and 2002, were $1.6
million and $1.5 million, respectively. Net charge-offs for the six months ended
December 31, 2002 and 2001, were $1.4 million and $349 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 1.65% at
December 31, 2003, 1.53% at December 31, 2002, and 1.56% at June 30, 2002.
Although management believes that the allowance for estimated losses on loans at
December 31, 2003 was at a level adequate to absorb losses on existing loans,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional provisions for loan
losses in the future. Asset quality is a priority for the Company and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality. The Company is focusing efforts at its
subsidiary banks in an attempt to improve the overall quality of the Company's
loan portfolio. A slowdown in economic activity beginning in 2001 severely
impacted several major industries as well as the economy as a whole. Even though
there are numerous indications of emerging strength, it is not certain that this
strength is sustainable. In addition, consumer confidence may still be
negatively impacted by the substantial decline in equity security prices
experienced in the period from 2000 through 2002. 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.
21
Nonaccrual loans were $4.2 million at December 31, 2003 compared to $4.6 million
at December 31, 2002, for a decrease of $404 thousand or 9%. The decrease in
nonaccrual loans was comprised of decreases in commercial loans of $302 thousand
and real estate loans of $139 thousand, partially offset by an increase in
consumer loans of $36 thousand. The decrease in nonaccrual commercial loans was
due primarily to the write-off of a single customer relationship at Quad City
Bank for $1.3 million, partially offset by the transfer to nonaccrual status of
another commercial lending relationship at Quad City Bank & Trust with an
outstanding balance at December 31, 2003 of $702 thousand. Nonaccrual loans at
December 31, 2003 represented less than one percent of the Company's loan
portfolio. All of the Company's nonperforming assets were located in the loan
portfolio at Quad City Bank & Trust. The loans in the Cedar Rapids Bank & Trust
loan portfolio have been made since its inception in 2001, and none of the loans
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 $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 were located in the loan portfolio at Quad City Bank & Trust.
As of December 31, 2003, December 31, 2002, and June 30, 2002, past due loans of
30 days or more amounted to $6.9 million, $9.6 million, and $4.3 million,
respectively. Past due loans as a percentage of gross loans receivable were 1.3%
at December 31, 2003, 2.1% at December 31, 2002 and 1.1% at June 30, 2002.
Other Assets. Premises and equipment increased by $2.8 million or 30% to $12.0
million at December 31, 2003 from $9.2 million at December 31, 2002. This
increase resulted primarily from Quad City Bank & Trust's purchases of the
northern segment of its Brady Street facility and the land for its fifth
location, in combination with Company purchases of additional furniture,
fixtures and equipment offset by depreciation expense. 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. This increase resulted from the purchase
of additional furniture, fixtures and equipment offset by depreciation expense.
Additional information regarding the composition of this account and related
accumulated depreciation is described in Note 5 to the consolidated financial
statements.
Accrued interest receivable on loans, securities, and interest-bearing deposits
at financial institutions increased by $425 thousand or 13% to $3.6 million at
December 31, 2003 from $3.2 million at December 31, 2002. Accrued interest
receivable on loans, securities, and interest-bearing deposits at financial
institutions increased by $95 thousand or 3% to $3.2 million at December 31,
2002 from $3.1 million at June 30, 2002. Increases were primarily due to greater
average outstanding balances in interest-bearing assets.
Other assets decreased by $965 thousand or 7% to $12.8 million at December 31,
2003 from $13.8 million at December 31, 2002. The three largest components of
other assets at December 31, 2003 were $5.5 million in Federal Reserve Bank and
Federal Home Loan Bank stocks, $3.1 million in cash surrender value of life
insurance contracts and $752 thousand in prepaid trust preferred offering
expense. 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. At both December 31, 2003 and 2002, other assets also included
accrued trust department fees, other miscellaneous receivables, and various
prepaid expenses.
Deposits. Deposits increased by $77.0 million or 18% to $511.7 million at
December 31, 2003 from $434.7 million at December 31, 2002. The increase
resulted from a $75.0 million net increase in noninterest bearing, NOW, money
market and other savings accounts and a $2.0 million net increase in
certificates of deposit. 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.
22
Short-term Borrowings. Short-term borrowings increased by $18.7 million or 57%
from $32.9 million as of December 31, 2002 to $51.6 million as of December 31,
2003. 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. 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 $34.7 million, $32.9 million, and $29.1 million at December 31,
2003, December 31, 2002, and June 30, 2002, respectively, as well as federal
funds purchased from correspondent banks of $16.9 million at December 31, 2003,
none at December 31, 2002, and $5.5 million at June 30, 2002.
FHLB Advances and Other Borrowings. FHLB advances increased $1.2 million or 2%
from $75.0 million as of December 31, 2002 to $76.2 million as of December 31,
2003. 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. As of December 31, 2003, the
subsidiary banks held $4.3 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 increased to $10.0 million at December 31, 2003 for an increase
of $5.0 million, or 100%, from December 31, 2002. In February and July 2003, the
Company drew additional advances of $2.0 million and $3.0 million, respectively,
as funding to maintain the required level of regulatory capital at Cedar Rapids
Bank & Trust in light of the bank's growth. Other borrowings were $5.0 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 I subsidiary. On the Company's financial
statements, these securities are listed as junior subordinated debentures and
were $12,000,000 at December 31, 2003 and 2002, and June 30, 2002. Previously,
these securities had been listed on financial statements as company obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
subordinated debentures, however upon adoption of Financial Accounting Standards
Board Interpretation (FIN) No. 46 on December 31, 2003, prior years' financial
statements were restated. Under current regulatory guidelines, these securities
are considered to be Tier 1 capital, with certain limitations that are
applicable to the Company. A detailed explanation of FIN No. 46 and its impact
on the Company is presented in the "Impact of New Accounting Standards" section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations. Additional information regarding the Company's adoption of FIN No.
46 is included in Note 1 to the consolidated financial statements.
In February 2004, the Company issued, in a private transaction, $8.0 million of
floating rate capital securities and $12.0 million of fixed rate capital
securities (together, the "Trust Preferred Securities") of QCR Holdings
Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust
III"), respectively. The securities represent undivided beneficial interests in
Trust II and Trust III, which were established by the Company for the purpose of
issuing the Trust Preferred Securities. Both Trust II and Trust III used the
proceeds from the sale of the Trust Preferred Securities to purchase junior
subordinated debentures of the Company.
Other liabilities decreased by $1.7 million or 20% to $6.7 million as of
December 31, 2003 from $8.4 million as of December 31, 2002. The decrease was
primarily the result of the payment during 2003 of income taxes and a large
portion of the accrued severance compensation related to Bancard's sale of its
ISO related merchant credit card operations in October 2002. Other liabilities
were comprised of unpaid amounts for various products and services, and accrued
but unpaid interest on deposits. At both December 31, 2003 and 2002, the largest
single component of other liabilities was interest payable at $1.2 million and
$1.8 million, respectively. 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. 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 of $2.8 million as of December 31, 2002
increased by $41 thousand, or 1%, to $2.9 million at December 31, 2003. The
slight increase was the result of stock issued from the net exercise of stock
options and stock purchased under the employee stock purchase plan. 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.
23
Additional paid-in capital increased to $17.1 million as of December 31, 2003
from $16.7 million at December 31, 2002. The increase of $382 thousand, or 2%,
resulted primarily from proceeds received in excess of the $1.00 per share par
value for the 40,929 shares of common stock issued as the result of the exercise
of stock options and purchases of stock under the employee stock purchase plan.
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.
Retained earnings increased by $5.2 million, or 33%, to $20.9 million at
December 31, 2003 from $15.7 million at December 31, 2002. The increase
reflected net income for the fiscal year reduced by the $307 thousand in
dividends declared during 2003. The Company paid a cash dividend of $0.05 per
share on July 3, 2003. On October 23, 2003, the board of directors declared a
cash dividend of $0.06 per share payable on January 5, 2004, to stockholders of
record on December 15, 2003. 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. The Company also paid a cash dividend of
$0.05 per share on January 3, 2003.
Accumulated other comprehensive income was $1.8 million as of December 31, 2003
as compared to $2.1 million as of December 31, 2002. The decrease in the gains
was attributable to the decrease during the period in the fair value of the
securities identified as available for sale, primarily as a result of a slight
recovery in market interest rates. Accumulated other comprehensive income
consisting of net unrealized gains on securities available for sale, net of
related income taxes, was $2.1 million as of December 31, 2002 as compared to
$1.3 million as of June 30, 2002. The increase in the gains was attributable to
the increase during the period in the fair value of the securities identified as
available for sale, primarily as a result of a decline in market interest rates.
In April 2000, the Company announced that the board of directors approved a
stock repurchase program enabling the Company to repurchase approximately 60,000
shares of its common stock. This stock repurchase program was completed in the
fall of 2000 and at both December 31, 2003 and 2002 and at June 30, 2002 the
Company held in treasury 60,146 shares at a total cost of $855 thousand. The
weighted average cost was $14.21 per share.
Liquidity and Capital Resources
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customers' credit needs. One source of
liquidity is cash and short-term assets, such as interest-bearing deposits in
other banks and federal funds sold, which totaled $38.9 million at December 31,
2003, $53.9 million at December 31, 2002, and $34.2 million at June 30, 2002.
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 provided by operating activities,
comprised predominately of proceeds on the sale of loans, was $30.2 million for
fiscal 2003 compared to net cash used in operating activities, primarily for the
origination of loans to be sold, of $9.8 million for the twelve months ended
December 31, 2002. Net cash used in 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 used in investing
activities, consisting principally of loan funding and the purchase of
securities, was $132.5 million for fiscal 2003 and $117.0 million for the
comparable period in 2002, comprised predominately of loan originations. Net
cash used in investing activities, consisting principally of loan funding and
the purchase of securities and federal funds was $59.9 million for the six-month
period ended December 31, 2002 and $59.7 million for the comparable period in
2001. Net cash provided by financing activities, consisting primarily of deposit
growth and proceeds from short-term borrowings, was $101.8 million for fiscal
2003 compared to $132.1 million, comprised predominately of growth in deposits
and proceeds from short-term borrowings, for the twelve months ended December
31, 2002. 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.
24
At December 31, 2003, the subsidiary banks had seven unused lines of credit
totaling $41.0 million of which $4.0 million was secured and $37.0 million was
unsecured. At December 31, 2002, the subsidiary banks had seven unused lines of
credit totaling $38.0 million of which $4.0 million was secured and $34.0
million was unsecured. At the close of fiscal 2003, the Company had a $15.0
million unsecured revolving credit note. The note, which matures July 21, 2004,
had a balance outstanding of $10.0 million at December 31, 2003. Interest is
payable monthly at the Federal Funds rate plus one percent per annum, as defined
in the credit note agreement. As of December 31, 2003, the interest rate was
1.97%. At December 31, 2002, the Company had a $10.0 million revolving credit
note, which was secured by all of the outstanding stock of Quad City Bank &
Trust. The note, which matured July 1, 2003, had a balance outstanding if $5.0
million at December 31, 2002. Interest was payable quarterly at the adjusted
LIBOR rates, as defined in the credit note agreement. As of December 31, 2002,
the interest rate was 3.8%.
At December 31, 2002, the subsidiary banks had seven unused lines of credit
totaling $38.0 million of which $4.0 million was secured and $34.0 million was
unsecured. At June 30, 2002, the subsidiary banks had seven unused lines of
credit totaling $36.0 million of which $4.0 million was secured and $32.0
million was unsecured. At both December 31, 2002 and June 30, 2002, 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.
On February 18, 2004, the Company issued $8.0 million of floating rate capital
securities and $12.0 million of fixed rate capital securities (together, the
"Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II")
and QCR Holdings Statutory Trust III ("Trust III"). The securities represent
undivided beneficial interests in Trust II and Trust III, which were established
by the Company for the purpose of issuing the Trust Preferred Securities. The
securities issued by Trust II and Trust III mature in 30 years. The floating
rate capital securities are callable at par after five years and the fixed rate
capital securities are callable at par after seven years. The floating rate
capital securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the initial rate set at 3.97%, and the fixed rate capital
securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly. Both Trust II and Trust III used the proceeds from the sale of the
Trust Preferred Securities to purchase junior subordinated debentures of QCR
Holdings, Inc. The Company incurred issuance costs of $410 thousand, which will
be amortized over the lives of the securities.
The Company intends to use its net proceeds for general corporate purposes,
including the possible redemption in June 2004 of the $12.0 million of 9.2%
cumulative trust preferred securities issued by Trust I in 1999. If redeemed,
the trust preferred securities issued in 1999 carry approximately $750 thousand
of unamortized issuance costs, which will be expensed as of June 30, 2004.
Commitments, Contingencies, Contractual Obligations, and Off-balance Sheet
Arrangements
In the normal course of business, the subsidiary banks make various commitments
and incur certain contingent liabilities that are not presented in the
accompanying consolidated financial statements. The commitments and contingent
liabilities include various guarantees, commitments to extend credit, and
standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the banks upon extension of credit, is based
upon management's credit evaluation of the counter party. Collateral held varies
but may include accounts receivable, marketable securities, inventory, property,
plant and equipment, and income-producing commercial properties.
25
Standby letters of credit are conditional commitments issued by the subsidiary
banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements and, generally, have terms of one year, or less. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The banks hold collateral, as
described above, supporting those commitments if deemed necessary. In the event
the customer does not perform in accordance with the terms of the agreement with
the third party, the banks would be required to fund the commitments. The
maximum potential amount of future payments the banks could be required to make
is represented by the contractual amount. If the commitment is funded, the banks
would be entitled to seek recovery from the customer. At December 31, 2003 and
2002 no amounts had been recorded as liabilities for the banks' potential
obligations under these guarantees.
As of December 31, 2003 and 2002, commitments to extend credit aggregated $194.9
million and $165.2 million, respectively. As of December 31, 2003 and 2002,
standby letters of credit aggregated $6.0 million and $4.9 million,
respectively. Management does not expect that all of these commitments will be
funded.
The Company had also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $3.8 million and $23.7 million as of December
31, 2003 and 2002, respectively. These amounts were included in loans held for
sale at the respective balance sheet dates.
Bancard is subject to the risk of cardholder chargebacks and its local merchants
being incapable of refunding the amount charged back. Management attempts to
mitigate such risk by regular monitoring of merchant activity and in appropriate
cases, holding cash reserves deposited by the local merchant.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed by a performance bond in the amount of $1.0 million. As of December
31, 2003 there were no significant pending liabilities.
A significant portion of residential mortgage loans sold to investors in the
secondary market is sold with recourse. Specifically, certain loan sales
agreements provide that if the borrower becomes delinquent a number of payments
or a number of days, within six months to one year of the sale, the subsidiary
banks must repurchase the loan from the subject investor. The banks did not
repurchase any loans from secondary market investors under the terms of these
loan sales agreements during the year ended December 31, 2003, six months ended
December 31, 2002, or the years ended June 30, 2002 or 2001. In the opinion of
management, the risk of recourse to the banks was not significant and,
accordingly, no liability has been established related to such.
The Company has various financial obligations, including contractual obligations
and commitments, which may require future cash payments. The following table
presents, as of December 31, 2003, significant fixed and determinable
contractual obligations to third parties by payment date. Further discussion of
the nature of each obligation is included in the referenced note to the
consolidated financial statements.
Payments Due by Period
(in thousands)
----------------------------------------------------
Description and One year After 5
Note reference Total or less 1-3 years 4-5 years years
----------------------------------------------------
Deposits without a ......... $315,812 $315,812 $ -- $ -- $ --
stated maturity ..........
Certificates of deposits (6) 195,840 157,188 34,665 3,987 --
Short-term borrowings (7) .. 51,610 51,610 -- -- --
Federal Home Loan
Bank advances (8) ....... 76,232 19,500 13,410 19,300 24,022
Other borrowings (9) ....... 10,000 10,000 -- -- --
Junior subordinated
debentures (10) .......... 12,000 -- -- -- 12,000
Rental commitments (5) ..... 1,926 514 977 253 182
Purchase obligations (17) .. 1,083 1,083 -- -- --
Operating leases (17) ...... 3,054 1,029 2,002 7 16
----------------------------------------------------
Total contractual
cash obligations ......... $667,557 $556,736 $ 51,054 $23,547 $36,220
====================================================
26
Purchase obligations represent obligations under agreements to purchase goods or
services that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. The purchase obligation amounts presented primarily
relate to certain contractual payments for capital expenditures of data
processing technology and facilities expansion. The Company's operating lease
obligations represent short and long-term lease payments for data processing
equipment and services, software, and other equipment and professional services.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Impact of New Accounting Standards
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. The alternative methods were
effective for transitions during 2003 and the Company did not make any such
voluntary changes in accounting. The disclosure requirements of the Statement
were effective for and adopted in the consolidated financial statements for the
fiscal year ending December 31, 2002.
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement was effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Implementation of the Statement on
July 1, 2003 did not have a significant impact on the consolidated financial
statements, as the Company had no such instruments or contracts.
The Financial Accounting Standards Board has issued Statement 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and requires that certain freestanding financial instruments be
reported as liabilities in the balance sheet. For the Company, the Statement was
effective July 1, 2003 and implementation had no significant impact on the
consolidated financial statements
The Financial Accounting Standard Board has issued Interpretation (FIN) No. 46
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51.", which, for the Company, is effective for the year
ending December 31, 2003. FIN 46 establishes accounting guidance for
consolidation of variable interest entities (VIE), that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46, VIEs were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity. Under the provisions of FIN 46, QCR Holdings Capital Trust I no longer
meets the criteria for consolidation and, as such, has not been consolidated in
these financial statements. FIN 46 was adopted on December 31, 2003 via a
retroactive restatement of the prior year's financial statements. There was no
cumulative effect on stockholders' equity from this adoption.
27
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include
trust preferred securities in their Tier I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of this accounting change and, if necessary
or warranted, provide further appropriate guidance. No further guidance has been
issued to date and, as such, the $12 million in trust preferred securities
issued by QCR Capital Trust I were included in Tier I capital for regulatory
capital purposes at December 31, 2003. There can be no assurance that the
Federal Reserve will continue to permit institutions to include trust preferred
securities in Tier I capital in the future. Assuming the Company was not
permitted to include these securities in Tier I capital at December 31, 2003,
the Company would still exceed the regulatory required minimums for capital
adequacy purposes.
In February 2004, the Company issued, in a private transaction, $8.0 million of
floating rate capital securities and $12.0 million of fixed rate capital
securities (together, the "Trust Preferred Securities") of QCR Holdings
Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust
III"), respectively. The securities represent undivided beneficial interests in
Trust II and Trust III, which were established by the Company for the purpose of
issuing the Trust Preferred Securities. Trust II and Trust III used the proceeds
from the sale of the Trust Preferred Securities to purchase junior subordinated
debentures of the Company. In February 2004, the Federal Reserve provided
confirmation to the Company for their treatment of these new issuances as Tier 1
capital for regulatory capital purposes, subject to established limitations.
The Accounting Standards Executive Committee has issued Statement of Position
(SOP) 03-3 "Accounting for Certain Loans or Debt Securities Acquired in a
Transfer". This Statement applies to all loans acquired in a transfer, including
those acquired in the acquisition of a bank or a branch, and provides that such
loans be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are less than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective for calendar year 2005 and, early adoption, although permitted, is not
planned. No significant impact is expected on the consolidated financial
statements at the time of adoption.
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.
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.
28
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and
indirect market risk. Direct market risk exists from changes in interest rates.
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Each subsidiary bank has an
asset/liability management committee of the board of directors that meets
quarterly to review the bank's interest rate risk position and profitability,
and to make or recommend adjustments for consideration by the full board of each
bank . Management also reviews Quad City Bank & Trust and Cedar Rapids Bank &
Trust's securities portfolios, formulates investment strategies, and oversees
the timing and implementation of transactions to assure attainment of the
board's objectives in the most effective manner. Notwithstanding the Company's
interest rate risk management activities, the potential for changing interest
rates is an uncertainty that can have an adverse effect on net income.
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.
29
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, 2003 and 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, 2003 Dec. 31, 2002 Dec.31, 2003 Dec. 31, 2002 Dec.31, 2003 Dec. 31, 2002
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 $ 53,893 $ 45,225 $ (3,532) $ (2,584) (6.15%) (5.40%)
--- $ 57,425 $ 47,809
-200 $ 59,932 $ 50,013 $ 2,507 $ 2,204 4.36% 4.61
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.
30
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, 2003 and 2002 33
Consolidated statements of income for the year ended December 31,
2003, six months ended December 31, 2002 and the year ended
June 30, 2002 and 2001 34
Consolidated statements of changes in stockholders' equity for
the year ended December 31, 2003, six months ended December 31,
2002 and the years ended June 30, 2002 and 2001 35
Consolidated statements of cash flows for the year ended
December 31, 2003, six months ended December 31, 2002 and the
years ended June 30, 2002 and 2001 36 - 37
Notes to consolidated financial statements 38 - 61
31
Independent Auditor's Report
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, 2003 and 2002, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year ended December 31, 2003, six months ended December 31, 2002,
and the years ended June 30, 2002 and 2001. 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, 2003 and 2002, and the results of their
operations and their cash flows for the year ended December 31, 2003, six months
ended December 31, 2002, and the years ended June 30, 2002 and 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
January 23, 2004
McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation
of separate and independent legal entities.
32
QCR Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
December 31, 2003 and 2002
Assets 2003 2002
- --------------------------------------------------------------------------------------------
Cash and due from banks ..................................... $ 24,427,573 $ 24,888,350
Federal funds sold .......................................... 4,030,000 14,395,000
Interest-bearing deposits at financial institutions ......... 10,426,092 14,585,795
Securities held to maturity, at amortized cost (fair value
2003 $416,751; 2002 $451,121) (Note 3) .................... 400,116 425,332
Securities available for sale, at fair value (Note 3) ....... 128,442,926 81,228,749
---------------------------
128,843,042 81,654,081
---------------------------
Loans receivable, held for sale (Note 4) .................... 3,790,031 23,691,004
Loans receivable, held for investment (Note 4) .............. 518,681,380 426,044,732
Less allowance for estimated losses on loans (Note 4) ..... 8,643,012 6,878,953
---------------------------
513,828,399 442,856,783
---------------------------
Premises and equipment, net (Note 5) ........................ 12,028,532 9,224,542
Accrued interest receivable ................................. 3,646,108 3,221,246
Other assets ................................................ 12,809,809 13,774,559
---------------------------
Total assets ........................................ $710,039,555 $604,600,356
===========================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ..................................... $130,962,916 $ 89,675,609
Interest-bearing ........................................ 380,688,947 345,072,014
---------------------------
Total deposits (Note 6) ............................. 511,651,863 434,747,623
Short-term borrowings (Note 7) ............................ 51,609,801 32,862,446
Federal Home Loan Bank advances (Note 8) .................. 76,232,348 74,988,320
Other borrowings (Note 9) ................................. 10,000,000 5,000,000
Junior subordinated debentures (Notes 1 and 10) ........... 12,000,000 12,000,000
Other liabilities ......................................... 6,722,808 8,415,365
---------------------------
Total liabilities ................................... 668,216,820 568,013,754
---------------------------
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;
2003 - shares issued 2,863,990 and outstanding 2,803,844;
2002 - shares issued 2,823,061 and outstanding 2,762,915 2,863,990 2,823,061
Additional paid-in capital ................................ 17,143,868 16,761,423
Retained earnings ......................................... 20,866,749 15,712,600
Accumulated other comprehensive income .................... 1,802,664 2,144,054
---------------------------
42,677,271 37,441,138
Less cost of 60,146 common shares acquired for the treasury . 854,536 854,536
---------------------------
Total stockholders' equity .......................... 41,822,735 36,586,602
---------------------------
Total liabilities and stockholders' equity .......... $710,039,555 $604,600,356
===========================
See Notes to Consolidated Financial Statements.
33
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Income
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, ---------------------------
2003 2002 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans, including fees ................................... $ 28,984,000 $ 13,747,643 $ 23,718,322 $ 22,970,407
Securities:
Taxable ............................................... 3,248,115 1,702,046 3,166,323 3,067,722
Nontaxable ............................................ 493,162 235,155 429,138 290,990
Interest-bearing deposits at financial institutions ..... 432,119 361,218 948,098 947,755
Federal funds sold ...................................... 220,865 73,611 258,256 1,267,062
---------------------------------------------------------
Total interest and dividend income ................ 33,378,261 16,119,673 28,520,137 28,543,936
---------------------------------------------------------
Interest expense:
Deposits ................................................ 7,005,306 4,151,446 8,894,578 13,022,210
Short-term borrowings ................................... 326,916 225,093 592,382 992,219
Federal Home Loan Bank advances ......................... 3,255,416 1,440,326 2,048,273 1,462,779
Other borrowings ........................................ 228,433 99,645 201,415 --
Junior subordinated debentures .......................... 1,133,506 566,753 1,133,506 1,134,541
---------------------------------------------------------
Total interest expense ............................ 11,949,577 6,483,263 12,870,154 16,611,749
---------------------------------------------------------
Net interest income ............................... 21,428,684 9,636,410 15,649,983 11,932,187
Provision for loan losses (Note 4) ........................ 3,405,427 2,183,745 2,264,965 889,670
---------------------------------------------------------
Net interest income after provision for loan losses 18,023,257 7,452,665 13,385,018 11,042,517
---------------------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ...... 2,194,974 1,292,213 2,097,209 1,673,444
Trust department fees ................................... 2,242,747 1,045,046 2,161,677 2,071,971
Deposit service fees .................................... 1,505,200 596,999 994,630 816,489
Gains on sales of loans, net ............................ 3,667,513 1,864,813 1,991,437 1,136,572
Securities gains (losses), net .......................... 5 61,514 6,433 (14,047)
Gain on sale of merchant credit card portfolio (Note 11) -- 3,460,137 -- --
Other ................................................... 1,557,170 518,999 663,273 628,639
---------------------------------------------------------
Total noninterest income .......................... 11,167,609 8,839,721 7,914,659 6,313,068
---------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits .......................... 12,710,505 6,075,885 10,077,583 8,014,268
Compensation and other expenses related to sale of
merchant credit card portfolio (Note 11) .............. -- 1,413,734 -- --
Professional and data processing fees ................... 1,962,243 872,750 1,410,770 1,159,929
Advertising and marketing ............................... 786,054 341,093 604,002 579,524
Occupancy and equipment expense ......................... 2,640,602 1,322,826 2,331,806 1,925,820
Stationery and supplies ................................. 460,421 229,066 476,158 352,441
Postage and telephone ................................... 632,354 291,737 486,053 409,626
Bank service charges .................................... 454,367 211,873 357,550 293,012
Insurance ............................................... 444,947 186,308 351,873 328,405
Other ................................................... 943,759 467,779 926,633 736,928
---------------------------------------------------------
Total noninterest expenses ........................ 21,035,252 11,413,051 17,022,428 13,799,953
---------------------------------------------------------
Income before income taxes ........................ 8,155,614 4,879,335 4,277,249 3,555,632
Federal and state income taxes (Note 12) .................. 2,694,687 1,682,791 1,314,796 1,159,900
---------------------------------------------------------
Net income ........................................ $ 5,460,927 $ 3,196,544 $ 2,962,453 $ 2,395,732
=========================================================
Earnings per common share (Note 16):
Basic ................................................... $ 1.96 $ 1.16 $ 1.10 $ 1.06
Diluted ................................................. $ 1.91 $ 1.13 $ 1.08 $ 1.04
Weighted average common shares outstanding .............. 2,782,042 2,752,739 2,685,996 2,268,465
Weighted average common and common equivalent
shares outstanding .................................... 2,855,055 2,819,416 2,743,805 2,314,334
See Notes to Consolidated Financial Statements.
34
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Year Ended December 31, 2003, Six Months Ended December 31, 2002
and Years Ended June 30, 2002 and 2001
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
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 16,761,423 15,712,600 2,144,054 (854,536) 36,586,602
Comprehensive income:
Net income .................................. -- -- 5,460,927 -- -- 5,460,927
Other comprehensive income, net of tax
(Note 2) .................................. -- -- -- (341,390) -- (341,390)
-----------
Comprehensive income .................. 5,119,537
-----------
Cash dividends declared, $.11 per share ..... -- -- (306,778) -- -- (306,778)
Proceeds from issuance of 6,852 shares of
common stock as a result of stock purchased
under the Employee Stock Purchase Plan
(Note 14) ................................. 6,852 104,635 -- -- -- 111,487
Proceeds from issuance of 50,658 shares of
common stock as a result of stock options
exercised (Note 14) ....................... 50,658 325,820 -- -- -- 376,478
Exchange of 16,581 shares of common
stock in connection with options exercised (16,581) (322,881) -- -- -- (339,462)
Tax benefit of nonqualified stock options
exercised ................................. -- 274,871 -- -- -- 274,871
---------------------------------------------------------------------------------
Balance, December 31, 2003 .................... $2,863,990 $17,143,868 $20,866,749 $ 1,802,664 $(854,536) $41,822,735
=================================================================================
See Notes to Consolidated Financial Statements.
35
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, ------------------------------
2003 2002 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .............................................. $ 5,460,927 $ 3,196,544 $ 2,962,453 $ 2,395,732
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation .......................................... 1,072,943 497,460 923,747 768,310
Provision for loan losses ............................. 3,405,427 2,183,745 2,264,965 889,670
Deferred income taxes ................................. (674,681) (403,312) (634,045) (362,995)
Amortization of offering costs on junior subordinated
debentures .......................................... 29,506 14,753 29,506 29,506
Amortization of premiums on securities, net ........... 788,263 148,782 162,642 60,062
Investment securities (gains) losses, net ............. (5) (61,514) (6,433) 14,047
Loans originated for sale ............................. (245,414,955) (136,646,900) (146,973,634) (97,605,425)
Proceeds on sales of loans ............................ 268,983,441 123,319,054 146,290,546 94,039,651
Net gains on sales of loans ........................... (3,667,513) (1,864,813) (1,991,437) (1,136,572)
Net losses on sales of premises and equipment ......... 50,446 -- -- --
Gain on sale of merchant credit card portfolio ........ -- (3,460,137) -- --
Tax benefit of nonqualified stock options exercised ... 274,871 87,922 60,332 --
Increase in accrued interest receivable ............... (424,862) (95,254) (262,814) (230,058)
(Increase) decrease in other assets ................... 2,075,198 (2,193,369) (283,790) (1,166,767)
Increase (decrease) in other liabilities .............. (1,722,249) 2,386,668 970,602 633,631
----------------------------------------------------------------
Net cash provided by (used in) operating activities 30,236,757 (12,890,371) 3,512,640 (1,671,208)
----------------------------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold ........... 10,365,000 (13,635,000) 7,015,000 18,330,000
Net (increase) decrease in interest-bearing deposits at
financial institutions ................................ 4,159,703 501,664 (1,568,962) (547,278)
Activity in securities portfolio:
Purchases ............................................. (91,746,856) (14,778,519) (30,034,923) (17,003,552)
Calls and maturities .................................. 39,195,000 7,335,000 9,702,500 15,045,000
Paydowns .............................................. 4,025,159 1,166,490 1,789,042 1,537,072
Sales of securities available for sale ................ -- 2,141,382 101,285 1,262,841
Activity in life insurance contracts:
Purchases ............................................. (66,312) (195,000) (401,087) --
Increase in cash value ................................ (190,873) (9,388) (115,888) (87,840)
Proceeds from sale of merchant credit card portfolio .... -- 3,500,000 -- --
Net loans originated and held for investment ............ (94,278,016) (45,365,509) (100,456,216) (41,568,458)
Purchase of premises and equipment ...................... (4,152,033) (515,241) (1,471,625) (1,713,387)
Proceeds from sales of premises and equipment ........... 224,654 -- -- --
----------------------------------------------------------------
Net cash used in investing activities ............. (132,464,574) (59,854,121) (115,440,874) (24,745,602)
----------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ........................ 76,904,240 58,430,314 74,162,085 14,088,468
Net increase (decrease) in short-term borrowings ........ 18,747,355 (1,766,263) 6,286,167 7,570,818
Activity in Federal Home Loan Bank advances:
Advances .............................................. 12,550,000 29,000,000 25,000,000 16,750,000
Payments .............................................. (11,305,972) (6,426,003) (2,298,436) (9,462,639)
Proceeds from other borrowings .......................... 5,000,000 -- 5,000,000 --
Purchase of treasury stock .............................. -- -- -- (255,056)
Payment of cash dividends ............................... (277,086) -- -- --
Proceeds from issuance of common stock, net ............. 148,503 2,364 4,959,541 925
----------------------------------------------------------------
Net cash provided by financing activities ......... $ 101,767,040 $ 79,240,412 $ 113,109,357 $ 28,692,516
----------------------------------------------------------------
(Continued)
36
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, ----------------------------
2003 2002 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks ... $ (460,777) $ 6,495,920 $ 1,181,123 $ 2,275,706
Cash and due from banks:
Beginning .................................................. 24,888,350 18,392,430 17,211,307 14,935,601
------------------------------------------------------------
Ending ..................................................... $ 24,427,573 $ 24,888,350 $ 18,392,430 $ 17,211,307
============================================================
Supplemental Disclosures of Cash Flow Information,
cash payments for:
Interest ................................................... $ 12,516,692 $ 6,537,656 $ 13,405,861 $ 16,069,527
Income and franchise taxes ................................. 4,904,697 1,112,741 1,363,292 1,480,894
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on securities available for sale, net ..... (341,390) 860,315 777,817 1,604,440
Due from broker for call of securities available for sale .. -- -- -- (1,000,000)
Exchange of shares of common stock in connection
with options exercised ................................... (339,462) (162,310) (186,063) --
See Notes to Consolidated Financial Statements.
37
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), and QCR Holdings
Capital Trust I (Trust I). Quad City Bank & Trust is a commercial bank that
serves the Quad Cities and adjacent communities. Cedar Rapids Bank & Trust is
a commercial bank that 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. Bancard's wholly-owned subsidiary,
Allied Merchant Services, Inc. (Allied), was liquidated on December 31, 2003.
All of the merchant credit card relationships owned by Allied were included
in Bancard's sale of its ISO-related merchant credit card operations to
iPayment, Inc. in October 2002. QCR Holdings Capital Trust I was capitalized
in June 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 all wholly-owned
subsidiaries, except QCR Holdings Capital Trust I, which does not meet the
criteria for consolidation. All material intercompany accounts and
transactions have been eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and
due from banks include cash on hand and non-interest bearing amounts due from
banks. Cash flows from federal funds sold, interest bearing deposits at
financial institutions, loans, deposits, and short-term borrowings are
treated as net increases or decreases.
Cash and due from banks: The subsidiary banks are required by federal banking
regulations to maintain certain cash and due from bank reserves. The reserve
requirement was approximately $12,216,000 and $7,721,000 as of December 31,
2003 and 2002, respectively.
Investment securities: Investment securities held to maturity are those debt
securities that the Company has the ability and intent to hold until maturity
regardless of changes in market conditions, liquidity needs, or changes in
general economic conditions. Such securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. If the ability or intent
to hold to maturity is not present for certain specified securities, such
securities are considered available for sale as the Company intends to hold
them for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based
on various factors, including movements in interest rates, changes in the
maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other factors. Securities available
for sale are carried at fair value. Unrealized gains or losses are reported
as increases or decreases in accumulated other comprehensive income. Realized
gains or losses, determined on the basis of the cost of specific securities
sold, are included in earnings.
38
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, 2003, the Company has three
stock-based employee compensation plans, which are described more fully in
Note 14. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, ------------------------
2003 2002 2002 2001
----------------------------------------------------
Net income, as reported ............... $5,460,927 $3,196,544 $2,962,453 $2,395,732
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects .. (96,447) (39,503) (90,182) (70,328)
----------------------------------------------------
Net income .................... $5,364,480 $3,157,041 $2,872,271 $2,325,404
====================================================
Earnings per share:
Basic:
As reported ....................... $ 1.96 $ 1.16 $ 1.10 $ 1.06
Pro forma ......................... 1.93 1.15 1.07 1.03
Diluted:
As reported ....................... 1.91 1.13 1.08 1.04
Pro forma ......................... 1.88 1.12 1.05 1.00
39
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 year
ended December 31, 2003, six months ended December 31, 2002, and the years
ended June 30, 2002 and 2001: dividend rate of .44% to .61% for the year
ended December 31, 2003, .59% for the six months ended December 31, 2002, and
0% for the years ended June 30, 2002 and 2001; risk-free interest rates based
upon current rates at the date of grant (3.68% to 6.22% for stock options and
.82% to 1.29% for the employee stock purchase plan); expected lives of 10
years for stock options and 3 months to 6 months for the employee stock
purchase plan; and expected price volatility of 23.09% to 24.69%.
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 and, 2001
throughout these consolidated financial statements are for the six months
ended December 31, 2002 and the years ended June 30, 2002 and 2001,
respectively.
In connection with the Company's change in fiscal year, presented below is
the financial data for comparable six month and twelve month periods:
Six Months Ended Twelve Months Ended
December 31, December 31,
-------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
2002 2001 2003 2002 2001
-------------------------------------------------------------------
Total interest income ........ $16,119,673 $13,845,800 $33,378,261 $30,794,010 $28,146,996
Total interest expense ....... 6,483,263 6,633,525 11,949,577 12,719,892 14,803,076
-------------------------------------------------------------------
Net interest income .. 9,636,410 7,212,275 21,428,684 18,074,118 13,343,920
Provision for loan losses .... 2,183,745 1,039,865 3,405,427 3,408,845 1,409,660
Noninterest income ........... 8,839,721 4,040,240 11,167,609 12,714,140 7,565,727
Noninterest expenses ......... 11,413,051 8,244,914 21,035,252 20,190,565 15,501,058
-------------------------------------------------------------------
Net income before
income taxes ......... 4,879,335 1,967,736 8,155,614 7,188,848 3,998,929
Federal and state income taxes 1,682,791 630,126 2,694,687 2,367,461 1,269,781
-------------------------------------------------------------------
Net income ........... $ 3,196,544 $ 1,337,610 $ 5,460,927 $ 4,821,387 $ 2,729,148
===================================================================
Earnings per common share:
Basic ........................ $ 1.16 $ 0.51 $ 1.96 $ 1.75 $ 1.13
Diluted ...................... 1.13 0.50 1.91 1.71 1.11
40
Restatement of financial statements: Under the provisions of FIN 46,
Consolidation of Variable Interest Entities, and FASB Interpretation No. FIN
46R, QCR Holdings Capital Trust I, a 100%-owned subsidiary of the Company, no
longer meets the criteria for consolidation. FIN 46 was adopted on December
31, 2003 via a retroactive restatement of the prior year's financial
statements. As a result, the balance sheet includes $12,000,000 of junior
subordinated debentures, which were previously included in the balance sheet
as Company Obligated Mandatorily Redeemable Preferred Securities. There was
no cumulative effect on stockholders' equity from this adoption.
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include
trust preferred securities in their Tier I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends
to review the regulatory implications of this accounting change and, if
necessary or warranted, provide further appropriate guidance. No further
guidance has been issued to date and the $12,000,000 in trust preferred
securities issued by QCR Capital Trust I, which are no longer included on the
Company's consolidated balance sheet as such, but are now represented by
junior subordinated debentures, were included in Tier I capital for
regulatory capital purposes at December 31, 2003. See also Notes 10 and 15.
There can be no assurance that the Federal Reserve will continue to permit
institutions to include trust preferred securities in regulatory capital in
the future. Assuming the Company was not permitted to include these
securities in regulatory capital at December 31, 2003, the Company would
still exceed the regulatory required minimums for capital adequacy purposes.
Reclassification: Certain amounts in the prior year financial statements have
been reclassified, with no effect on net income or stockholders' equity, to
conform with the current period presentation.
Note 2. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income,
which for the Company is comprised entirely of unrealized gains and losses on
securities available for sale.
Other comprehensive income (loss) for the year ended December 31, 2003, six
months ended December 31, 2002, and the years ended June 30, 2002 and 2001 is
comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------
Year ended December 31, 2003:
Unrealized gains (losses) on securities available for sale:
Unrealized holding (losses) arising during the period ... $ (549,473) $ (208,086) $ (341,387)
Less reclassification adjustment for gains
included in net income ................................ 5 2 3
-----------------------------------------
Other comprehensive income (loss) ................... $ (549,478) $ (208,088) $ (341,390)
=========================================
Six months ended December 31, 2002:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period ...... $ 1,436,098 $ 537,283 $ 898,815
Less reclassification adjustment for gains
included in net income ................................ 61,514 23,014 38,500
-----------------------------------------
Other comprehensive income .......................... $ 1,374,584 $ 514,269 $ 860,315
=========================================
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------
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
=========================================
41
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of December 31,
2003 and 2002 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------------
December 31, 2003:
Securities held to maturity:
Municipal securities ....... $ 250,116 $ 3,856 $ -- $ 253,972
Foreign bonds .............. 150,000 12,779 -- 162,779
---------------------------------------------------------------
$ 400,116 $ 16,635 $ -- $ 416,751
===============================================================
Securities available for sale:
U.S. Treasury securities ... $ 1,001,823 $ 3,028 $ -- $ 1,004,851
U.S. agency securities ..... 86,732,152 1,104,501 (63,574) 87,773,079
Mortgage-backed securities . 5,656,092 67,078 (8,438) 5,714,732
Municipal securities ....... 15,663,699 1,017,795 (884) 16,680,610
Corporate securities ....... 9,466,395 491,943 (3,782) 9,954,556
Trust preferred securities . 1,349,800 105,009 -- 1,454,809
Other securities ........... 5,687,664 173,612 (987) 5,860,289
---------------------------------------------------------------
$ 125,557,625 $ 2,962,966 $ (77,665) $ 128,442,926
===============================================================
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
Foreign 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
================================================================
Gross unrealized losses and fair value, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position, as of December 31, 2003 are summarized as follows:
Less than 12 Months 12 Months or More Total
----------------------------- --------------------------- ----------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------------------------------------------------------------------------------------------
Securities available for sale:
U.S. agency securities ..... $ 29,629,310 $ (63,574) $ -- $ -- $ 29,629,310 $ (63,574)
Mortgage-backed securities . 2,919,512 (8,438) -- -- 2,919,512 (8,438)
Municipal securities ....... 246,727 (884) -- -- 246,727 (884)
Corporate securities ....... 1,058,945 (3,782) -- -- 1,058,945 (3,782)
Other securities ........... -- -- 24,927 (987) 24,927 (987)
--------------------------------------------------------------------------------------------
$ 33,854,494 $ (76,678) $ 24,927 $ (987) $ 33,879,421 $ (77,665)
============================================================================================
42
For all of the above investment securities, the unrealized losses are generally
due to changes in interest rates and, as such, are considered to be temporary,
by the Company.
There were no sales of securities during the year ended December 31, 2003. All
sales of securities during the six months ended December 31, 2002 and the years
ended June 30, 2002 and 2001 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
Year Ended Months Ended Year Ended June 30,
December 31, December 31, -------------------------
2003 2002 2002 2001
-------------------------------------------------------
Proceeds from sales of securities ... $ -- $2,141,382 $ 101,285 $1,262,841
Gross gains from sales of securities -- 64,026 10,093 11,831
Gross losses from sales of securities -- 2,512 3,660 25,878
The amortized cost and fair value of securities as of December 31, 2003 by
contractual maturity are shown below. Expected maturities of mortgage-backed
securities may differ from contractual maturities because the mortgages
underlying the mortgage-backed securities may be called or prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary. Other securities are excluded from the
maturity categories as there is no fixed maturity date.
Amortized
Cost Fair Value
-----------------------------
Securities held to maturity:
Due in one year or less ...................... $ 300,116 $ 306,145
Due after one year through five years ........ 50,000 53,612
Due after five years ......................... 50,000 56,994
-----------------------------
$ 400,116 $ 416,751
=============================
Securities available for sale:
Due in one year or less ...................... $ 16,752,367 $ 17,009,472
Due after one year through five years ........ 72,512,056 74,027,539
Due after five years ......................... 24,949,446 25,830,894
-----------------------------
114,213,869 116,867,905
Mortgage-backed securities ................... 5,656,092 5,714,732
Other securities ............................. 5,687,664 5,860,289
-----------------------------
$125,557,625 $128,442,926
=============================
As of December 31, 2003 and 2002, investment securities with a carrying value of
$83,068,190 and $55,974,583, 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, 2003 and 2002 is
presented as follows:
2003 2002
------------------------------
Commercial ........................................... $ 435,345,514 $ 350,205,750
Real estate loans held for sale - residential mortgage 3,790,031 23,691,004
Real estate - residential mortgage ................... 29,603,777 28,760,597
Real estate - construction ........................... 2,253,675 2,229,740
Installment and other consumer ....................... 50,984,349 44,567,327
------------------------------
521,977,346 449,454,418
Deferred loan origination costs, net ................. 494,065 281,318
Less allowance for estimated losses on loans ......... (8,643,012) (6,878,953)
------------------------------
$ 513,828,399 $ 442,856,783
==============================
43
Loans on nonaccrual status amounted to $4,204,078 and $4,608,391 as of December
31, 2003 and 2002, respectively. Interest income in the amount of $468,758,
$311,519, and $156,478 for the year ended December 31, 2003, six months ended
December 31, 2002, and the year ended June 30, 2002, respectively, would have
been earned on the nonaccrual loans had they been performing in accordance with
their original terms. Cash interest collected on nonaccrual loans was $262,819,
$69,503, and $122,303 for the year ended December 31, 2003, 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 year ended June 30, 2001.
Changes in the allowance for estimated losses on loans for the year ended
December 31, 2003, six months ended December 31, 2002, and the years ended June
30, 2002 and 2001 are presented as follows:
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, --------------------------
2003 2002 2002 2001
--------------------------------------------------------
Balance, beginning ....................... $ 6,878,953 $ 6,111,454 $ 4,248,182 $ 3,617,401
Provisions charged to expense ............ 3,405,427 2,183,745 2,264,965 889,670
Loans charged off ........................ (2,075,406) (1,454,192) (641,156) (300,463)
Recoveries on loans previously charged off 434,038 37,946 239,463 41,574
--------------------------------------------------------
Balance, ending .......................... $ 8,643,012 $ 6,878,953 $ 6,111,454 $ 4,248,182
========================================================
Loans considered to be impaired as of December 31, 2003 and 2002 are as follows:
2003 2002
----------------------
Impaired loans for which an allowance has been provided $3,355,017 $2,478,393
======================
Allowance provided for impaired loans, included in
the allowance for loan losses ....................... $ 539,105 $ 786,301
======================
Impaired loans for which no allowance has been provided $ 932,064 $2,434,463
======================
Impaired loans for which no allowance has been provided have adequate
collateral, based on management's current estimates.
The average recorded investment in impaired loans during the year ended December
31, 2003, six months ended December 31, 2002, and the year ended June 30, 2002
was $5,213,072, $5,795,054, and $1,157,939, respectively. Interest income on
impaired loans of $205,366, $123,882, and $42,414 was recognized for cash
payments received for the year ended December 31, 2003, 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 for
the year ended June 30, 2001.
Loans past due 90 days or more and still accruing interest totaled $755,757 and
$430,745 as of December 31, 2003 and 2002, 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 year ended December 31, 2003, six months ended December 31, 2002, and
year ended June 30, 2002 was as follows:
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
2003 2002 2002
--------------------------------------------
Balance, beginning .............................. $ 23,267,366 $ 22,806,789 $ 19,383,492
Net (decrease) due to change in related parties (359) -- --
Advances ...................................... 10,589,823 1,876,950 11,004,085
Repayments .................................... (9,931,825) (1,416,373) (7,580,788)
--------------------------------------------
Balance, ending ................................. $ 23,925,005 $ 23,267,366 $ 22,806,789
============================================
44
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of December
31, 2003 and 2002:
2003 2002
-----------------------------
Land ....................................... $ 1,639,080 $ 813,400
Buildings .................................. 7,711,335 6,143,269
Furniture and equipment .................... 8,023,725 6,618,773
-----------------------------
17,374,140 13,575,442
Less accumulated depreciation .............. 5,345,608 4,350,900
-----------------------------
$12,028,532 $ 9,224,542
=============================
Certain facilities are leased under operating leases. Rental expense was
$837,271, $430,576, $795,768, and $615,058 for the year ended December 31, 2003,
six months ended December 31, 2002, and the years ended June 30, 2002 and 2001,
respectively.
Future minimum rental commitments under noncancelable leases are as follows as
of December 31, 2003:
Year ending December 31:
2004 $ 513,889
2005 504,459
2006 472,282
2007 150,915
2008 102,501
Thereafter 181,795
-----------
$ 1,925,841
===========
Note 6. Deposits
The aggregate amount of certificates of deposit each with a minimum denomination
of $100,000, was $73,799,534 and $69,373,970 as of December 31, 2003 and 2002,
respectively.
As of December 31, 2003, the scheduled maturities of certificates of deposit
were as follows:
Year ending December 31:
2004 $ 157,187,962
2005 25,259,419
2006 9,406,064
2007 2,636,926
2008 1,349,605
-------------
$ 195,839,976
=============
Note 7. Short-Term Borrowings
Short-term borrowings as of December 31, 2003 and 2002 are summarized as
follows:
2003 2002
--------------------------
Overnight repurchase agreements with customers ... $34,699,801 $32,862,446
Federal funds purchased .......................... 16,910,000 --
--------------------------
$51,609,801 $32,862,446
==========================
Information concerning repurchase agreements is summarized as follows as of
December 31, 2003 and 2002:
2003 2002
--------------------------
Average daily balance during the period ................. $36,270,809 $32,121,426
Average daily interest rate during the period ........... 0.82% 1.22%
Maximum month-end balance during the period ............. $38,341,650 $33,384,561
Weighted average rate as of end of period ............... 0.82% 1.26%
Securities underlying the agreements as of end of period:
Carrying value ........................................ $72,393,780 $44,745,780
Fair value ............................................ 72,393,780 44,745,780
45
The securities underlying the agreements as of December 31, 2003 and 2002 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, 2003 and 2002, the Banks held $4,251,000 and $3,926,800,
respectively, of FHLB stock. Maturity and interest rate information on advances
from the FHLB as of December 31, 2003 and 2002 is as follows:
December 31, 2003
--------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
--------------------------
Maturity:
Year ending December 31:
2004 $ 19,500,000 3.21%
2005 4,000,000 3.27
2006 9,410,000 3.43
2007 8,700,000 3.95
2008 10,600,000 3.74
Thereafter 24,022,348 4.61
------------
Total FHLB advances $ 76,232,348 3.84
============
Of the advances maturing after December 31, 2003, $19,000,000 have options which
allow the Banks the right, but not the obligation, to "put" the advances back to
the FHLB.
December 31, 2002
--------------------------
Weighted
Average
Interest Rate
Amount Due at Year-End
--------------------------
Maturity:
Year ending December 31:
2003 $ 7,865,000 3.93%
2004 20,701,166 3.34
2005 4,750,000 3.68
2006 7,610,000 4.18
2007 8,200,000 4.02
Thereafter 25,862,154 4.70
------------
Total FHLB advances $ 74,988,320 4.05
============
Advances are collateralized by securities, with a carrying value of $3,196,119
and $2,109,106 as of December 31, 2003 and 2002, respectively. Advances as of
December 31, 2003 and 2002 are also collateralized by 1-to-4 unit residential,
home equity 2nd mortgages, commercial real estate, home equity lines of credit,
and business loans equal to 135%, 175%, 175%, 200%, and 250%, respectively, of
total outstanding notes. At December 31, 2003, the aggregate total of loans
pledged was $229,843,419.
Note 9. Other Borrowings
As of December 31, 2003, the Company had a $15,000,000 unsecured revolving
credit note. The note, which matures July 21, 2004, had a balance outstanding of
$10,000,000 as of December 31, 2003. Interest is payable monthly at the Federal
Funds rate plus 1% per annum, as defined in the credit note agreement. As of
December 31, 2003, the interest rate was 1.97%.
The revolving credit note agreement contains certain covenants that place
restrictions on additional debt and stipulate minimum capital and various
operating ratios.
As of December 31, 2002, the Company had a $10,000,000 revolving credit note,
which was secured by all of the outstanding stock of Quad City Bank & Trust. The
note had a balance outstanding of $5,000,000 at December 31, 2002. Interest was
payable quarterly at the adjusted LIBOR rates as defined in the credit note
agreement. As of December 31, 2002, the interest rate was 3.8%.
46
Unused lines of credit of the subsidiary banks as of December 31, 2003 and 2002
are summarized as follows:
2003 2002
--------------------------
Secured ........................................... $ 4,000,000 $ 4,000,000
Unsecured ......................................... 37,000,000 34,000,000
--------------------------
$41,000,000 $38,000,000
==========================
Note 10. Junior Subordinated Debentures
Junior subordinated debentures are due to QCR Holdings Capital Trust I, a 100%
owned non-consolidated subsidiary of the Company. The debentures were issued in
1999 in conjunction with the Trust's issuance of 1,200,000 shares of Company
Obligated Mandatorily Redeemable Preferred Securities. The debentures bear the
same interest rate and terms as the preferred securities. Distributions on the
trust preferred securities are paid quarterly. Cumulative cash distributions are
calculated at a 9.2% annual rate. The capital securities have a maturity date of
June 30, 2029; however, the Trust has the option to shorten the maturity date to
a date not earlier than June 30, 2004.
The debentures are included on the balance sheets as liabilities; however for
regulatory purposes, approximately $12,000,000 and $11,480,000, are allowed in
the calculation of Tier I capital as of December 31, 2003 and 2002,
respectively, with the remainder allowed as Tier II capital. The required
deconsolidation of trust preferred subsidiaries, such as QCR Capital Trust I,
under FIN 46R, has called into question the permissibility of including these
securities in regulatory capital in the future. See further information in Note
1.
Note 11. Sale of Merchant Credit Card Portfolio
On October 22, 2002, the Company announced Bancard's 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 continues to provide credit
card processing for its local merchants and cardholders of the subsidiary banks
and agent banks. It is anticipated that the Company's termination of ISO-related
merchant credit card processing will reduce Bancard's future earnings. However,
the Company believes that Bancard can be profitable with its narrowed business
focus of continuing to provide credit card processing for its local merchants
and agent banks and for cardholders of the Company's subsidiary banks.
Note 12. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components
for the year ended December 31, 2003, six months ended December 31, 2002, and
the years ended June 30, 2002 and 2001:
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, ----------------------------
2003 2002 2002 2001
------------------------------------------------------------
Current ........ $ 3,369,368 $ 2,086,103 $ 1,948,841 $ 1,522,895
Deferred ....... (674,681) (403,312) (634,045) (362,995)
------------------------------------------------------------
$ 2,694,687 $ 1,682,791 $ 1,314,796 $ 1,159,900
============================================================
47
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
year ended December 31, 2003, six months ended December 31, 2002, and the years
ended June 30, 2002 and 2001:
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
--------------------- --------------------- ---------------------------------------------
2003 2002 2002 2001
--------------------- --------------------- --------------------- ---------------------
% of % of % of % of
Pretax Pretax Pretax Pretax
Amount Income Amount Income Amount Income Amount Income
---------------------------------------------------------------------------------------------
Computed "expected"
tax expense ......... $ 2,854,465 35.0% $ 1,707,767 35.0% $ 1,497,037 35.0% $ 1,244,471 35.0%
Effect of graduated
tax rates ........... (81,556) (1.0) (48,793) (1.0) (42,772) (1.0) (35,556) (1.0)
Tax exempt income, net (274,495) (3.4) (105,270) (2.2) (196,870) (4.6) (147,396) (4.1)
State income taxes, net
of federal benefit .. 226,446 2.8 161,761 3.3 166,812 3.9 132,546 3.7
Other ................. (30,173) (0.4) (32,674) (0.6) (109,411) (2.6) (34,165) (1.0)
---------------------------------------------------------------------------------------------
$ 2,694,687 33.0% $ 1,682,791 34.5% $ 1,314,796 30.7% $ 1,159,900 32.6%
=============================================================================================
The net deferred tax assets included with other assets on the consolidated
balance sheets consisted of the following as of December 31, 2003 and 2002:
2003 2002
-----------------------
Deferred tax assets:
Compensation ........................................ $1,058,111 $ 628,825
Loan and credit card losses ......................... 3,038,140 2,481,400
Other ............................................... 70,609 66,978
-----------------------
4,166,860 3,177,203
-----------------------
Deferred tax liabilities:
Net unrealized gains on securities available for sale 1,082,637 1,290,725
Premises and equipment .............................. 736,021 609,785
Investment accretion ................................ 36,226 36,242
Deferred loan origination fees, net ................. 198,945 102,177
Other ............................................... 93,258 1,270
-----------------------
2,147,087 2,040,199
-----------------------
Net deferred tax asset ........................ $2,019,773 $1,137,004
=======================
The change in deferred income taxes was reflected in the consolidated financial
statements as follows for the year ended December 31, 2003, six months ended
December 31, 2002, and the years ended June 30, 2002 and 2001:
Year Ended Months Ended Year Edned June 30,
December 31, December 31, --------------------
2003 2002 2002 2001
-------------------------------------------------
Provision for income taxes ............ $(674,681) $(403,312) $(634,045) $(362,995)
Statement of stockholders' equity-
accumulated other comprehensive
income, unrealized gains (losses)
on securities available for sale, net (208,088) 514,269 457,334 892,060
--------------------------------------------------
$(882,769) $ 110,957 $(176,711) $ 529,065
==================================================
48
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 year ended December 31, 2003, six months ended December
31, 2002, and the years ended June 30, 2002 and 2001 were as follows:
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, --------------------
2003 2002 2002 2001
------------------------------------------------
Matching contribution ........ $377,854 $179,930 $318,457 $240,960
Discretionary contribution ... 90,000 60,500 49,000 41,500
----------------------------------------------
$467,854 $240,430 $367,457 $282,460
==============================================
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 earned 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 year ended December 31, 2003, six
months ended December 31, 2002, and the years ended June 30, 2002 and 2001 the
Company expensed $86,275, $41,041, $67,273, and $27,791, respectively, related
to the agreements. As of December 31, 2003 and 2002 the liability related to the
agreements totals $459,240 and $320,965, 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.
All of the options have been granted under this plan, and on June 30, 2003,
the plan expired. The Company's Board of Directors adopted in November 1996
the QCR Holdings, Inc. 1997 Stock Incentive Plan (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. As
of December 31, 2003, there are 24,917 remaining options available for grant
under this plan. The Stock Option Plan and the Stock Incentive Plan are
administered by the Executive Committee appointed by the Board of Directors
(Committee).
The number and exercise price of options granted under the Stock Option Plan
and the Stock Incentive 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).
49
A summary of the stock option plans as of December 31, 2003 and 2002 and June
30, 2002 and 2001 and changes during the six months ended and years ended on
those dates is presented below:
December 31, June 30,
----------------------------------------- --------------------------------------------
2003 2002 2002 2001
------------------- ------------------- --------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------------
Outstanding, beginning 200,275 $11.34 228,038 $10.89 236,437 $10.22 189,005 $10.24
Granted ............ 4,900 20.20 700 14.95 18,325 14.50 50,200 10.52
Exercised .......... (50,658) 7.47 (24,270) 6.79 (23,375) 6.72 (150) 6.17
Forfeited .......... (4,742) 14.11 (4,193) 14.80 (3,349) 13.00 (2,618) 17.10
-------- -------- -------- --------
Outstanding, ending .. 149,775 12.86 200,275 11.34 228,038 10.89 236,437 10.22
======== ======== ======== ========
Exercisable, ending .. 97,065 128,414 139,090 153,390
Weighted average fair
value per option of
options granted
during the period .. $ 8.37 $ 6.10 $ 6.93 $ 5.17
A further summary of options outstanding as of December 31, 2003 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 19,330 0.76 $ 6.52 19,330 $ 6.52
$7.83 to $8.83 6,060 2.45 8.77 6,060 8.77
$10.00 to $13.25 56,510 7.09 10.93 25,470 11.13
$13.33 to $13.67 17,390 3.50 13.66 17,390 13.66
$14.08 to $16.13 26,820 7.52 15.35 10,980 15.63
$17.11 to $22.90 23,665 5.74 20.26 17,835 20.41
--------- - ---------
149,775 97,065
========= =========
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
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, 2003 and 2002 and June 30, 2002 and
2001 there were 90,350, 90,450, 90,850, and 90,850 SARs, respectively,
outstanding, with 61,540, 48,820, 48,820, and 28,200, respectively,
exercisable. During the year ended December 31, 2003, six months ended
December 31, 2002, and the years ended June 20, 2002 and 2001 the Company
expensed $915,224, $120,474, $187,360 and $(36,825), respectively, related to
the SARs. As of December 31, 2003 and 2002 the liability related to the SARs
totals $1,223,058 and $307,834, respectively.
50
A further summary of SARs is presented below:
Liability Recorded for SARs SAR Expense
December 31, 2003 --------------------------- for the
-------------------------- December 31, Year Ended
SARs SARs ------------------------- December 31,
Exercise Price Outstanding Exercisable 2003 2002 2003
- -----------------------------------------------------------------------------------------------------------
$10.35 23,100 9,420 $ 407,715 $ 153,270 $ 254,445
$10.50 15,000 6,000 262,500 96,000 166,500
$13.67 15,000 15,000 214,950 48,450 166,500
$16.13 12,850 7,830 152,594 10,114 142,480
$17.75 5,450 4,440 55,863 - 55,863
$18.25 500 400 4,875 - 4,875
$20.33 1,500 1,500 11,505 - 11,505
$21.33 16,950 16,950 113,056 - 113,056
--------------------------------------------------------------------------
90,350 61,540 $ 1,223,058 $ 307,834 $ 915,224
==========================================================================
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 were 100,000 shares of common stock available for
issuance under the Purchase Plan. For each six-month offering period, the
Board of Directors will determine how many of the total number of available
shares will be offered. The purchase price is the lesser of 90% of the fair
market value at the date of the grant or the Investment Date. The investment
date, as established by the Board of Directors of the Company, is the date
common stock is purchased after the end of each calendar quarter during an
offering period. The maximum dollar amount any one participant can elect to
contribute in an offering period is $5,000. Additionally, the maximum
percentage that any one participant can elect to contribute is 5% of his or
her compensation. During the year ended December 31, 2003, 8,673 shares were
granted and 6,852 purchased. Shares granted during the year ended December
31, 2003 had a weighted average fair value of $2.77 per share.
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,
2003 and 2002, that the Company and the Banks met all capital adequacy
requirements to which they are subject.
51
As of December 31, 2003, 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, 2003 and 2002 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, 2003:
Company:
Total risk-based capital ..... $59,326 10.3% $46,151 > 8.0% N/A N/A
Tier 1 risk-based capital .... 52,020 9.0 23,076 > 4.0 N/A N/A
Leverage ratio ............... 52,020 7.4 28,283 > 4.0 N/A N/A
Quad City Bank & Trust:
Total risk-based capital ..... $46,934 10.4% $36,724 > 8.0% $ 45,343 > 10.0%
Tier 1 risk-based capital .... 41,252 9.1 18,137 > 4.0 27,206 > 6.0
Leverage ratio ............... 41,252 7.4 22,169 > 4.0 27,711 > 5.0
Cedar Rapids Bank & Trust (A):
Total risk-based capital ..... $16,031 13.3% $ 9,618 > 8.0% $ 12,022 > 10.0%
Tier 1 risk-based capital .... 14,524 12.1 4,809 > 4.0 7,213 > 6.0
Leverage ratio ............... 14,524 10.1 5,782 > 4.0 7,227 > 5.0
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
(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.
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.
52
Note 16. Earnings Per Common Share
The following information was used in the computation of basic and diluted
earnings per common share for the year ended December 31, 2003, six months ended
December 31, 2002, and the years ended June 30, 2002 and 2001:
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, -----------------------
2003 2002 2002 2001
---------------------------------------------------
Net income ....................................... $5,460,927 $3,196,544 $2,962,453 $2,395,732
==================================================
Weighted average common shares outstanding ....... 2,782,042 2,752,739 2,685,996 2,268,465
Weighted average common shares issuable upon
exercise of stock options and under the Employee
Stock Purchase Plan ............................ 73,013 66,677 57,809 45,869
--------------------------------------------------
Weighted average common and common
equivalent shares outstanding .................. 2,855,055 2,819,416 2,743,805 2,314,334
==================================================
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, 2003 and 2002 no amounts
have been recorded as liabilities for the Banks' potential obligations under
these guarantees.
As of December 31, 2003 and 2002, commitments to extend credit aggregated
$194,915,000 and $165,163,000, respectively. As of December 31, 2003 and 2002,
standby letters of credit aggregated $5,994,000 and $4,914,000, respectively.
Management does not expect that all of these commitments will be funded.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $3,790,031 and $23,691,004 as of December 31,
2003 and 2002, respectively. These amounts are included in loans held for sale
at the respective balance sheet dates.
Bancard is subject to the risk of cardholder chargebacks and its local merchants
being incapable of refunding the amount charged back. Management attempts to
mitigate such risk by regular monitoring of merchant activity and in appropriate
cases, holding cash reserves deposited by the local merchant.
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, 2003 there were no significant pending liabilities.
53
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 $20,809,486 and $25,256,262 as of December 31, 2003 and 2002, 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 year ended December 31, 2003, six months ended December
31, 2002, or the years ended June 30, 2002 or 2001. In the opinion of
management, the risk of recourse to the Banks is not significant and,
accordingly, no liability has been established related to such.
The Company has various financial obligations, including contractual obligations
and commitments, which may require future cash payments. The Company has
purchase obligations which represent obligations under agreements to purchase
goods or services that are enforceable and legally binding on the Company and
that specify all significant terms. At December 31, 2003, the Company's purchase
obligations were primarily related to certain contractual payments for capital
expenditures of data processing technology and facilities expansion. The Company
has operating lease obligations which represent short and long-term lease
payments for data processing equipment and services, software, and other
equipment and professional services. The following table presents, as of
December 31, 2003, significant fixed and determinable contractual obligations to
these third parties by payment date.
Purchase Operating
Obligation Lease
------------------------------
Year ending December 31:
2004 $ 1,082,897 $ 1,029,476
2005 -- 1,036,011
2006 -- 946,579
2007 -- 18,900
2008 -- 3,525
Thereafter -- 19,340
-----------------------------
$ 1,082,897 $ 3,053,831
=============================
Plans were announced in October 2003 for Quad City Bank & Trust to add a fifth
full service banking facility. The facility is to be located in the Five Points
area of west Davenport, Iowa. Demolition of existing structures on the site has
been completed, and construction of the new facility is scheduled for completion
in late 2004 or early 2005. Total costs for the project are anticipated to be
approximately $1,700,000 with $519,000 incurred as of December 31, 2003.
In February 2004, Cedar Rapids Bank & Trust announced plans to build a four
floor building in downtown Cedar Rapids. The Bank's main office will be
relocated to this site when construction is completed, which is anticipated to
be early in 2005. Cedar Rapids Bank & Trust will own the lower three floors of
the facility, and an unrelated third party will own the fourth floor in a
condominium arrangement with the Bank. Costs for this facility are projected to
be $5,000,000 with $141,000 incurred at December 31, 2003. The Bank is also
considering the construction of a branch office in late 2004.
54
Note 18. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2003
-------------------------------------------------
March June September December
2003 2003 2003 2003
-------------------------------------------------
Total interest income ........ $7,906,067 $8,346,224 $8,622,572 $8,503,398
Total interest expense ....... 3,057,956 3,227,136 2,889,456 2,775,029
-------------------------------------------------
Net interest income .. 4,848,111 5,119,088 5,733,116 5,728,369
Provision for loan losses .... 1,330,427 358,000 939,000 778,000
Noninterest income ........... 2,488,823 3,248,738 3,259,834 2,170,214
Noninterest expenses ......... 4,783,843 5,399,579 5,356,233 5,495,597
-------------------------------------------------
Net income before
income taxes ......... 1,222,664 2,610,247 2,697,717 1,624,986
Federal and state income taxes 395,716 883,347 889,569 526,055
-------------------------------------------------
Net income ........... $ 826,948 $1,726,900 $1,808,148 $1,098,931
=================================================
Earnings per common share:
Basic ...................... $ 0.30 $ 0.62 $ 0.65 $ 0.39
Diluted .................... 0.29 0.61 0.63 0.38
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
55
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
2001 2001 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
56
Note 19. Parent Company Only Financial Statements
The following is condensed financial information of QCR Holdings, Inc. (parent
company only):
Assets 2003 2002
- -------------------------------------------------------------------------------------
Cash and due from banks .............................. $ 254,507 $ 206,768
Interest-bearing deposits at financial institutions .. 133,791 286,909
Securities available for sale, at fair value ......... 1,494,098 1,479,421
Investment in Quad City Bank & Trust Company ......... 42,736,830 38,247,616
Investment in Cedar Rapids Bank & Trust Company ...... 14,677,711 9,551,420
Investment in Quad City Bancard, Inc. ................ 2,903,214 2,444,989
Investment in QCR Holdings Capital Trust I ........... 390,432 390,432
Net loans receivable ................................. 21,764 21,007
Other assets ......................................... 2,186,991 1,952,467
----------------------------
Total assets ................................. $ 64,799,338 $ 54,581,029
============================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------
Liabilities:
Other borrowings ................................... $ 10,000,000 $ 5,000,000
Junior subordinated debentures ..................... 12,000,000 12,000,000
Other liabilities .................................. 976,603 994,427
----------------------------
Total liabilities ............................ 22,976,603 17,994,427
----------------------------
Stockholders' Equity:
Common stock ....................................... 2,863,990 2,823,061
Additional paid-in capital ......................... 17,143,868 16,761,423
Retained earnings .................................. 20,866,749 15,712,600
Accumulated other comprehensive income ............. 1,802,664 2,144,054
Less cost of common shares acquired for the treasury (854,536) (854,536)
----------------------------
Total stockholders' equity ................... 41,822,735 36,586,602
----------------------------
Total liabilities and stockholders' equity ... $ 64,799,338 $ 54,581,029
============================
57
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, --------------------------
2003 2002 2002 2001
- -----------------------------------------------------------------------------------------------------
Total interest income ..................... $ 83,894 $ 42,939 $ 102,458 $ 170,319
Investment securities gains (losses), net . 5 -- 6,433 (25,753)
Equity in net income (loss) of Cedar Rapids
Bank & Trust Company .................... 191,525 (275,095) (892,383) --
Equity in net income of Quad City
Bank & Trust Company .................... 5,884,041 2,510,614 5,133,113 3,471,422
Equity in net income of Quad City
Bancard, Inc. ........................... 867,217 1,580,932 111,057 184,234
Other ..................................... 303,052 171,822 70,067 (7,745)
-------------------------------------------------------
Total income ...................... 7,329,734 4,031,212 4,530,745 3,792,477
-------------------------------------------------------
Interest expense .......................... 1,361,939 666,398 1,334,921 1,134,541
Salaries and employee benefits ............ 720,989 239,321 387,203 377,136
Professional and data processing fees ..... 288,217 117,658 145,843 173,277
Other ..................................... 292,914 150,046 495,859 408,091
-------------------------------------------------------
Total expenses .................... 2,664,059 1,173,423 2,363,826 2,093,045
-------------------------------------------------------
Income before income tax benefit .. 4,665,675 2,857,789 2,166,919 1,699,432
Income tax benefit ........................ 795,252 338,755 795,534 696,300
-------------------------------------------------------
Net income ........................ $ 5,460,927 $ 3,196,544 $ 2,962,453 $ 2,395,732
=======================================================
58
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, ----------------------------
2003 2002 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ............................................ $ 5,460,927 $ 3,196,544 $ 2,962,453 $ 2,395,732
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 .................... (4,884,041) (2,510,614) (4,333,113) (3,471,422)
Cedar Rapids Bank & Trust Company ................. (191,525) 275,095 892,383 --
Quad City Bancard, Inc. ........................... 41,775 (9,932) 861,703 132,266
Depreciation ........................................ 4,506 795 252 1,121
Provision for loan losses ........................... -- (55) (1,835) (3,790)
Investment securities (gains) losses, net ........... (5) -- (6,433) 25,753
Tax benefit of nonqualified stock options exercised . 274,871 87,922 60,332 --
(Increase) decrease in accrued interest receivable .. (6,715) (10,048) 4,016 (2,802)
(Increase) decrease in other assets ................. (299,820) 187,941 (608,624) 317,712
Increase (decrease) in other liabilities ............ (47,516) (82,401) 277,024 457,834
-----------------------------------------------------------
Net cash provided by (used in)
operating activities ............................ 352,457 1,135,247 108,158 (147,596)
-----------------------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing deposits at
financial institutions .............................. 153,118 273,743 (5,263) 1,146,571
Purchase of securities available for sale ............. (28,496) (251,411) (18,205) (269,279)
Proceeds from sale of securities available for sale ... -- -- 101,285 99,247
Proceeds from calls and maturities of securities ...... 200,000 -- 107,500 --
Capital infusion, Cedar Rapids Bank & Trust Company ... (5,000,000) -- (10,500,000) --
Capital infusion, Quad City Bank & Trust Company ...... -- (1,000,000) -- --
Capital infusion, Quad City Bancard, Inc. ............. (500,000) -- -- (900,000)
Net loans (originated) repaid ......................... (757) -- 125,989 391,127
-----------------------------------------------------------
Net cash provided by (used in) investing
activities ...................................... (5,176,135) (977,668) (10,188,694) 467,666
-----------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from other borrowings ........................ 5,000,000 -- 5,000,000 --
Purchase of treasury stock ............................ -- -- -- (255,056)
Payment of cash dividends ............................. (277,086) -- -- --
Proceeds from issuance of common stock, net ........... 148,503 2,364 4,959,541 925
-----------------------------------------------------------
Net cash provided by (used in) financing
activities ...................................... 4,871,417 2,364 9,959,541 (254,131)
-----------------------------------------------------------
Net increase (decrease) in cash and due
from banks ...................................... 47,739 159,943 (120,995) 65,939
Cash and due from banks:
Beginning ............................................. 206,768 46,825 167,820 101,881
------------------------------------------------------------
Ending ................................................ $ 254,507 $ 206,768 $ 46,825 $ 167,820
============================================================
59
Note 20. Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosures of fair value information about financial instruments for
which it is practicable to estimate that value. When quoted market prices are
not available, fair values are based on estimates using present value or other
techniques. Those techniques are significantly affected by the assumptions used,
including the discounted rates and estimates of future cash flows. In this
regard, fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
settlement. Some financial instruments and all nonfinancial instruments are
excluded from the disclosures. The aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of their financial instruments.
Cash and due from banks, federal funds sold, and interest-bearing deposits at
financial institutions: The carrying amounts reported in the balance sheets
for cash and due from banks, federal funds sold, and interest-bearing
deposits at financial institutions equal their fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: The fair values for variable rate loans equal their
carrying values. The fair values for all other types of loans are estimated
using discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers with similar credit
quality. The fair value of loans held for sale is based on quoted market
prices of similar loans sold in the secondary market.
Accrued interest receivable and payable: The fair value of accrued interest
receivable and payable is equal to its carrying value.
Deposits: The fair values disclosed for demand deposits equal their carrying
amounts, which 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 junior subordinated debentures: The fair
value of these instruments is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
Other borrowings: The fair value for variable rate other borrowings is equal
to its carrying value.
Commitments to extend credit: The fair value of these commitments is not
material.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 2003 and 2002 are presented as follows:
December 31,
---------------------------------------------------------
2003 2002
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------------------- ---------------------------
Cash and due from banks ....... $ 24,427,573 $ 24,427,573 $ 24,888,350 $ 24,888,350
Federal funds sold ............ 4,030,000 4,030,000 14,395,000 14,395,000
Interest-bearing deposits at
financial institutions ...... 10,426,092 10,426,092 14,585,795 14,585,795
Investment securities:
Held to maturity ............ 400,116 416,751 425,332 451,121
Available for sale .......... 128,442,926 128,442,926 81,228,749 81,228,749
Loans receivable, net ......... 513,828,399 518,111,399 442,856,783 451,842,783
Accrued interest receivable ... 3,646,108 3,646,108 3,221,246 3,221,246
Deposits ...................... 511,651,863 513,337,863 434,747,623 437,275,623
Short-term borrowings ......... 51,609,801 51,609,801 32,862,446 32,862,446
Federal Home Loan Bank advances 76,232,348 75,824,348 74,988,320 75,210,320
Other borrowings .............. 10,000,000 10,000,000 5,000,000 5,000,000
Junior subordinated debentures 12,000,000 12,886,941 12,000,000 12,049,741
Accrued interest payable ...... 1,236,906 1,236,906 1,804,021 1,804,021
60
Note 21. Business Segment Information
Selected financial information on the Company's business segments is presented
as follows for the year ended December 31, 2003, six months ended December 31,
2002, and the years ended June 30, 2002 and 2001:
Six
Year Ended Months Ended Year Ended June 30,
December 31, December 31, ------------------------------
2003 2002 2002 2001
----------------------------------------------------------------
Commercial banking:
Revenue ............. $ 39,545,476 $ 18,860,169 $ 31,834,976 $ 30,786,066
Net income .......... 5,398,289 1,893,051 3,151,538 2,599,978
Assets .............. 705,077,595 597,370,496 512,831,887 394,223,857
Depreciation ........ 1,042,781 483,920 888,186 724,330
Capital expenditures 4,143,705 494,914 1,453,335 1,702,763
Credit card processing:
Revenue ............. 2,372,619 4,841,477 2,263,866 1,883,540
Net income .......... 1,056,399 1,703,340 343,552 220,890
Assets .............. 736,710 3,759,355 3,061,251 3,672,002
Depreciation ........ 25,656 12,745 35,309 42,859
Capital expenditures 8,328 9,827 15,270 10,624
Trust management:
Revenue ............. 2,242,747 1,045,046 2,161,677 2,071,971
Net income .......... 490,018 222,117 540,942 523,670
Assets .............. N/A N/A N/A N/A
Depreciation ........ N/A N/A N/A N/A
Capital expenditures N/A N/A N/A N/A
All other:
Revenue ............. 385,028 212,702 174,277 115,427
Net (loss) .......... (1,483,779) (621,964) (1,073,579) (948,806)
Assets .............. 4,225,250 3,470,505 2,935,357 3,052,075
Depreciation ........ 4,506 795 252 1,121
Capital expenditures . -- 10,500 3,020 --
Note 22. Subsequent Event
On February 19, 2004, QCR Holdings, Inc. announced the issuance of $8.0 million
of Floating Rate Capital Securities and $12.0 million of Fixed Rate Capital
Securities (together, the "Trust Preferred Securities") of QCR Holdings
Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust
III"), respectively. The securities represent undivided beneficial interests in
Trust II and Trust III, which were established by QCR Holdings, Inc. for the
purpose of issuing the Trust Preferred Securities. The Trust Preferred
Securities were sold in a private transaction exempt from registration under the
Securities Act of 1933, as amended (the "Act") and have not been registered
under the Act.
The securities issued by Trust II and Trust III mature in 30 years. The Floating
Rate Capital Securities are callable at par after five years and the Fixed Rate
Capital Securities are callable at par after seven years. The Floating Rate
Capital Securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the initial rate set at 3.97%, and the Fixed Rate Capital
Securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly. Both Trust II and Trust III used the proceeds from the sale of the
Trust Preferred Securities to purchase junior subordinated debentures of QCR
Holdings, Inc. The Company incurred issuance costs of $410,000, which will be
amortized over the lives of the securities.
The Company intends to use its net proceeds for general corporate purposes,
including the possible redemption in June 2004 of the $12,000,000 of 9.2%
cumulative Trust Preferred Securities issued by QCR Holdings Capital Trust I in
1999. If redeemed, the Trust Preferred Securities issued in 1999 carry
approximately $750,000 of unamortized issuance costs, which will be expensed as
of June 30, 2004.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
61
Item 9A. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
December 31, 2003. Based on that evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is set forth under the caption "Election
of Directors" in the Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under the caption "Executive
Compensation" in the Proxy Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners" in the Proxy Statement, and is
incorporated herein by reference, or is presented below.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2003
for (i) all compensation plans previously approved by the Company's
stockholders and (ii) all compensation plans not previously approved by the
Company's stockholders:
(a) the number of securities to be issued upon the exercise of outstanding
options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options,
warrants and rights; and
(c) other than securities to be issued upon the exercise of such
outstanding options, warrants and rights, the number of securities
remaining available for future issuance under the plans.
62
====================================================================================================================================
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Number of securities remaining
Number of securities available for
to be issued upon future issuance under
exercise of Weighted-average exercise equity compensation plans
outstanding options, price of outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column(a))
Plan category (a) (b) (c)
====================================================================================================================================
Equity compensation plans approved
by security holders............... 151,596 $ 12.92 116,244 (1)
Equity compensation plans
not approved by security holders.. -- -- --
Total............................. 151,596 $ 12.92 116,244 (1)
====================================================================================================================================
(1) Includes 91,327 shares available under the QCR Holdings, Inc. Employee
Stock Purchase Plan.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the captions "Security
Ownership of Certain Beneficial Owners" and "Transactions with Management" in
the Proxy Statement, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is set forth under the caption
"Independent Public Accountants" in the Proxy statement and is incorporated
herein by reference.
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:
63
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).
4.2 Registration of Preferred Share Purchase Rights of QCR Holdings, Inc.
(incorporated by reference to Item 1. of Registrant's form 8-A12G, File No.
000-22208).
10.1 Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company
and Michael A. Bauer dated January 1, 2004 (exhibit is being filed herewith).
10.2 Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company
and Douglas M. Hultquist dated January 1, 2004 (exhibit is being filed herewith).
10.3 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company
and Michael A. Bauer dated January 1, 2004 (exhibit is being filed herewith).
10.4 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company
and Douglas M. Hultquist dated January 1, 2004 (exhibit is being filed herewith).
10.5 Lease Agreement between Quad City Bank and Trust Company and 56 Utica L.L.C.
(incorporated herein by reference to Exhibit 10.5 of Registrant's Annual Report on
Form 10-K for the year ended June 30, 2000).
10.6 Employment Agreement between Quad City Bank and Trust Company and Larry J. Helling
dated January 1, 2004 (exhibit is being filed herewith).
10.7 First Amendment of Lease Agreement dated October
2001, between Cedar Rapids Bank and Trust Company
f.k.a. Quad City Bank and Trust Company, and Ryan
Companies (incorporated herein by reference to
Exhibit 10.1 of Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30,
2002).
10.8 Executive Deferred Compensation Agreement for Todd A. Gipple,
Executive Vice President and Chief Financial Officer of QCR Holdings, Inc. dated
January 1, 2004 (exhibit is being filed herewith).
10.9 Executive Deferred Compensation Agreement for Larry J. Helling, President and
Chief Executive Officer of Cedar Rapids Bank and Trust Company dated January 1,
2004 (exhibit is being filed herewith).
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 Employment Agreement between QCR Holdings, Inc. and Todd A. Gipple dated January
1, 2004 (exhibit is being filed herewith).
10.12 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).
10.13 Dividend Reinvestment Plan of QCR Holdings, Inc. (incorporated herein by
reference to Exhibit 5.1 of Registrant's Form S-3, File No. 333-102699).
10.18 Indenture by and between QCR Holdings, Inc. /QCR Holdings Statutory Trust II and U.S. Bank
National Association, as debenture and institutional trustee, dated February 18,
2004 (exhibit is being filed herewith).
10.19 Indenture by and between QCR Holdings, Inc. / QCR Holdings Statutory Trust III and
U.S. Bank National Association, as debenture and institutional trustee, dated
February 18, 2004 (exhibit is being filed herewith).
12.1 Statement re: Computation of Ratios (exhibit is being filed herewith).
21.1 Subsidiaries of QCR Holdings, Inc. (exhibit is being filed herewith).
23.1 Consent of Independent Accountant - McGladrey and Pullen LLP (exhibit is being
filed herewith).
64
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K with the Securities and
Exchange Commission on October 24, 2003 under Item 5, which reported
information related to the Company's declaration of a $0.06 cash
dividend payable January 5, 2004, and under Item 12, which reported
information related to the Company's earnings for the quarter ended
September 30, 2003 in the format of a press release.
The Company filed a current report on Form 8-K with the Securities and
Exchange Commission on November 7, 2003 under Item 12, which reported
the Company's financial information, including earnings for the quarter
ended September 30, 2003, in the format of a shareholder letter dated
November 2003.
The Company filed a current report on Form 8-K with the Securities and
Exchange Commission on January 29, 2004 under Item 12, which reported
information related to the Company's earnings for the quarter ended
December 31, 2003 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 19, 2004 under Item 5, which reported
information related to the Company's announcement of the issuance of
$8.0 million of Floating Rate Capital Securities and $12.0 million of
Fixed Rate Capital Securities of QCR Holdings Statutory Trust II and
QCR Holdings Statutory Trust III 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
65
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 19, 2004 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 19, 2004
- -----------------------------
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive March 19, 2004
- ----------------------------- Officer and Director
Douglas M. Hultquist
/s Patrick S. Baird Director March 19, 2004
- -----------------------------
Patrick Baird
/s/ James J. Brownson Director March 19, 2004
- -----------------------------
James J. Brownson
/s/ Larry J. Helling Director March 19, 2004
- -----------------------------
Larry J. Helling
/s/ John K. Lawson Director March 19, 2004
- -----------------------------
John K. Lawson
/s/ Ronald G. Peterson Director March 19, 2004
- -----------------------------
Ronald G. Peterson
/s/ Henry Royer Director March 19, 2004
- -----------------------------
Henry Royer
/s/ John W. Schricker Director March 19, 2004
- -----------------------------
John W. Schricker
66
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.
Recent Regulatory Developments
National Bank Preemption. On January 7, 2004, the Office of the Comptroller of
the Currency (the "OCC") issued two final rules that clarify the federal
character of the national banking system. The first rule provides that, except
where made applicable by federal law, state laws that obstruct, impair or
condition national banks' ability to fully exercise their deposit-taking,
lending and operational powers are not applicable to national banks. That rule
further provides that the following types of state laws apply to national banks
to the extent that they only incidentally affect the exercise of national banks'
deposit-taking, lending and operational powers: contract, criminal, taxation,
tort, zoning and laws relating to certain homestead rights, rights to collect
debts, acquisitions and transfers of property and other laws as determined to
apply to national banks by the OCC. The second rule affirms that, under federal
law, with some exceptions, the OCC has exclusive visitorial authority (the power
to inspect, examine, supervise and regulate) with respect to the content and
conduct of activities authorized for national banks. These controversial rules
give national banks, especially those that operate in multiple states, a
significant competitive advantage over state-chartered banks and are therefore
likely to be challenged by individuals and organizations that represent the
interests of individual states and state-chartered banks. Both the U.S. House
Committee on Financial Services and the New York Attorney General have already
initiated such challenges.
FACT Act. On December 4, 2003, President Bush signed into law the Fair and
Accurate Credit Transactions Act of 2003 (the "FACT Act"), which contains
numerous amendments to the Fair Credit Reporting Act relating to matters
including identity theft and privacy. Among its other provisions, the FACT Act
requires financial institutions: (i) to establish an identity theft prevention
program; (ii) to enhance the accuracy and integrity of information furnished to
consumer reporting agencies; and (iii) to allow customers to prevent financial
institution affiliates from using, for marketing solicitation purposes,
transaction and experience information about the customers received from the
financial institution. The FACT Act also requires the federal banking
regulators, and certain other agencies, to promulgate regulations to implement
its provisions. The various provisions of the FACT Act contain different
effective dates including March 31, 2004, for those provisions of the FACT Act
that do not require significant changes to business procedures and December 1,
2004, for certain other provisions that will require significant business
procedure changes.
67
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.
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.
68
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, 2003, the Company had
regulatory capital in excess of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its shareholders
may be affected by both general corporate law considerations and policies of the
Federal Reserve applicable to bank holding companies. As a Delaware corporation,
the Company is subject to the limitations of the Delaware General Corporation
Law (the "DGCL"), which allow the Company to pay dividends only out of its
surplus (as defined and computed in accordance with the provisions of the DGCL)
or if the Company has no such surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Additionally, policies of the Federal Reserve caution that a bank holding
company should not pay cash dividends that exceed its net income or that can
only be funded in ways that weaken the bank holding company's financial health,
such as by borrowing. The Federal Reserve also possesses enforcement powers over
bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The Banks
The 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, 2003, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2004, BIF assessment rates will continue to range from 0% of deposits
to 0.27% of deposits.
69
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, 2003, 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 year ended December 31, 2003, the Banks paid supervisory
assessments to the Superintendent totaling $77 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.
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.
70
As of December 31, 2003: (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.
Liability of Commonly Controlled Institutions. Under federal law, institutions
insured by the FDIC may be liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC in connection with the default of commonly
controlled FDIC-insured depository institutions or any assistance provided by
the FDIC to commonly controlled FDIC-insured depository institutions in danger
of default. Because the Company controls each of the Banks, the Banks are
commonly controlled for purposes of these provisions of federal law.
Dividend Payments. The primary source of funds for the Company is dividends from
the Banks. Under 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, 2003. As of December 31, 2003, approximately $1.6 million would
have been available to be paid as dividends by the Banks. Notwithstanding the
availability of funds for dividends, however, the Federal Reserve may prohibit
the payment of any dividends by the Banks if the Federal Reserve determines such
payment would constitute an unsafe or unsound practice.
Insider Transactions. The Banks are subject to certain restrictions imposed by
federal law on extensions of credit to the Company, on investments in the stock
or other securities of the Company and the acceptance of the stock or other
securities of the Company as collateral for loans made by the Banks. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to their respective directors and officers, to directors and
officers of the Company and its subsidiaries, to principal shareholders of the
Company and to "related interests" of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the terms upon
which any person who is a director or officer of the Company or one of its
subsidiaries or a principal shareholder of the Company may obtain credit from
banks with which the Banks maintain correspondent relationships.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
71
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.
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).
Federal law permits state and national banks to merge with banks in other states
subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is permitted only in those
few states that authorize such expansion.
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 $45.4 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $45.4 million, the reserve
requirement is $1.164 million plus 10% of the aggregate amount of total
transaction accounts in excess of $45.4 million. The first $6.6 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.
72
Appendix B
GUIDE 3 INFORMATION
The Following tables and schedules show selected comparative financial
information required by the Securities and Exchange Commission Securities Act
Guide 3, regarding the business of QCR Holdings, Inc. ("the Company") for the
periods shown.
Dual presentation of the tables and schedules is provided. The first
presentation is comparative financial information for periods as presented in
teh Company's December 31, 2003 10-K. The second presentation is comparative
financial information restatedi n calendar year periods consistent with the
Company's current fiscal year, which was adopted in August 2002.
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential. A and B. Consolidated Average Balance Sheets and
Analysis of Net Interest Earnings.
Years Ended December 31,
---------------------------------------------------------------------------------------------
2003 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 .................. $ 23,864 $ 221 0.93% $ 9,813 $ 195 1.99% $ 14,030 $ 698 4.98
Interest-bearing deposits at
at financial institutions.......... 14,705 432 2.94 20,221 826 4.08 15,050 975 6.48
Investment securities (1) ........... 92,558 3,995 4.32 74,500 4,090 5.49 57,163 3,513 6.15
Gross loans receivable (2) .......... 480,314 28,984 6.03 387,936 25,928 6.68 294,708 23,116 7.84
------------------- ------------------- -------------------
Total interest earning assets..... 611,441 33,632 5.50 492,470 31,039 6.30 380,951 28,302 7.43
Noninterest-earning assets:
Cash and due from banks ............. $ 28,394 $ 22,124 $ 16,748
Premises and equipment, net ......... 9,852 9,216 8,805
Less allowance for estimated
losses on loans ................... (7,997) (5,902) (4,375)
Other ............................... 18,362 13,572 11,482
-------- -------- --------
Total assets ..................... $660,052 $531,480 $413,611
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits .... $158,287 1,450 0.92% $119,388 1,751 1.47% $ 96,200 2,445 2.54
Savings deposits .................... 12,817 58 0.45 10,072 100 0.99 7,565 124 1.64
Time deposits ....................... 199,328 5,498 2.76 180,345 6,458 3.58 158,353 8,451 5.34
Short-term borrowings ............... 40,122 327 0.82 31,217 468 1.50 26,166 866 3.31
Federal Home Loan Bank advances ..... 77,669 3,255 4.19 54,113 2,592 4.79 30,123 1,699 5.64
Junior subordinated debentures ...... 12,000 1,134 9.45 12,000 1,134 9.45 12,000 1,134 9.45
Other borrowings .................... 8,071 228 2.82 5,000 217 4.34 1,538 84 5.46
------------------- ------------------- -------------------
Total interest-bearing liabilities 508,294 11,950 2.35 412,135 12,720 3.09 331,945 14,803 4.46
Noninterest-bearing demand .......... 102,825 70,265 47,990
Other noninterest-bearing
liabilities ....................... 9,720 16,141 8,236
Total liabilities ................... 620,839 498,541 388,171
Stockholders' equity ................ 39,213 32,939 25,440
------------------- -------- --------
Total liabilities and
stockholders' equity ........... $660,052 $531,480 $413,611
======== ======== ========
Net interest income ................. $ 21,682 $ 18,319 $ 13,499
======== ======== ========
Net interest spread ................. 3.15% 3.21% 2.97%
===== ===== =====
Net interest margin ................. 3.55% 3.72% 3.54%
===== ===== =====
Ratio of average interest earning
assets to average interest-
bearing liabilities ............... 120.29% 119.49% 114.76%
======== ======== =======
(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.
73
Six months Ended December 31,
---------------------------------------------------------------
2002 2001
------------------------------ ------------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost (3) Balance or Paid Cost (3)
----------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Interest earnings assets:
Federal funds sold .................................. $ 10,593 $ 74 1.40% $ 8,277 $ 137 3.31%
Interest-bearing deposits at
at financial institutions.......................... 6,441 203 6.30 9,811 315 6.42
Investment securities (1) ........................... 82,723 2,058 4.98 63,294 1,780 5.62
Net loans receivable (2) ............................ 412,560 13,748 6.66 307,683 11,538 7.50
Other interest earning assets ....................... 17,521 158 1.80 5,746 168 5.85
-------------------- -------------------
Total interest earning assets..................... 529,837 16,241 6.13 394,811 13,938 7.05
Noninterest-earning assets:
Cash and due from banks ............................. $ 23,651 $ 16,896
Premises and equipment, net ......................... 9,174 9,033
Other ............................................... 4,355 5,855
-------- --------
Total assets ..................................... $567,017 $426,595
======== ========
STOCKHOLDERS' EQUITY Interest-bearing liabilities:
Interest-bearing demand deposits .................... $129,247 874 1.35% $100,840 1,084 2.15%
Savings deposits .................................... 10,880 45 0.83 8,145 57 1.40
Time deposits ....................................... 189,891 3,233 3.41 155,353 3,596 4.63
Short-term borrowings ............................... 35,810 225 1.26 28,651 350 2.44
Federal Home Loan Bank advances ..................... 66,415 1,440 4.34 33,155 896 5.40
Junior subordinated debentures ...................... 12,000 567 9.45 12,000 567 9.45
Other borrowings .................................... 5,000 100 4.00 3,125 84 5.38
-------------------- -------------------
Total interest-bearing
liabilities .................................. 449,243 6,484 2.90 341,269 6,634 3.89
Noninterest-bearing demand .......................... 70,028 54,613
Other noninterest-bearing
liabilities ....................................... 13,026 3,016
Total liabilities ................................... 532,297 398,898
Stockholders' equity ................................ 34,720 27,697
-------- --------
Total liabilities and
stockholders' equity ........................... $567,017 $426,595
======== ========
Net interest income ................................. $ 9,757 $ 7,304
======== ========
Net interest spread ................................. 3.23% 3.16%
===== =====
Net interest margin ................................. 3.68% 3.70%
===== =====
Ratio of average interest earning
assets to average interest-
bearing liabilities ............................... 117.94% 115.69%
======== ========
(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.
74
Years Ended June 30,
---------------------------------------------------------------
2002 2001
------------------------------ ------------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost
---------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Interest earnings assets:
Federal funds sold ............................ $ 8,831 $ 258 2.92% $ 21,404 $ 1,267 5.92%
Interest-bearing deposits at
at financial institutions.................... 9,233 590 6.39 11,102 702 6.32
Investment securities (1) ..................... 68,019 3,789 5.57 57,454 3,477 6.05
Net loans receivable (2) ...................... 329,578 23,718 7.20 261,404 22,971 8.79
Other interest earning assets ................. 8,642 386 4.47 4,915 245 4.98
-------------------- -------------------
Total interest earning assets............... 424,303 28,741 6.77 356,279 28,662 8.04
Noninterest-earning assets:
Cash and due from banks ....................... $ 18,665 $ 15,085
Premises and equipment, net ................... 9,308 8,295
Other ......................................... 8,777 5,231
-------- --------
Total assets ............................... $461,053 $384,890
======== ========
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits .............. $104,021 1,962 1.89% $ 86,639 2,918 3.37%
Savings deposits .............................. 8,597 112 1.30 6,707 132 1.97
Time deposits ................................. 164,542 6,821 4.15 159,822 9,972 6.24
Short-term borrowings ......................... 27,466 592 2.16 22,477 992 4.41
Federal Home Loan Bank advances ............... 41,310 2,048 4.96 24,324 1,463 6.01
Junior subordinated debentures ................ 12,000 1,134 9.45 12,000 1,135 9.46
Other borrowings .............................. 3,846 201 5.23 -- -- --
-------------------- -------------------
Total interest-bearing
liabilities .............................. 361,782 12,870 3.56 311,969 16,612 5.32
Noninterest-bearing demand .................... 59,715 45,902
Other noninterest-bearing
liabilities ................................. 10,143 5,133
Total liabilities ............................. 431,640 363,004
Stockholders' equity .......................... 29,413 21,886
-------- --------
Total liabilities and
stockholders' equity ..................... $461,053 $384,890
======== ========
Net interest income ........................... $ 15,871 $ 12,050
======== ========
Net interest spread ........................... 3.22% 2.72%
===== =====
Net interest margin ........................... 3.74% 3.38%
===== =====
Ratio of average interest earning
assets to average interest-
bearing liabilities ......................... 117.28% 114.20%
======== ========
(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.
75
C. Analysis of Changes of Interest Income/Interest Expense
For the years ended December 31, 2003, 2002 and 2001
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Year Rate Volume
------------------------------
2003 vs. 2002
------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ............................................................. $ 26 $ (144) $ 170
Interest-bearing deposits at other financial institutions(394) ................. (200) (194)
Investment securities (2) ...................................................... (95) (973) 878
Gross loans receivable (2) (3) ................................................. 3,056 (2,692) 5,748
-----------------------------
Total change in interest income ...................................... $ 2,593 $(4,009) $ 6,602
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits ............................................... $ (301) $ (772) $ 471
Savings deposits ............................................................... (42) (64) 22
Time deposits .................................................................. (960) (1,591) 631
Short-term borrowings .......................................................... (141) (251) 110
Federal Home Loan Bank advances ................................................ 663 (355) 1,018
Junior subordinated debentures ................................................. -- -- --
Other borrowings ............................................................... 11 (93) 104
-----------------------------
Total change in interest expense ..................................... $ (770) $(3,126) $ 2,356
-----------------------------
Total change in net interest income ............................................ $ 3,363 $ (883) $ 4,246
=============================
2002 vs. 2001
-----------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ............................................................. $ (503) $ (335) $ (168)
Interest-bearing deposits at other financial institutions(149) ................. (424) 275
Investment securities (2) ...................................................... 577 (404) 981
Gross loans receivable (2) (3) ................................................. 2,812 (3,764) 6,576
-----------------------------
Total change in interest income ...................................... $ 2,737 $(4,927) $ 7,664
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits ............................................... $ (694) $(1,193) $ 499
Savings deposits ............................................................... (24) (58) 34
Time deposits .................................................................. (1,993) (3,052) 1,059
Short-term borrowings .......................................................... (398) (541) 143
Federal Home Loan Bank advances ................................................ 893 (288) 1,181
Junior subordinated debentures ................................................. -- -- --
Other borrowings ............................................................... 133 (20) 153
-----------------------------
Total change in interest expense ..................................... $(2,083) $(5,152) $ 3,069
-----------------------------
Total change in net interest income ............................................ $ 4,820 $ 225 $ 4,595
=============================
(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.
76
For the six months ended December 31, 2002
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Year Rate Volume
------------------------------
2003 vs. 2002
------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ............................................................. $ (63) $ (146) $ 83
Certificates of deposit at other financial instituti(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
Junior subordinated debentures ................................................. -- -- --
Other borrowings ............................................................... 16 (56) 72
-----------------------------
Total change in interest expense...................................... $ (150) $(3,670) $ 3,520
-----------------------------
Total change in net interest income ............................................ $ 2,453 $ (683) $ 3,136
=============================
For the years ended June 30, 2002 and 2001
2002 vs. 2001
-----------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ............................................................. $(1,009) $ (467) $ (542)
Certificates of deposit at other financial instituti(112) ...................... 7 (119)
Investment securities (2) ...................................................... 312.00 (292) 604
Net loans receivable (2) (3) ................................................... 747 (4,604) 5,351
Other interest earning assets .................................................. 141 (27) 168
-----------------------------
Total change in interest income ...................................... $ 79 $(5,383) $ 5,462
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits ............................................... $ (956) $(1,461) $ 505
Savings deposits ............................................................... (20) (52) 32
Time deposits .................................................................. (3,151) (3,438) 287
Short-term borrowings .......................................................... (400) (586) 186
Federal Home Loan Bank advances ................................................ 585 (293) 878
Junior subordinated debentures ................................................. (1) (1) --
Other borrowings ............................................................... 201 -- 201
-----------------------------
Total change in interest expense...................................... $(3,742) $(5,831) $ 2,089
-----------------------------
Total change in net interest income ............................................ $ 3,821 $ 448 $ 3,373
=============================
(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.
77
II. Investment Portfolio
A. Investment Securities
The following tables present the amortized cost and fair value of investment
securities as of December 31, 2003 and 2002.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------------------------------------
(Dollars in Thousands)
December 31, 2003
- -----------------------------------
Securities held to maturity:
Municipal securities .............. $ 250 $ 4 $ -- $ 254
Other bonds ....................... 150 13 -- 163
------------------------------------------
Totals ....................... $ 400 $ 17 $ -- $ 417
==========================================
Securities available for sale:
U.S. Treasury securities .......... $ 1,002 $ 3 $ -- $ 1,005
U.S. agency securities ............ 86,732 1,105 (64) 87,773
Mortgage-backed securities ........ 5,656 67 (8) 5,715
Municipal securities .............. 15,664 1,018 (1) 16,681
Corporate securities .............. 9,466 492 (4) 9,954
Trust preferred securities ........ 1,350 105 -- 1,455
Other securities .................. 5,688 173 (1) 5,860
------------------------------------------
Totals ....................... $125,558 $ 2,963 $ (78) $128,443
==========================================
December 31, 2002
- -----------------------------------
Securities held to maturity:
Municipal securities .............. $ 250 $ 9 $ -- $ 259
Other bonds ....................... 175 17 -- 192
------------------------------------------
Totals ....................... $ 425 $ 26 $ -- $ 451
==========================================
Securities available for sale:
U.S. Treasury securities .......... $ 1,017 $ 20 $ -- $ 1,037
U.S. agency securities ............ 47,535 1,702 (1) 49,236
Mortgage-backed securities ........ 5,601 170 0 5,771
Municipal securities .............. 13,941 978 -- 14,919
Corporate securities .............. 7,691 475 -- 8,166
Trust preferred securities ........ 1,350 93 (11) 1,432
Other securities .................. 659 20 (11) 668
------------------------------------------
Totals ....................... $ 77,794 $ 3,458 $ (23) $ 81,229
==========================================
78
The following tables present the amortized cost and fair value of investment
securities as of June 30, 2002 and 2001.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------------------------------------
(Dollars in Thousands)
June 30, 2002
- ------------------------------------
Securities held to maturity:
Municipal securities ............... $ 250 $ 8 $ -- $ 258
Other bonds ........................ 175 4 -- 179
------------------------------------------
Totals ........................ $ 425 $ 12 $ -- $ 437
==========================================
Securities available for sale:
U.S. Treasury securities ........... $ 1,024 $ 9 $ -- $ 1,033
U.S. agency securities ............. 42,251 1,088 -- 43,339
Mortgage-backed securities ......... 5,758 124 -- 5,882
Municipal securities ............... 13,664 538 (15) 14,187
Corporate securities ............... 9,291 191 (6) 9,476
Trust preferred securities ......... 1,350 111 (15) 1,446
Other securities ................... 408 39 (4) 443
------------------------------------------
Totals ........................ $ 73,746 $ 2,100 $ (40) $ 75,806
==========================================
June 30, 2001
- ------------------------------------
Securities held to maturity:
Municipal securities ............... $ 501 $ 5 $ -- $ 506
Other bonds ........................ 75 3 -- 78
------------------------------------------
Totals ........................ $ 576 $ 8 $ -- $ 584
==========================================
Securities available for sale:
U.S. agency securities ............. $ 31,788 $ 626 $ -- $ 32,414
Mortgage-backed securities ......... 5,509 18 (19) 5,508
Municipal securities ............... 11,893 144 (40) 11,997
Corporate securities ............... 4,578 31 (13) 4,596
Trust preferred securities ......... 1,148 95 (14) 1,229
Other securities ................... 394 19 (22) 391
------------------------------------------
Totals ........................ $ 55,310 $ 933 $ (108) $ 56,135
==========================================
79
B. Investment Securities, Maturities, and Yields
The following table presents the maturity of securities held on December 31,
2003 and the weighted average stated coupon rates by range of maturity:
Weighted
Amortized Average
Cost Yield
----------------------
(Dollars in Thousands)
U.S. Treasury securities:
Within 1 year ......................................... $ 1,002 3.20%
====================
U.S. Agency securities:
Within 1 year .......................................... $12,563 3.58%
After 1 but within 5 years ............................. 60,976 2.91%
After 5 but within 10 years ............................ 13,193 2.94%
--------------------
Total ......................................... $86,732 3.00%
====================
Mortgage-backed securities:
After 1 but within 5 years ............................. $ 2,508 4.02%
After 5 but within 10 years ............................ 3,148 4.67%
--------------------
Total ......................................... $ 5,656 4.38%
====================
Municipal securities:
Within 1 year .......................................... $ 750 6.25%
After 1 but within 5 years ............................. 4,757 6.36%
After 5 but within 10 years ............................ 5,599 6.83%
After 10 years ......................................... 4,808 7.83%
--------------------
Total ......................................... $15,914 6.96%
====================
Corporate securities:
Within 1 year .......................................... $ 2,687 4.91%
After 1 but within 5 years ............................. 6,779 5.19%
--------------------
Total ......................................... $ 9,466 5.11%
====================
Trust preferred securities:
After 10 years ......................................... $ 1,350 8.92%
====================
Other bonds:
Within 1 year .......................................... $ 50 6.60%
After 1 but within 5 years ............................. 50 5.30%
After 5 but within 10 years ............................ 50 6.55%
--------------------
Total ......................................... $ 150 6.15%
====================
Other securities with no maturity or stated face rate .... $ 5,688
=======
80
The company does not use any financial instruments referred to as derivatives to
manage interest rate risk.
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
----------------------
(Dollars in Thousands)
U.S. Treasury securities:
After 1 but within 5 years ......................... $ 1,017 3.20%
=====================
U.S. Agency securities:
Within 1 year ...................................... $11,756 4.42%
After 1 but within 5 years ......................... 29,976 4.30%
After 5 but within 10 years ........................ 5,803 5.80%
---------------------
Total ..................................... $47,535 4.51%
=====================
Mortgage-backed securities:
Within 1 year ...................................... $ 68 5.81%
After 1 but within 5 years ......................... 211 5.75%
After 5 but within 10 years ........................ 3,299 4.80%
After 10 years ..................................... 2,023 5.86%
---------------------
Total ..................................... $ 5,601 5.23%
=====================
Municipal securities:
Within 1 year ...................................... $ 320 6.42%
After 1 but within 5 years ......................... 4,151 6.20%
After 5 but within 10 years ........................ 5,023 6.60%
After 10 years ..................................... 4,698 7.73%
---------------------
Total ..................................... $14,192 6.85%
=====================
Corporate securities:
After 1 but within 5 years ......................... $ 5,818 5.68%
After 5 but within 10 years ........................ 1,873 6.10%
---------------------
Total ..................................... $ 7,691 5.78%
=====================
Trust preferred securities:
After 10 years ..................................... $ 1,350 8.71%
=====================
Other bonds:
Within 1 year ...................................... $ 25 6.30%
After 1 but within 5 years ......................... 100 5.95%
After 5 but within 10 years ........................ 50 6.55%
---------------------
Total ..................................... $ 175 6.17%
=====================
Other securities with no maturity or stated face rate . $ 659
=======
81
The company does not use any financial instruments referred to as derivatives to
manage interest rate risk.
C. Investment Concentrations
At both December 31, 2003 and 2002, there were no securities in the investment
portfolio above (other than U.S. Government, U.S. Government agencies, and
corporations) that exceeded 10% of the stockholders' equity.
III. Loan Portfolio
A. Types of Loans
The composition of the loan portfolio is presented as follows:
December 31, June 30,
-------------------- --------------------------------------------
2003 2002 2002 2001 2000 1999
--------------------------------------------------------------------
(Dollars in Thousands)
Commercial .............................................. $435,345 $350,206 $305,019 $209,933 $167,733 $136,258
Real estate loans held for sale - residential mortgage .. 3,790 23,691 8,498 5,824 1,122 2,033
Real estate - residential mortgage ...................... 29,604 28,761 34,034 32,191 35,180 25,559
Real estate - construction .............................. 2,254 2,230 2,861 2,568 3,464 3,368
Installment and other consumer .......................... 50,984 44,567 40,037 37,362 34,405 30,810
--------------------------------------------------------------------
Total loans ........................... 521,977 449,455 390,449 287,878 241,904 198,028
Deferred loan origination costs (fees), net ............. 494 281 145 (13) (51) (51)
Less allowance for estimated
losses on loans ....................................... (8,643) (6,879) (6,111) (4,248) (3,617) (2,895)
-------------------------------------------------------------------
Net loans .............................. $513,828 $442,857 $384,483 $283,617 $238,236 $195,082
===================================================================
December 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------
(Dollars in Thousands)
Commercial .............................................. $435,345 $350,206 $255,486 $186,952 $142,219
Real estate loans held for sale - residential mortgage .. 3,790 23,691 13,470 1,627 1,177
Real estate - residential mortgage ...................... 29,604 28,761 30,457 37,388 31,360
Real estate - construction .............................. 2,254 2,230 3,399 2,117 2,668
Installment and other consumer .......................... 50,984 44,567 40,103 37,434 33,899
-------------------------------------------------------
Total loans ............................ 521,977 449,455 342,915 265,518 211,323
Deferred loan origination costs (fees), net ............. 494 281 84 100 53
Less allowance for estimated
losses on loans ....................................... (8,643) (6,879) (4,939) (3,972) (3,341)
-------------------------------------------------------
Net loans .............................. $513,828 $442,857 $338,060 $261,646 $208,035
=======================================================
82
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
------------------------------------------------------------------------
(Dollars in Thousands)
At December 31, 2003
- ----------------------------------------------------------
Commercial ............................................... $ 116,545 $ 273,007 $ 45,793 $ 241,491 $ 77,309
Real estate loans held for sale - residential mortgage ... -- -- 3,790 3,790 --
Real estate - residential mortgage ....................... 964 218 28,422 7,241 21,399
Real estate - construction ............................... 2,174 80 -- 80 --
Installment and other consumer ........................... 13,675 34,490 2,819 26,436 10,873
-----------------------------------------------------------------------
Total loans ............................. $ 133,358 $307,795 $ 80,824 $ 279,038 $ 109,581
=======================================================================
At December 31, 2002
- ----------------------------------------------------------
Commercial ............................................... $ 105,187 $208,470 $ 36,549 $ 191,766 $ 53,253
Real estate loans held for sale - residential mortgage ... -- -- 23,691 23,691 --
Real estate - residential mortgage ....................... 1,714 269 26,778 3,669 23,377
Real estate - construction ............................... 2,149 81 -- 81 --
Installment and other consumer ........................... 14,116 28,214 2,237 23,715 6,737
-----------------------------------------------------------------------
Total loans ............................. $ 123,166 $237,034 $ 89,255 $ 242,922 $ 83,367
=======================================================================
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The following tables represent Nonaccrual, Past Due, Renegotiated Loans, and
other Real Estate Owned:
December 31, June 30,
---------------- ---------------------------------
2003 2002 2002 2001 2000 1999
----------------------------------------------------
(Dollars in Thousands)
Loans accounted for on nonaccrual basis ............. $4,204 $4,608 $1,560 $1,232 $ 383 $1,288
Accruing loans past due 90 days or more ............. 756 431 708 495 352 238
Other real estate owned ............................. -- -- -- 47 -- 120
Troubled debt restructurings ........................ -- -- -- -- -- --
----------------------------------------------------
Totals ............................... $4,960 $5,039 $2,268 $1,774 $ 735 $1,646
====================================================
December 31,
-------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------
(Dollars in Thousands)
Loans accounted for on nonaccrual basis ............. $4,204 $4,608 $1,846 $ 655 $1,178
Accruing loans past due 90 days or more ............. 756 431 1,765 1,197 200
Other real estate owned ............................. -- -- 47 -- --
Troubled debt restructurings ........................ -- -- -- -- --
-------------------------------------------
Totals ............................... $4,960 $5,039 $3,658 $1,852 $1,378
===========================================
83
The policy of the company is to place a loan on nonaccrual status if: (a)
payment in full of interest or principal is not expected, or (b) principal or
interest has been in default for a period of 90 days or more unless the
obligation is both in the process of collection and well secured. Well secured
is defined as collateral with sufficient market value to repay principal and all
accrued interest. A debt is in the process of collection if collection of the
debt is proceeding in due course either through legal action, including judgment
enforcement procedures, or in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in restoration to current status.
2. Potential Problem Loans. To management's best knowledge, there are no such
significant loans that have not been disclosed in the above table.
3. Foreign Outstandings. None.
4. Loan Concentrations. At December 31, 2003, 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.
IV. Summary of Loan Loss Experience
A. Analysis of the Allowance for Estimated Losses on Loans
The following tables summarize activity in the allowance for estimated losses on
loans of the Company:
Six Months
Year Ended Ended Years Ended
December 31, December 31, June 30,
-------------------------- ---------------------------------------------------
2003 2002 2002 2001 2000 1999
---------------------------------------------------------------------------------
(Dollars in Thousands)
Average amount of loans outstanding,
before allowance for estimated losses
on loans .............................. $ 480,314 $ 419,104 $ 334,205 $ 265,350 $ 212,497 $ 184,757
Allowance for estimated losses on loans:
Balance, beginning of fiscal period ..... 6,879 6,111 4,248 3,617 2,895 2,350
Charge-offs:
Commercial .......................... (1,777) (1,349) (437) (87) (43) (105)
Real Estate ......................... -- -- -- -- (7) (25)
Installment and other consumer ...... (298) (105) (204) (213) (377) (349)
-------------------------------------------------------------------------------
Subtotal charge-offs ......... (2,075) (1,454) (641) (300) (427) (479)
-------------------------------------------------------------------------------
Recoveries:
Commercial .......................... 192 0 101 2 1 53
Real Estate ......................... -- -- -- -- -- --
Installment and other consumer ...... 242 38 138 39 96 79
-------------------------------------------------------------------------------
Subtotal recoveries .......... 434 38 239 41 97 132
-------------------------------------------------------------------------------
Net charge-offs .............. (1,641) (1,416) (402) (259) (330) (347)
Provision charged to expense ............ 3,405 2,184 2,265 890 1,052 892
-------------------------------------------------------------------------------
Balance, end of fiscal year ............. $ 8,643 $ 6,879 $ 6,111 $ 4,248 $ 3,617 $ 2,895
===============================================================================
Ratio of net charge-offs to average loans
outstanding ........................... 0.34% 0.34% 0.12% 0.10% 0.16% 0.19%
84
Years ended
December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------
(Dollars in Thousands)
Average amount of loans outstanding,
before allowance for estimated losses
on loans .............................. $ 480,314 $ 387,936 $ 294,708 $ 237,947 $ 199,401
Allowance for estimated losses on loans:
Balance, beginning of fiscal period ..... 6,879 4,939 3,972 3,341 2,629
Charge-offs:
Commercial .......................... (1,777) (1,455) (332) (87) (57)
Real Estate ......................... -- -- -- -- (32)
Installment and other consumer ...... (298) (214) (205) (355) (342)
-----------------------------------------------------------------
Subtotal charge-offs ......... (2,075) (1,669) (537) (442) (431)
-----------------------------------------------------------------
Recoveries:
Commercial ........................... 192 73 29 2 4
Real Estate .......................... -- -- -- -- --
Installment and other consumer ....... 242 126 66 71 102
-----------------------------------------------------------------
Subtotal recoveries .......... 434 199 95 73 106
-----------------------------------------------------------------
Net charge-offs .............. (1,641) (1,470) (442) (369) (325)
Provision charged to expense ............ 3,405 3,410 1,409 1,000 1,037
-----------------------------------------------------------------
Balance, end of fiscal year ............. $ 8,643 $ 6,879 $ 4,939 $ 3,972 $ 3,341
=================================================================
Ratio of net charge-offs to average loans
outstanding ........................... 0.34% 0.38% 0.15% 0.16% 0.16%
B. Allocation of the Allowance for Estimated Losses on Loans
The following tables present the allowance for the estimated losses on loans by
type of loans and the percentage of loans in each category to total loans:
----------------------------------------------------------------------------
December 31, 2003 December 31, 2002 June 30, 2003
----------------------- ------------------------ ------------------------
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
----------------------------------------------------------------------------
(Dollars in Thousands)
Commercial .......................................... $7,676 83.40% $6,176 77.91% $5,240 78.12%
Real estate loans held for sale - residential
mortgage .......................................... 4 0.73% 24 5.27% 1 2.18%
Real estate - residential mortgage .................. 272 5.67% 159 6.40% 302 8.72%
Real estate - construction .......................... 11 0.43% 11 0.50% 14 0.73%
Installment and other consumer ...................... 678 9.77% 507 9.92% 554 10.25%
Unallocated ......................................... 2 NA 2 NA -- NA
----------------------------------------------------------------------------
Total ................................... $8,643 100.00% $6,879 100.00% $6,111 100.00%
============================================================================
85
----------------------------------------------------------------------------
June 30, 2001 June 30, 2000 June 30, 1999
----------------------- ------------------------ ------------------------
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
----------------------------------------------------------------------------
(Dollars in Thousands)
Commercial .......................................... $3,231 72.92% $2,863 69.33% $2,165 68.80%
Real estate loans held for sale - residential
mortgage .......................................... -- 2.02% -- 0.46% -- 1.03%
Real estate - residential mortgage .................. 182 11.18% 121 14.55% 94 12.91%
Real estate - construction .......................... -- 0.89% 9 1.43% 8 1.70%
Installment and other consumer ...................... 835 12.99% 618 14.23% 579 15.56%
Unallocated ......................................... -- NA 6 NA 49 NA
----------------------------------------------------------------------------
Total .................................. $4,248 100.00% $3,617 100.00% $2,895 100.00%
============================================================================
----------------------------------------------------------------------------
December 31, 2003 December 31, 2002 June 30, 2003
% of Loans % of Loans % of Loans
Amount to Total Loans Amount to Total Loans Amount to Total Loans
----------------------------------------------------------------------------
(Dollars in Thousands)
Commercial .......................................... $7,676 83.40% $6,176 77.91% $4,305 74.50%
Real estate loans held for sale - residential
mortgage .......................................... 4 0.73% 24 5.27% 14 3.93%
Real estate - residential mortgage .................. 272 5.67% 159 6.40% 140 8.88%
Real estate - construction .......................... 11 0.43% 11 0.50% 17 0.99%
Installment and other consumer ...................... 678 9.77% 507 9.92% 461 11.70%
Unallocated ......................................... 2 NA 2 NA 2 NA
---------------------------------------------------------------------------
Total .................................. $8,643 100.00% $6,879 100.00% $4,939 100.00%
===========================================================================
-------------------------------------------------
December 31, 2003 December 31, 2002
% of Loans % of Loans
Amount to Total Loans Amount to Total Loans
-------------------------------------------------
Commercial .......................................... $3,339 70.41% $2,674 67.30%
Real estate loans held for sale - residential
mortgage .......................................... 2 0.61% 1 0.56%
Real estate - residential mortgage .................. 183 14.08% 62 14.84%
Real estate - construction .......................... 11 0.80% 13 1.26%
Installment and other consumer ...................... 437 14.10% 585 16.04%
Unallocated ......................................... -- NA 6 NA
-------------------------------------------------
Total .................................. $3,972 100.00% $3,341 100.00%
=================================================
V. Deposits.
The average amount of and average rate paid for the categories of deposits for
the years ended December 31, 2003, 2002, and 2001, six months ended December 31,
2002 and 2001, and the years ended June 30, 2002 and 2001 are discussed in the
consolidated average balance sheets and can be found on pages 2,3, and 4 of
Appendix B.
86
Included in interest bearing deposits at December 31, 2003 and 2002, and June
30, 2002 and 2001 were certificates of deposit totaling $73,799,534,
$69,373,970, $62,919,139, and $50,298,559 respectively, that were $100,000 or
greater. Maturities of these certificates were as follows:
December 31, June 30,
-------------------------------------
2003 2002 2002 2001
-------------------------------------
(Dollars in Thousands)
One to three months .................... $28,120 $28,053 $18,223 $20,949
Three to six months .................... 21,176 20,713 11,202 11,488
Six to twelve months ................... 17,600 12,591 24,464 12,973
Over twelve months ..................... 6,904 8,017 9,030 4,889
-------------------------------------
Total certificates of
deposit greater than $100,000 $73,800 $69,374 $62,919 $50,299
=====================================
December 31,
-----------------------------
2003 2002 2001
-----------------------------
(Dollars in Thousands)
One to three months ........................... $28,120 $28,053 $33,024
Three to six months ........................... 21,176 20,713 20,360
Six to twelve months .......................... 17,600 12,591 3,640
Over twelve months ............................ 6,904 8,017 6,388
-----------------------------
Total certificates of
deposit greater than $100,000 ....... $73,800 $69,374 $63,412
=============================
VI. Return on Equity and Assets.
The following tables present the return on assets and equity and the equity to
assets ratio of the Company:
Six months
Year ended ended Years ended
December 31, December 31, June 30,
--------------------------------------------
2003 2002 2002 2001
--------------------------------------------
(Dollars in Thousands)
Average total assets ................. $660,052 $567,017 $461,053 $384,890
Average equity ....................... 39,213 34,720 29,413 21,886
Net income ........................... 5,461 3,197 2,962 2,396
Return on average assets ............. 0.83% 1.13% 0.64% 0.62%
Return on average equity ............. 13.93% 18.41% 10.07% 10.95%
Dividend payout ratio ................ 5.61% 4.31% NA NA
Average equity to average assets ratio 5.94% 6.12% 6.38% 5.69%
Years ended
December 31,
--------------------------------
2003 2002 2001
--------------------------------
(Dollars in Thousands)
Average total assets ................. $660,052 $531,480 $413,611
Average equity ....................... 39,213 32,939 25,440
Net income ........................... 5,461 4,821 2,729
Return on average assets ............. 0.83% 0.91% 0.66%
Return on average equity ............. 13.93% 14.64% 10.73%
Dividend payout ratio ................ 5.61% 2.86% NA
Average equity to average assets ratio 5.94% 6.20% 6.15%
87
VII. Short Term Borrowings.
The information requested is disclosed in the Notes to Consolidated Financial
Statements in Note 7.
88