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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007.
Commission file number: 0-22208
QCR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 42-1397595 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
3551 Seventh Street, Suite 204, Moline, Illinois 61265
(Address of principal executive offices)
(Address of principal executive offices)
(309) 736-3580
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common stock, $1.00 Par Value The NASDAQ Capital Market
Common stock, $1.00 Par Value The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Exchange Act:
Preferred Share Purchase Rights.
Preferred Share Purchase Rights.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes o No þ
Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant, based on the last sales price quoted on The Nasdaq Capital Market on June 30, 2007, the
last business day of the registrant’s most recently completed second fiscal quarter, was
approximately $72,660,623.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the
latest practicable date: As of February 27, 2008, the Registrant had outstanding 4,602,966 shares
of common stock, $1.00 par value per share.
Documents incorporated by reference:
Part III of Form 10-K — Proxy statement for annual meeting of stockholders to be held in May 2008.
Part III of Form 10-K — Proxy statement for annual meeting of stockholders to be held in May 2008.
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QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
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QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX - Continued
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Part I
Item 1. Business
General. QCR Holdings, Inc. (the “Company”) is a multi-bank holding company headquartered in
Moline, Illinois that was formed in February 1993 under the laws of the state of Delaware. The
Company serves the Quad City, Cedar Rapids, Rockford and Milwaukee communities through the
following four wholly-owned banking subsidiaries, which provide full-service commercial and
consumer banking and trust and asset management services:
| • | Quad City Bank and Trust Company (“Quad City Bank & Trust”), which is based in Bettendorf, Iowa and commenced operations in 1994, | ||
| • | Cedar Rapids Bank and Trust Company (“Cedar Rapids Bank & Trust”), which is based in Cedar Rapids, Iowa and commenced operations in 2001, | ||
| • | Rockford Bank and Trust Company (“Rockford Bank & Trust”), which is based in Rockford, Illinois and commenced operations in 2005, and | ||
| • | First Wisconsin Bank and Trust Company (“First Wisconsin Bank & Trust”), which is based in Brookfield, Wisconsin and commenced operations in 2007. |
The Company also engages in merchant and cardholder credit card processing through its wholly-owned
subsidiary, Quad City Bancard, Inc. (“Bancard”), based in Moline, Illinois, in direct financing
lease contracts through its 80% equity investment in M2 Lease Funds, LLC (“M2 Lease Funds”), based
in Brookfield, Wisconsin, and in real estate holdings through its 57% equity investment in Velie
Plantation Holding Company, LLC (“Velie Plantation Holding Company”), based in Moline, Illinois.
Subsidiary Banks. Quad City Bank & Trust was capitalized on October 13, 1993 and commenced
operations on January 7, 1994. Quad City Bank & Trust is an Iowa-chartered commercial bank that is
a member of the Federal Reserve System with depository accounts insured by the Federal Deposit
Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. Quad City Bank & Trust
provides full service commercial and consumer banking and trust and asset management services in
the Quad Cities and adjacent communities through its five offices that are located in Bettendorf
and Davenport, Iowa and in Moline, Illinois. At December 31, 2007, Quad City Bank & Trust had
total segment assets of $860.7 million. See Financial Statement Note 20 for additional business
segment information.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal
Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law.
The Company commenced operations in Cedar Rapids in June 2001 operating as a branch of Quad City
Bank & Trust. The Cedar Rapids branch operation then began functioning under the Cedar Rapids Bank
& Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and
consumer banking and trust and asset management services to Cedar Rapids, Iowa and adjacent
communities through its two facilities, which were both completed in the summer of 2005. The
headquarters for Cedar Rapids Bank & Trust is located in downtown Cedar Rapids, and its first
branch location is located in northern Cedar Rapids. At December 31, 2007, Cedar Rapids Bank &
Trust had total segment assets of $383.9 million. See Financial Statement Note 20 for additional
business segment information.
The Company commenced operations in Rockford, Illinois in September 2004 operating as a branch of
Quad City Bank & Trust, and that operation began functioning under the Rockford Bank & Trust
charter in January 2005. Rockford Bank & Trust is an Illinois-chartered commercial bank that is a
member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum
amount permitted by law. It provides full-service commercial and consumer banking to Rockford and
adjacent communities through its original office located in downtown Rockford and its branch
facility located on Guilford Road at Alpine Road in Rockford, which was completed in 2006. At
December 31, 2007, Rockford Bank & Trust had total segment assets of $157.8 million. See Financial
Statement Note 20 for additional business segment information.
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On February 20, 2007, the Company purchased its fourth bank charter, First Wisconsin Bank & Trust.
The Company commenced operations in the Milwaukee area in April 2006, operating initially as a loan
production office/deposit production office of Rockford Bank & Trust, until June 2006, at which
time such office became a branch of Rockford Bank & Trust. In October 2006, the Company announced
that it had entered into a series of agreements providing for the acquisition of a
Wisconsin-chartered bank and the subsequent move of the branch into the purchased charter. First
Wisconsin Bank & Trust is a Wisconsin-chartered commercial bank that is a member of the Federal
Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law.
It provides full-service commercial and consumer banking to the Milwaukee, Wisconsin area and
adjacent communities through its office located in Brookfield, Wisconsin. At December 31, 2007,
First Wisconsin Bank & Trust had total segment assets of $70.7 million. See Financial Statement
Note 20 for additional business segment information.
Operating Subsidiaries. Bancard was capitalized in April 1995 as a Delaware corporation that
provides merchant and cardholder credit card processing services. Bancard provides credit card
processing for merchants and cardholders of the Company’s four subsidiary banks and 128 agent
banks. During 2007, Bancard processed in excess of 3.8 million merchant transactions with a dollar
volume exceeding $387.7 million.
On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of M2 Lease Funds.
John Engelbrecht, the President and Chief Executive Officer of M2 Lease Funds, retained 20% of the
membership units. M2 Lease Funds, which is based in Brookfield, Wisconsin, is engaged in the
business of leasing machinery and equipment to commercial and industrial businesses under direct
financing lease contracts. Quad City Bank & Trust’s acquisition of M2 Lease Funds resulted in
goodwill of $3.4 million and minority interest, which at December 31, 2007, was $1.1 million. In
accordance with the provisions of FAS Statement 142, goodwill is not being amortized, but is being
evaluated annually for impairment. There was no impairment of goodwill in 2007.
Since 1998, the Company has held a 20% equity investment in Velie Plantation Holding Company. In
2006, the Company acquired an additional 37% of the membership units bringing its total investment
to 57% in aggregate. Velie Plantation Holding Company is engaged in holding the real estate
property known as the Velie Plantation Mansion in Moline, Illinois. Six additional investors in
Velie Plantation Holding Company have retained 43% of the membership units. The acquisition of a
majority of the membership units resulted in minority interest of $664 thousand at December 31,
2007.
Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated
subsidiaries formed for the issuance of trust preferred securities, including pertinent information
as of December 31, 2007 and 2006:
| Interest | Interest | |||||||||||||||||||
| Rate as | Rate as | |||||||||||||||||||
| Amount | of | of | ||||||||||||||||||
| Name | Date Issued | Issued | Interest Rate | 12/31/07 | 12/31/06 | |||||||||||||||
QCR Holdings Statutory Trust II |
February 2004 | $ | 12,372,000 | 6.93 | %* | 6.93 | % | 6.93 | % | |||||||||||
QCR Holdings Statutory Trust III |
February 2004 | 8,248,000 | 2.85% over 3-month LIBOR | 8.08 | % | 8.31 | % | |||||||||||||
QCR Holdings Statutory Trust IV |
May 2005 | 5,155,000 | 1.80% over 3-month LIBOR | 7.04 | % | 7.16 | % | |||||||||||||
QCR Holdings Statutory Trust V |
February 2006 | 10,310,000 | 6.62 | %** | 6.62 | % | 6.62 | % | ||||||||||||
| * | Rate is fixed until March 31, 2011, then becomes variable based on 3-month LIBOR plus 2.85%, reset quarterly. | |
| ** | Rate is fixed until April 7, 2011, then becomes variable based on 3-month LIBOR plus 1.55%, reset quarterly. |
Securities issued by Trust II mature in thirty years, but are callable at par after seven years
from issuance. Securities issued by Trust III, Trust IV, and Trust V mature in thirty years, but
are callable at par after five years from issuance.
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Other Ownership Interests. The Company invests its capital in stocks of financial institutions and
mutual funds, as well as participates in loans with the subsidiary banks. In addition to its
wholly-owned and majority-owned subsidiaries, the Company owns a 20% equity position in Nobel Real
Estate Investors, LLC (“Nobel Real Estate”). In July 2007, the Company sold its 20% equity
interest in Nobel Electronic Transfer, LLC (“Nobel”) to TriSource Solutions, LLC (“TriSource”) in
exchange for $500 thousand in cash and a 2.25% equity interest in TriSource, which it continues to
own. In June 2005, Cedar Rapids Bank & Trust entered into a joint venture as a 50% owner of Cedar
Rapids Mortgage Company, LLC (“Cedar Rapids Mortgage Company”).
The Company and its subsidiaries collectively employed 350 full-time equivalents at December 31,
2007.
Business. The Company’s principal business consists of attracting deposits from the public and
investing those deposits in loans and securities. The deposits of the subsidiary banks are insured
to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent
primarily on net interest income, which is the difference between the interest earned on its loans
and securities and the interest paid on deposits and borrowings. The Company’s operating results
are affected by economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities, as described more fully in this Form
10-K. Its operating results also can be 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 Board of Governors of the Federal Reserve System (the “Federal Reserve”) is the primary federal
regulator of the Company and its subsidiaries. In addition, Quad City Bank & Trust and Cedar
Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking (the “Iowa
Superintendent”), Rockford Bank & Trust is regulated by the State of Illinois Department of
Financial and Professional Regulation (“the Illinois DFPR”), and First Wisconsin Bank & Trust is
regulated by the State of Wisconsin Department of Financial Institutions (the “Wisconsin DFI”).
The FDIC, as administrator of the Deposit Insurance Fund, has regulatory authority over the
subsidiary banks.
Lending. The Company and its subsidiaries provide a broad range of commercial and retail lending
and investment services to corporations, partnerships, individuals and government agencies. The
subsidiary banks actively market their services to qualified lending customers. Lending officers
actively solicit the business of new borrowers entering their market areas as well as long-standing
members of the local business community. The subsidiary banks have established lending policies
which include a number of underwriting factors to be considered in making a loan, including
location, loan-to-value ratio, cash flow, interest rate and the credit history of the borrower.
Quad City Bank & Trust’s current legal lending limit is approximately $11.1 million. As of
December 31, 2007, commercial loans, including commercial real estate loans, made up approximately
82% of the loan portfolio, while residential mortgages and consumer loans each comprised
approximately 9%.
Cedar Rapids Bank & Trust’s current legal lending limit is approximately $4.7 million. As of
December 31, 2007, commercial loans, including commercial real estate loans, made up approximately
85% of the loan portfolio, while residential mortgages comprised approximately 8% and consumer
loans comprised approximately 7%.
Rockford Bank & Trust’s current legal lending limit is approximately $3.2 million. As of December
31, 2007, commercial loans, including commercial real estate loans, made up approximately 86% of
the loan portfolio, while residential mortgages comprised approximately 8% and consumer loans
comprised approximately 6%.
First Wisconsin Bank & Trust’s current legal lending limit is approximately $1.9 million. As of
December 31, 2007, commercial loans, including commercial real estate loans, made up approximately
84% of the loan portfolio, while residential mortgages comprised approximately 2% and consumer
loans comprised approximately 14%.
As part of the loan monitoring activity at the four subsidiary banks, credit administration
personnel interact closely with senior bank management. The Company has also instituted a separate
loan review function to analyze credits of the subsidiary banks. Management has attempted to
identify problem loans at an early stage and to aggressively seek a resolution of these situations.
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As noted above, the subsidiary banks are active commercial lenders. The areas of emphasis include
loans to wholesalers, manufacturers, building contractors, developers, business services companies
and retailers. The banks provide a wide range of business loans, including lines of credit for
working capital and operational purposes, and term loans for the acquisition of facilities,
equipment and other purposes. Collateral for these loans generally includes accounts receivable,
inventory, equipment and real estate. In addition, the subsidiary banks often take personal
guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the
overall financial condition of the borrower. Terms of commercial business loans generally range
from one to five years. Some of the subsidiary banks’ commercial business loans have floating
interest rates or reprice within one year. The banks also make commercial real estate loans.
Collateral for these loans generally includes the underlying real estate and improvements, and may
include additional assets of the borrower.
The subsidiary banks sell the majority of their residential real estate loans in the secondary
market. During the year ended December 31, 2007, the subsidiary banks originated $135.0 million of
residential real estate loans and sold $103.6 million, or 77%, of these loans. During the year
ended December 31, 2006, the subsidiary banks originated $134.3 million of residential real estate
loans and sold $84.2 million, or 63%, of these loans. During the year ended December 31, 2005, the
subsidiary banks originated $122.1 million of residential real estate loans and sold $99.6 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, and
then retain these loans in their portfolios. The subsidiary banks’ residential real estate loan
portfolios, net of loans held for sale, were approximately $78.0 million at December 31, 2007.
Servicing rights are not presently retained on the loans sold in the secondary market.
The consumer lending departments of each bank provide many types of consumer loans including motor
vehicle, home improvement, home equity, signature loans and small personal credit lines.
Competition. The Company currently operates in the highly competitive Quad City, Cedar Rapids,
Rockford, and Milwaukee markets. Competitors include not only other commercial banks, credit
unions, thrift institutions, and mutual funds, but also, insurance companies, finance companies,
brokerage firms, investment banking companies, and a variety of other financial services and
advisory companies. Many of these competitors are not subject to the same regulatory restrictions
as the Company. Many of these unregulated competitors compete across geographic boundaries and
provide customers increasing access to meaningful alternatives to banking services. Additionally,
the Company competes in markets with a number of much larger financial institutions with
substantially greater resources and larger lending limits. These competitive trends are likely to
continue and may increase as a result of the continuing reduction on restrictions on the interstate
operations of financial institutions. Under the Gramm-Leach-Bliley Act of 1999, securities firms
and insurance companies that elect to become financial holding companies may acquire banks and
other financial institutions. The financial services industry is also likely to become more
competitive as further technological advances enable more companies to provide financial services.
Appendices. The commercial banking business is a highly regulated business. See Appendix A for a
summary of the federal and state statutes and regulations that 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
relating to the business of the Company required to be presented pursuant to the securities laws,
Consistent with the information presented in Form 10-K, results are presented for the fiscal years
ended December 31, 2007, 2006, 2005, 2004 and 2003.
Internet Site, Securities Filings and Governance Documents. The Company maintains Internet sites
for itself and its four banking subsidiaries. The Company makes available free of charge through
these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
after it electronically files such material with, or furnishes it to, the Securities and Exchange
Commission. Also available are many of our corporate governance documents, including our Code of
Conduct and Ethics Policy. The sites are www.qcrh.com, www.qcbt.com, www.crbt.com,
www.rfrdbank.com, and www.firstwisconsinbank.com.
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Item 1A. Risk Factors
In addition to the other information in this Annual Report on Form 10-K, stockholders or
prospective investors should carefully consider the following risk factors:
Our business is concentrated in and dependent upon the continued growth and welfare of the Quad
City, Cedar Rapids, Rockford and Milwaukee markets.
We operate primarily in the Quad City, Cedar Rapids, Rockford, and Milwaukee markets, and as a
result, our financial condition, results of operations and cash flows are subject to changes in the
economic conditions in those areas. We have developed a particularly strong presence in
Bettendorf, Cedar Rapids and Davenport, Iowa and Moline and Rockford, Illinois and their
surrounding communities. Our success depends upon the business activity, population, income
levels, deposits and real estate activity in these markets. Although our customers’ business and
financial interests may extend well beyond these market areas, adverse economic conditions that
affect these market areas could reduce our growth rate, affect the ability of our customers to
repay their loans to us and generally affect our financial condition and results of operations.
Because of our geographic concentration, we are less able than other regional or national financial
institutions to diversify our credit risks across multiple markets.
We face intense competition in all phases of our business from other banks and financial
institutions.
The banking and financial services businesses in all of our markets are highly competitive. Our
competitors include large regional banks, local community banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies, finance companies,
money market mutual funds, credit unions and other non-bank financial services providers. Many of
these competitors are not subject to the same regulatory restrictions as we are. Many of our
unregulated competitors compete across geographic boundaries and are able to provide customers with
a feasible alternative to traditional banking services. Additionally, if the regulatory trend
toward reducing restrictions on the interstate operations of financial institutions continues, we
will continue to experience increased competition as a result.
Increased competition in our markets may also result in a decrease in the amounts of our loans and
deposits, reduced spreads between loan rates and deposit rates or loan terms that are more
favorable to the borrower. Any of these results could have a material adverse effect on our
ability to grow and remain profitable. If increased competition causes us to significantly
discount the interest rates we offer on loans or increase the amount we pay on deposits, our net
interest income could be adversely impacted. If increased competition causes us to relax our
underwriting standards, we could be exposed to higher losses from lending activities.
Additionally, many of our competitors are much larger in total assets and capitalization, have
greater access to capital markets and larger lending limits and offer a broader range of financial
services than we can offer.
Our community banking strategy relies heavily on our subsidiaries’ independent management teams,
and the unexpected loss of key managers may adversely affect our operations.
We rely heavily on the success of our bank subsidiaries’ independent management teams.
Accordingly, much of our success to date has been influenced strongly by our ability to attract and
to retain senior management experienced in banking and financial services and familiar with the
communities in our market areas. Our ability to retain executive officers, the current management
teams, branch managers and loan officers of our operating subsidiaries will continue to be
important to the successful implementation of our strategy. It is also critical, as we grow, to be
able to attract and retain qualified additional management and loan officers with the appropriate
level of experience and knowledge about our market areas to implement our community-based operating
strategy. The unexpected loss of services of any key management personnel, or the inability to
recruit and retain qualified personnel in the future, could have an adverse effect on our business,
financial condition and results of operations.
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Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital
to support our operations. We anticipate that our existing capital resources will satisfy our
capital requirements for the foreseeable future. However, we may at some point need to raise
additional capital to support our continued growth. Our ability to raise additional capital, if
needed, will depend on conditions in the capital markets at that time, which are outside our
control, and on our financial performance. Accordingly, we cannot assure you of our ability to
raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional
capital when needed, our ability to further expand our operations through internal growth,
branching, de novo bank formations and/or acquisitions could be materially impaired.
We may experience difficulties in managing our growth and our growth strategy involves risks that
may negatively impact our net income.
While we have no current plans, we may expand into additional communities or attempt to strengthen
our position in our current markets by undertaking additional de novo bank formations or branch
openings. Based on our experience, we believe that it generally takes several years for new
banking facilities to achieve overall profitability, due to the impact of organizational and
overhead expenses and the start-up phase of generating loans and deposits. If we undertake
additional branching and de novo bank and business formations, we are likely to continue to
experience the effects of higher operating expenses relative to operating income from the new
operations, which may have an adverse effect on our levels of reported net income, return on
average equity and return on average assets. Other effects of engaging in such growth strategies
may include potential diversion of our management’s time and attention and general disruption to
our business.
In addition to branching and de novo bank formations, we may acquire banks and related businesses
that we believe provide a strategic fit with our business. To the extent that we grow through
acquisitions, we cannot assure you that we will be able to adequately and profitably manage this
growth. Acquiring other banks and businesses will involve similar risks to those commonly
associated with branching and de novo bank formations, but may also involve additional risks,
including:
| • | potential exposure to unknown or contingent liabilities of banks and businesses we acquire; | ||
| • | exposure to potential asset quality issues of the acquired bank or related business; | ||
| • | difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; and | ||
| • | the possible loss of key employees and customers of the banks and businesses we acquire. |
Interest rates and other conditions impact our results of operations.
Our profitability is in part a function of the spread between the interest rates earned on
investments and loans and the interest rates paid on deposits and other interest-bearing
liabilities. Like most banking institutions, our net interest spread and margin will be affected
by general economic conditions and other factors, including fiscal and monetary policies of the
federal government, that influence market interest rates and our ability to respond to changes in
such rates. At any given time, our assets and liabilities will be such that they are affected
differently by a given change in interest rates. As a result, an increase or decrease in rates,
the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have
a positive or negative effect on our net income, capital and liquidity. We measure interest rate
risk under various rate scenarios and using specific criteria and assumptions. A summary of this
process, along with the results of our net interest income simulations is presented at
“Quantitative and Qualitative Disclosures About Market Risk” included under Item 7A of Part II of
this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable
and effectively managed, significant fluctuations in interest rates may have an adverse effect on
our business, financial condition and results of operations.
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We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual
borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of
collateral and risks resulting from changes in economic and industry conditions. We attempt to
minimize our credit risk through prudent loan application approval procedures, careful monitoring
of the concentration of our loans within specific industries and periodic independent reviews of
outstanding loans by our credit review department. However, we cannot assure you that such
approval and monitoring procedures will reduce these credit risks.
The majority of our subsidiary banks’ loan/lease portfolios are invested in commercial
loans/leases, and we focus on lending to small to medium-sized businesses. The size of the
loans/leases we can offer to commercial customers is less than the size of the loans/leases that
our competitors with larger lending limits can offer. This may limit our ability to establish
relationships with the area’s largest businesses. As a result, we may assume greater lending risks
than financial institutions that have a lesser concentration of such loans/leases and tend to make
loans/leases to larger businesses. Collateral for these loans/leases generally includes accounts
receivable, inventory, equipment and real estate. However, depending on the overall financial
condition of the borrower, some loans are made on an unsecured basis. In addition to commercial
loans/leases and commercial real estate loans, our subsidiary banks are also active in residential
mortgage and consumer lending.
Commercial and industrial loans/leases make up a large portion of our loan/lease portfolio.
Commercial and industrial loans/leases were $435.4 million, or approximately 39% of our total
loan/lease portfolio, as of December 31, 2007. Our commercial loans/leases are primarily made
based on the identified cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. Most often, this collateral is accounts receivable, inventory and
equipment. Credit support provided by the borrower for most of these loans/leases and the
probability of repayment is based on the liquidation value of the pledged collateral and
enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due from its customers.
The collateral securing other loans/leases may depreciate over time, may be difficult to appraise
and may fluctuate in value based on the success of the business.
Our loan/lease portfolio has a significant concentration of commercial real estate loans, which
involve risks specific to real estate value.
Commercial real estate lending comprises a significant portion of our lending business.
Specifically, commercial real estate loans were $499.5 million, or approximately 45% of our total
loan/lease portfolio, as of December 31, 2007. Our commercial real estate loans increased by
approximately 43% from their levels at December 31, 2006. The market value of real estate can
fluctuate significantly in a short period of time as a result of market conditions in the
geographic area in which the real estate is located. Although a significant portion of such loans
are secured by real estate as a secondary form of collateral, adverse developments affecting real
estate values in one or more of our markets could increase the credit risk associated with our loan
portfolio. Additionally, real estate lending typically involves higher loan principal amounts and
the repayment of the loans generally is dependent, in large part, on sufficient income from the
properties securing the loans to cover operating expenses and debt service. Economic events or
governmental regulations outside of the control of the borrower or lender could negatively impact
the future cash flow and market values of the affected properties.
If the problems that have occurred in residential real estate and mortgage markets throughout much
of the United States were to spread to the commercial real estate market, particularly within one
or more of our markets, the value of collateral securing our commercial real estate loans could
decline. In such case, we may not be able to realize the amount of security that we anticipated at
the time of originating the loan, which could cause us to increase our provision for loan losses
and adversely affect our operating results, financial condition and/or capital. We generally have
not experienced a downturn in credit performance by our commercial real estate loan customers, but
in light of the uncertainty that exists in the economy and credit markets nationally, there can be
no guarantee that we will not experience any deterioration in such performance.
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Our allowance for loan/lease losses may prove to be insufficient to absorb potential losses in our
loan/lease portfolio.
We established our allowance for loan/lease losses in consultation with management of our
subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease
losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible
to changes in economic, operating and other conditions, including changes in interest rates, which
may be beyond our control, and such losses may exceed current estimates. At December 31, 2007, our
allowance for loan/lease losses as a percentage of total gross loans/leases was 1.09% and as a
percentage of total non-performing loans/leases was approximately 161%. Although management
believes that the allowance for loan/lease losses is adequate to absorb losses on any existing
loans/leases that may become uncollectible, we cannot predict loan/lease losses with certainty, and
we cannot assure you that our allowance for loan/lease losses will prove sufficient to cover actual
loan/lease losses in the future. Loan/lease losses in excess of our reserves may adversely affect
our business, financial condition and results of operations. Additional information regarding our
allowance for loan/lease losses and the methodology we use to determine an appropriate level of
reserves is located in the “Management’s Discussion and Analysis” section included under Item 7 of
Part II of this Form 10-K.
Our Bancard operation faces other risks.
Bancard, our credit card processing subsidiary, is subject to certain risks, which could have a
negative impact on its operations. These risks primarily are competition, credit risks and the
possibility that merchants’ willingness to accept credit cards will decline. Many of Bancard’s
competitors have greater financial, technological, marketing and personnel resources than Bancard
and there can be no assurance that Bancard will be able to compete effectively with such entities.
Bancard is also subject to credit risks. When a billing dispute arises between a cardholder and a
merchant, and if the dispute is not resolved in favor of the merchant, the transaction is charged
back to the merchant. If Bancard is unable to collect such chargeback from the merchant’s account,
and if the merchant refuses or is unable to reimburse Bancard for the chargeback due to bankruptcy
or other reasons, Bancard bears the loss for the amount of the refund paid to the cardholder.
Bancard, in general, handles processing for smaller merchants, which may present greater risk of
loss. Although Bancard maintains a reserve against these losses, there is no assurance that it will
be adequate.
Additionally, VISA and MasterCard have the ability to increase the “interchange” rates charged to
merchants for credit card transactions. There can be no assurance that merchants will continue to
accept credit cards as payment if they feel rates are too high. Bancard is also subject to an
approval process by the VISA and MasterCard credit card associations. In the event Bancard fails to
comply with these standards, Bancard’s designation as a certified processor could be suspended or
terminated. There can be no assurance that VISA or MasterCard will maintain Bancard’s registrations
or that the current VISA or MasterCard rules allowing Bancard to provide transaction processing
services will remain in effect.
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We have a continuing need for technological change and we may not have the resources to effectively
implement new technology.
The financial services industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to enabling us to better
serve our customers, the effective use of technology increases efficiency and enables us to reduce
costs. Our future success will depend in part upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy customer demands
for convenience as well as to create additional efficiencies in our operations as we continue to
grow and expand our market areas. Many of our larger competitors have substantially greater
resources to invest in technological improvements. As a result, they may be able to offer
additional or superior products to those that we will be able to offer, which would put us at a
competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able
to effectively implement new technology-driven products and services or be successful in marketing
such products and services to our customers.
System failure or breaches of our network security could subject us to increased operating costs as
well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems.
Our operations are dependent upon our ability to protect our computer equipment against damage from
physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as
well as from security breaches, denial of service attacks, viruses, worms and other disruptive
problems caused by hackers. Any damage or failure that causes an interruption in our operations
could have a material adverse effect on our financial condition and results of operations.
Computer break-ins, phishing and other disruptions could also jeopardize the security of
information stored in and transmitted through our computer systems and network infrastructure,
which may result in significant liability to us and may cause existing and potential customers to
refrain from doing business with us. Although we, with the help of third-party service providers,
intend to continue to implement security technology and establish operational procedures to prevent
such damage, there can be no assurance that these security measures will be successful. In
addition, advances in computer capabilities, new discoveries in the field of cryptography or other
developments could result in a compromise or breach of the algorithms we and our third-party
service providers use to encrypt and protect customer transaction data. A failure of such security
measures could have a material adverse effect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee
fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or
regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include
hiding unauthorized activities from us, improper or unauthorized activities on behalf of our
customers or improper use of confidential information. It is not always possible to prevent
employee errors and misconduct, and the precautions we take to prevent and detect this activity may
not be effective in all cases. Employee errors could also subject us to financial claims for
negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational
risks, including data processing system failures and errors and customer or employee fraud. Should
our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not
insured or exceeds applicable insurance limits, it could have a material adverse effect on our
business, financial condition and results of operations.
Government regulation can result in limitations on our operations.
We operate in a highly regulated environment and are subject to supervision and regulation by a
number of governmental regulatory agencies, including the Federal Reserve, the FDIC, the Iowa
Superintendent, the Illinois DFPR, and the Wisconsin DFI. Regulations adopted by these agencies,
which are generally intended to provide protection for depositors and customers rather than for the
benefit of stockholders, govern a comprehensive range of
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matters relating to ownership and control of our shares, our acquisition of other companies and
businesses, permissible activities for us to engage in, maintenance of adequate capital levels and
other aspects of our operations. These bank regulators possess broad authority to prevent or remedy
unsafe or unsound practices or violations of law. The laws and regulations applicable to the
banking industry could change at any time and we cannot predict the effects of these changes on our
business and profitability. Increased regulation could increase our cost of compliance and
adversely affect profitability. For example, new legislation or regulation may limit the manner in
which we may conduct our business, including our ability to offer new products, obtain financing,
attract deposits, make loans and achieve satisfactory interest spreads.
In addition, there have been a number of legislative and regulatory proposals that have arisen in
the wake of the recent troubles in the credit markets in the United State that would have an impact
on the operation of bank holding companies and their bank and non-bank subsidiaries. It is
impossible to predict whether or in what form these proposals may be adopted in the future and, if
adopted, what their effect will be on us.
Failure to pay interest on our debt or dividends on our preferred stock may adversely impact our
ability to pay common stock dividends.
As of December 31, 2007, we had $36.1 million of junior subordinated debentures held by four
business trusts that we control. Interest payments on the debentures, which totaled $2.6 million
for 2007, must be paid before we pay dividends on our capital stock, including our common stock.
We have the right to defer interest payments on the debentures for up to 20 consecutive quarters.
However, if we elect to defer interest payments, all deferred interest must be paid before we may
pay dividends on our capital stock. As of December 31, 2007, the Company had 568 shares of
non-cumulative perpetual preferred stock issued and outstanding. Although the preferred shares
will accrue no dividends, dividends will be payable on the preferred shares if declared, but no
dividends may be declared on the Company’s common stock unless and until dividends have been
declared on the outstanding shares. Deferral, of either interest payments on the debentures or
preferred dividends on the preferred shares, could cause a subsequent decline in the market price
of our common stock because the Company would not be able to pay dividends on its common stock.
There is a limited trading market for our common shares, and you may not be able to resell your
shares at or above the price stockholders paid for them.
Although our common shares are listed for quotation on The Nasdaq Capital Market, the trading in
our common shares has substantially less liquidity than many other companies listed on Nasdaq. A
public trading market having the desired characteristics of depth, liquidity and orderliness
depends on the presence in the market of willing buyers and sellers of our common shares at any
given time. This presence depends on the individual decisions of investors and general economic
and market conditions over which we have no control. We cannot assure you that the volume of
trading in our common shares will increase in the future.
Item 1B. Unresolved Staff Comments
There are no unresolved staff comments.
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Item 2. Properties
The following table is a listing of the Company’s operating facilities for its subsidiary banks:
| Facility | ||||||||
| Square | Facility Owned or | |||||||
| Facility Address | Footage | Leased | ||||||
Quad City Bank & Trust |
||||||||
2118 Middle Road in Bettendorf, IA |
6,700 | Owned | ||||||
4500 Brady Street in Davenport, IA |
36,000 | Owned | ||||||
3551 7th Street in Moline, IL |
30,000 | Owned * | ||||||
5515 Utica Ridge Road in Davenport, IA |
6,000 | Leased | ||||||
1700 Division Street in Davenport, IA |
12,000 | Owned | ||||||
Cedar Rapids Bank & Trust |
||||||||
400 1st Avenue NE, Suite 100 in Cedar Rapids, IA |
36,000 | Owned | ||||||
5400 Council Street in Cedar Rapids, IA |
5,900 | Owned | ||||||
Rockford Bank & Trust |
||||||||
127 North Wyman Street in Rockford, IL |
7,800 | Leased | ||||||
4571 Guilford Road in Rockford, IL |
20,000 | Owned | ||||||
First Wisconsin Bank & Trust |
||||||||
175 North Patrick Boulevard in Brookfield, WI |
2,100 | Leased | ||||||
| * | The building is owned by Velie Plantation Holding Company, in which the Company has a 57% interest. |
The subsidiary banks intend to limit their investment in premises to no more than 50% of their
capital. Management believes that the facilities are of sound construction, in good operating
condition, are appropriately insured and are adequately equipped for carrying on the business of
the Company.
No individual real estate property or mortgage amounts to 10% or more of consolidated assets.
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, 2007.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information. The common stock, par value $1.00 per share, of the Company is listed on The
Nasdaq Capital Market under the symbol “QCRH”. The stock began trading on October 6, 1993. As of
December 31, 2007, there were 4,597,744 shares of common stock outstanding held by approximately
2,600 holders of record. The following table sets forth the high and low sales prices of the
common stock, as reported by The Nasdaq Capital Market, for the periods indicated.
| 2007 | 2006 | 2005 | ||||||||||||||||||||||
| sales price | sales price | sales price | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
First quarter |
$ | 17.900 | $ | 15.280 | $ | 19.660 | $ | 17.440 | $ | 22.000 | $ | 20.000 | ||||||||||||
Second quarter |
17.750 | 15.150 | 19.950 | 16.250 | 22.060 | 19.830 | ||||||||||||||||||
Third quarter |
16.430 | 13.760 | 18.169 | 16.210 | 22.750 | 20.500 | ||||||||||||||||||
Fourth quarter |
16.000 | 14.250 | 18.860 | 16.772 | 20.500 | 17.920 | ||||||||||||||||||
Dividends. On April 26, 2007, the Company declared a cash dividend of $0.04 per share, or $183
thousand, which was paid on July 6, 2007, to stockholders of record as of June 22, 2007. On
October 25, 2007, the Company declared a cash dividend of $0.04 per share, or $184 thousand, which
was paid on January 7, 2008, to stockholders of record as of December 21, 2007. 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 is heavily dependent on dividend payments from its subsidiary banks to make dividend
payments on the Company’s preferred and common stock. Under applicable state laws, the banks are
restricted as to the maximum amount of dividends that they may pay on their common stock. Iowa,
Illinois and Wisconsin law provide that state-chartered banks in those states may not pay dividends
in excess of their undivided profits. Before declaring its first dividend, Rockford Bank & Trust,
as a de novo institution, is required by Illinois law to carry at least one-tenth of its net
profits since the issuance of its charter to its surplus until its surplus is equal to its capital.
In addition, First Wisconsin Bank & Trust may not pay dividends until after the year 2009 and only
then if two consecutive satisfactory composite CAMELS ratings have been obtained, unless the prior
approval of the Federal Reserve Bank of Chicago is obtained.
The Company’s ability to pay dividends to its shareholders may be affected by both general
corporate law considerations and policies of the Federal Reserve applicable to bank holding
companies. The payment of dividends by any financial institution or its holding company is affected
by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines
and regulations, and a financial institution generally is prohibited from paying any dividends if,
following payment thereof, the institution would be undercapitalized.
The Company also has certain contractual restrictions on its ability to pay dividends. The Company
has issued junior subordinated debentures in four private placements. Under the terms of the
debentures, the Company may be prohibited, under certain circumstances, from paying dividends on
shares of its common stock. During the fourth quarters of 2006 and 2007, the Company issued shares
of non-cumulative perpetual preferred stock. Also, under the terms of this preferred stock, the
Company may be prohibited, under certain circumstances, from paying dividends on shares of its
common stock. None of these circumstances currently exist.
Purchase of Equity Securities by the Company. The Company did not repurchase any of its common
stock during the fourth quarter of 2007.
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Stockholder Return Performance Graph. The following graph indicates, for the period commencing
December 31, 2002, a comparison of cumulative total returns for QCR Holdings, Inc., the Nasdaq
Composite Index and the SNL Bank NASDAQ Index prepared by SNL Securities, Charlottesville,
Virginia. The graph was prepared at the Company’s request by SNL Securities.
| Period Ending | ||||||||||||||||||||||||
| Index | 12/31/02 | 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | ||||||||||||||||||
QCR Holdings, Inc. |
$ | 100.00 | $ | 166.47 | $ | 188.04 | $ | 177.10 | $ | 159.48 | $ | 129.35 | ||||||||||||
NASDAQ Composite Index |
$ | 100.00 | $ | 150.01 | $ | 162.89 | $ | 165.13 | $ | 180.85 | $ | 198.60 | ||||||||||||
SNL Bank NASDAQ Index |
$ | 100.00 | $ | 129.08 | $ | 147.94 | $ | 143.43 | $ | 161.02 | $ | 126.42 | ||||||||||||
Item 6. Selected Financial Data
The following “Selected Consolidated Financial Data” of the Company is derived in part from, and
should be read in conjunction with, our consolidated financial statements and the accompanying
notes thereto. See Item 8 “Financial Statements.” Results for past periods are not necessarily
indicative of results to be expected for any future period.
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SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
(dollars in thousands, except per share data)
| Years Ended December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Statement of Income Data: |
||||||||||||||||||||
Interest income |
$ | 85,725 | $ | 68,803 | $ | 48,688 | $ | 38,017 | $ | 33,378 | ||||||||||
Interest expense |
49,356 | 38,907 | 21,281 | 13,325 | 11,950 | |||||||||||||||
Net interest income |
36,369 | 29,896 | 27,407 | 24,692 | 21,428 | |||||||||||||||
Provision for loan/lease losses |
2,864 | 3,284 | 877 | 1,372 | 3,405 | |||||||||||||||
Non-interest income |
14,093 | 11,983 | 10,073 | 8,682 | 11,168 | |||||||||||||||
Non-interest expenses |
39,037 | 34,669 | 29,433 | 24,281 | 21,035 | |||||||||||||||
Pre-tax net income |
8,561 | 3,926 | 7,170 | 7,721 | 8,156 | |||||||||||||||
Income tax expense |
2,396 | 858 | 2,282 | 2,504 | 2,695 | |||||||||||||||
Minority interest in income of
consolidated subsidiaries |
388 | 266 | 78 | — | — | |||||||||||||||
Net income |
5,777 | 2,802 | 4,810 | 5,217 | 5,461 | |||||||||||||||
Per Common Share Data: |
||||||||||||||||||||
Net income-basic |
$ | 1.03 | $ | 0.57 | $ | 1.06 | $ | 1.23 | $ | 1.31 | ||||||||||
Net income-diluted |
1.02 | 0.57 | 1.04 | 1.20 | 1.28 | |||||||||||||||
Cash dividends declared |
0.08 | 0.08 | 0.08 | 0.08 | 0.07 | |||||||||||||||
Dividend payout ratio |
7.77 | % | 14.04 | % | 7.55 | % | 6.50 | % 5.34 | % | |||||||||||
Balance Sheet: |
||||||||||||||||||||
Total assets |
$ | 1,476,564 | $ | 1,271,675 | $ | 1,042,614 | $ | 870,084 | $ | 710,040 | ||||||||||
Securities |
235,905 | 194,774 | 182,365 | 149,561 | 128,843 | |||||||||||||||
Loans/leases |
1,106,900 | 960,747 | 756,254 | 648,351 | 522,471 | |||||||||||||||
Allowance for estimated losses
on loans/leases |
12,024 | 10,612 | 8,884 | 9,262 | 8,643 | |||||||||||||||
Deposits |
929,427 | 875,447 | 698,504 | 588,016 | 511,652 | |||||||||||||||
Stockholders’ equity: |
||||||||||||||||||||
Preferred |
20,158 | 12,884 | — | — | — | |||||||||||||||
Common |
65,908 | 57,999 | 54,467 | 50,774 | 41,823 | |||||||||||||||
Key Ratios: |
||||||||||||||||||||
Return on average assets |
0.43 | % | 0.24 | % | 0.51 | % | 0.65 | % 0.83 | % | |||||||||||
Return on average
common equity |
9.31 | 5.02 | 9.14 | 11.89 | 13.93 | |||||||||||||||
Return on average
total equity |
7.70 | 4.85 | 9.14 | 11.89 | 13.93 | |||||||||||||||
Net interest margin (TEY) (1) |
2.97 | 2.87 | 3.25 | 3.41 | 3.55 | |||||||||||||||
Efficiency ratio (2) |
77.36 | 82.78 | 78.53 | 72.75 | 64.53 | |||||||||||||||
Nonperforming assets to
total assets |
0.51 | 0.58 | 0.36 | 1.23 | 0.70 | |||||||||||||||
Allowance for estimated losses on
loans/leases to total loans/leases |
1.09 | 1.10 | 1.17 | 1.43 | 1.65 | |||||||||||||||
Net charge-offs to
average loans/leases |
0.14 | 0.18 | 0.25 | 0.13 | 0.34 | |||||||||||||||
Average total stockholders’ equity
to average assets |
5.55 | 5.01 | 5.63 | 5.49 | 5.94 | |||||||||||||||
| (1) | Interest earned and yields on nontaxable investments are determined on a tax equivalent basis using a 34% tax rate. | |
| (2) | Non-interest expenses divided by the sum of net interest income before provision for loan/lease losses and non-interest income. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides additional information regarding our operations for the
twelve-month periods ending December 31, 2007, 2006, and 2005, and our financial condition at
December 31, 2007 and 2006. This discussion should be read in conjunction with “Selected
Consolidated Financial Data” and our consolidated financial statements and the accompanying notes
thereto included or incorporated by reference elsewhere in this document.
Overview
The Company was formed in February 1993 for the purpose of organizing Quad City Bank & Trust. Over
the past fifteen years, the Company has grown to include three additional banking subsidiaries and
a number of nonbanking subsidiaries. As of December 31, 2007, the Company had $1.48 billion in
consolidated assets.
The Company reported earnings of $5.8 million, or $1.03 basic earnings per share, for 2007,
compared to $2.8 million, or $0.57 basic earnings per share, for 2006, and $4.8 million, or $1.06
basic earnings per share, for 2005. During 2007, the Company experienced steady and profitable
growth including a combined increase in net interest income and other non-interest income of $8.6
million, or 20%, as compared to 2006. The largest contributor to this significant improvement in
earnings was an increase in net interest income of $6.5 million, or 22%, from the previous year.
Additionally, non-interest income increased $2.1 million, or 18%, which was largely attributable to
increases in trust fees, deposit service charges, and investment advisory fees. Additionally, the
Company more effectively managed expenses as evidenced by an improvement in the efficiency ratio
from 82.78% in 2006 to 77.36% in 2007.
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.
As noted above, net interest income increased $6.5 million, or 22%, to $36.4 million for 2007, from
$29.9 million for 2006. For 2007, average earning assets increased by $183.1 million, or 17%, and
average interest-bearing liabilities
increased by $164.9 million, or 17%, when compared with average balances for 2006. A comparison of
yields, spreads and margins from 2007 to 2006 shows the following:
| • | The average yield on interest-earning assets increased 40 basis points to 6.95%. | ||
| • | The average cost of interest-bearing liabilities increased 34 basis points to 4.38%. | ||
| • | The net interest spread improved 6 basis points from 2.51% to 2.57%. | ||
| • | The net interest margin improved 10 basis points from 2.87% to 2.97%. |
The Company’s management closely monitors and manages net interest margin. From a profitability
standpoint, an important challenge for the Company’s subsidiary banks is the improvement of their
net interest margins. Management continually addresses this issue with the use of alternative
funding sources and pricing strategies.
The Company’s operating results are also affected by sources of non-interest income, including
merchant credit card fees, trust fees, deposit service charge fees, gains from the sales of
residential real estate loans and other income. 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.
Trust department income continues to be a significant contributor to non-interest income. During
2007, trust department fees contributed $3.7 million. During 2006, trust department fees totaled
$3.0 million. Trust department fees contributed $2.8 million to our non-interest income during
2005. 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, 2007 increased $296.5 million during the year to $1.19 billion, resulting primarily from
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the development of existing relationships and the addition of new trust relationships. Assets
under administration at December 31, 2006 were $894.1 million, which was an increase of $82.9
million from December 31, 2005, when assets totaled $811.2 million.
The Company’s operating results were also affected by non-interest expenses, which include employee
compensation and benefits, occupancy and equipment expense, and other administrative expenses. The
Company has continued to add facilities and employees to accommodate both our historical growth and
anticipated future growth. As such, overhead expenses have had a significant impact on earnings.
This trend is likely to continue as the Company and our four banks continue to add the facilities
and resources necessary to attract and serve additional customers.
Critical Accounting Policy
The Company’s financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America. The financial information contained within these
statements is, to a significant extent, financial information that is based on approximate measures
of the financial effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and subjective decisions and
assessments, management has identified its most critical accounting policy to be that related to
the allowance for loan/lease losses. The Company’s allowance for loan/lease loss methodology
incorporates a variety of risk considerations, both quantitative and qualitative in establishing an
allowance for loan/lease loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company’s historical loss experience, delinquency and charge-off
trends, collateral values, governmental guarantees, payment status, changes in nonperforming
loans/leases, and other factors. Quantitative factors also incorporate known information about
individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative
factors include the general economic environment in the Company’s markets, including economic
conditions throughout the Midwest, and in particular, the economic health of certain industries.
Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease
policies and pace of portfolio growth are other qualitative factors that are considered in the
methodology. As the Company adds new products and increases the complexity of its loan/lease
portfolio, it enhances its methodology accordingly. Management may report a materially different
amount for the provision for loan/lease losses in the statement of operations to change the
allowance for loan/lease losses if its assessment of the above factors were different. The
discussion regarding the Company’s allowance for loan/lease losses should be read in conjunction
with the Company’s financial statements and the accompanying notes presented elsewhere herein, as
well as the portion of this Management’s Discussion and Analysis section entitled ”Financial
Condition – Allowance for Loan/Lease Losses.” Although management believes the levels of the
allowance as of December 31, 2007, 2006, and 2005 were adequate to absorb losses inherent in the
loan/lease portfolio, a decline in local economic conditions, or other factors, could result in
increasing losses that cannot be reasonably predicted at this time.
Results of Operations
2007 compared with 2006
Overview. Net income for 2007 was $5.8 million compared to net income of $2.8 million for 2006 for
an increase of $3.0 million, or 107%. Basic earnings per share for 2007 were $1.03 compared to
$0.57 for 2006. The increase in net income was comprised of an increase in net interest income
after provision for loan losses of $6.9 million in combination with an increase in aggregate
non-interest income of $2.1 million, offset by an increase in non-interest expenses of $4.4
million. The primary factor which contributed to the improvement in net income from 2006 to 2007
was the increase in net interest margin from 2.87% to 2.97% coupled with the growth in average
earning assets and liabilities of 17%.
Interest income. Interest income grew $16.9 million from $68.8 million for 2006 to $85.7 million
for 2007. The 25% increase in interest income was attributable to greater average outstanding
balances in interest-earning assets, principally loans receivable, in combination with an improved
aggregate asset yield. The average yield on interest earning assets for 2007 was 6.95% compared to
6.55% for 2006.
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Interest expense. Interest expense increased by $10.5 million, from $38.9 million for 2006 to
$49.4 million for 2007. The 27% increase in interest expense was primarily attributable to an
aggregate increase in interest rates, in combination
with greater average outstanding balances in interest-bearing liabilities, primarily customer
deposits. The average cost on interest bearing liabilities was 4.38% for 2007 compared to 4.04%
for 2006.
Provision for loan/lease losses. The provision for loan/lease losses is established based on a
number of factors, including the Company’s historical loss experience, delinquencies and charge-off
trends, the local and national economy and the risk associated with the loans/leases in the
portfolio as described in more detail in the “Critical Accounting Policy” section. The Company had
an allowance for estimated losses on loans/leases of approximately 1.09% of total gross
loans/leases at December 31, 2007, compared to approximately 1.10% of total gross loans at December
31, 2006, and 1.17% at December 31, 2005. The provision for loan/lease losses decreased slightly
to $2.9 million for 2007, compared to $3.3 million for 2006. During both periods, management made
monthly provisions for loan/lease losses based upon a number of factors; principally the increase
in loans/leases and a detailed analysis of the loan/lease portfolio. In 2007, the Company
experienced $146.2 million of growth within the loan/lease portfolio which was the largest
contributor to the $2.9 million of provision expense. During 2007, there were transfers totaling
$496 thousand of loans to other real estate owned. For 2007, commercial and commercial real estate
loans/leases had total charge-offs of $1.4 million, and there were $327 thousand of commercial
recoveries. Consumer loan charge-offs and recoveries totaled $469 thousand and $92 thousand,
respectively, for 2007. For 2007, credit cards accounted for 89% of the consumer loan net
charge-offs. Residential real estate loans had $174 thousand of charge-offs and $173 thousand of
recoveries during 2007. Net charge-offs to average loans/leases improved from 0.18% for 2006 to
0.14% for 2007. The ability to grow profitably is, in part, dependent upon the ability to maintain
asset quality. Management continually focuses its efforts at the subsidiary banks to attempt to
improve the overall quality of the Company’s loan/lease portfolio.
Non-interest income. The following table sets forth the various categories of non-interest income
for the years ended December 31, 2007 and 2006.
Non-interest Income
| Years ended | ||||||||||||
| December 31, | ||||||||||||
| 2007 | 2006 | % change | ||||||||||
Credit card fees, net of processing costs |
$ | 1,731,992 | $ | 1,947,984 | (11.1 | )% | ||||||
Trust department fees |
3,743,120 | 3,049,440 | 22.7 | % | ||||||||
Deposit service fees |
2,711,040 | 1,928,246 | 40.6 | % | ||||||||
Gains on sales of loans, net |
1,219,800 | 991,536 | 23.0 | % | ||||||||
Securities losses, net |
0 | (142,866 | ) | NA | ||||||||
Gains on sales of foreclosed assets |
1,007 | 664,223 | (99.8 | )% | ||||||||
Gains on sales of other assets |
435,791 | 0 | NA | |||||||||
Earnings on bank-owned life insurance |
892,395 | 759,100 | 17.6 | % | ||||||||
Investment advisory and management fees |
1,575,887 | 1,216,350 | 29.6 | % | ||||||||
Other |
1,781,944 | 1,569,092 | 13.6 | % | ||||||||
Total non-interest income |
$ | 14,092,976 | $ | 11,983,105 | 17.6 | % | ||||||
Analysis concerning changes in non-interest income for 2007, when compared to 2006, is as follows:
| • | Bancard’s credit card fees, net of processing costs, decreased $216 thousand. The majority of this decrease was due to an increase in net charge-offs of $223 thousand from 2006 while its fees remained the same. | ||
| • | Trust department fees increased $694 thousand. This was the result of the continued development of existing trust relationships and the addition of new trust customers throughout the past twelve months. Total trust assets under administration were $1.19 billion at December 31, 2007 compared to $894.1 million at December 31, 2006. |
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| • | Deposit service fees increased $783 thousand. This increase was primarily a result of an increase in NSF (non-sufficient funds or overdraft) charges related to demand deposit accounts at the Company’s subsidiary banks. | ||
| • | Gains on sales of residential mortgage loans, net, increased $228 thousand. Loans originated for sale during 2007 were $104.0 million and during 2006 were $87.7 million. Proceeds on the sales of loans during 2007 and 2006 were $104.9 million and $85.2 million, respectively. | ||
| • | During 2007, the Company did not have any sales of securities. In March 2006, the Company recognized an impairment loss of $143 thousand on a mortgage-backed mutual fund investment held in Quad City Bank & Trust’s securities portfolio, and in April, incurred an additional loss of $71 thousand on the subsequent sale of that security. In July 2006, the losses were partially offset when the Company recognized a gain of $71 thousand on the partial redemption of class B common stock of Mastercard Incorporated held by Quad City Bank & Trust, as a member bank of Mastercard International Incorporated. | ||
| • | In 2007, the Company sold a foreclosed asset for a gain of $1 thousand. During 2006, a foreclosed asset, determined by litigation to be property of Quad City Bank & Trust, was sold at auction for a net gain of $650 thousand. During 2006, the Company realized an additional net gain of $14 thousand on the sale of three other foreclosed assets at Quad City Bank & Trust. | ||
| • | On July 11, 2007, the Company announced the sale of its 20% interest in Nobel to TriSource Solutions, LLC (“TriSource”). The consideration received by the Company in the sale was $500 thousand in cash and a 2.25% ownership in TriSource, resulting in a net gain on sale of investment of $436 thousand. | ||
| • | Earnings on the cash surrender value of life insurance increased $133 thousand. During the year ended December 31, 2007, the subsidiary banks purchased additional bank-owned life insurance (BOLI) on key executives, increasing the level of insurance by $10.0 million. | ||
| • | Investment advisory and management fees increased $360 thousand. This increase was due to both the continued development of existing customers and the addition of new customers with a resulting growth in the number and value of accounts during the year ended December 31, 2007. | ||
| • | Other non-interest income increased $213 thousand. Other non-interest income consisted primarily of income from affiliated companies, earnings on other assets, Visa check card fees, and ATM fees. |
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Non-interest expenses. The following table sets forth the various categories of non-interest
expenses for the years ended December 31, 2007 and 2006.
Non-interest Expenses
| Years ended | ||||||||||||
| December 31, | ||||||||||||
| 2007 | 2006 | % change | ||||||||||
Salaries and employee benefits |
$ | 24,086,588 | $ | 21,262,541 | 13.3 | % | ||||||
Professional and data processing fees |
3,877,117 | 3,192,326 | 21.5 | % | ||||||||
Advertising and marketing |
1,356,420 | 1,367,545 | (0.8 | )% | ||||||||
Occupancy and equipment expense |
5,008,821 | 4,762,827 | 5.2 | % | ||||||||
Stationery and supplies |
612,603 | 670,915 | (8.7 | )% | ||||||||
Postage and telephone |
1,020,503 | 961,394 | 6.1 | % | ||||||||
Bank service charges |
579,923 | 583,687 | (0.6 | )% | ||||||||
FDIC and other insurance |
1,020,629 | 612,058 | 66.8 | % | ||||||||
Loss on disposals/sales of fixed assets |
223,308 | 36,305 | 515.1 | % | ||||||||
Other |
1,251,147 | 1,219,386 | 2.6 | % | ||||||||
Total non-interest expenses |
$ | 39,037,059 | $ | 34,668,984 | 12.6 | % | ||||||
Analysis concerning changes in non-interest expenses for 2007, when compared to 2006, is as
follows:
| • | Salaries and benefits increased $2.8 million. The increase was primarily due to an increase in the number of full-time equivalent employees from 331 to 350 from year-to-year. Of the 19 new full-time equivalent employees, 13 were attributable to the Company’s continued expansion in its newest markets, Rockford and Milwaukee. | ||
| • | Professional and data processing fees increased $685 thousand. The primary contributors to the year-to-year increase were legal, consulting, and data processing fees incurred at the subsidiary banks. | ||
| • | Occupancy and equipment expense increased $246 thousand. The increase was the result of costs associated with additional furniture, fixtures and equipment, such as depreciation and repairs as well as increases in maintenance, utilities, and property taxes across the Company’s existing properties. | ||
| • | FDIC and other insurance expense increased $409 thousand from the prior year. The large majority of this increase was the result of the FDIC’s new premium pricing system and the assessment methodology for deposit insurance coverage now being applied to the subsidiary banks. | ||
| • | Loss on disposals/sales of fixed assets increased $187 thousand. During the first quarter of 2007, Quad City Bank & Trust contributed two vacant lots to a developer to allow for the development of upscale retail space adjacent to its Five Points facility, which resulted in an aggregate write-off of $239 thousand. |
Income tax expense. The provision for income taxes was $2.4 million for the year ended December
31, 2007 compared to $858 thousand for the year ended December 31, 2006 for an increase of $1.5
million, or 179%. The increase was the result of an increase in income before income taxes of $4.6
million, or 118%, for 2007 when compared to 2006. Primarily due to an increase in the
proportionate share of taxable income to total income from year to year, the Company experienced an
increase in the effective tax rate from 21.8% for 2006 to 28.0% for 2007. The Company’s adoption
of FIN 48 resulted in no effect to the provision of income taxes for 2007.
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2006 compared with 2005
Overview. Net income for 2006 was $2.8 million compared to net income of $4.8 million for 2005 for
a decrease of $2.0 million, or 42%. Basic earnings per share for 2006 were $0.57 compared to $1.06
for 2005. The decrease in net income was comprised of an increase in net interest income after
provision for loan losses of $81 thousand in combination with an increase in aggregate non-interest
income of $1.9 million and a decrease in federal and state income taxes of $1.4 million, offset by
an increase in non-interest expenses of $5.2 million. Several factors contributed to the decline
in net income from 2005 to 2006. Primary factors included a $2.4 million, or 274%, increase in the
provision for loan/lease losses, an increase in salaries and employee benefits of 29%, or $4.8
million, and $2.0 million of pretax operating costs associated with the start-up of the new banking
operation in Milwaukee.
Interest income. Interest income grew from $48.7 million for 2005 to $68.8 million for 2006. The
41% increase in interest income was attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable, in combination with an improved aggregate
asset yield. The average yield on interest earning assets for 2006 was 6.55% compared to 5.75% for
2005.
Interest expense. Interest expense increased by $17.6 million, from $21.3 million for 2005 to
$38.9 million for 2006. The 83% increase in interest expense was primarily attributable to an
aggregate increase in interest rates, in combination with greater average outstanding balances in
interest-bearing liabilities, primarily customer deposits. The average cost on interest bearing
liabilities was 4.04% for 2006 compared to 2.79% for 2005.
Provision for loan/lease losses. The provision for loan/lease losses is established based on a
number of factors, including the local and national economy and the risk associated with the
loans/leases in the portfolio. The Company had an allowance for estimated losses on loans/leases
of approximately 1.10% of total gross loans/leases at December 31, 2006, compared to approximately
1.17% of total gross loans at December 31, 2005.. The provision for loan/lease losses increased
significantly to $3.3 million for 2006, compared to $877 thousand for 2005. During both periods,
management made monthly provisions for loan/lease losses based upon a number of factors;
principally the increase in loans/leases and a detailed analysis of the loan/lease portfolio. In
2006, along with more than $204 million of growth within the loan/lease portfolio, the Company
experienced the write-off of a single credit relationship for $992 thousand. During 2006, the net
growth in the loan/lease portfolio generated a provision expense of $2.3 million, and 31%, or $1.0
million of provision expense, was the result of adjustments to the allowance for estimated losses
on loans/leases based on write-offs, payoffs, or restructures of credits within the Company’s
portfolio. During 2005, the successful resolution of several large credits primarily in Quad City
Bank & Trust’s loan/lease portfolio, through foreclosure, payoff, or restructuring, resulted in
reductions to both provision expense and the level of allowance for loan/lease losses. During
2006, there were transfers totaling $130 thousand of loans to other real estate owned. For 2006,
commercial loans/leases had total charge-offs of $1.4 million, of which $992 thousand, or 70%,
resulted from a single customer relationship at Rockford Bank & Trust, and there were $262 thousand
of commercial recoveries. Consumer loan charge-offs and recoveries totaled $460 thousand and $50
thousand, respectively, for 2006. For 2006, credit cards accounted for 27% of the consumer loan
net charge-offs. Real estate loans had $45 thousand of charge-offs and $52 thousand of recovery
activity during 2006. The ability to grow profitably is, in part, dependent upon the ability to
maintain asset quality. Management continually focuses its efforts at the subsidiary banks to
attempt to improve the overall quality of the Company’s loan/lease portfolio.
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Non-interest income. The following table sets forth the various categories of non-interest income
for the years ended December 31, 2006 and 2005.
Non-interest Income
| Years ended | ||||||||||||
| December 31, | ||||||||||||
| 2006 | 2005 | % change | ||||||||||
Credit card fees, net of processing costs |
$ | 1,947,984 | $ | 1,782,452 | 9.3 | % | ||||||
Trust department fees |
3,049,440 | 2,818,832 | 8.2 | % | ||||||||
Deposit service fees |
1,928,246 | 1,582,530 | 21.9 | % | ||||||||
Gains on sales of loans, net |
991,536 | 1,254,242 | (21.0 | )% | ||||||||
Securities gains/(losses), net |
(142,866 | ) | 50 | NA | ||||||||
Gains on sales of foreclosed assets |
664,223 | 42,380 | 1467.3 | % | ||||||||
Earnings on bank-owned life insurance |
759,100 | 656,005 | 15.7 | % | ||||||||
Investment advisory and management fees |
1,216,350 | 691,800 | 75.8 | % | ||||||||
Other |
1,569,092 | 1,244,212 | 26.1 | % | ||||||||
Total non-interest income |
$ | 11,983,105 | $ | 10,072,503 | 19.0 | % | ||||||
Analysis concerning changes in non-interest income for 2006, when compared to 2005, is as follows:
| • | Bancard’s credit card fees, net of processing costs, improved by $166 thousand. Increases during 2006 in Bancard’s cardholder processing operation provided essentially all of the improvement in credit card fees, net of processing costs. The year-to-year increase in local and agent bank merchant processing volumes and the subsequent increase in merchant processing fee income during 2006 was offset by aggregate reversals during 2005 of $134 thousand of specific allocations to the allowance for local merchant chargeback losses, and $118 thousand in recoveries during 2005 of prior period expenses. | ||
| • | Trust department fees increased $231 thousand. This was the result of the continued development of existing trust relationships and the addition of new trust customers throughout 2006. Total trust assets under administration were $894.1 million at December 31, 2006 compared to $811.2 million at December 31, 2005. | ||
| • | Deposit service fees increased $346 thousand. This increase was primarily a result of an increase in service fees collected on the demand deposit accounts in a unique program at Cedar Rapids Bank & Trust. The twelve-month average balance of the Company’s consolidated demand deposits at December 31, 2006 increased $85.6 million from December 31, 2005. Service charges and NSF (non-sufficient funds or overdraft) charges related to the Company’s demand deposit accounts were the main components of deposit service fees. | ||
| • | Gains on sales of loans, net, decreased $263 thousand. Loans originated for sale during 2006 were $87.7 million and during 2005 were $98.7 million. Proceeds on the sales of loans during 2006 and 2005 were $85.2 million and $100.8 million, respectively. | ||
| • | In March 2006, the Company recognized an impairment loss of $143 thousand on a mortgage-backed mutual fund investment held in Quad City Bank & Trust’s securities portfolio, and in April, incurred an additional loss of $71 thousand on the subsequent sale of that security. In July 2006, the losses were partially offset when the Company recognized a gain of $71 thousand on the partial redemption of class B common stock of Mastercard Incorporated held by Quad City Bank & Trust, as a member bank of Mastercard International Incorporated. | ||
| • | During 2006, a foreclosed asset, determined by litigation to be property of Quad City Bank & Trust, was sold at auction for a net gain of $650 thousand. During 2006, the Company realized an additional net gain of $14 thousand on the sale of three other foreclosed assets at Quad City Bank & Trust. |
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| • | Earnings on the cash surrender value of life insurance increased $103 thousand. At December 31, 2006, levels of bank-owned life insurance (BOLI) on key executives at the subsidiary banks was $13.9 million at Quad City Bank & Trust, $4.2 million at Cedar Rapids Bank & Trust, and $825 thousand at Rockford Bank & Trust. | ||
| • | Investment advisory and management fees increased $525 thousand. Beginning January 1, 2006, the investment representatives at Quad City Bank & Trust, who had previously been employees of LPL Financial Services, were brought on as staff of the bank. As a result of this organizational change, fees are now reported gross rather than net of representative commissions, as in previous years. Approximately 70% of the year-to-year increase was due to this change. The balance of the increase was due to the increased volume of investment services provided by representatives of LPL Financial Services at the subsidiary banks, primarily at Quad City Bank & Trust. | ||
| • | Other non-interest income increased $325 thousand. During 2006, M2 Lease Funds had $93 thousand in gains on the disposal of leased assets, which contributed to other non-interest income. M2 Lease Funds was acquired during the third quarter of 2005. Other non-interest income in each period consisted primarily of income from affiliated companies, earnings on other assets, Visa check card fees, and ATM fees. |
Non-interest expenses. The following table sets forth the various categories of non-interest
expenses for the years ended December 31, 2006 and 2005.
Non-interest Expenses
| Years ended | ||||||||||||
| December 31, | ||||||||||||
| 2006 | 2005 | % change | ||||||||||
Salaries and employee benefits |
$ | 21,262,541 | $ | 16,458,860 | 29.2 | % | ||||||
Professional and data processing fees |
3,192,326 | 2,865,064 | 11.4 | % | ||||||||
Advertising and marketing |
1,367,545 | 1,221,039 | 12.0 | % | ||||||||
Occupancy and equipment expense |
4,762,827 | 4,316,443 | 10.3 | % | ||||||||
Stationery and supplies |
670,915 | 645,985 | 3.9 | % | ||||||||
Postage and telephone |
961,394 | 842,779 | 14.1 | % | ||||||||
Bank service charges |
583,687 | 516,537 | 13.0 | % | ||||||||
Insurance |
612,058 | 594,282 | 3.0 | % | ||||||||
Loss on disposals/sales of fixed assets |
36,305 | 332,283 | (89.1 | )% | ||||||||
Other |
1,219,386 | 1,639,876 | (25.6 | )% | ||||||||
Total non-interest expenses |
$ | 34,668,984 | $ | 29,433,148 | 17.8 | % | ||||||
Analysis concerning changes in non-interest expenses for 2006, when compared to 2005, is as
follows:
| • | Salaries and benefits increased $4.8 million. The increase was primarily due to an increase in the average number of employees from 286 full time equivalents (FTEs) to 329 from year-to-year, as a result of the Company’s continued expansion. Also, the Company experienced increases in the expense for several employee compensation programs, such as the SERPs, the deferred compensation program and stock-based compensation programs during 2006, primarily related to a combination of the application of the provisions of SFAS 123R and a senior officer’s planned retirement in 2009. As the result of a previously described organizational change at Quad City Bank & Trust, commissions for investment representatives, previously net from fees, are now included as a portion of salaries and benefits expense. The Company’s application of the provisions of SFAS 123R is described in detail in Note 1, Nature of Business and Significant Accounting Policies. | ||
| • | Professional and data processing fees increased $327 thousand. The primary contributors to the year-to-year increase were legal, consulting, and data processing fees incurred at the subsidiary banks. |
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Table of Contents
| • | Advertising and marketing expense increased $147 thousand. Cedar Rapids Bank & Trust and Rockford Bank & Trust, as the primary contributors, accounted for 84% of the increase. | ||
| • | Occupancy and equipment expense increased $446 thousand. The increase was a reflection of the Company’s investment during 2005 in five new subsidiary bank facilities, in combination with the related costs associated with additional furniture, fixtures and equipment, such as depreciation, maintenance, utilities, and property taxes. However, the year-to-year increase in occupancy and equipment expense was offset by a $344 thousand intercompany elimination of rental income earned by Velie Plantation Holding Company, which had not been a consolidated subsidiary of the Company at December 31, 2005. | ||
| • | Loss on disposals/sales of fixed assets decreased $296 thousand. During the third quarter of 2005, in conjunction with Cedar Rapids Bank & Trust’s move into their new main office facility, the Company took a one-time $332 thousand write-off of tenant improvements which had been made to the GreatAmerica Building, which had initially served as that subsidiary’s main office. | ||
| • | Other non-interest expense decreased $420 thousand. During 2005, Quad City Bank & Trust incurred $303 thousand of write-downs on the property value of other real estate owned (OREO) and $114 thousand of other expense incurred on OREO property. Also, during the third quarter of 2006, the subsidiary banks re-allocated $236 thousand of accrued non-interest expense into specific accrual categories, such as legal expense and marketing expense. |
Income tax expense. The provision for income taxes was $858 thousand for the year ended December
31, 2006 compared to $2.3 million for the year ended December 31, 2005 for a decrease of $1.4
million, or 62%. The decrease was the result of a decrease in income before income taxes of $3.2
million, or 46%, for 2006 when compared to 2005. Primarily due to an increase in the proportionate
share of tax-exempt income to total income from year to year, the Company experienced a decrease in
the effective tax rate from 31.8% for 2005 to 21.8% for 2006.
Financial Condition
Total assets of the Company increased by $204.9 million, or 16%, to $1.48 billion at December 31,
2007 from $1.27 billion at December 31, 2006. Total assets of the Company increased by $229.1
million, or 22%, to $1.27 billion at December 31, 2006 from $1.04 billion at December 31, 2005.
This growth primarily resulted from an increase in the securities and loans/leases portfolio funded
by deposits received from customers and by proceeds from Federal Home Loan Bank advances and other
borrowings.
Investments. Securities increased by $41.1 million, or 21%, to $235.9 million at December 31, 2007
from $194.8 million at December 31, 2006. 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 $129.1 million, and there was an increase in unrealized
gains on securities available for sale, before applicable income tax of $4.5 million. These
increases were partially offset by paydowns of $562 thousand that were received on mortgage-backed
securities, proceeds from calls, maturities and redemptions of $92.0 million, and the amortization
of premiums, net of the accretion of discounts, of $93 thousand.
Securities increased by $12.4 million, or 7%, to $194.8 million at December 31, 2006 from $182.4
million at December 31, 2005. The net increase was the result of a number of transactions in the
securities portfolio. The Company purchased additional securities, classified as available for
sale, in the amount of $79.8 million, and there was an increase in unrealized gains on securities
available for sale, before applicable income tax of $923 thousand. These increases were partially
offset by paydowns of $706 thousand that were received on mortgage-backed securities, proceeds from
calls and maturities of $62.4 million, proceeds from sales of $4.8 million, net losses of $143
thousand, and the amortization of premiums, net of the accretion of discounts, of $252 thousand.
As of December 31, 2007, 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.
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Table of Contents
Loans/leases. Total gross loans/leases receivable increased by $146.2 million, or 15%, to $1.11
billion at December 31, 2007 from $960.7 million at December 31, 2006. The increase was the result
of the origination or purchase of $591.6 million of commercial business, consumer and real estate
loans/leases, less loans transferred to other real estate owned (OREO) of $496 thousand, loan/lease
charge-offs, net of recoveries, of $1.5 million and loan/lease repayments or sales of loans of
$443.4 million.
At December 31, 2007, no one customer accounted for more than 10% of revenues or loans.
Total gross loans/leases receivable increased by $204.5 million, or 27%, to $960.7 million at
December 31, 2006 from $756.3 million at December 31, 2005. The increase was the result of the
origination or purchase of $515.7 million of commercial business, consumer and real estate
loans/leases, less loans transferred to other real estate owned (OREO) of $130 thousand, loan/lease
charge-offs, net of recoveries, of $1.6 million and loan/lease repayments or sales of loans of
$309.5 million.
Allowance for Loan/Lease Losses. The allowance for estimated losses on loans/leases was $12.0
million at December 31, 2007 compared to $10.6 million at December 31, 2006, for an increase of
$1.4 million, or 13%. The allowance for estimated losses on loans/leases was $10.6 million at
December 31, 2006 compared to $8.9 million at December 31, 2005, for an increase of $1.7 million,
or 19%. The adequacy of the allowance for estimated losses on loans/leases was determined by
management based on factors that included the overall composition of the loan/lease portfolio,
types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and
doubtful credits, economic conditions and other factors that, in management’s judgment, deserved
evaluation in estimating loan/lease losses. To ensure that an adequate allowance was maintained,
provisions were made based on the increase in loans/leases and a detailed analysis of the
loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed monthly with specific
detailed reviews completed on all credits risk-rated less than “fair quality” and carrying
aggregate exposure in excess of $250 thousand. The adequacy of the allowance for estimated losses
on loans/leases was monitored by the credit administration staff, and reported to management and
the board of directors.
Net charge-offs for the years ended December 31, 2007, 2006, and 2005, were $1.5 million, $1.6
million, and $1.7 million, respectively. One measure of the adequacy of the allowance for
estimated losses on loans/leases is the ratio of the allowance to the total loan/lease portfolio.
Provisions were made monthly to ensure that an adequate level was maintained. The allowance for
estimated losses on loans/leases as a percentage of total gross loans/leases was 1.09% at December
31, 2007, 1.10% at December 31, 2006, and 1.17% at December 31, 2005.
Although management believes that the allowance for estimated losses on loans/leases at December
31, 2007 was at a level adequate to absorb probable losses on existing loans/leases, there can be
no assurance that such losses will not exceed the estimated amounts or that the Company will not be
required to make additional provisions for loan/lease losses in the future. Asset quality is a
priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent
upon the ability to maintain that quality. The Company is focusing efforts at its subsidiary banks
in an attempt to improve the overall quality of the Company’s loan/lease portfolio. Future events
could at any time adversely affect cash flows for both commercial and individual borrowers, as a
result of which, the Company could experience increases in problem assets, delinquencies and losses
on loans/leases, and require further increases in the provision.
Nonperforming Assets. The policy of the Company is to place a loan/lease on nonaccrual status if:
(a) payment in full of interest or principal is not expected or (b) principal or interest has been
in default for a period of 90 days or more unless the obligation is both in the process of
collection and well secured. Well secured is defined as collateral with sufficient market value to
repay principal and all accrued interest. A debt is in the process of collection if collection of
the debt is proceeding in due course either through legal action, including judgment enforcement
procedures, or in appropriate circumstances, through collection efforts not involving legal action
which are reasonably expected to result in repayment of the debt or in its restoration to current
status.
Nonaccrual loans/leases were $6.5 million at December 31, 2007 which represented a slight decrease
of $50 thousand when compared to December 31, 2006. Nonaccrual loans/leases comprised of $5.3
million of commercial and commercial real estate loans/leases, $878 thousand of real estate loans,
and $276 thousand of consumer loans. Of the
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$5.3 million of commercial and commercial real estate
nonaccrual loans/leases, $4.2 million was a result of two large lending relationships (one at Quad
City Bank & Trust, and the other at Rockford Bank & Trust). Nonaccrual loans at December 31, 2007
represented less than 1% of the Company’s held for investment loan portfolio. At December 31,
2007, 48% of the Company’s nonaccrual loans/leases were held in Quad City Bank & Trust’s portfolio,
33% were held in Rockford Bank & Trust’s portfolio, 17% were held in Cedar Rapids Bank & Trust’s
portfolio, and 2% were held in M2 Lease Funds’ portfolio.
Nonaccrual loans/leases were $6.5 million at December 31, 2006 compared to $2.6 million at December
31, 2005, for an increase of $3.9 million, or 154%. The increase in nonaccrual loans/leases was
comprised of increases in commercial loans of $3.8 million and real estate loans of $160 thousand,
and a decrease in consumer loans of $30 thousand. Nonaccrual commercial loans totaled $5.5
million, of which $4.0 million was due to a single large lending relationship at Quad City Bank &
Trust. Nonaccrual loans at December 31, 2006 represented less than 1% of the Company’s held for
investment loan portfolio. At December 31, 2006, 82% of the Company’s nonaccrual loans/leases were
held in Quad City Bank & Trust’s portfolio, 13% were held in M2 Lease Funds’ portfolio, and 5% were
held in Cedar Rapids Bank & Trust’s portfolio.
As of December 31, 2007, 2006, and 2005, past due loans of 30 days or more and still accruing
amounted to $12.3 million, $8.2 million, and $8.7 million, respectively. Past due loans as a
percentage of gross loans receivable were 1.1% at December 31, 2007, 0.9% at December 31, 2006, and
1.2 % at December 31, 2005.
Other Assets. Premises and equipment decreased by $256 thousand, or 1%, to $32.3 million at
December 31, 2007 from $32.5 million at December 31, 2006. This slight decrease was a result of
Company purchases of additional furniture, fixtures and equipment of $2.0 million offset by $2.3
million of depreciation expense. Additional information regarding the composition of this account
and related accumulated depreciation is described in Note 5 to the consolidated financial
statements.
Premises and equipment increased by $6.9 million, or 27%, to $32.5 million at December 31, 2006
from $25.6 million at December 31, 2005. This increase resulted primarily from $4.0 million in
construction costs incurred for Rockford Bank & Trust’s first branch facility, which opened in
November 2006, in combination with a $4.0 million real estate acquisition, resulting from a
majority ownership in Velie Plantation Holding Company at December 31, 2006. Additionally, there
were Company purchases of additional furniture, fixtures and equipment of $1.3 million offset by
$2.4 million of depreciation expense. Additional information regarding the composition of this
account and related accumulated depreciation is described in Note 5 to the consolidated financial
statements.
On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership units of M2 Lease Funds.
The purchase price of $5.0 million resulted in $3.2 million in goodwill. In accordance with the
provisions of FAS statement 142, goodwill is not being amortized, but is evaluated annually for
impairment.
Accrued interest receivable on loans, securities, and interest-bearing deposits at financial
institutions increased by $804 thousand, or 11%, to $8.0 million at December 31, 2007 from $7.2
million at December 31, 2006. Accrued interest receivable on loans, securities, and
interest-bearing deposits at financial institutions increased by $2.4 million, or 48%, to $7.2
million at December 31, 2006 from $4.8 million at December 31, 2005. Increases were due to a
combination of greater average outstanding balances in interest-bearing assets, as well as
increased average yields on interest-bearing assets.
Bank-owned life insurance (“BOLI”) increased by $10.0 million from $18.9 million at December 31,
2006 to $28.9 million at December 31, 2007. BOLI increased by $1.5 million from $17.4 million at
December 31, 2005 to $18.9 million at December 31, 2006. Banks may generally buy BOLI as a
financing or cost recovery vehicle for pre-and post-retirement employee benefits. During 2007, the
subsidiary banks purchased additional BOLI in the amount of $9.1 million. These purchases combined
with existing BOLI, resulted in each subsidiary bank holding investments in BOLI policies near the
regulatory maximum of 25% of capital. As the owners and beneficiaries of these holdings, the banks
monitor the associated risks, including diversification, lending-limit, concentration, interest
rate risk, credit risk, and
liquidity. Quarterly financial information on the insurance carriers is provided to the Company by
its compensation-consulting firm. Benefit expense associated with the supplemental retirement
benefits and deferred compensation arrangements was $595 thousand and $324 thousand, respectively,
for 2007. Earnings on BOLI totaled
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$892 thousand for 2007. Benefit expense associated with both
the supplemental retirement benefits and deferred compensation arrangements was $533 thousand and
$269 thousand, respectively, for 2006. Earnings on BOLI totaled $759 thousand for 2006.
Deposits. Deposits increased by $54.0 million, or 6%, to $929.4 million at December 31, 2007 from
$875.4 million at December 31, 2006. The increase resulted from a $54.5 million net increase in
non-interest bearing, NOW, money market and savings accounts combined with a $17.3 million net
increase in interest-bearing certificates of deposit offset by a net decrease in brokered
certificates of deposit of $17.8 million.
Deposits increased by $176.9 million, or 25%, to $875.4 million at December 31, 2006 from $698.5
million at December 31, 2005. The increase resulted from a $67.7 million net increase in
non-interest bearing, NOW, money market and savings accounts combined with a $73.8 million net
increase in interest-bearing certificates of deposit, and a net increase in brokered certificates
of deposit of $35.4 million.
Short-term Borrowings. Short-term borrowings increased by $71.5 million, or 64%, from $111.7
million as of December 31, 2006 to $183.2 million as of December 31, 2007. Short-term borrowings
increased by $4.2 million, or 4%, from $107.5 million as of December 31, 2005 to $111.7 million as
of December 31, 2006. The subsidiary banks offer short-term repurchase agreements to some of their
major customers. Also, the subsidiary banks purchase Federal funds for short-term funding needs
from the Federal Reserve Bank, or from their correspondent banks. Short-term borrowings were
comprised of customer repurchase agreements of $93.3 million, $62.3 million, and $54.7 million at
December 31, 2007, 2006, and 2005, respectively, as well as Federal funds purchased from
correspondent banks of $89.9 million at December 31, 2007, $49.4 million at December 31, 2006, and
$52.8 million at December 31, 2005.
FHLB Advances and Other Borrowings. FHLB advances increased $16.9 million, or 11%, from $151.9
million as of December 31, 2006 to $168.8 million as of December 31, 2007. FHLB advances increased
$21.9 million, or 17%, from $130.0 million as of December 31, 2005 to $151.9 million as of December
31, 2006. As of December 31, 2007, the subsidiary banks held $9.7 million of FHLB stock in
aggregate. As a result of their memberships in the FHLB of Des Moines and Chicago, the subsidiary
banks have the ability to borrow funds for short-term or long-term purposes under a variety of
programs. The subsidiary banks utilized FHLB advances for loan matching as a hedge against the
possibility of rising interest rates or when these advances provided a less costly source of funds
than customer deposits.
Other borrowings increased significantly by $43.9 million from $3.8 million at December 31, 2006 to
$47.7 million at December 31, 2007. The majority of the increase was a result of the Company
entering into fixed rate structured wholesale repurchase agreement transactions in the amount of
$40 million. These borrowings have five-year terms with various put options, and are
collateralized by U.S. government agency bonds. Quad City Bank & Trust carries $30 million of the
liability, and Cedar Rapids Bank & Trust carries $10 million of the liability, as the result of
these transactions. Additional information regarding these transactions is described in Note 9 to
the consolidated financial statements. The remaining increase was a result of activity on the line
of credit at an upstream correspondent bank. Draws occurred throughout the year for the initial
capitalization of First Wisconsin Bank & Trust, capital maintenance purposes at each of the
subsidiaries, and for general corporate purposes. During the fourth quarter of 2007, with proceeds
from the issuance of $7.5 million of non-cumulative perpetual preferred stock, the Company reduced
the balance on the line of credit by $5.0 million.
Other borrowings decreased $7.0 million, or 65%, from $10.8 million at December 31, 2005 to $3.8
million at December 31, 2006. In February 2006, with proceeds from the issuance of the trust
preferred securities of Trust V, the Company made a payment to reduce the balance on a line of
credit at an upstream correspondent bank by $10.0 million. In March 2006, the Company drew an
advance of $8.5 million, primarily to provide $3.0 million of additional capital to Quad City Bank
& Trust and $4.5 million of additional capital to Cedar Rapids Bank & Trust for capital maintenance
purposes at each of these subsidiaries. During the third quarter of 2006, the Company drew
additional advances totaling $6.0 million, primarily to provide $3.2 million of additional capital
to Quad City Bank & Trust and $1.5 million of additional capital to Rockford Bank & Trust for
capital maintenance purposes at each of these subsidiaries. During the fourth quarter of 2006,
with proceeds from the issuance $12.9 million of non-cumulative perpetual preferred stock, the
Company reduced the balance on the line of credit by $12.5 million. In December 2006, the Company
drew an additional $1.0 million for general corporate purposes.
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Junior subordinated debentures remained at $36.1 million at December 31, 2007 as at December 31,
2006. Additional information regarding the composition of this account is described in Note 10 to
the consolidated financial statements.
Junior subordinated debentures increased $10.3 million, or 40%, from $25.8 million at December 31,
2005 to $36.1 million at December 31, 2006. On February 4, 2006, the Company issued $10,000,000 of
fixed/floating rate capital securities through a newly formed subsidiary, Trust V Trust V is a
100% owned non-consolidated subsidiary of the Company. Trust V used the proceeds from the sale of
the trust preferred securities, along with the funds from its equity, to purchase junior
subordinated debentures of the Company in the amount of $10.3 million.
Stockholders’ Equity. In the fourth quarter of 2007, the Company issued 300 shares of Series C
Non-Cumulative Perpetual Preferred Stock at $25 thousand per share for a total of $7.5 million with
a stated rate of 9.50%. The Preferred Shares will accrue no dividends, and dividends will be
payable on the Preferred Shares only if declared. The capital raised was used to pay down the
balance on the Company’s line of credit. Similarly, in the fourth quarter of 2006, the Company
issued 268 shares of Series B Non-Cumulative Perpetual Preferred Stock at $50 thousand per share
for a total of $12.9 million with a stated rate of 8.00%. The Preferred Shares will accrue no
dividends, and dividends will be payable on the Preferred Shares only if declared. The capital
raised was used to pay down the balance on the Company’s line of credit.
Common stock of $4.6 million as of December 31, 2007 increased by $37 thousand, or less than 1%,
from December 31, 2006. The slight increase was the net result of stock issued from the net
exercise of stock options and stock purchased under the employee stock purchase plan. Common stock
of $4.5 million as of December 31, 2005 increased by $29 thousand, or less than 1%, to $4.6 million
at December 31, 2006. The slight increase was the net result of stock issued from the net exercise
of stock options and stock purchased under the employee stock purchase plan.
Additional paid-in capital increased to $42.3 million as of December 31, 2007 from $34.3 million as
of December 31, 2006. The increase of $8.0 million, or 23%, resulted primarily from $7.2 million
in proceeds received in excess of the $1.00 per share par value for the 300 shares of Preferred
Stock issued. Additional paid-in capital increased to $34.3 million as of December 31, 2006 from
$20.8 million at December 31, 2005. The increase of $13.5 million, or 65%, resulted primarily from
$12.9 million in proceeds received in excess of the $1.00 per share par value for the 268 shares of
Preferred Stock issued.
Retained earnings increased $4.3 million, or 13%, to $36.3 million at December 31, 2007 from $32.0
million at December 31, 2006. The increase reflected net income for the fiscal year reduced by a
combination of $367 thousand in common dividends declared during 2007 and $1.0 million in preferred
dividends declared during 2007. A cash dividend of $0.04 was paid in July 2007. And, in October
2007, the Company declared a cash dividend of $0.04 per share payable on January 7, 2008 to
stockholders of record on December 21, 2007. The preferred dividends were declared and paid
quarterly on the Series B Preferred Stock. Retained earnings increased by $2.3 million, or 8%, to
$32.0 million at December 31, 2006 from $29.7 million at December 31, 2005. The increase reflected
net income for the fiscal year reduced by a combination of $364 thousand in common dividends
declared during 2006 and $164 thousand in preferred dividends declared in December 2006. A cash
dividend of $0.04 was paid in July 2006. On October 26, 2006, the board of directors declared a
cash dividend of $0.04 per share payable on January 5, 2007, to stockholders of record on December
22, 2006.
Accumulated other comprehensive income was $2.8 million as of December 31, 2007 compared to $28
thousand as of December 31, 2006. The increase was attributable to the increase during the period
ion the fair value of the securities identified as available for sale, primarily as a result of
declining interest rates in the latter half of 2007. Accumulated other comprehensive income was
$28 thousand as of December 31, 2006 compared to a loss of $567 thousand as of December 31, 2005.
The increase 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 relatively modest decrease in market
interest rates during 2006.
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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 $52.9 million at
December 31, 2007, $47.0 million at December 31, 2006, and $44.7 million at December 31, 2005. The
subsidiary banks have a variety of sources of short-term liquidity available to them, including
federal funds purchased from correspondent banks, sales of securities available for sale, FHLB
advances, brokered certificates of deposits, 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 primarily of net income and net
proceeds on the sale of loans, was $10.1 million for 2007 compared to net cash provided by
operating activities, comprised predominately of the increase in other liabilities, of $7.2 million
for 2006. Net cash provided by operating activities, comprised predominately of the increase in
other liabilities, was $7.2 million for 2006 compared to net cash provided by operating activities,
primarily net income and net proceeds on the sale of loans, of $9.6 million for 2005. Net cash
used in investing activities, consisting principally of loan funding and the purchase of
securities, was $204.1 million for 2007 and $222.9 million for 2006, comprised predominately of
loan originations and the purchase of securities. Net cash used in investing activities,
consisting principally of loan funding and the purchase of securities, was $222.9 million for 2006
and $127.7 million for 2005, comprised predominately of loan originations and the purchase of
securities. Net cash provided by financing activities, consisting primarily of deposit growth and
proceeds from borrowings, was $192.8 million for 2007 compared to $219.2 million, comprised
predominately of growth in deposits and proceeds from Federal Home Loan Bank advances for 2006.
Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from
Federal Home Loan Bank advances, was $219.2 million for 2006 compared to $135.7 million, comprised
predominately of growth in deposits and proceeds from Federal Home Loan Bank advances for 2005.
At December 31, 2007, the subsidiary banks had fourteen lines of credit totaling $132.5 million, of
which $11.0 million was secured and $121.5 million was unsecured. At December 31, 2007, the
subsidiary banks used $41.0 million of these available lines. At December 31, 2007, the Company had
a $25.0 million unsecured revolving credit note with a maturity date of April 4, 2008. At December
31, 2007, the note carried a balance outstanding of $7.0 million. Interest is payable monthly at
the Federal Funds rate plus 1.25% per annum, as defined in the credit agreement. As of December
31, 2007, the interest rate on the note was 5.40%.
At December 31, 2006, the subsidiary banks had fourteen lines of credit totaling $104.5 million, of
which $13.0 million was secured and $91.5 million was unsecured. At December 31, 2006, the
subsidiary banks were not drawn on any of these available lines. At December 31, 2006, the Company
had a $15.0 million unsecured revolving credit note with a maturity date of April 6, 2007.
In recent years, the Company has secured additional capital through various resources including
approximately $36.1 million through the issuance of trust preferred securities and $20.4 million
through the issuance of non-cumulative perpetual preferred stock. See Financial Statement Notes 10
and 1, for information on the issuance of trust preferred securities, and preferred
stock respectively.
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.
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Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon
extension of credit, is based upon management’s credit evaluation of the counter party. Collateral
held varies but may include accounts receivable, marketable securities, inventory, property, plant
and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee
the performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements and, generally, have terms of one year, or less. The
credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The banks hold collateral, as described above, supporting
those commitments if deemed necessary. In the event the customer does not perform in accordance
with the terms of the agreement with the third party, the banks would be required to fund the
commitments. The maximum potential amount of future payments the banks could be required to make
is represented by the contractual amount. If the commitment is funded, the banks would be entitled
to seek recovery from the customer. At December 31, 2007 and 2006, no amounts had been recorded as
liabilities for the banks’ potential obligations under these guarantees.
As of December 31, 2007 and 2006, commitments to extend credit aggregated $479.1 million and $459.3
million, respectively. As of December 31, 2007 and 2006, standby letters of credit aggregated
$15.2 million and $18.6 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 $6.5 million and $6.2 million as of December 31, 2007 and 2006, respectively. These
amounts were included in loans held for sale at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold with varying recourse
provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by
the seller in situations such as, breach of representation, warranty, or covenant, untimely
document delivery, false or misleading statements, failure to obtain certain certificates or
insurance, unmarketability, etc. Certain loan sales agreements contain repurchase requirements
based on payment-related defects that are defined in terms of the number of days/months since the
purchase, the sequence number of the payment, and/or the number of days of payment delinquency.
Based on the specific terms stated in the agreements of investors purchasing residential mortgage
loans from the Company’s subsidiary banks, the Company had $45.0 million and $39.7 million of sold
residential mortgage loans with recourse provisions still in effect at December 31, 2007 and
December 31, 2006, respectively. The subsidiary banks did not repurchase any loans from secondary
market investors under the terms of loans sales agreements during the years ended December 31,
2007, 2006 or 2005. In the opinion of management, the risk of recourse to the subsidiary banks is
not significant, and accordingly no liabilities have been established related to such.
Aside from cash on-hand and in-vault, the majority of the Company’s cash is maintained at upstream
correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal
funds sold exceeded federal insured limits by approximately $14.0 million and $7.0 million as of
December 31, 2007 and 2006, respectively. In the opinion of management, no material risk of loss
exists due to the financial condition of the upstream correspondent banks.
In an arrangement with Goldman, Sachs and Company, certain subsidiary banks offer a cash management
program for select customers. Based on a predetermined minimum balance, which must be maintained
in the account, excess funds are automatically swept daily to an institutional money market fund
distributed by Goldman Sachs. At December 31, 2007 and December 31, 2006, the Company had $47.1
million and $23.5 million, respectively, of customer funds invested in this cash management
program.
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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, 2007,
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 | ||||||||||||||||||||
| Description and | (in thousands) | |||||||||||||||||||
| Financial Statement Note | One year | After 5 | ||||||||||||||||||
| Reference | Total | Or less | 1-3 years | 4-5 years | years | |||||||||||||||
Deposits without a
stated maturity |
$ | 512,846 | $ | 512,846 | $ | — | $ | — | $ | — | ||||||||||
Certificates of deposits (6) |
416,581 | 327,840 | 65,601 | 23,140 | — | |||||||||||||||
Short-term borrowings (7) |
183,196 | 183,196 | — | — | — | |||||||||||||||
Federal Home Loan
Bank advances (8) |
168,815 | 15,100 | 22,300 | 50,750 | 80,665 | |||||||||||||||
Other borrowings (9) |
47,690 | 7,690 | — | — | 40,000 | |||||||||||||||
Junior subordinated
debentures (10) |
36,085 | — | — | — | 36,085 | |||||||||||||||
Rental commitments (5) |
4,507 | 694 | 1,411 | 1,109 | 1,293 | |||||||||||||||
Operating contracts |
3,121 | 1,787 | 1,326 | 8 | — | |||||||||||||||
Total contractual
cash obligations |
$ | 1,372,841 | $ | 1,049,153 | $ | 90,638 | $ | 75,007 | $ | 158,043 | ||||||||||
Purchase obligations represent obligations under agreements to purchase goods or services that are
enforceable and legally binding on the Company and that specify all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. The Company had no purchase obligations at December 31,
2007. The Company’s operating contract obligations represent short and long-term lease payments
for data processing equipment and services, software, and other equipment and professional
services.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been prepared in accordance
with U.S. 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.
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Impact of New Accounting Standards
In September 2006, FASB issued Statement of Financial Accounting Standard No. 157 (“SFAS No. 157”),
“Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair
value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any
new fair value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is in the process of evaluating the impact that SFAS No. 157 may
have on its consolidated financial statements.
In February of 2007, FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS 159”),
“The Fair Value Option for Financial Assets and Financial Liabilities”, which gives entities the
option to measure eligible financial assets, and financial liabilities at fair value on an
instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available for
eligible items that exist on the date that a company adopts SFAS No. 159 or when an entity first
recognizes a financial asset or financial liability. The decision to elect the fair value option
for an eligible item is irrevocable. Subsequent changes in fair value must be recorded in
earnings. This statement is effective as of the beginning of a company’s first fiscal year after
November 15, 2007. The statement offered early adoption provisions that the Company elected not to
exercise. The Company is in the process of evaluating the impact that SFAS No. 159 may have on its
consolidated financial statements.
In December 2007, FASB Issued Statement No. 141 (revised 2007), Business Combinations. Statement
No. 141R fundamentally changes the manner in which the entity will account for a business
combination. This statement is effective for fiscal years beginning on or after December 15, 2008
and is predominantly prospective. The Company is currently evaluating the impact of the adoption
of Statement No. 141R.
In December 2007, FASB issued Statement No. 160, Noncontrolling Interest in Consolidated Financial
Statements. Statement No. 160 changes the measurement, recognition and presentation of minority
interests in consolidated subsidiaries (now referred to as noncontrolling interests). This
statement is effective for fiscal years beginning on or after December 15, 2008 and is prospective
for the change related to measurement and recognition and retrospective for the changes related to
presentation. The Company is currently evaluating the impact of the adoption of Statement No. 160.
FORWARD LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and
written statements of the Company and its management may contain, forward-looking statements,
within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with
respect to the financial condition, results of operations, plans, objectives, future performance
and business of the Company. Forward-looking statements, which may be based upon beliefs,
expectations and assumptions of the Company’s management and on information currently available to
management, are generally identifiable by the use of words such as “believe,” “expect,”
“anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,”
“may,” “will,” “would,” “could,” “should” “likely,” or other similar expressions. Additionally,
all statements in this document, including forward-looking statements, speak only as of the date
they are made, and the Company undertakes no obligation to update any statement in light of new
information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. The factors that could have a material adverse effect on the operations and
future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section
included under Item 1A. of Part I of this Form 10-K. In addition to the risk factors described in
that section, there are other factors that may impact any public company, including ours, which
could have a material adverse effect on the operations and future prospects of the Company and its
subsidiaries. These additional factors include, but are not limited to, the following:
| • | The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks. | ||
| • | The costs, effects and outcomes of existing or future litigation. |
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| • | Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board. | ||
| • | The ability of the Company to manage the risks associated with the foregoing as well as anticipated. |
These risks and uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The Company, like other financial institutions, is subject to direct and indirect market risk.
Direct market risk exists from changes in interest rates. The Company’s net income is dependent on
its net interest income. Net interest income is susceptible to interest rate risk to the degree
that interest-bearing liabilities mature or reprice on a different basis than interest-earning
assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning
assets in a given period, a significant increase in market rates of interest could adversely affect
net interest income. Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management monitors the
Company’s interest rate risk. Each subsidiary bank has an asset/liability management committee of
the board of directors that meets quarterly to review the bank’s interest rate risk position and
profitability, and to make or recommend adjustments for consideration by the full board of each
bank. Management also reviews the subsidiary banks’ securities portfolios, formulates investment
strategies, and oversees the timing and implementation of transactions to assure attainment of the
board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk
management activities, the potential for changing interest rates is an uncertainty that can have an
adverse effect on net income.
In adjusting the Company’s asset/liability position, the board and management attempt to manage the
Company’s interest rate risk while maintaining or enhancing net interest margins. At times,
depending on the level of general interest rates, the relationship between long-term and short-term
interest rates, market conditions and competitive factors, the board and management may decide to
increase the Company’s interest rate risk position somewhat in order to increase its net interest
margin. The Company’s results of operations and net portfolio values remain vulnerable to
increases in interest rates and to fluctuations in the difference between long-term and short-term
interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a
detailed and dynamic simulation model used to quantify the estimated exposure of net interest
income to sustained interest rate changes. This simulation model captures the impact of changing
interest rates on the interest income received and interest expense paid on all interest sensitive
assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity
analysis demonstrates net interest income exposure over a one year horizon, assuming no balance
sheet growth and a 200 basis point upward and a 200 basis point downward shift in interest rates,
where interest-bearing assets and liabilities reprice at their earliest possible repricing date.
The model assumes a parallel and pro rata shift in interest rates over a twelve-month period.
Application of the simulation model analysis at December 31, 2007 demonstrated a 2.10% decrease in
interest income with a 200 basis point increase in interest rates, and a 2.50% increase in interest
income with a 200 basis point decrease in interest rates. Both simulations are within the
board-established policy limits of a 10% decline in value.
Interest rate risk is the most significant market risk affecting the Company. For that reason, the
Company engages the assistance of a national consulting firm and their risk management system to
monitor and control the Company’s interest rate risk exposure. Other types of market risk, such
as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course
of the Company’s business activities.
35
Table of Contents
Item 8. Financial Statements
QCR Holdings, Inc.
Index to Consolidated Financial Statements
| 37 | ||||
Financial Statements |
||||
| 38 | ||||
| 39 | ||||
| 40 | ||||
| 41-42 | ||||
| 43-77 |
36
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
QCR Holdings, Inc.
We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and subsidiaries
as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2007. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of QCR Holdings, Inc. and subsidiaries as of December 31,
2007 and 2006, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), QCR Holdings, Inc. and subsidiaries’ internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated March 4, 2008 expressed an unqualified opinion on the effectiveness of QCR
Holdings, Inc. and subsidiaries’ internal control over financial reporting.
/s/
McGladrey & Pullen, LLP
Davenport, Iowa
March 4, 2008
Davenport, Iowa
March 4, 2008
McGladrey & Pullen, LLP is a member firm of RSM International –
an affiliation of separate and independent legal entities.
an affiliation of separate and independent legal entities.
37
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Balance Sheets
December 31, 2007 and 2006
| 2007 | 2006 | |||||||
Assets |
||||||||
Cash and due from banks |
$ | 41,195,890 | $ | 42,502,770 | ||||
Federal funds sold |
6,620,000 | 2,320,000 | ||||||
Interest-bearing deposits at financial institutions |
5,096,048 | 2,130,096 | ||||||
Securities held to maturity, at amortized cost |
350,000 | 350,000 | ||||||
Securities available for sale, at fair value (Note 3) |
235,554,653 | 194,423,893 | ||||||
| 235,904,653 | 194,773,893 | |||||||
Loans receivable, held for sale (Note 4) |
6,507,583 | 6,186,632 | ||||||
Loans/leases receivable, held for investment (Note 4) |
1,100,392,324 | 954,560,692 | ||||||
| 1,106,899,907 | 960,747,324 | |||||||
Less allowance for estimated losses on loans/leases (Note 4) |
(12,023,637 | ) | (10,612,082 | ) | ||||
| 1,094,876,270 | 950,135,242 | |||||||
Premises and equipment, net (Note 5) |
32,268,686 | 32,524,840 | ||||||
Goodwill |
3,222,688 | 3,222,688 | ||||||
Intangible asset |
887,542 | — | ||||||
Accrued interest receivable |
7,964,557 | 7,160,298 | ||||||
Bank-owned life insurance |
28,888,938 | 18,877,526 | ||||||
Other assets |
19,639,070 | 18,027,603 | ||||||
Total assets |
$ | 1,476,564,342 | $ | 1,271,674,956 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 165,286,011 | $ | 124,184,486 | ||||
Interest-bearing |
764,141,207 | 751,262,781 | ||||||
Total deposits (Note 6) |
929,427,218 | 875,447,267 | ||||||
Short-term borrowings (Note 7) |
183,195,840 | 111,683,951 | ||||||
Federal Home Loan Bank advances (Note 8) |
168,815,006 | 151,858,749 | ||||||
Other borrowings (Note 9) |
47,690,122 | 3,761,636 | ||||||
Junior subordinated debentures (Note 10) |
36,085,000 | 36,085,000 | ||||||
Other liabilities |
23,564,681 | 20,592,953 | ||||||
Total liabilities |
1,388,777,867 | 1,199,429,556 | ||||||
Minority interest in consolidated subsidiaries |
1,720,683 | 1,362,820 | ||||||
Commitments and Contingencies (Note 16) |
||||||||
Stockholders’ Equity (Note 14): |
||||||||
Preferred stock, $1 par value, shares authorized 250,000 |
568 | 268 | ||||||
December 2007 - 568 shares issued and
outstanding |
||||||||
December 2006 - 268 shares issued and outstanding |
||||||||
Common stock, $1 par value; shares authorized 10,000,000 |
4,597,744 | 4,560,629 | ||||||
December 2007 - 4,597,744 shares issued
and outstanding |
||||||||
December 2006 - 4,560,629 shares issued
and outstanding |
||||||||
Additional paid-in capital |
42,317,374 | 34,293,511 | ||||||
Retained earnings |
36,338,566 | 32,000,213 | ||||||
Accumulated other comprehensive income |
2,811,540 | 27,959 | ||||||
Total stockholders’ equity |
86,065,792 | 70,882,580 | ||||||
Total liabilities and stockholders’ equity |
$ | 1,476,564,342 | $ | 1,271,674,956 | ||||
See Notes to Consolidated Financial Statements.
38
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2007, 2006, and 2005
| 2007 | 2006 | 2005 | ||||||||||
Interest and dividend income: |
||||||||||||
Loans/leases, including fees |
$ | 74,679,005 | $ | 60,098,090 | $ | 42,427,118 | ||||||
Securities: |
||||||||||||
Taxable |
9,411,975 | 6,995,972 | 5,345,980 | |||||||||
Nontaxable |
1,039,623 | 914,128 | 579,817 | |||||||||
Interest-bearing deposits at financial institutions |
346,382 | 319,491 | 129,460 | |||||||||
Federal funds sold |
248,055 | 475,345 | 205,893 | |||||||||
Total interest and dividend income |
85,725,040 | 68,803,026 | 48,688,268 | |||||||||
Interest expense: |
||||||||||||
Deposits |
32,299,290 | 27,064,755 | 12,842,421 | |||||||||
Short-term borrowings |
5,361,783 | 3,169,069 | 2,181,997 | |||||||||
Federal Home Loan Bank advances |
7,237,026 | 5,609,114 | 4,168,077 | |||||||||
Other borrowings |
1,835,464 | 574,517 | 501,241 | |||||||||
Junior subordinated debentures |
2,622,531 | 2,489,879 | 1,587,049 | |||||||||
Total interest expense |
49,356,094 | 38,907,334 | 21,280,785 | |||||||||
Net interest income |
36,368,946 | 29,895,692 | 27,407,483 | |||||||||
Provision for loan/lease losses (Note 4) |
2,863,902 | 3,284,242 | 877,084 | |||||||||
Net interest income after provision for loan/lease losses |
33,505,044 | 26,611,450 | 26,530,399 | |||||||||
Noninterest income: |
||||||||||||
Credit card fees, net of processing costs |
1,731,992 | 1,947,984 | 1,782,452 | |||||||||
Trust department fees |
3,743,120 | 3,049,440 | 2,818,832 | |||||||||
Deposit service fees |
2,711,040 | 1,928,246 | 1,582,530 | |||||||||
Gains on sales of loans, net |
1,219,800 | 991,536 | 1,254,242 | |||||||||
Securities gains (losses), net |
— | (142,866 | ) | 50 | ||||||||
Gains on sales of foreclosed assets |
1,007 | 664,223 | 42,380 | |||||||||
Gains on sales of other assets |
435,791 | — | — | |||||||||
Earnings on bank-owned life insurance |
892,395 | 759,100 | 656,005 | |||||||||
Investment advisory and management fees |
1,575,887 | 1,216,350 | 691,800 | |||||||||
Other |
1,781,944 | 1,569,092 | 1,244,212 | |||||||||
Total noninterest income |
14,092,976 | 11,983,105 | 10,072,503 | |||||||||
Noninterest expenses: |
||||||||||||
Salaries and employee benefits |
24,086,588 | 21,262,541 | 16,458,860 | |||||||||
Professional and data processing fees |
3,877,117 | 3,192,326 | 2,865,064 | |||||||||
Advertising and marketing |
1,356,420 | 1,367,545 | 1,221,039 | |||||||||
Occupancy and equipment expense |
5,008,821 | 4,762,827 | 4,316,443 | |||||||||
Stationery and supplies |
612,603 | 670,915 | 645,985 | |||||||||
Postage and telephone |
1,020,503 | 961,394 | 842,779 | |||||||||
Bank service charges |
579,923 | 583,687 | 516,537 | |||||||||
FDIC and other Insurance |
1,020,629 | 612,058 | 594,282 | |||||||||
Loss on disposals/sales of fixed assets |
223,308 | 36,305 | 332,283 | |||||||||
Other |
1,251,147 | 1,219,386 | 1,639,876 | |||||||||
Total noninterest expenses |
39,037,059 | 34,668,984 | 29,433,148 | |||||||||
Income before income taxes |
8,560,961 | 3,925,571 | 7,169,754 | |||||||||
Federal and state income taxes (Note 11) |
2,395,693 | 857,842 | 2,282,201 | |||||||||
Income before minority interest in net
income of consolidated subsidiaries |
6,165,268 | 3,067,729 | 4,887,553 | |||||||||
Minority interest in income of consolidated subsidiaries |
387,791 | 265,524 | 77,538 | |||||||||
Net Income |
$ | 5,777,477 | $ | 2,802,205 | $ | 4,810,015 | ||||||
Net Income |
$ | 5,777,477 | $ | 2,802,205 | $ | 4,810,015 | ||||||
Less: preferred stock dividends |
1,072,000 | 164,373 | — | |||||||||
Net income available to common stockholders |
$ | 4,705,477 | $ | 2,637,832 | $ | 4,810,015 | ||||||
Earnings per common share (Note 15): |
||||||||||||
Basic |
$ | 1.03 | $ | 0.57 | $ | 1.06 | ||||||
Diluted |
$ | 1.02 | $ | 0.57 | $ | 1.04 | ||||||
Weighted average common shares outstanding |
4,581,919 | 4,609,626 | 4,518,162 | |||||||||
Weighted average common and common equivalent
shares outstanding |
4,599,568 | 4,653,229 | 4,616,556 | |||||||||
Cash dividends declared per common share |
$ | 0.08 | $ | 0.08 | $ | 0.08 | ||||||
See Notes to Consolidated Financial Statements.
39
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2007, 2006, and 2005
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Preferred | Common | Paid-In | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Stock | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||
Balance, December 31, 2004 |
— | 4,496,730 | 20,329,033 | 25,278,666 | 669,371 | 50,773,800 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
— | — | — | 4,810,015 | — | 4,810,015 | ||||||||||||||||||
Other comprehensive (loss), net of tax (Note 2) |
— | — | — | — | (1,236,850 | ) | (1,236,850 | ) | ||||||||||||||||
Comprehensive income |
3,573,165 | |||||||||||||||||||||||
Cash dividends declared, $0.08 per share |
— | — | — | (361,981 | ) | — | (361,981 | ) | ||||||||||||||||
Proceeds from issuance of 10,584 shares of common
stock as a result of stock purchased under the
Employee Stock Purchase Plan (Note 13) |
— | 10,584 | 181,458 | — | — | 192,042 | ||||||||||||||||||
Proceeds from issuance of 25,335 shares of common
stock as a result of stock options exercised (Note 13) |
— | 25,335 | 167,764 | — | — | 193,099 | ||||||||||||||||||
Exchange of 1,425 shares of common
stock in connection with options exercised |
— | (1,425 | ) | (27,994 | ) | — | — | (29,419 | ) | |||||||||||||||
Tax benefit of nonqualified stock options exercised |
— | — | 125,993 | — | — | 125,993 | ||||||||||||||||||
Balance, December 31, 2005 |
$ | — | $ | 4,531,224 | $ | 20,776,254 | $ | 29,726,700 | $ | (567,479 | ) | $ | 54,466,699 | |||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
— | — | — | 2,802,205 | — | 2,802,205 | ||||||||||||||||||
Other comprehensive income, net of tax (Note 2) |
— | — | — | — | 595,438 | 595,438 | ||||||||||||||||||
Comprehensive income |
3,397,643 | |||||||||||||||||||||||
Common cash dividends declared, $0.08 per share |
— | — | — | (364,319 | ) | — | (364,319 | ) | ||||||||||||||||
Preferred cash dividends declared |
— | — | — | (164,373 | ) | — | (164,373 | ) | ||||||||||||||||
Proceeds from issuance of 268 shares of preferred stock |
268 | — | 12,884,146 | — | — | 12,884,414 | ||||||||||||||||||
Proceeds from issuance of 14,552 shares of common
stock as a result of stock purchased under the
Employee Stock Purchase Plan (Note 13) |
— | 14,552 | 223,901 | — | — | 238,453 | ||||||||||||||||||
Proceeds from issuance of 16,221 shares of common
stock as a result of stock options exercised (Note 13) |
— | 16,221 | 109,522 | — | — | 125,743 | ||||||||||||||||||
Exchange of 1,368 shares of common
stock in connection with options exercised |
— | (1,368 | ) | (23,458 | ) | — | — | (24,826 | ) | |||||||||||||||
Tax benefit of nonqualified stock options exercised |
— | — | 37,795 | — | — | 37,795 | ||||||||||||||||||
Stock-based compensation expense |
— | — | 285,351 | — | — | 285,351 | ||||||||||||||||||
Balance, December 31, 2006 |
$ | 268 | $ | 4,560,629 | $ | 34,293,511 | $ | 32,000,213 | $ | 27,959 | $ | 70,882,580 | ||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
— | — | — | 5,777,477 | — | 5,777,477 | ||||||||||||||||||
Other comprehensive income, net of tax (Note 2) |
— | — | — | — | 2,783,581 | 2,783,581 | ||||||||||||||||||
Comprehensive income |
8,561,058 | |||||||||||||||||||||||
Common cash dividends declared, $0.08 per share |
— | — | — | (367,124 | ) | — | (367,124 | ) | ||||||||||||||||
Preferred cash dividends declared |
— | — | — | (1,072,000 | ) | — | (1,072,000 | ) | ||||||||||||||||
Proceeds from issuance of 300 shares of preferred stock |
300 | — | 7,273,279 | — | — | 7,273,579 | ||||||||||||||||||
Proceeds from issuance of 19,834 shares of
common stock as a result of stock purchased
under the Employee Stock Purchase Plan |
— | 19,834 | 259,054 | — | — | 278,888 | ||||||||||||||||||
Proceeds from issuance of 19,069 shares of common
stock as a result of stock options exercised |
— | 19,069 | 154,007 | — | — | 173,076 | ||||||||||||||||||
Exchange of 1,788 shares of common
stock in connection with options exercised |
— | (1,788 | ) | (28,643 | ) | — | — | (30,431 | ) | |||||||||||||||
Tax benefit of nonqualified stock options exercised |
— | — | 22,370 | — | — | 22,370 | ||||||||||||||||||
Stock-based compensation expense |
— | — | 343,796 | — | — | 343,796 | ||||||||||||||||||
Balance, December 31, 2007 |
$ | 568 | $ | 4,597,744 | $ | 42,317,374 | $ | 36,338,566 | $ | 2,811,540 | $ | 86,065,792 | ||||||||||||
See Notes to Consolidated Financial Statements.
40
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2007, 2006, and 2005
Years Ended December 31, 2007, 2006, and 2005
| 2007 | 2006 | 2005 | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income |
$ | 5,777,477 | $ | 2,802,205 | $ | 4,810,015 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation |
2,293,874 | 2,395,174 | 2,008,773 | |||||||||
Provision for loan/lease losses |
2,863,902 | 3,284,242 | 877,084 | |||||||||
Deferred income taxes |
511,109 | (394,934 | ) | (109,452 | ) | |||||||
Amortization of offering costs on subordinated
debentures |
14,317 | 14,317 | 14,317 | |||||||||
Stock-based compensation expense |
21,348 | 171,125 | — | |||||||||
Minority interest in income of consolidated subsidiaries |
387,791 | 265,524 | 77,538 | |||||||||
Gains on sale of foreclosed assets |
(1,007 | ) | (664,223 | ) | (42,380 | ) | ||||||
Gains on sale of other assets |
(435,791 | ) | — | — | ||||||||
(Accretion of discounts) amortization of premiums on securities, net |
(92,868 | ) | 252,457 | 524,808 | ||||||||
Investment securities losses (gains), net |
— | 142,866 | (50 | ) | ||||||||
Loans originated for sale |
(103,958,168 | ) | (87,721,100 | ) | (98,719,913 | ) | ||||||
Proceeds on sales of loans |
104,860,392 | 85,161,720 | 100,840,794 | |||||||||
Net gains on sales of loans |
(1,219,800 | ) | (991,536 | ) | (1,254,242 | ) | ||||||
Net losses on disposals/sales of premises and equipment |
223,308 | 36,305 | 332,283 | |||||||||
Tax benefit of nonqualified stock options exercised |
— | — | 125,993 | |||||||||
Increase in accrued interest receivable |
(804,259 | ) | (2,310,920 | ) | (776,616 | ) | ||||||
Increase in other assets |
(3,563,530 | ) | (819,095 | ) | (2,113,950 | ) | ||||||
Increase in other liabilities |
3,185,676 | 5,560,811 | 2,973,423 | |||||||||
Net cash provided by operating activities |
10,063,771 | 7,184,938 | 9,568,425 | |||||||||
Cash Flows from Investing Activities: |
||||||||||||
Net (increase) decrease in federal funds sold |
(4,300,000 | ) | 2,130,000 | (1,560,000 | ) | |||||||
Net (increase) decrease in interest-bearing deposits at
financial institutions |
(2,965,952 | ) | (859,430 | ) | 2,586,897 | |||||||
Proceeds from sale of foreclosed assets |
93,901 | 1,220,942 | 1,272,757 | |||||||||
Proceeds from sale of other assets |
500,000 | — | — | |||||||||
Activity in securities portfolio: |
||||||||||||
Purchases |
(129,121,827 | ) | (79,759,340 | ) | (82,280,843 | ) | ||||||
Calls, maturities and redemptions |
92,041,150 | 62,386,012 | 45,787,488 | |||||||||
Paydowns |
562,361 | 705,794 | 1,197,070 | |||||||||
Sales |
— | 4,786,122 | — | |||||||||
Activity in bank-owned life insurance: |
||||||||||||
Purchases |
(9,119,017 | ) | (750,766 | ) | (776,634 | ) | ||||||
Increase in cash value |
(892,395 | ) | (759,100 | ) | (656,026 | ) | ||||||
Net loans/leases originated and held for investment |
(147,780,355 | ) | (202,624,972 | ) | (78,520,322 | ) | ||||||
Purchase of premises and equipment |
(2,261,028 | ) | (9,334,578 | ) | (9,779,493 | ) | ||||||
Purchase of intangible asset |
(887,542 | ) | — | — | ||||||||
Payment for acquisition of M2 Lease Funds, LLC |
— | — | (4,967,300 | ) | ||||||||
Net cash used in investing activities |
$ | (204,130,704 | ) | $ | (222,859,316 | ) | $ | (127,696,406 | ) | |||
(Continued)
41
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2007, 2006, and 2005
Years Ended December 31, 2007, 2006, and 2005
| 2007 | 2006 | 2005 | ||||||||||
Cash Flows from Financing Activities: |
||||||||||||
Net increase in deposit accounts |
$ | 53,979,951 | $ | 176,943,368 | $ | 110,488,216 | ||||||
Net increase in short-term borrowings |
71,511,889 | 4,214,100 | 2,698,673 | |||||||||
Activity in Federal Home Loan Bank advances: |
||||||||||||
Advances |
71,400,000 | 61,500,000 | 49,700,000 | |||||||||
Payments |
(54,443,743 | ) | (39,642,105 | ) | (11,721,023 | ) | ||||||
Net increase (decrease) in other borrowings |
43,928,486 | (7,003,278 | ) | (20,603,724 | ) | |||||||
Proceeds from issuance of junior subordinated debentures |
— | 10,310,000 | 5,155,000 | |||||||||
Tax benefit of nonqualified stock options exercised |
22,370 | 37,795 | — | |||||||||
Payment of cash dividends |
(1,334,012 | ) | (363,143 | ) | (360,598 | ) | ||||||
Proceeds from issuance of preferred stock, net |
7,273,579 | 12,884,414 | — | |||||||||
Proceeds from issuance of common stock, net |
421,533 | 339,370 | 355,722 | |||||||||
Net cash provided by financing activities |
192,760,053 | 219,220,521 | 135,712,266 | |||||||||
Net increase (decrease) in cash and due from banks |
(1,306,880 | ) | 3,546,143 | 17,584,285 | ||||||||
Cash and due from banks, beginning |
42,502,770 | 38,956,627 | 21,372,342 | |||||||||
Cash and due from banks, ending |
$ | 41,195,890 | $ | 42,502,770 | $ | 38,956,627 | ||||||
Supplemental Disclosures of Cash Flow Information,
cash payments for: |
||||||||||||
Interest |
$ | 49,277,295 | $ | 36,621,518 | $ | 20,407,363 | ||||||
Income and franchise taxes |
1,960,408 | 1,496,155 | 1,340,742 | |||||||||
Supplemental Schedule of Noncash Investing Activities: |
||||||||||||
Change in accumulated other comprehensive income, unrealized
gaines (losses) on securities available for sale, net |
2,783,581 | 595,438 | (1,236,850 | ) | ||||||||
Exchange of shares of common stock in connection
with options exercised |
(30,431 | ) | (24,826 | ) | (29,419 | ) | ||||||
Transfers of loans to other real estate owned |
496,376 | 129,895 | 169,441 | |||||||||
Acquisition of M2 Lease Funds, LLC, cash paid at settlement |
$ | 4,967,300 | ||||||||||
Fair value of assets acquired and liabilities assumed: |
||||||||||||
Leases receivable held for investment, net |
31,673,951 | |||||||||||
Premises and equipment, net |
82,714 | |||||||||||
Goodwill |
3,222,688 | |||||||||||
Other assets |
47,177 | |||||||||||
Other borrowings |
(25,368,638 | ) | ||||||||||
Other liabilities |
(4,117,165 | ) | ||||||||||
Minority interest |
(573,427 | ) | ||||||||||
| $ | 4,967,300 | |||||||||||
See Notes to Consolidated Financial Statements.
42
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
QCR Holdings, Inc. (the Company) is a bank holding company providing bank and bank related services
through its subsidiaries, Quad City Bank and Trust Company (Quad City Bank & Trust), Cedar Rapids
Bank and Trust Company (Cedar Rapids Bank & Trust), Rockford Bank and Trust Company (Rockford Bank
& Trust), First Wisconsin Bank and Trust Company (First Wisconsin Bank & Trust), Quad City Bancard,
Inc. (Bancard), M2 Lease Funds, LLC (M2 Lease Funds), Velie Plantation Holding Company, LLC (Velie
Plantation Holding Company), QCR Holdings Statutory Trust II (Trust II), QCR Holdings Statutory
Trust III (Trust III), QCR Holdings Statutory Trust IV (Trust IV), and QCR Holdings Statutory Trust
V (Trust V). Quad City Bank & Trust is a commercial bank that serves the Iowa and Illinois Quad
Cities and adjacent communities. Cedar Rapids Bank & Trust is a commercial bank that serves Cedar
Rapids, Iowa, and adjacent communities. Rockford Bank & Trust is a commercial bank that serves
Rockford, Illinois, and adjacent communities.
In October 2006, the Company announced that it had entered into a series of agreements that would
result in the addition of a Wisconsin-chartered bank. On February 20, 2007, the Company completed
these transactions and the company’s fourth bank charter, First Wisconsin Bank and Trust Company
began serving the Milwaukee, Wisconsin area. Under agreements with Security Bank Shares, Inc.,
Ridgeland Bancorp, Inc., and Ridgeland’s stockholders, QCR Holdings, Inc. acquired from Ridgeland
Bancorp ownership of Farmers State Bank, of Ridgeland, Wisconsin. Concurrently with this
acquisition, the Company transferred its Wisconsin branch of Rockford Bank & Trust to Farmers State
Bank, and Farmers State Bank sold its banking offices in Ridgeland and Dallas, Wisconsin, to
Security Bank, New Auburn, Wisconsin, a banking subsidiary of Security Bank Shares, Inc. The
Company’s newly acquired Wisconsin bank charter was renamed from Farmer’s State Bank to First
Wisconsin Bank and Trust Company and was also relocated from Ridgeland to Pewaukee, Wisconsin. The
Company provided the new charter with $10,000,000 in capital.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are chartered and regulated by the state of
Iowa, Rockford Bank & Trust is chartered and regulated by the state of Illinois, and First
Wisconsin Bank & Trust is chartered and regulated by the state of Wisconsin. All four subsidiary
banks are insured and subject to regulation by the Federal Deposit Insurance Corporation, and are
members of and regulated by the Federal Reserve System. Bancard conducts the Company’s credit card
operation and is regulated by the Federal Reserve System. M2 Lease Funds, which is an 80% owned
subsidiary, based in the Milwaukee, Wisconsin, area is engaged in the business of direct financing
lease contracts. Velie Plantation Holding Company, LLC, which is a 55.6% owned subsidiary, is
engaged in holding the real estate property known as the Velie Plantation Mansion in Moline,
Illinois. Trust II, III, IV and V were formed for the purpose of issuing various trust preferred
securities (see Note 10).
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Lease
residual values and the allowance for estimated losses on loans/leases are inherently subjective as
they require material estimates that are susceptible to significant change. The fair value of
financial instruments is an estimate that can be computed within a range.
Principles of consolidation: The accompanying consolidated financial statements include
the accounts of the Company and its subsidiaries, except Trust II, III, IV and V, which do not meet
the criteria for consolidation. All material intercompany accounts and transactions have been
eliminated in consolidation.
43
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks
include cash on hand and non-interest bearing amounts due from banks. Cash flows from federal
funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, and
short-term and other 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
$692,000 and $8,800,000 as of December 31, 2007 and 2006, 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, net of taxes, are reported as increases or decreases in accumulated other comprehensive
income. Realized gains or losses, determined on the basis of the cost of specific securities sold,
are included in earnings.
Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation. Consideration is given to (1)
the length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent and ability of the
Banks(s)/Company to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Loans receivable held for sale: Residential real estate loans, which are originated and
intended for resale in the secondary market in the foreseeable future, are classified as held for
sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As
assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these
loans are classified as operating activities in the statement of cash flows.
Loans receivable held for investment: Loans that management has the intent and ability to
hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for
investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the
allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans.
Interest is credited to earnings as earned based on the principal amount outstanding. Deferred
direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s
yield. As assets held for and used in the production of services, the origination and collection
of these loans is classified as an investing activity in the statement of cash flows.
When collection of loan payments is considered doubtful, income recognition is ceased and the loan
receivable is placed on nonaccrual status. Previously recorded but uncollected amounts on
nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Cash collected
on nonaccrual loans is recorded as income unless the principal is doubtful of collection in which
case cash received is applied to principal.
44
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Direct finance leases receivable held for investment: The Company leases machinery and
equipment to customers under leases that qualify as direct financing leases for financial reporting
and as operating leases for income tax purposes. Under the direct financing method of accounting,
the minimum lease payments to be received under the lease contract, together with the estimated
unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are
recorded as lease receivables when the lease is signed and the lease property delivered to the
customer. The excess of the minimum lease payments and residual values over the cost of the
equipment is recorded as unearned lease income. Unearned lease income is recognized over the term
of the lease on a basis that results in an approximate level rate of return on the unrecovered
lease investment. Lease income is recognized on the interest method. Residual is the estimated
fair market value of the equipment on lease at lease termination. In estimating the equipment’s
fair value at lease termination, the Company relies on historical experience by equipment type and
manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.
The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts
the Company will ultimately realize could differ from the estimated amounts.
When collection of lease payments is considered doubtful, income recognition is ceased and the
lease receivable is placed on nonaccrual status. Previously recorded but uncollected amounts on
nonaccrual leases are reversed at the time the lease is placed on nonaccrual status. Cash
collected on nonaccrual leases is recorded as income unless the principal is doubtful of collection
in which case cash received is applied to principal.
The Company defers and amortizes fees and certain incremental direct costs over the contractual
term of the lease as an adjustment to the yield. These initial direct leasing costs generally
approximate 3% of the leased asset’s cost. The unamortized direct costs are recorded as a
reduction of unearned lease income.
Allowance for estimated losses on loans/leases: The allowance for estimated losses on
loans/leases is maintained at the level considered adequate by management of the Company and the
subsidiaries to provide for losses that are probable. The allowance is increased by provisions
charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance,
the Company, the subsidiary banks, and M2 Lease Funds consider the overall composition of the
loan/lease portfolio. Loans/leases which have identified weaknesses are classified into higher
risk groups, or are identified for continued monitoring. Historical loss percentages are then
applied to various classifications and, considering economic conditions and other factors that in
management’s judgment deserve evaluation, additional identified and unidentified loss amounts are
added.
Loans/leases are considered impaired when, based on current information and events, it is probable
the Company and the bank involved will not be able to collect all amounts due. The portion of the
allowance for loan/lease losses applicable to an impaired loan/lease is computed based on the
present value of the estimated future cash flows of interest and principal discounted at the
loan’s/lease’s effective interest rate or on the fair value of the collateral for collateral
dependent loans/leases. The entire change in present value of expected cash flows of impaired
loans/leases is reported as bad debt expense in the same manner in which impairment initially was
recognized or as a reduction in the amount of bad debt expense that otherwise would be reported.
The Company and subsidiaries recognize interest income on impaired loans/leases on a cash basis.
Credit related financial instruments: In the ordinary course of business, the Company has
entered into commitments to extend credit and standby letters of credit. Such financial
instruments are recorded when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for as sales
only when control over the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee
obtains the right to pledge or exchange the assets it received, and no condition both constrains
the transferee from taking advantage of its right to pledge or exchange and provides more than a
modest benefit to the transferor, and (3) the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity or the ability to
unilaterally cause the holder to return specific assets.
45
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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.
Goodwill: The Company has recorded goodwill from the purchase of 80% of M2 Lease Funds.
In accordance with the provisions of FAS Statement No. 142, goodwill is not being amortized, but is
evaluated annually for impairment. An impairment charge is recognized only when the calculated
fair value of the reporting unit, including goodwill, is less than its carrying amount. Based on
the annual analysis completed in July 2007, the Company believes that no goodwill impairment
existed.
Bank-owned life insurance: Bank-owned life insurance is carried at cash surrender value
with increases/decreases reflected as income/expense in the statement of income.
Foreclosed assets: Assets acquired through, or in lieu of, loan foreclosures, which are
included in other assets on the consolidated balance sheets are held for sale and are recorded at
the lower of cost or fair value. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount or fair value less costs
to sell.
Preferred Stock: In the fourth quarter of 2007, the Company closed a private placement
offering resulting in the issuance of 300 shares of Series C Non-Cumulative Perpetual Preferred
Stock (“Series C Preferred Stock”) to accredited investors for an aggregate purchase price of
$7,500,000, or $25,000 per share. The shares of Series C Preferred Stock have a stated dividend
rate of 9.50%. Dividends are not accrued and are payable only if declared and no dividends may be
declared on the Company’s common stock unless and until dividends have been declared on the
outstanding shares of Series C Preferred Stock. The Company has the right at any other time after
the first anniversary of the issuance of the shares of Series C Preferred Stock, subject to all
required regulatory approvals, to redeem all, but not less than all, of the shares then
outstanding. Any such redemption shall be made by the Company upon at least 30 days’ prior written
notice. The shares shall be redeemed for an amount per share in cash which is equal to: (i) the
sum of (A) $25,000; plus (B) a premium in the amount of $2,375 multiplied by a fraction the
numerator of which is the total number of calendar days the shares being redeemed have been
outstanding and the denominator of which is 365; but (ii) less the aggregate amount of any
dividends that have been paid on the shares. The Series C Preferred Stock was not registered under
the Securities Act of 1933 (the “Act”) and was issued pursuant to an exemption from registration
under Regulation D of the rules promulgated under the Act.
In the fourth quarter of 2006, the Company closed a private placement offering resulting in the
issuance of 268 shares of Series B Non-Cumulative Perpetual Preferred Stock (“Series B Preferred
Stock”) to accredited investors for an aggregate purchase price of $13,400,000, or $50,000 per
share. The shares of Series B Preferred Stock have a stated dividend rate of 8.00%. Dividends are
not accrued and are payable only if declared and no dividends may be declared on the Company’s
common stock unless and until dividends have been declared on the outstanding shares of Series B
Preferred Stock. The Company has the right at any other time after the first anniversary of the
issuance of the shares of Series B Preferred Stock, subject to all required regulatory approvals,
to redeem all, but not less than all, of the shares then outstanding. Any such redemption shall be
made by the Company upon at least 30 days’ prior written notice. The shares can redeemed for an
amount per share in cash which is equal to: (i) the sum of (A) $50,000; plus (B) a premium in the
amount of $4,000 multiplied by a fraction the numerator of which is the total number of calendar
days the shares being redeemed have been outstanding and the denominator of which is 365; but
(ii) less the aggregate amount of any dividends that have been paid on the shares. The Series B
Preferred Stock was not registered under the Securities Act of 1933 (the “Act”) and was issued
pursuant to an exemption from registration under Regulation D of the rules promulgated under the
Act.
Stock-based compensation plans: At December 31, 2007, the Company has three stock-based
employee compensation plans, which are described more fully in Note 13.
46
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company adopted the provisions of Statement of Financial Accounting Standard 123R (“SFAS 123R”)
effective as of January 1, 2006. SFAS 123R eliminates the ability to account for stock-based
compensation using APB 25 and requires that all share-based awards made to employees and directors,
including stock options, SARs and stock purchase plan transactions be recognized as compensation
cost in the income statement based on their fair values on the measurement date, which is generally
the date of the grant. The Company transitioned to fair-value based accounting for stock-based
compensation using a modified version of prospective application (“modified prospective
application”). Under the modified prospective application, compensation cost included in
noninterest expenses for the year ended December 31, 2007 and 2006 includes 1) compensation cost
for unvested share-based payments granted prior to January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of Statement of Financial Accounting
Standard 123 (“SFAS 123”), and 2) compensation cost for all share-based payments granted
subsequent to January 1, 2006, and any modifications to existing awards, based on the grant-date
fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not
restated to reflect the impact of adopting the new standard.
As a result of applying the provisions of SFAS 123R during the years ended December 31, 2007 and
2006, the Company recognized additional stock-based compensation expense related to stock options,
stock purchases, and SARs of $21,000 and $171,000, respectively. As required by SFAS 123R,
management made an estimate of expected forfeitures and is recognizing compensation costs only for
those equity awards expected to vest.
The Company receives a tax deduction for certain stock option exercises during the period the
options are exercised, generally for the excess of the price at which the options are sold over the
exercise price of the options. Prior to adoption of SFAS 123R, the Company reported all tax
benefits resulting from the exercise of stock options as operating cash flows in our consolidated
statements of cash flows. In accordance with SFAS 123R, for the year ended December 31, 2006, the
Company revised its consolidated statements of cash flows presentation to report the tax benefits
from the exercise of stock options as financing cash flows.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option
grants with the following assumptions for the indicated periods:
| 2007 | 2006 | 2005 | ||||||||||
Dividend yield |
0.46% to 0.53% | 0.42% to 0.48% | 0.36% to 0.41% | |||||||||
Expected volatility |
24.33% to 24.74% | 24.46% to 26.55% | 24.49% to 24.81% | |||||||||
Risk-free interest rate |
4.53% to 5.06% | 4.47% to 5.26% | 4.23% to 4.48% | |||||||||
Expected life of option grants |
6 years | 6 years | 10 years | |||||||||
Weighted-average grant date fair value |
$5.80 | $6.48 | $8.99 | |||||||||
The Company also uses the Black-Scholes option pricing model to estimate the fair value of stock
purchase grants with the following assumptions for the indicated periods:
| ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Dividend yield |
0.45% to 0.50% | 0.41% to 0.46% | 0.38% | |||||||||
Expected volatility |
13.98% to 17.80% | 10.93% to 13.06% | 15.85% to 24.81% | |||||||||
Risk-free interest rate |
4.94% to 5.04% | 4.17% to 5.21% | 2.21% to 3.31% | |||||||||
Expected life of option grants |
3 to 6 months | 3 to 6 months | 3 to 6 months | |||||||||
Weighted-average grant date fair value |
$2.36 | $2.44 | $3.09 | |||||||||
47
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The fair value is amortized on a straight-line basis over the vesting periods of the grants and
will be adjusted for subsequent changes in estimated forfeitures. The expected dividend yield
assumption is based on the Company’s current expectations about its anticipated dividend policy.
Expected volatility is based on historical volatility of the Company’s common stock price. The
risk-free interest rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant. The expected life of grants is derived
using the “simplified” method as allowed under the provisions of the Securities and Exchange
Commission’s Staff Accounting Bulletin No. 107 (SAB 107) and represents the period of time that
options are expected to be outstanding. In December 2007, the SEC released Staff Accounting
Bulletin No. 110 (SAB 110). SAB 110 amends SAB 107 to allow for the continued use, under certain
circumstances, of the “simplified” method in developing an estimate of the expected term of “plain
vanilla” stock options accounted for under SFAS 123R. As a result, the Company will continue to use
the simplified method. Historical data is used to estimate forfeitures used in the model. Two
separate groups of employees (employees subject to broad based grants, and executive employees and
directors) are used.
As of December 31, 2007, there was $616,517 of unrecognized compensation cost related to share
based payments, which is expected to be recognized over a weighted average period of 2.8 years.
The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of the Company’s common stock for the 117,307 options that
were in-the-money at December 31, 2007. The aggregate intrinsic value at December 31, 2007 was
$578,760 on options outstanding and $576,994 on options exercisable. During the year ended
December 31, 2007, 2006, and 2005, the aggregate intrinsic value of options exercised under the
Company’s stock option plans was $57,169, $95,735, and $143,982, respectively, determined as of the
date of the option exercise.
The following table illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123), to stock-based employee compensation for periods prior to the January 1,
2006 adoption date. For purposes of this pro forma disclosure, the value of the option and
purchase plan grants were estimated using a Black-Scholes option pricing model and amortized on a
straight-line basis over the respective vesting period of the awards.
| 2005 | ||||
Net income, as reported |
$ | 4,810,015 | ||
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects |
(174,598 | ) | ||
Net income |
$ | 4,635,417 | ||
Earnings per share: |
||||
Basic: |
||||
As reported |
$ | 1.06 | ||
Pro forma |
1.03 | |||
Diluted: |
||||
As reported |
1.04 | |||
Pro forma |
1.01 | |||
48
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
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.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period during which, based on
all available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that
is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional
income taxes in the statement of income.
Trust assets: Trust assets held by the subsidiary banks in a fiduciary, agency, or
custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not
included in the accompanying consolidated financial statements since such items are not assets of
the subsidiary banks.
Earnings per common share: Basic earnings per share is computed by dividing net income,
less preferred stock dividends declared, by the weighted average number of common stock shares
outstanding for the respective period. Diluted earnings per share is computed by dividing net
income, less preferred stock dividends declared, by the weighted average number of common stock and
common stock equivalents outstanding for the respective period.
Reclassifications: Certain amounts in the prior year financial statements have been
reclassified, with no effect on net income or stockholders’ equity, to conform with the current
period presentation.
New Accounting Pronouncements: In September 2006, FASB issued Statement of Financial
Accounting Standard No. 157 (“SFAS No. 157”), “Fair Value Measurements,” which defines fair value,
establishes guidelines for measuring fair value and expands disclosures regarding fair value
measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company is in the process of
evaluating the impact that SFAS No. 157 may have on its consolidated financial statements.
49
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
In February of 2007, FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS 159”),
“The Fair Value Option for Financial Assets and Financial Liabilities”, which gives entities the
option to measure eligible financial assets, and financial liabilities at fair value on an
instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available for
eligible items that exist on the date that a company adopts SFAS No. 159 or when an entity first
recognizes a financial asset or financial liability. The decision to elect the fair value option
for an eligible item is irrevocable. Subsequent changes in fair value must be recorded in
earnings. This statement is effective as of the beginning of a company’s first fiscal year after
November 15, 2007. The statement offered early adoption provisions that the Company elected not to
exercise. The Company is in the process of evaluating the impact that SFAS No. 159 may have on its
consolidated financial statements.
In December 2007, FASB issued Statement No. 141 (revised 2007), Business Combinations. Statement
No. 141R fundamentally changes the manner in which the entity will account for a business
combination. This Statement is effective for fiscal years beginning on or after December 15, 2008
and is predominantly prospective. The company is currently evaluating the impact of the adoption
of Statement No. 141R.
In December 2007, FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements. Statement No. 160 changes the measurement, recognition and presentation of minority
interests in consolidated subsidiaries (now referred to as noncontrolling interests). This
statement is effective for fiscal years beginning on or after December 15, 2008 and is prospective
for the change related to measurement and recognition and retrospective for the changes related to
presentation. The company is currently evaluating the impact of the adoption of Statement No. 160.
Note 2. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income (loss), which for
the Company is comprised entirely of unrealized gains and losses on securities available for sale.
Other comprehensive income (loss) for the years ended December 31, 2007, 2006, and 2005 is
comprised as follows:
| Tax | ||||||||||||
| Before | Expense | Net | ||||||||||
| Tax | (Benefit) | of Tax | ||||||||||
Year ended December 31, 2007: |
||||||||||||
Unrealized gains on securities available for sale: |
||||||||||||
Unrealized holding gains arising during the period |
$ | 4,519,576 | $ | 1,735,995 | $ | 2,783,581 | ||||||
Less reclassification adjustment for gains (losses)
included in net income |
— | — | — | |||||||||
Other comprehensive income |
$ | 4,519,576 | $ | 1,735,995 | $ | 2,783,581 | ||||||
Year ended December 31, 2006: |
||||||||||||
Unrealized gains (losses) on securities available for sale: |
||||||||||||
Unrealized holding gains arising during the period |
$ | 780,219 | $ | 276,937 | $ | 503,282 | ||||||
Less reclassification adjustment for (losses)
included in net income |
(142,866 | ) | (50,710 | ) | (92,156 | ) | ||||||
Other comprehensive income |
$ | 923,085 | $ | 327,647 | $ | 595,438 | ||||||
Year ended December 31, 2005: |
||||||||||||
Unrealized (losses) on securities available for sale: |
||||||||||||
Unrealized holding (losses) arising during the period |
$ | (1,967,594 | ) | $ | (730,775 | ) | $ | (1,236,819 | ) | |||
Less reclassification adjustment for gains
included in net income |
50 | 19 | 31 | |||||||||
Other comprehensive (loss) |
$ | (1,967,644 | ) | $ | (730,794 | ) | $ | (1,236,850 | ) | |||
50
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of December 31, 2007 and 2006 are
summarized as follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | (Losses) | Value | |||||||||||||
December 31, 2007: |
||||||||||||||||
Securities
held to maturity, other bonds |
$ | 350,000 | $ | — | $ | (278 | ) | $ | 349,722 | |||||||
Securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 3,303,637 | $ | 59,099 | $ | — | $ | 3,362,736 | ||||||||
U.S. govt. sponsored agency securities |
197,713,761 | 4,031,826 | (28,083 | ) | 201,717,504 | |||||||||||
Mortgage-backed securities |
1,599,905 | 5,842 | (7,807 | ) | 1,597,940 | |||||||||||
Municipal securities |
25,119,113 | 490,081 | (38,897 | ) | 25,570,297 | |||||||||||
Corporate securities |
1,864,726 | 11,942 | — | 1,876,668 | ||||||||||||
Trust preferred securities |
200,000 | — | (200 | ) | 199,800 | |||||||||||
Other securities |
1,201,325 | 64,291 | (35,908 | ) | 1,229,708 | |||||||||||
| $ | 231,002,467 | $ | 4,663,081 | $ | (110,895 | ) | $ | 235,554,653 | ||||||||
December 31, 2006: |
||||||||||||||||
Securities
held to maturity, other bonds |
$ | 350,000 | $ | 8,149 | $ | (307 | ) | $ | 357,842 | |||||||
Securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 2,106,899 | $ | 3,840 | $ | (276 | ) | $ | 2,110,463 | |||||||
U.S. govt. sponsored agency securities |
157,623,292 | 199,173 | (843,448 | ) | 156,979,017 | |||||||||||
Mortgage-backed securities |
2,084,340 | — | (51,627 | ) | 2,032,713 | |||||||||||
Municipal securities |
28,583,691 | 372,314 | (79,013 | ) | 28,876,992 | |||||||||||
Corporate securities |
2,366,594 | 27,773 | — | 2,394,367 | ||||||||||||
Trust preferred securities |
450,000 | 10,800 | — | 460,800 | ||||||||||||
Other securities |
1,176,467 | 400,382 | (7,308 | ) | 1,569,541 | |||||||||||
| $ | 194,391,283 | $ | 1,014,282 | $ | (981,672 | ) | $ | 194,423,893 | ||||||||
51
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (Continued)
Gross unrealized losses and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, as of December 31, 2007
and 2006, are summarized as follows:
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
December 31, 2007: |
||||||||||||||||||||||||
Securities
held to maturity, other bonds |
$ | 49,982 | $ | (18 | ) | $ | 49,741 | $ | (260 | ) | $ | 99,723 | $ | (278 | ) | |||||||||
Securities available for sale: |
||||||||||||||||||||||||
U.S. govt. sponsored agency
securities |
3,499,245 | (921 | ) | 11,986,235 | (27,162 | ) | 15,485,480 | (28,083 | ) | |||||||||||||||
Mortgage-backed securities |
6,244 | (8 | ) | 1,352,956 | (7,799 | ) | 1,359,200 | (7,807 | ) | |||||||||||||||
Municipal securities |
2,175,325 | (36,573 | ) | 1,150,219 | (2,324 | ) | 3,325,544 | (38,897 | ) | |||||||||||||||
Trust preferred securities |
199,800 | (200 | ) | — | — | 199,800 | (200 | ) | ||||||||||||||||
Other securities |
578,486 | (26,216 | ) | 36,804 | (9,692 | ) | 615,290 | (35,908 | ) | |||||||||||||||
| $ | 6,459,100 | $ | (63,918 | ) | $ | 14,526,214 | $ | (46,977 | ) | $ | 20,985,314 | $ | (110,895 | ) | ||||||||||
December 31, 2006: |
||||||||||||||||||||||||
Securities held to maturity,
other bonds |
$ | — | $ | — | $ | 49,693 | $ | (307 | ) | $ | 49,693 | $ | (307 | ) | ||||||||||
Securities available for sale: |
||||||||||||||||||||||||
U.S. Treasury securities |
— | — | 99,748 | (276 | ) | 99,748 | (276 | ) | ||||||||||||||||
U.S. govt. sponsored agency
securities |
47,615,026 | (217,030 | ) | 75,540,891 | (626,418 | ) | 123,155,917 | (843,448 | ) | |||||||||||||||
Mortgage-backed securities |
316,950 | (54 | ) | 1,715,763 | (51,573 | ) | 2,032,713 | (51,627 | ) | |||||||||||||||
Municipal securities |
3,990,590 | (19,116 | ) | 5,365,926 | (59,897 | ) | 9,356,516 | (79,013 | ) | |||||||||||||||
Other securities |
752,409 | (7,308 | ) | — | — | 752,409 | (7,308 | ) | ||||||||||||||||
| $ | 52,674,975 | $ | (243,508 | ) | $ | 82,722,328 | $ | (738,164 | ) | $ | 135,397,303 | $ | (981,672 | ) | ||||||||||
At December 31, 2007, the investment portfolio included 325 securities. Of this number, 26
securities have current unrealized losses, which have existed for twelve months or more. All of
these securities are considered to be acceptable credit risks. Based upon an evaluation of the
available evidence, including recent changes in market rates, credit rating information and
information obtained from regulatory filings, management believes the declines in fair value for
those securities are temporary. In addition, the Bank(s)/Company have the intent and ability to
hold these investment securities for a period of time sufficient to allow for an anticipated
recovery.
52
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (Continued)
Should the impairment of any of these securities become other than temporary, the cost basis of the
investment will be reduced and the resulting loss recognized in net earnings in the period on which
the other-than-temporary impairment is identified.
In March 2006, the company recognized an impairment loss of $142,586 on a mortgage-backed mutual
fund investment held in the available for sale security portfolio at Quad City Bank & Trust. In
April 2006, the company recognized an additional loss of $71,293 on the sale of this investment.
All sales of securities, as applicable, for the years ended December 31, 2007, 2006 and 2005,
respectively, were from securities identified as available for sale. Information on proceeds
received, as well as the gains and losses from the sale of those securities is as follows:
| 2007 | 2006 | 2005 | ||||||||||
Proceeds from sales of securities |
$ | — | $ | 4,786,122 | $ | — | ||||||
Gross gains from sales of securities |
— | — | — | |||||||||
Gross losses from sales of securities |
— | 71,293 | — | |||||||||
The amortized cost and fair value of securities as of December 31, 2007 by contractual maturity are
shown below. Expected maturities of mortgage-backed securities may differ from contractual
maturities because the mortgages underlying the mortgage-backed securities may be called or prepaid
without any penalties. Therefore, these securities are not included in the maturity categories in
the following summary. Other securities are excluded from the maturity categories as there is no
fixed maturity date.
| Amortized | ||||||||
| Cost | Fair Value | |||||||
Securities held to maturity: |
||||||||
Due after one year through five years |
$ | 200,000 | $ | 199,741 | ||||
Due after five years |
150,000 | 149,981 | ||||||
| $ | 350,000 | $ | 349,722 | |||||
Securities available for sale: |
||||||||
Due in one year or less |
$ | 42,071,921 | $ | 42,123,647 | ||||
Due after one year through five years |
41,220,399 | 42,054,273 | ||||||
Due after five years |
144,908,917 | 148,549,085 | ||||||
| 228,201,237 | 232,727,005 | |||||||
Mortgage-backed securities |
1,599,905 | 1,597,940 | ||||||
Other securities |
1,201,325 | 1,229,708 | ||||||
| $ | 231,002,467 | $ | 235,554,653 | |||||
As of December 31, 2007 and 2006, investment securities with a carrying value of $206,678,180 and
$149,381,225, respectively, were pledged on securities sold under agreements to repurchase and for
other purposes as required or permitted by law.
53
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable
The composition of the loan/lease portfolio as of December 31, 2007 and 2006 is presented as
follows:
| 2007 | 2006 | |||||||
Real estate loans held for sale — residential mortgage |
$ | 6,507,583 | $ | 6,186,632 | ||||
Real estate loans — residential mortgage |
69,243,629 | 68,913,610 | ||||||
Real estate loans — construction |
8,787,190 | 6,534,234 | ||||||
Commercial loans |
368,169,985 | 396,598,398 | ||||||
Commercial real estate loans |
499,486,146 | 350,339,235 | ||||||
Direct financing leases |
67,223,693 | 52,627,879 | ||||||
Installment and other consumer loans |
85,930,782 | 78,058,107 | ||||||
| 1,105,349,008 | 959,258,095 | |||||||
Plus deferred loan/lease orgination costs, net of fees |
1,550,899 | 1,489,229 | ||||||
| 1,106,899,907 | 960,747,324 | |||||||
Less allowance for estimated losses on loans/leases |
(12,023,637 | ) | (10,612,082 | ) | ||||
| $ | 1,094,876,270 | $ | 950,135,242 | |||||
Loans/leases on nonaccrual status amounted to $6,488,409 and $6,538,109 as of December 31, 2007 and
2006, respectively. Interest income in the amount of $166,883, $613,250, and $570,055 for the years
ended December 31, 2007, 2006, and 2005, respectively, would have been earned on the nonaccrual
loans/leases had they been performing in accordance with their original terms. Cash interest
collected on nonaccrual loans was $574,067, $246,124, and $298,168 for the years ended December 31,
2007, 2006 and 2005, respectively.
Changes in the allowance for estimated losses on loans/leases for the years ended December 31,
2007, 2006, and 2005 are presented as follows:
| 2007 | 2006 | 2005 | ||||||||||
Balance, beginning |
$ | 10,612,082 | $ | 8,883,855 | $ | 9,261,991 | ||||||
Provisions charged to expense |
2,863,902 | 3,284,242 | 877,084 | |||||||||
Loans/leases charged off |
(2,044,093 | ) | (1,919,515 | ) | (2,045,846 | ) | ||||||
Recoveries on loans/leases previously charged off |
591,746 | 363,500 | 357,172 | |||||||||
Acquisition of M2 Lease Funds |
— | — | 433,454 | |||||||||
Balance, ending |
$ | 12,023,637 | $ | 10,612,082 | $ | 8,883,855 | ||||||
54
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (Continued)
Loans/leases considered to be impaired as of December 31, 2007, 2006 and 2005 are as follows:
| 2007 | 2006 | 2005 | ||||||||||
Impaired loans/leases for which an
allowance has been provided |
$ | 5,058,107 | $ | 5,617,727 | $ | 1,826,429 | ||||||
Allowance provided for impaired loans/leases, included
in the allowance for loan/lease losses |
$ | 1,507,674 | $ | 2,032,801 | $ | 1,096,493 | ||||||
Impaired loans/leases for which no
allowance has been provided |
$ | 164,330 | $ | 665,785 | $ | — | ||||||
Impaired loans/leases for which no allowance has been provided have adequate collateral, based on
management’s current estimates.
The following summarizes additional information regarding impaired loans/leases:
| 2007 | 2006 | 2005 | ||||||||||
Average recorded investment in impaired loans/leases
for the years ended |
$ | 5,821,901 | $ | 5,020,599 | $ | 1,508,112 | ||||||
Interest income on impaired loans/leases recognized
for cash payments received for the years ended |
$ | 528,584 | $ | 212,027 | $ | 120,120 | ||||||
Loans past due 90 days or more and still accruing
interest as of December 31, |
$ | 499,546 | $ | 754,685 | $ | 603,637 | ||||||
There were no direct financing leases which were past due 90 days or more and still accruing
interest as of December 31, 2007.
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 committed amount of loans greater than or equal to $60,000 during the years ended
December 31, 2007, 2006, and 2005, was as follows:
| 2007 | 2006 | 2005 | ||||||||||
Balance, beginning |
$ | 18,404,968 | $ | 11,386,193 | $ | 17,533,546 | ||||||
Net increase due to change in related parties |
7,517,875 | 5,402,821 | 248,623 | |||||||||
Advances |
5,188,811 | 4,379,210 | 7,801,170 | |||||||||
Repayments |
(9,714,045 | ) | (2,763,256 | ) | (14,197,146 | ) | ||||||
Balance, ending |
$ | 21,397,609 | $ | 18,404,968 | $ | 11,386,193 | ||||||
55
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (Continued)
The Company’s loan portfolio includes a geographic concentration in the Midwest. Additionally, the
loan portfolio included a concentration of loans in certain industries as of December 31, 2007 as
follows:
| Industry Name | Balance | |||
Lessors of Non-Residential Buildings & Dwellings |
182,381,381 | |||
Lessors of Residential Buildings & Dwellings |
43,556,555 | |||
Land Subdivision |
42,111,753 | |||
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
Land |
$ | 5,525,022 | $ | 5,088,125 | ||||
Buildings (useful lives 15 to 50 years) |
25,165,334 | 25,053,432 | ||||||
Furniture and equipment (useful lives 3 to 10 years) |
15,191,339 | 13,710,682 | ||||||
| 45,881,695 | 43,852,239 | |||||||
Less accumulated depreciation |
13,613,009 | 11,327,399 | ||||||
| $ | 32,268,686 | $ | 32,524,840 | |||||
Certain facilities are leased under operating leases. Rental expense was $510,804, $584,813, and
$1,037,747, for the years ended December 31, 2007, 2006, and 2005, respectively.
Future minimum rental commitments under noncancelable leases are as follows as of December 31,
2007:
| Year ending December 31: | ||||
2008 |
694,116 | |||
2009 |
711,391 | |||
2010 |
699,324 | |||
2011 |
580,377 | |||
2012 |
528,664 | |||
Thereafter |
1,293,019 | |||
| $ | 4,506,891 | |||
56
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Deposits
The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was
$244,830,326 and $251,349,867 as of December 31, 2007 and 2006, respectively.
As of December 31, 2007, the scheduled maturities of certificates of deposit were as follows:
| Year ending December 31: | ||||
2008 |
327,839,978 | |||
2009 |
41,128,880 | |||
2010 |
24,472,389 | |||
2011 |
15,125,572 | |||
2012 |
8,013,924 | |||
| $ | 416,580,743 | |||
Note 7. Short-Term Borrowings
Short-term borrowings as of December 31, 2007 and 2006 are summarized as follows:
| 2007 | 2006 | |||||||
Overnight repurchase agreements with customers |
$ | 93,255,840 | $ | 62,273,951 | ||||
Federal funds purchased |
89,940,000 | 49,410,000 | ||||||
| $ | 183,195,840 | $ | 111,683,951 | |||||
Information concerning repurchase agreements is summarized as follows as of December 31, 2007 and
2006:
| 2007 | 2006 | |||||||
Average daily balance during the period |
$ | 76,802,788 | $ | 62,906,621 | ||||
Average daily interest rate during the period |
3.43 | % | 2.96 | % | ||||
Maximum month-end balance during the period |
$ | 94,526,420 | $ | 66,448,872 | ||||
Weighted average rate as of end of period |
2.60 | % | 2.25 | % | ||||
Securities underlying the agreements as of end of period: |
||||||||
Carrying value |
$ | 114,913,586 | $ | 101,410,110 | ||||
Fair value |
114,913,586 | 101,410,110 | ||||||
The securities underlying the agreements as of December 31, 2007 and 2006 were under the Company’s
control in safekeeping at third-party financial institutions.
Information concerning federal funds purchased is summarized as follows as of December 31, 2007 and
2006:
| 2007 | 2006 | |||||||
Average daily balance during the period |
$ | 64,954,256 | $ | 34,673,281 | ||||
Average daily interest rate during the period |
5.87 | % | 4.87 | % | ||||
Maximum month-end balance during the period |
$ | 93,100,000 | $ | 68,450,000 | ||||
Weighted average rate as of end of period |
5.20 | % | 5.11 | % | ||||
57
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Federal Home Loan Bank Advances
The subsidiary banks are members of the Federal Home Loan Bank (FHLB) of Des Moines or Chicago. As
of December 31, 2007 and 2006, the subsidiary banks held $9,673,900 and $8,450,700, respectively,
of FHLB stock, which is included in other assets on the consolidated balance sheet. Maturity and
interest rate information on advances from the FHLB as of December 31, 2007 and 2006 is as follows:
| December 31, 2007 | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Interest Rate | ||||||||
| Amount Due | at Year-End | |||||||
Maturity: |
||||||||
Year ending December 31: |
||||||||
2008 |
15,100,000 | 3.48 | % | |||||
2009 |
14,200,000 | 4.05 | ||||||
2010 |
8,100,000 | 5.16 | ||||||
2011 |
9,000,000 | 5.08 | ||||||
2012 |
41,750,000 | 3.45 | ||||||
Thereafter |
80,665,006 | 4.52 | ||||||
Total FHLB advances |
$ | 168,815,006 | 4.50 | |||||
Of the advances outstanding, $127,500,000 have options which allow the FHLB, at its discretion, to
terminate the advances and require the subsidiary banks to repay at predetermined dates prior to
the stated maturity date of the advances.
| December 31, 2006 | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Interest Rate | ||||||||
| Amount Due | at Year-End | |||||||
Maturity: |
||||||||
Year ending December 31: |
||||||||
2007 |
42,200,000 | 3.84 | % | |||||
2008 |
15,100,000 | 3.40 | ||||||
2009 |
14,200,000 | 3.99 | ||||||
2010 |
8,100,000 | 5.16 | ||||||
2011 |
8,000,000 | 5.08 | ||||||
Thereafter |
64,258,749 | 4.50 | ||||||
Total FHLB advances |
$ | 151,858,749 | 4.22 | |||||
Advances are collateralized by securities with a carrying value of $23,524,159 and $29,236,702 as
of December 31, 2007 and 2006, respectively, and by loans pledged of $326,898,241 and $271,824,874,
respectively, in aggregate. On pledged loans, the FHLB applies varying collateral maintenance
levels from 135% to 220% based on the loan type.
58
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Other Borrowings and Unused Lines of Credit
Other borrowings as of December 31, 2007 and 2006 are summarized as follows:
| 2007 | 2006 | |||||||
Wholesale repurchase agreements |
$ | 40,000,000 | $ | — | ||||
364-day revolving note |
7,000,000 | 3,500,000 | ||||||
Other |
690,122 | 261,636 | ||||||
| $ | 47,690,122 | $ | 3,761,636 | |||||
In May 2007 the Company entered a structured wholesale repurchase agreement transaction. This
wholesale repurchase agreement is in the amount of $30,000,000 bearing a fixed interest rate of
4.55%. The wholesale repurchase agreement has a 5-year maturity and contains a continuous
quarterly put option effective after 2 years. Embedded within this contract is an interest cap
option that results when the 3-month LIBOR rate increases to 5.36% or higher. If that situation
occurs, the rate paid will be decreased by the difference between the 3-month LIBOR rate and 5.36%.
In no case will the rate paid fall below 0.00%.
In August 2007, the Company entered into a structured wholesale repurchase agreement transaction.
This wholesale repurchase agreement is in the amount of $5,000,000 bearing a fixed interest rate of
4.20%. The wholesale repurchase agreement has a 5-year maturity and contains a continuous
quarterly put option effective after 1 year.
In October 2007, the Company entered into a structured wholesale repurchase agreement transaction.
This wholesale repurchase agreement is in the amount of $5,000,000 bearing a fixed interest rate of
3.99%. The wholesale repurchase agreement has a 5-year maturity and contains a continuous
quarterly put option effective after 1 year.
At December 31, 2007, the Company had a single $25,000,000 unsecured revolving credit note with a
maturity date of April 4, 2008. At December 31, 2007, the note carried a balance outstanding of
$7,000,000. Interest is payable monthly at the effective Federal Funds rate plus 1.25% per annum,
as defined in the credit agreement. As of December 31, 2007, the interest rate on the note was
5.40%.
The current revolving note agreement contains certain covenants that place restrictions on
additional debt and stipulate minimum capital and various operating ratios.
Unused lines of credit of the subsidiary banks as of December 31, 2007 and 2006 are summarized as
follows:
| 2007 | 2006 | |||||||
Secured |
$ | 3,000,000 | $ | 13,000,000 | ||||
Unsecured |
88,500,000 | 91,500,000 | ||||||
| $ | 91,500,000 | $ | 104,500,000 | |||||
59
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\
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 10. Junior Subordinated Debentures
Junior subordinated debentures are summarized as of December 31, 2007 and 2006 as follows:
| 2007 | 2006 | |||||||
Note Payable to Trust II |
$ | 12,372,000 | $ | 12,372,000 | ||||
Note Payable to Trust III |
8,248,000 | 8,248,000 | ||||||
Note Payable to Trust IV |
5,155,000 | 5,155,000 | ||||||
Note Payable to Trust V |
10,310,000 | 10,310,000 | ||||||
| $ | 36,085,000 | $ | 36,085,000 | |||||
A schedule of the Company’s trust preferred offerings outstanding as of December 31, 2007 and 2006,
is as follows:
| Interest | Interest | |||||||||||||||||||
| Rate as | Rate as | |||||||||||||||||||
| Amount | of | of | ||||||||||||||||||
| Name | Date Issued | Issued | Interest Rate | 12/31/07 | 12/31/06 | |||||||||||||||
QCR Holdings Statutory Trust II |
February 2004 | $ | 12,372,000 | 6.93 | %* | 6.93 | % | 6.93 | % | |||||||||||
QCR Holdings Statutory Trust III |
February 2004 | 8,248,000 | 2.85% over 3-month LIBOR | 8.08 | % | 8.31 | % | |||||||||||||
QCR Holdings Statutory Trust IV |
May 2005 | 5,155,000 | 1.80% over 3-month LIBOR | 7.04 | % | 7.16 | % | |||||||||||||
QCR Holdings Statutory Trust V |
February 2006 | 10,310,000 | 6.62 | %** | 6.62 | % | 6.62 | % | ||||||||||||
| * | Rate is fixed until March 31, 2011, then becomes variable based on 3-month LIBOR plus 2.85%, reset quarterly. | |
| ** | Rate is fixed until April 7, 2011, then becomes variable based on 3-month LIBOR plus 1.55%, reset quarterly. |
Securities issued by Trust II mature in thirty years, but are callable at par after seven years
from issuance. Securities issued by Trust III, Trust IV, and Trust V mature in thirty years, but
are callable at par after five years from issuance.
Note 11. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components for the years ended
December 31, 2007, 2006, and 2005:
| 2007 | 2006 | 2005 | ||||||||||
Current |
$ | 1,923,300 | $ | 1,252,776 | $ | 2,391,653 | ||||||
Deferred |
472,393 | (394,934 | ) | (109,452 | ) | |||||||
| $ | 2,395,693 | $ | 857,842 | $ | 2,282,201 | |||||||
60
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Federal and State Income Taxes (Continued)
A reconciliation of the expected federal income tax expense to the income tax expense included in
the consolidated statements of income was as follows for the years ended December 31, 2007, 2006,
and 2005:
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| Pretax | Pretax | Pretax | ||||||||||||||||||||||
| Amount | Income | Amount | Income | Amount | Income | |||||||||||||||||||
Computed “expected”
tax expense |
$ | 2,996,336 | 35.0 | % | $ | 1,373,950 | 35.0 | % | $ | 2,509,414 | 35.0 | % | ||||||||||||
Effect of graduated
tax rates interest |
(81,732 | ) | (1.0 | ) | (39,256 | ) | (1.0 | ) | (71,698 | ) | (1.0 | ) | ||||||||||||
Tax exempt income, net |
(502,639 | ) | (5.9 | ) | (360,351 | ) | (9.2 | ) | (231,370 | ) | (3.2 | ) | ||||||||||||
Bank-owned life
insurance |
(269,286 | ) | (3.1 | ) | (234,667 | ) | (6.0 | ) | (213,388 | ) | (3.0 | ) | ||||||||||||
State income taxes, net
of federal benefit |
339,856 | 4.0 | 182,958 | 4.7 | 262,850 | 3.7 | ||||||||||||||||||
Other |
(86,842 | ) | (1.0 | ) | (64,792 | ) | (1.7 | ) | 26,393 | 0.4 | ||||||||||||||
| $ | 2,395,693 | 28.0 | % | $ | 857,842 | 21.8 | % | $ | 2,282,201 | 31.8 | % | |||||||||||||
On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of SFAS No. 109 (“FIN 48”). This statement clarifies the criteria
that an individual tax position must satisfy for some or all of the benefits of that position to be
recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of
more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be
taken on a tax return, in order for those tax positions to be recognized in the financial
statements. The adoption of FIN 48 had no impact on the Company’s consolidated financial
statements.
The aggregate amount of unrecognized tax benefits included in liabilities was as follows:
Balance at January 1, 2007 |
$ | 635,617 | ||
Impact of tax positions taken during 2007 |
150,368 | |||
Gross decrease related to tax positions taken prior to 2007 |
(210 | ) | ||
Gross increase related to tax positions taken prior to 2007 |
35,646 | |||
Reduction as a result of a lapse of the applicable statute of limitations |
(3,449 | ) | ||
Balance at December 31, 2007 |
$ | 817,972 | ||
All unrecognized tax benefits, if recognized, would affect the effective tax rate. The liability
for unrecognized tax benefits includes accrued interest for tax positions, which either do not meet
the more-likely-than-not recognition threshold or where the tax benefit is measured at an amount
less than the tax benefit claimed or expected to be claimed on an income tax return. At December
31, 2007 and 2006, accrued interest on uncertain tax positions was approximately $139,000 and
$104,000, respectively. Estimated interest related to the underpayment of income taxes is
classified as a component of Income Taxes in the Statement of Income and totaled $35,000 for the
twelve months ended December 31, 2007.
61
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Federal and State Income Taxes (Continued)
The Company’s federal income tax returns are open and subject to examination from the 2004 tax
return year and forward. Various state franchise and income tax returns are generally open from the
2003 and later tax return years based on individual state statute of limitations. M2 Lease Funds
currently is under audit from the Internal Revenue Service for its 2005 tax year.
The net deferred tax assets included with other assets on the consolidated balance sheets consisted
of the following as of December 31, 2007 and 2006:
| 2007 | 2006 | |||||||
Deferred tax assets: |
||||||||
Compensation |
$ | 2,241,883 | $ | 1,859,693 | ||||
Loan/lease losses |
4,151,989 | 3,732,247 | ||||||
Other |
132,863 | 30,066 | ||||||
| 6,526,735 | 5,622,006 | |||||||
Deferred tax liabilities: |
||||||||
Net unrealized gains on securities available for sale |
1,740,646 | 4,651 | ||||||
Premises and equipment |
3,033,744 | 1,532,501 | ||||||
Investment accretion |
32,493 | 33,101 | ||||||
Deferred loan origination fees, net |
10,706 | 136,068 | ||||||
Other |
129,714 | 127,865 | ||||||
| 4,947,303 | 1,834,186 | |||||||
Net deferred tax asset |
$ | 1,579,432 | $ | 3,787,820 | ||||
The change in deferred income taxes was reflected in the consolidated financial statements as
follows for the years ended December 31, 2007, 2006, and 2005:
| 2007 | 2006 | 2005 | ||||||||||
Provision for income taxes |
$ | 472,393 | $ | (394,934 | ) | $ | (109,452 | ) | ||||
Statement of stockholders’ equity-accumulated other comprehensive
income (loss), unrealized gains (losses)
on securities available for sale, net |
1,735,995 | 327,647 | (730,794 | ) | ||||||||
| $ | 2,208,388 | $ | (67,287 | ) | $ | (840,246 | ) | |||||
62
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Employee Benefit Plans
The Company has a profit sharing plan which includes a provision designed to qualify under Section
401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions.
All employees are eligible to participate in the plan. The Company matches 100% of the first 3% of
employee contributions, and 50% of the next 3% of employee contributions, up to a maximum amount of
4.5% of an employee’s compensation. Additionally, at its discretion, the Company may make
additional contributions to the plan which are allocated to the accounts of participants in the
plan based on relative compensation. Company contributions for the years ended December 31, 2007,
2006, and 2005 were as follows:
| 2007 | 2006 | 2005 | ||||||||||
Matching contribution |
$ | 719,529 | $ | 674,786 | $ | 557,299 | ||||||
Discretionary contribution |
101,900 | 52,300 | 90,100 | |||||||||
| $ | 821,429 | $ | 727,086 | $ | 647,399 | |||||||
The Company has entered into nonqualified supplemental executive retirement plans (SERPs) with
certain executive officers. The SERPs allow certain executives to accumulate retirement benefits
beyond those provided by the qualified plans. During the years ended December 31, 2007, 2006 and
2005, the Company expensed $594,794, $533,239, and $176,313, respectively, related to these plans.
As of December 31, 2007 and 2006, the liability related to the SERPs was $1,438,346 and $843,552,
respectively.
The Company has entered into deferred compensation agreements with certain executive officers.
Under the provisions of the agreements the officers may defer compensation and the Company matches
the deferral up to certain maximums. The Company’s matching contribution varies by officer and is
a maximum of between $10,000 and $20,000 annually. Interest on the deferred amounts is earned at
The Wall Street Journal‘s prime rate subject to a minimum of 6% and a maximum of 12% with
such limits differing by officer. Upon retirement, the officer will receive the deferral balance
in 180 equal monthly installments. During the years ended December 31, 2007, 2006 and 2005 the
Company expensed $246,649, $169,015, and $124,562, respectively, related to the agreements. As of
December 31, 2007 and 2006 the liability related to the agreements totals $1,307,879 and
$1,009,230, respectively.
The Company has also entered into deferred compensation agreements with certain management
officers. Under the provisions of the agreements the officers may defer compensation and the
Company matches the deferral up to certain maximums. The Company’s matching contribution differs
by officer and is a maximum between 4% and 10% of officer’s compensation. Interest on the deferred
amounts is earned at The Wall Street Journal‘s prime rate plus one percentage point, and
has a minimum of 4% and shall not exceed 8%. Upon retirement, the officer will receive the
deferral balance in 180 equal monthly installments. During the years ended December 31, 2007, 2006
and 2005, the Company expensed $164,966, $98,674, and $44,111, respectively related to the
agreements. As of December 31, 2007 and 2006, the liability related to the agreements totaled
$780,786 and $445,206, respectively.
63
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Stock-Based Compensation
Stock-based compensation expense, calculated in accordance with the provisions of SFAS 123, was
reflected in the consolidated financial statements as follows for the years ended December 31, 2007
and 2006. Prior to January 1, 2006, the Company accounted for its stock compensation plans in
accordance with APB Opinion No. 25, and related interpretations.
| 2007 | 2006 | |||||||
Stock option and incentive plans |
$ | 295,763 | $ | 246,340 | ||||
Stock purchase plan |
48,033 | 39,011 | ||||||
Stock appreciation rights |
(322,448 | ) | (114,226 | ) | ||||
| $ | 21,348 | $ | 171,125 | |||||
Stock option and incentive plans:
The Company’s Board of Directors and its stockholders adopted in June 1993 the QCR Holdings, Inc.
Stock Option Plan (Stock Option Plan). Up to 225,000 shares of common stock may be issued to
employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive
stock options or nonqualified stock options granted under the Stock Option Plan. All of the
options have been granted under this plan, and on June 30, 2003, the plan expired. The Company’s
Board of Directors adopted in November 1996 the QCR Holdings, Inc. 1997 Stock Incentive Plan (1997
Stock Incentive Plan). Up to 225,000 shares of common stock may be issued to employees and
directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock
options and restricted stock granted under the 1997 Stock Incentive Plan. As of December 31, 2006,
there are no remaining options available for grant under this plan. The Company’s Board of
Directors adopted in January 2004, and the stockholders approved in May 2004, the QCR Holdings,
Inc. 2004 Stock Incentive Plan (2004 Stock Incentive Plan). Up to 225,000 shares of common stock
may be issued to employees and directors of the Company and its subsidiaries pursuant to the
exercise of nonqualified stock options and restricted stock granted under the 2004 Stock Incentive
Plan. As of December 31, 2007, there are 52,846 remaining options available for grant under this
plan. The Stock Option Plan, the 1997 Stock Incentive Plan, and the 2004 Stock Incentive Plan
(stock option plans) are administered by the Executive Committee appointed by the Board of
Directors (Committee).
The number and exercise price of options granted under the stock option plans is determined by the
Committee at the time the option is granted. In no event can the exercise price be less than the
value of the common stock at the date of the grant for incentive stock options. All options have a
10-year life and will vest and become exercisable from 1-to-5 years after the date of the grant.
Only nonqualified stock options have been issued to date.
In the case of nonqualified stock options, the stock option plans provide for the granting of “Tax
Benefit Rights” to certain participants at the same time as these participants are awarded
nonqualified options. Each Tax Benefit Right entitles a participant to a cash payment, which is
expensed by the Company, equal to the excess of the fair market value of a share of common stock on
the exercise date over the exercise price of the related option multiplied by the difference
between the rate of tax on ordinary income over the rate of tax on capital gains (federal and
state).
64
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Stock-Based Compensation (Continued)
A summary of the stock option plans as of December 31, 2007, 2006, and 2005 and changes during the
years then ended is presented below:
| December 31, | ||||||||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding, beginning |
281,594 | $ | 14.43 | 252,658 | $ | 13.25 | 244,816 | $ | 11.56 | |||||||||||||||
Granted |
74,650 | 16.67 | 54,650 | 18.73 | 34,400 | 21.08 | ||||||||||||||||||
Exercised |
(19,069 | ) | 16.57 | (16,221 | ) | 17.82 | (25,335 | ) | 20.62 | |||||||||||||||
Forfeited |
(5,098 | ) | 13.98 | (9,493 | ) | 18.72 | (1,223 | ) | 12.63 | |||||||||||||||
Outstanding, ending |
332,077 | 15.25 | 281,594 | 14.43 | 252,658 | 13.25 | ||||||||||||||||||
Exercisable, ending |
186,939 | 167,455 | 146,979 | |||||||||||||||||||||
Weighted average fair
value per option of
options granted
during the period |
$ | 5.80 | $ | 6.48 | $ | 8.99 | ||||||||||||||||||
A further summary of options outstanding as of December 31, 2007 is presented below:
| Options Outstanding | ||||||||||||||||||||
| Weighted | Options Exercisable | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||
| Exercise Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
$6.90
|
13,830 | 3.50 | $ | 6.90 | 13,830 | $ | 6.90 | |||||||||||||
$7.00 to $7.13
|
33,650 | 3.26 | 7.01 | 33,650 | 7.01 | |||||||||||||||
$7.45 to $9.39
|
16,350 | 2.34 | 8.54 | 16,350 | 8.54 | |||||||||||||||
$9.87 to $11.64
|
31,679 | 3.76 | 10.34 | 31,169 | 10.33 | |||||||||||||||
$11.83 to $16.85
|
86,948 | 7.05 | 15.76 | 24,538 | 13.77 | |||||||||||||||
$17.00 to $18.60
|
50,600 | 7.75 | 18.06 | 15,261 | 18.37 | |||||||||||||||
$18.67 to $20.90
|
69,900 | 7.16 | 19.48 | 40,421 | 19.51 | |||||||||||||||
$21.00 to $22.00
|
29,120 | 7.17 | 21.28 | 11,720 | 21.28 | |||||||||||||||
| 332,077 | 186,939 | |||||||||||||||||||
65
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Stock-Based Compensation (Continued)
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, 2007 there were 101,682
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 8% and 5% of his or her compensation for the years ended December 31, 2007 and
2006, respectively. During the year ended December 31, 2007, 20,328 shares were granted and 19,834
purchased. Shares granted during the year ended December 31, 2007 had a weighted average fair
value of $2.36 per share.
Stock appreciation rights:
The 1997 Stock Incentive Plan and 2004 Stock Incentive Plan allow the granting of stock
appreciation rights (SARs). SARs are rights entitling the grantee to receive cash equal to the
fair market value of 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, 2007, 2006, and 2005 there were 86,325, 94,875, and 104,775
SARs, respectively, outstanding, with 86,325, 94,875, and 93,435, respectively, exercisable. As of
December 31, 2007 and 2006 the liability related to the SARs totals $428,986 and $825,752,
respectively.
A further summary of SARs is presented below:
| December 31, 2007 | Liability Recorded for SARs | |||||||||||||||||||
| SARs | SARs | December 31, | ||||||||||||||||||
| Grant Date Price | Outstanding | Exercisable | 2007 | 2006 | ||||||||||||||||
$6.90 |
30,900 | 30,900 | $ | 241,638 | $ | 360,912 | ||||||||||||||
$7.00 |
9,000 | 9,000 | 69,120 | 124,740 | ||||||||||||||||
$9.11 |
— | — | — | 58,928 | ||||||||||||||||
$10.75 |
15,825 | 15,825 | 70,421 | 131,348 | ||||||||||||||||
$11.83 |
4,425 | 4,425 | 16,594 | 30,754 | ||||||||||||||||
$12.17 |
750 | 750 | 2,483 | 4,912 | ||||||||||||||||
$14.22 |
25,425 | 25,425 | 28,730 | 114,158 | ||||||||||||||||
| 86,325 | 86,325 | $ | 428,986 | $ | 825,752 | |||||||||||||||
66
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Regulatory Capital Requirements and Restrictions on Dividends
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Company and subsidiary
banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the subsidiary banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and
of Tier 1 capital (as defined) to average assets (as defined). Except as noted in (A) in the
following table, management believes, as of December 31, 2007 and 2006, that the Company and the
subsidiary banks met all capital adequacy requirements to which they are subject.
As of December 31, 2007, the most recent notification from the Federal Deposit Insurance
Corporation categorized the subsidiary banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, an institution must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
following tables. There are no conditions or events since the notification that management
believes have changed the subsidiary banks’ categories. The Company and the subsidiary banks’
actual capital amounts and ratios as of December 31, 2007 and 2006 are also presented in the table
(dollars in thousands).
| To Be Well | ||||||||||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||
As of December 31, 2007: |
||||||||||||||||||||||||||||||||
Company: |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 127,901 | 10.48 | % | $ | 97,617 | > | 8.0 | % | N/A | N/A | |||||||||||||||||||||
Tier 1 risk-based capital |
105,524 | 8.65 | % | 48,808 | > | 4.0 | % | N/A | N/A | |||||||||||||||||||||||
Leverage ratio |
105,524 | 7.42 | % | 56,879 | > | 4.0 | % | N/A | N/A | |||||||||||||||||||||||
Quad City Bank & Trust: |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 72,074 | 10.16 | % | $ | 56,752 | > | 8.0 | % | $ | 70,940 | > | 10.00 | % | ||||||||||||||||||
Tier 1 risk-based capital |
66,111 | 9.32 | % | 28,376 | > | 4.0 | % | 42,564 | > | 6.00 | % | |||||||||||||||||||||
Leverage ratio |
66,111 | 7.86 | % | 33,665 | > | 4.0 | % | 42,081 | > | 5.00 | % | |||||||||||||||||||||
Cedar Rapids Bank & Trust: |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 31,941 | 10.32 | % | $ | 24,760 | > | 8.0 | % | $ | 30,950 | > | 10.00 | % | ||||||||||||||||||
Tier 1 risk-based capital |
28,140 | 9.09 | % | 12,380 | > | 4.0 | % | 18,570 | > | 6.00 | % | |||||||||||||||||||||
Leverage ratio |
28,140 | 7.50 | % | 15,012 | > | 4.0 | % | 18,765 | > | 5.00 | % | |||||||||||||||||||||
Rockford Bank & Trust (A): |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 15,851 | 10.95 | % | $ | 11,584 | > | 8.0 | % | $ | 14,479 | > | 10.00 | % | ||||||||||||||||||
Tier 1 risk-based capital |
14,300 | 9.88 | % | 5,792 | > | 4.0 | % | 8,688 | > | 6.00 | % | |||||||||||||||||||||
Leverage ratio |
14,300 | 9.77 | % | 5,852 | > | 4.0 | % | 7,315 | > | 5.00 | % | |||||||||||||||||||||
First Wisconsin Bank & Trust (B): |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 8,787 | 15.41 | % | $ | 4,562 | > | 8.0 | % | $ | 5,703 | > | 10.00 | % | ||||||||||||||||||
Tier 1 risk-based capital |
8,079 | 14.17 | % | 2,281 | > | 4.0 | % | 3,422 | > | 6.00 | % | |||||||||||||||||||||
Leverage ratio |
8,079 | 13.08 | % | 2,470 | > | 4.0 | % | 3,088 | > | 5.00 | % | |||||||||||||||||||||
67
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Regulatory Capital Requirements and Restrictions on Dividends (Continued)
| To Be Well | ||||||||||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||
As of December 31, 2006: |
||||||||||||||||||||||||||||||||
Company: |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 114,784 | 10.46 | % | $ | 87,827 | > | 8.0 | % | N/A | N/A | |||||||||||||||||||||
Tier 1 risk-based capital |
90,176 | 8.21 | % | 43,914 | > | 4.0 | N/A | N/A | ||||||||||||||||||||||||
Leverage ratio |
90,176 | 7.21 | % | 50,031 | > | 4.0 | N/A | N/A | ||||||||||||||||||||||||
Quad City Bank & Trust: |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 74,221 | 10.50 | % | $ | 56,568 | > | 8.0 | % | $ | 70,710 | > | 10.00 | % | ||||||||||||||||||
Tier 1 risk-based capital |
67,749 | 9.58 | % | 28,284 | > | 4.0 | 42,426 | > | 6.00 | % | ||||||||||||||||||||||
Leverage ratio |
67,749 | 8.22 | % | 32,971 | > | 4.0 | 41,214 | > | 5.00 | % | ||||||||||||||||||||||
Cedar Rapids Bank & Trust: |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 28,331 | 10.25 | % | $ | 22,109 | > | 8.0 | % | $ | 27,637 | > | 10.00 | % | ||||||||||||||||||
Tier 1 risk-based capital |
25,104 | 9.08 | % | 11,055 | > | 4.0 | 16,582 | > | 6.00 | % | ||||||||||||||||||||||
Leverage ratio |
25,104 | 7.66 | % | 13,107 | > | 4.0 | 16,384 | > | 5.00 | % | ||||||||||||||||||||||
Rockford Bank & Trust (A): |
||||||||||||||||||||||||||||||||
Total risk-based capital |
$ | 10,264 | 10.53 | % | $ | 7,801 | > | 8.0 | % | $ | 9,751 | > | 10.00 | % | ||||||||||||||||||
Tier 1 risk-based capital |
9,352 | 9.59 | % | 3,901 | > | 4.0 | 5,851 | > | 6.00 | % | ||||||||||||||||||||||
Leverage ratio |
9,352 | 8.70 | % | 4,298 | > | 4.0 | 5,373 | > | 5.00 | % | ||||||||||||||||||||||
| (A) | As a de novo bank, Rockford Bank & Trust cannot, 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. At December 31, 2006, Rockford Bank & Trust did not maintain a tangible Tier 1 leverage ratio of at least 9%, which was corrected with an injection of capital from the Company. See Note 17(A). The de novo period for Rockford Bank & Trust expired on January 3, 2008. | |
| (B) | As a de novo bank, First Wisconsin Bank & Trust cannot, 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 1 leverage ratio of at least 9% throughout its first three years of operations. The de novo period for First Wisconsin Bank & Trust will expire on February 20, 2010. |
The Company’s ability to pay dividends to its shareholders may be affected by both general
corporate law considerations and policies of the Federal Reserve applicable to bank holding
companies.
The payment of dividends by any financial institution or its holding company is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and
regulations, and a financial institution generally is prohibited from paying any dividends if,
following payment thereof, the institution would be undercapitalized. 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.
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and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 15. Earnings Per Common Share
The following information was used in the computation of basic and diluted earnings per common
share for the years ended December 31, 2007, 2006, and 2005:
| 2007 | 2006 | 2005 | ||||||||||
Net income |
$ | 5,777,477 | $ | 2,802,205 | $ | 4,810,015 | ||||||
Less preferred stock dividends |
1,072,000 | 164,373 | — | |||||||||
Net income available to common stockholders |
$ | 4,705,477 | $ | 2,637,832 | $ | 4,810,015 | ||||||
Weighted average common shares outstanding |
4,581,919 | 4,609,626 | 4,518,162 | |||||||||
Weighted average common shares issuable upon
exercise of stock options and under the Employee
Stock Purchase Plan* |
17,649 | 43,603 | 98,394 | |||||||||
Weighted average common and common
equivalent shares outstanding |
4,599,568 | 4,653,229 | 4,616,556 | |||||||||
| * | Excludes anti-dilutive shares of 213,900, 138,814, and 49,950 at December 31, 2007, 2006 and 2005, respectively. |
Note 16. Commitments and Contingencies
In the normal course of business, the subsidiary banks make various commitments and incur certain
contingent liabilities that are not presented in the accompanying consolidated financial
statements. The commitments and contingent liabilities include various guarantees, commitments to
extend credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary
banks upon extension of credit, is based upon management’s credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, marketable securities, inventory,
property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee
the performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements and, generally, have terms of one year or less. The
credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The subsidiary banks hold collateral, as described above,
supporting those commitments if deemed necessary. In the event the customer does not perform in
accordance with the terms of the agreement with the third party, the subsidiary banks would be
required to fund the commitments. The maximum potential amount of future payments the subsidiary
banks could be required to make is represented by the contractual amount. If the commitment is
funded, the subsidiary banks would be entitled to seek recovery from the customer. At December 31,
2007 and 2006 no amounts have been recorded as liabilities for the subsidiary banks’ potential
obligations under these guarantees.
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 16. Commitments and Contingencies (Continued)
As of December 31, 2007 and 2006, commitments to extend credit aggregated $479,126,000 and
$459,311,000, respectively. As of December 31, 2007 and 2006, standby letters of credit aggregated
$15,245,000 and $18,629,000, 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 $6,507,583 and $6,186,632 as of December 31, 2007 and 2006, respectively. These
amounts are included in loans held for sale at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold with varying recourse
provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by
the seller in situations such as, breach of representation, warranty, or covenant, untimely
document delivery, false or misleading statements, failure to obtain certain certificates or
insurance, unmarketability, etc. Certain loan sales agreements contain repurchase requirements
based on payment-related defects that are defined in terms of the number of days/months since the
purchase, the sequence number of the payment, and/or the number of days of payment delinquency.
Based on the specific terms stated in the agreements of investors purchasing residential mortgage
loans from the Company’s subsidiary banks, the Company had $44,999,539 and $39,666,000 of sold
residential mortgage loans with recourse provisions still in effect at December 31, 2007 and 2006,
respectively. The subsidiary banks did not repurchase any loans from secondary market investors
under the terms of loans sales agreements during the years ended December 31, 2007, 2006, and 2005.
In the opinion of management, the risk of recourse and the subsequent requirement of loan
repurchase to the subsidiary banks is not significant, and accordingly no liabilities have been
established related to such.
Aside from cash on-hand and in-vault, the majority of the Company’s cash is maintained at upstream
correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal
funds sold exceeded federal insured limits by approximately $14,000,000 and $7,000,000 as of
December 31, 2007 and 2006, respectively. In the opinion of management, no material risk of loss
exists due to the financial condition of the upstream correspondent banks.
In an arrangement with Goldman, Sachs and Company (Goldman Sachs), certain subsidiary banks offer a
cash management program for select customers. Based on a predetermined minimum balance, which must
be maintained in the account, excess funds are automatically swept daily to an institutional money
market fund distributed by Goldman Sachs. At December 31, 2007 and December 31, 2006, the Company
had $47,133,788 and $23,482,000 and, respectively, of customer funds invested in this cash
management program.
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and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 17. Quarterly Results of Operations (Unaudited)
| Year Ended December 31, 2007 | ||||||||||||||||
| March | June | September | December | |||||||||||||
| 2007 | 2007 | 2007 | 2007 | |||||||||||||
Total interest income |
$ | 19,942,071 | $ | 21,045,728 | $ | 22,102,454 | $ | 22,634,787 | ||||||||
Total interest expense |
11,607,731 | 12,232,724 | 12,790,693 | 12,724,946 | ||||||||||||
Net interest income |
8,334,340 | 8,813,004 | 9,311,761 | 9,909,841 | ||||||||||||
Provision for loan losses |
406,457 | 824,535 | 1,037,351 | 595,559 | ||||||||||||
Noninterest income |
3,127,829 | 3,598,743 | 3,858,490 | 3,507,914 | ||||||||||||
Noninterest expenses |
9,201,518 | 9,588,611 | 9,875,764 | 10,371,166 | ||||||||||||
Income before income taxes and minority interest |
1,854,194 | 1,998,601 | 2,257,136 | 2,451,030 | ||||||||||||
Federal and state income taxes |
500,566 | 545,049 | 646,281 | 703,797 | ||||||||||||
Minority interest in income of
consolidated subsidiary |
90,942 | 142,947 | 17,046 | 136,856 | ||||||||||||
Net income |
$ | 1,262,686 | $ | 1,310,605 | $ | 1,593,809 | $ | 1,610,377 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.22 | $ | 0.23 | $ | 0.29 | $ | 0.29 | ||||||||
Diluted |
0.22 | 0.23 | 0.29 | 0.29 | ||||||||||||
| Year Ended December 31, 2006 | ||||||||||||||||
| March | June | September | December | |||||||||||||
| 2006 | 2006 | 2006 | 2006 | |||||||||||||
Total interest income |
$ | 14,868,849 | $ | 16,222,226 | $ | 18,373,203 | $ | 19,338,748 | ||||||||
Total interest expense |
7,752,028 | 8,970,128 | 10,689,212 | 11,495,966 | ||||||||||||
Net interest income |
7,116,821 | 7,252,098 | 7,683,991 | 7,842,782 | ||||||||||||
Provision for loan losses |
543,844 | 351,736 | 728,678 | 1,659,984 | (A) | |||||||||||
Noninterest income |
2,796,049 | 3,596,766 | 2,742,322 | 2,847,968 | ||||||||||||
Noninterest expenses |
8,193,513 | 8,682,140 | 9,007,578 | 8,785,753 | ||||||||||||
Income before income taxes and minority interest |
1,175,513 | 1,814,988 | 690,057 | 245,013 | ||||||||||||
Federal and state income taxes |
288,958 | 563,750 | 125,094 | (119,960 | ) | |||||||||||
Minority interest in income of
consolidated subsidiary |
53,384 | 47,757 | 45,410 | 118,973 | ||||||||||||
Net income |
$ | 833,171 | $ | 1,203,481 | $ | 519,553 | $ | 246,000 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.18 | $ | 0.26 | $ | 0.11 | $ | 0.02 | ||||||||
Diluted |
0.18 | 0.26 | 0.11 | 0.02 | ||||||||||||
| (A) | Fourth quarter 2006 net income was significantly impacted by the increased provision expense associated with the charge-off of $992,115 of a single commercial credit in our Milwaukee market. This action reduced fourth quarter after tax net income by $649,231 or $0.14 per common share. |
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and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 18. Parent Company Only Financial Statements
The following is condensed financial information of QCR Holdings, Inc. (parent company only):
Condensed Balance Sheets
December 31, 2007 and 2006
December 31, 2007 and 2006
| 2007 | 2006 | |||||||
Assets |
||||||||
Cash and due from banks |
$ | 1,390,032 | $ | 1,200,403 | ||||
Interest-bearing deposits at financial institutions |
170,145 | 158,919 | ||||||
Securities available for sale, at fair value |
1,229,708 | 1,569,541 | ||||||
Investment in bank subsidiaries |
122,478,056 | 104,410,202 | ||||||
Investment in nonbank subsidiaries |
1,639,236 | 1,710,251 | ||||||
Other assets |
4,865,810 | 3,022,677 | ||||||
Total assets |
$ | 131,772,987 | $ | 112,071,993 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Liabilities: |
||||||||
Other borrowings |
$ | 7,000,000 | $ | 3,500,000 | ||||
Junior subordinated debentures |
36,085,000 | 36,085,000 | ||||||
Other liabilities |
2,622,195 | 1,604,413 | ||||||
Total liabilities |
45,707,195 | 41,189,413 | ||||||
Stockholders’ Equity: |
||||||||
Preferred stock |
568 | 268 | ||||||
Common stock |
4,597,744 | 4,560,629 | ||||||
Additional paid-in capital |
42,317,374 | 34,293,511 | ||||||
Retained earnings |
36,338,566 | 32,000,213 | ||||||
Accumulated other comprehensive income |
2,811,540 | 27,959 | ||||||
Total stockholders’ equity |
86,065,792 | 70,882,580 | ||||||
Total liabilities and stockholders’ equity |
$ | 131,772,987 | $ | 112,071,993 | ||||
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and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 18. Parent Company Only Financial Statements (Continued)
Condensed Statements of Income
Years Ended December 31, 2007, 2006, and 2005
Years Ended December 31, 2007, 2006, and 2005
| 2007 | 2006 | 2005 | ||||||||||
Total interest income |
$ | 218,795 | $ | 126,990 | $ | 48,991 | ||||||
Securities gains, net |
— | — | 50 | |||||||||
Equity in net income of bank subsidiaries |
8,905,497 | 5,521,908 | 6,491,611 | |||||||||
Equity in net income of nonbank subsidiaries |
215,849 | 369,964 | 405,220 | |||||||||
Other |
516,693 | 244,503 | 386,382 | |||||||||
Total income |
9,856,834 | 6,263,365 | 7,332,254 | |||||||||
Interest expense |
3,347,664 | 3,038,143 | 1,988,963 | |||||||||
Salaries and employee benefits |
1,417,738 | 1,264,543 | 778,402 | |||||||||
Professional and data processing fees |
677,874 | 388,136 | 508,237 | |||||||||
Other |
433,934 | 446,057 | 344,280 | |||||||||
Total expenses |
5,877,210 | 5,136,879 | 3,619,882 | |||||||||
Income before income tax benefit |
3,979,624 | 1,126,486 | 3,712,372 | |||||||||
Income tax benefit |
1,797,853 | 1,675,719 | 1,097,643 | |||||||||
Net income |
$ | 5,777,477 | $ | 2,802,205 | $ | 4,810,015 | ||||||
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and Subsidiaries
Notes to Consolidated Financial Statements
Note 18. Parent Company Only Financial Statements (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2007, 2006, and 2005
Years Ended December 31, 2007, 2006, and 2005
| 2007 | 2006 | 2005 | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income |
$ | 5,777,477 | $ | 2,802,205 | $ | 4,810,015 | ||||||
Adjustments to reconcile net income to net cash
(used in) provided by operating activities: |
||||||||||||
Distributions in excess of (less than) earnings of: |
||||||||||||
Bank subsidiaries |
2,094,503 | (3,621,909 | ) | (6,491,611 | ) | |||||||
Nonbank subsidiaries |
69,656 | (35,841 | ) | 28,893 | ||||||||
Depreciation |
2,633 | 2,500 | 3,877 | |||||||||
Provision for loan losses |
— | — | 3,269 | |||||||||
Gain on sale of other assets |
(435,791 | ) | — | — | ||||||||
Investment securities gains, net |
— | — | (50 | ) | ||||||||
Stock-based compensation expense |
343,796 | 285,351 | — | |||||||||
Tax benefit of nonqualified stock options exercised |
— | — | 125,993 | |||||||||
(Increase) decrease in accrued interest receivable |
142,974 | (103,172 | ) | 26,788 | ||||||||
(Increase) decrease in other assets |
(3,314,476 | ) | (243,954 | ) | 424,737 | |||||||
Increase (decrease) in other liabilities |
912,670 | 101,394 | (176,051 | ) | ||||||||
Net cash (used in) provided by operating activities |
5,593,442 | (813,426 | ) | (1,244,140 | ) | |||||||
Cash Flows from Investing Activities: |
||||||||||||
Net (increase) decrease in interest-bearing deposits at
financial institutions |
(11,226 | ) | (63,192 | ) | 319,712 | |||||||
Purchase of securities available for sale |
(24,857 | ) | (13,675 | ) | (167,736 | ) | ||||||
Proceeds from calls and maturities of securities |
— | 50,000 | 298,988 | |||||||||
Proceeds from sale of other assets |
500,000 | — | — | |||||||||
Capital infusion, bank subsidiaries |
(15,750,000 | ) | (14,100,000 | ) | (14,000,000 | ) | ||||||
Capital infusion, nonbank subsidiaries |
— | (910,000 | ) | (155,000 | ) | |||||||
Net loans repaid |
— | — | 22,084 | |||||||||
Purchase of premises and equipment |
(1,200 | ) | — | (7,500 | ) | |||||||
Net cash used in investing activities |
(15,287,283 | ) | (15,036,867 | ) | (13,689,452 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Net increase (decrease) in other borrowings |
3,500,000 | (7,000,000 | ) | 4,500,000 | ||||||||
Proceeds from issuance of junior subordinated debentures |
— | 10,310,000 | 5,155,000 | |||||||||
Tax benefit of nonqualified stock options exercised |
22,370 | 37,795 | — | |||||||||
Payment of cash dividends on common and preferred stock |
(1,334,012 | ) | (363,143 | ) | (360,598 | ) | ||||||
Proceeds from issuance of preferred stock, net |
7,273,579 | 12,884,414 | — | |||||||||
Proceeds from issuance of common stock, net |
421,533 | 339,370 | 355,722 | |||||||||
Net cash provided by financing activities |
9,883,470 | 16,208,436 | 9,650,124 | |||||||||
Net increase (decrease) in cash and due from banks |
189,629 | 358,143 | (5,283,468 | ) | ||||||||
Cash and due from banks: |
||||||||||||
Beginning |
1,200,403 | 842,260 | 6,125,728 | |||||||||
Ending |
$ | 1,390,032 | $ | 1,200,403 | $ | 842,260 | ||||||
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and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 19. Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosures
of fair value information about financial instruments for which it is practicable to estimate that
value. When quoted market prices are not available, fair values are based on estimates using
present value or other techniques. Those techniques are significantly affected by the assumptions
used, including the discounted rates and estimates of future cash flows. In this regard, fair
value estimates cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in an immediate settlement. Some financial instruments and all nonfinancial
instruments are excluded from the disclosures. The aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of
their financial instruments.
Cash and due from banks, federal funds sold, and interest-bearing deposits at financial
institutions: 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/leases receivable: The fair values for variable rate loans equal their carrying
values. The fair values for all other types of loans/leases are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans/leases with similar terms to
borrowers with similar credit quality. The fair value of loans held for sale is based on quoted
market prices of similar loans sold in the secondary market.
Accrued interest receivable and payable: The fair value of accrued interest receivable and
payable is equal to its carrying value.
Deposits: The fair values disclosed for demand deposits equal their carrying amounts,
which represent the amount payable on demand. Fair values for time deposits are estimated using a
discounted cash flow calculation that applies interest rates currently being offered on time
deposits to a schedule of aggregate expected monthly maturities on time deposits.
Short-term borrowings: The fair value for short-term borrowings is equal to its carrying
value.
Federal Home Loan Bank advances and junior subordinated debentures: The fair value of
these instruments is estimated using discounted cash flow analyses, based on the Company’s current
incremental borrowing rates for similar types of borrowing arrangements.
Other borrowings: The fair value for the wholesale repurchase agreements is estimated
using rates currently available for debt with similar terms and remaining maturities. 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.
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and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 19. Fair Value of Financial Instruments (Continued)
The carrying values and estimated fair values of the Company’s financial instruments as of December
31, 2007 and 2006 are presented as follows:
| 2007 | 2006 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| Value | Fair Value | Value | Fair Value | |||||||||||||
Cash and due from banks |
$ | 41,195,890 | $ | 41,195,890 | $ | 42,502,770 | $ | 42,502,770 | ||||||||
Federal funds sold |
6,620,000 | 6,620,000 | 2,320,000 | 2,320,000 | ||||||||||||
Interest-bearing deposits at financial institutions |
5,096,048 | 5,096,048 | 2,130,096 | 2,130,096 | ||||||||||||
Investment securities: |
||||||||||||||||
Held to maturity |
350,000 | 349,722 | 350,000 | 357,842 | ||||||||||||
Available for sale |
235,554,653 | 235,554,653 | 194,423,893 | 194,423,893 | ||||||||||||
Loans/leases receivable, net |
1,094,876,270 | 1,096,292,000 | 950,135,242 | 946,862,000 | ||||||||||||
Accrued interest receivable |
7,964,557 | 7,964,557 | 7,160,298 | 7,160,298 | ||||||||||||
Deposits |
929,427,218 | 932,165,000 | 875,447,267 | 874,762,000 | ||||||||||||
Short-term borrowings |
183,195,840 | 183,195,840 | 111,683,951 | 111,683,951 | ||||||||||||
Federal Home Loan Bank advances |
168,815,006 | 174,912,000 | 151,858,749 | 151,133,000 | ||||||||||||
Other borrowings |
47,690,122 | 48,550,000 | 3,761,636 | 3,761,636 | ||||||||||||
Junior subordinated debentures |
36,085,000 | 34,602,700 | 36,085,000 | 37,041,365 | ||||||||||||
Accrued interest payable |
4,774,551 | 4,774,551 | 4,696,214 | 4,696,214 | ||||||||||||
Note 20. Business Segment Information
The Company’s business segments operate utilizing strong intercompany relationships, primarily with
Quad City Bank & Trust. Cedar Rapids Bank & Trust, Rockford Bank & Trust and First Wisconsin Bank
& Trust all look to Quad City Bank & Trust as their primary upstream correspondent bank. These
relationships produce Federal funds activity, both purchases and sales, which result in
intercompany interest income/expense, and intercompany deposit service fee/income expense, that is
eliminated in segment reporting. At December 31, 2007, the net effect of this elimination to Quad
City Bank & Trust’s net income was negative $406,000 for 2007. The reciprocal net effects of this
elimination to net income were a positive $130,000 to Cedar Rapids Bank & Trust, a positive
$132,000 to Rockford Bank & Trust and a positive $144,000 to First Wisconsin Bank & Trust. At
December 31, 2006, the net effect of this elimination to Quad City Bank & Trust’s net income was
negative $49,000 for 2006. The reciprocal net effects of this elimination to net income were a
positive $42,000 to Cedar Rapids Bank & Trust and a positive $7,000 to Rockford Bank & Trust. At
December 31, 2005, the negative net effect of this elimination to Quad City Bank & Trust’s net
income was $98,000 for 2005. The reciprocal net effects to net income, at December 31, 2005, were
a positive $152,000 to Cedar Rapids Bank & Trust and a negative $54,000 to Rockford Bank & Trust
for the year.
Business segment information presented in the “All other” category includes the selected financial
information for the parent-only entity and its 56% owned subsidiary, Velie Plantation Holding
Company.
In 2007, the Company determined that its Leasing Services business segment (M2 Lease Funds) was
more appropriately presented as consolidated into the Quad City Bank & Trust Commercial Banking
business segment. Accordingly, the selected financial information was reclassified for the years
ended December 31, 2006 and 2005.
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and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 20. Business Segment Information (Continued)
Selected financial information on the Company’s business segments, with all inter-company accounts
and transactions eliminated, is presented as follows for the years ended December 31, 2007, 2006,
and 2005:
| Commercial Banking | ||||||||||||||||||||||||||||||||||||
| Quad Bank | Cedar Rapids | Rockford | First Wisconsin | Credit Card | Trust | Intercompany | Consolidated | |||||||||||||||||||||||||||||
| & Trust | Bank & Trust | Bank & Trust | Bank & Trust | Processing | Management | All other | Eliminations | Total | ||||||||||||||||||||||||||||
| Twelve Months Ended December 31, 2007 | ||||||||||||||||||||||||||||||||||||
Total Revenue |
$ | 58,138,479 | $ | 25,112,511 | $ | 8,434,430 | $ | 2,801,140 | $ | 1,731,992 | $ | 3,743,120 | $ | 764,114 | $ | (907,770 | ) | $ | 99,818,016 | |||||||||||||||||
Net Income |
7,485,756 | 2,359,902 | (849,961 | ) | (1,165,738 | ) | 137,426 | 1,075,539 | (3,137,543 | ) | (127,904 | ) | 5,777,477 | |||||||||||||||||||||||
Total Assets |
860,707,797 | 383,953,801 | 157,816,671 | 70,660,417 | 1,069,831 | — | 11,960,271 | (9,604,446 | ) | 1,476,564,342 | ||||||||||||||||||||||||||
Depreciation |
1,293,148 | 580,101 | 306,414 | 70,994 | 32,320 | — | 10,897 | — | 2,293,874 | |||||||||||||||||||||||||||
Capital Expenditures |
898,150 | 926,492 | 111,847 | 265,164 | 39,847 | — | 19,528 | — | 2,261,028 | |||||||||||||||||||||||||||
Intangible Assets |
3,222,688 | — | — | 887,542 | — | — | — | — | 4,110,230 | |||||||||||||||||||||||||||
| Twelve Months Ended December 31, 2006 | ||||||||||||||||||||||||||||||||||||
Total Revenue |
$ | 50,754,327 | $ | 20,535,062 | $ | 5,015,189 | $ | — | $ | 1,947,984 | $ | 3,049,440 | $ | 390,404 | $ | (906,275 | ) | $ | 80,786,131 | |||||||||||||||||
Net Income |
5,588,203 | 1,634,451 | (2,404,317 | ) | — | 295,529 | 703,570 | (2,895,349 | ) | (119,882 | ) | 2,802,205 | ||||||||||||||||||||||||
Total Assets |
826,583,341 | 342,574,303 | 107,234,480 | — | 1,311,990 | — | 10,133,185 | (16,162,343 | ) | 1,271,674,956 | ||||||||||||||||||||||||||
Depreciation |
1,492,127 | 615,561 | 192,686 | — | 33,331 | — | 61,469 | — | 2,395,174 | |||||||||||||||||||||||||||
Capital Expenditures |
747,898 | 260,264 | 4,346,189 | — | 5,228 | — | 3,974,999 | — | 9,334,578 | |||||||||||||||||||||||||||
Intangible Assets |
3,222,688 | — | — | — | — | — | — | — | 3,222,688 | |||||||||||||||||||||||||||
| Twelve Months Ended December 31, 2005 | ||||||||||||||||||||||||||||||||||||
Total Revenue |
$ | 38,186,234 | $ | 14,671,574 | $ | 1,163,172 | $ | — | $ | 1,782,452 | $ | 2,818,832 | $ | 482,711 | $ | (344,203 | ) | $ | 58,760,772 | |||||||||||||||||
Net Income |
6,000,692 | 1,030,578 | (1,243,441 | ) | — | 357,932 | 611,647 | (2,039,527 | ) | 92,134 | 4,810,015 | |||||||||||||||||||||||||
Total Assets |
723,579,622 | 289,863,023 | 41,296,253 | — | 1,159,471 | — | 8,378,967 | (21,663,808 | ) | 1,042,613,528 | ||||||||||||||||||||||||||
Depreciation |
1,485,921 | 392,491 | 97,125 | — | 29,359 | — | 3,877 | — | 2,008,773 | |||||||||||||||||||||||||||
Capital Expenditures |
1,825,188 | 6,170,123 | 1,744,149 | — | 32,533 | — | 7,500 | — | 9,779,493 | |||||||||||||||||||||||||||
Intangible Assets |
3,222,688 | — | — | — | — | — | — | — | 3,222,688 | |||||||||||||||||||||||||||
77
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. An evaluation was performed under the
supervision and with the participation of the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the
Exchange Act) as of December 31, 2007. Based on that evaluation, the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s
disclosure controls and procedures were effective to ensure that information required to be
disclosed in the reports filed and submitted under the Exchange Act was recorded, processed,
summarized and reported as and when required.
Management’s Report on Internal Control Over Financial Reporting. The Company’s management is
responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial
reporting includes controls and procedures designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that: (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions of the Company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the
possibility of human error and the circumvention of overriding controls. Accordingly, even
effective internal control can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the effectiveness of internal
control may vary over time.
The Company’s management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007. Management’s assessment is based on the criteria
established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and was designed to provide reasonable assurance that the
Company maintained effective internal control over financial reporting as of December 31, 2007.
Based on this assessment, management believes that the Company maintained effective internal
control over financial reporting as of December 31, 2007.
McGladrey & Pullen, LLP, the Company’s independent registered public accounting firm, has issued an
attestation report on the Company’s internal control over financial reporting as of December 31,
2007, which is included following in this Form 10-K.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
QCR Holdings, Inc.
QCR Holdings, Inc.
We have audited QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). QCR Holdings, Inc.
and subsidiaries’ management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, QCR Holdings, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO)
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31, 2007 and
2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash
flows for each of the years in the three-year period ended December 31, 2007 of QCR Holdings, Inc.
and subsidiaries and our report dated March 4, 2008 expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
March 4, 2008
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Changes in Internal Control over Financial Reporting. During 2005, the Company underwent a
comprehensive effort to ensure compliance with the requirements under Section 404 of the
Sarbanes-Oxley Act of 2002. Continuing enhancements to the Company’s control environment were made
during 2007 as part of the Company’s ongoing efforts to improve internal control over financial
reporting. There have been no significant changes to the Company’s internal control over financial
reporting during the period covered by this report that have materially effected, or are reasonably
likely to affect the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is set forth in the 2008 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 2008 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 2008 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, 2007 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. |
80
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EQUITY COMPENSATION PLAN INFORMATION
| Number of securities | ||||||||||||
| Number of securities | remaining available for | |||||||||||
| to be issued upon | Weighted-average exercise | future issuance under | ||||||||||
| exercise of | price of outstanding | equity compensation plans | ||||||||||
| outstanding options, | options, warrants and | (excluding securities | ||||||||||
| warrants and rights | rights | reflected in column(a)) | ||||||||||
| Plan category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by
security holders |
336,450 | $ | 15.22 | 134,200 | (1) | |||||||
Equity compensation plans
not approved by security holders |
— | — | — | |||||||||
Total |
336,450 | $ | 15.22 | 134,200 | (1) | |||||||
| (1) | Includes 81,354 shares available under the QCR Holdings, Inc. Employee Stock Purchase Plan. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is set forth under the captions “Security Ownership of
Certain Beneficial Owners,” “Corporate Governance and the Board of Directors,” and “Transactions
with Management and Directors” in the 2008 Proxy Statement, and is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services
The information required by this item is set forth under the caption “Independent Registered Public
Accounting Firm” in the 2008 Proxy statement and is incorporated herein by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated Financial Statements under Item 8.
(a) 2. Financial Statement Schedules
Financial statement schedules are omitted, as they are not required or are not applicable,
or the required information is shown in the consolidated financial statements and the
accompanying notes thereto.
(a) 3. Exhibits
The following exhibits are either filed as a part of this Annual Report on Form 10-K or are
incorporated herein by reference:
81
Table of Contents
| Exhibit Number. | Exhibit Description | |
3.1
|
Certificate of Incorporation of QCR Holdings, Inc., as amended (incorporated herein by reference to Exhibit 3(i) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004). | |
3.2
|
Bylaws of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 99.1 of the Registrant’s Form 8-K dated December 20, 2007). | |
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). | |
4.3
|
Certificate of Designation of Series of Preferred Stock of QCR Holdings, Inc., Statement of Description of Rights, Preferences and Limitations of Series B Non-Cumulative Perpetual Preferred Stock (incorporated herein by reference to Exhibit 99.1 of Registrant’s Form 8-K dated November 3, 2006). | |
4.4
|
Designation of Rights, Preferences and Limitations of Series C Non-Cumulative Perpetual Preferred Stock of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 99.1 of Registrant’s Form 8-K dated December 28, 2007). | |
10.1
|
Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer dated January 1, 2004 (incorporated herein by reference to Exhibit 10(i) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003). | |
10.2
|
Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated January 1, 2004 (incorporated herein by reference to Exhibit 10(ii) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003). | |
10.3
|
Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Michael A. Bauer dated January 1, 2004 (incorporated herein by reference to Exhibit 10(iii) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003). | |
10.4
|
Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Douglas M. Hultquist dated January 1, 2004 (incorporated herein by reference to Exhibit 10(iv) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003). | |
10.5
|
Lease Agreement between Quad City Bank and Trust Company and 56 Utica L.L.C. (incorporated herein by reference to Exhibit 10.5 of Registrant’s Annual Report on Form 10-K for the year ended June 30, 2000). | |
10.6
|
Employment Agreement between Quad City Bank and Trust Company and Larry J. Helling dated January 1, 2004 (incorporated herein by reference to Exhibit 10(vi) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003). |
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| Exhibit Number. | Exhibit Description | |
10.7
|
Executive Deferred Compensation Agreement for Todd A. Gipple, Executive Vice President and Chief Financial Officer of QCR Holdings, Inc. dated January 1, 2004 (incorporated herein by reference to Exhibit 10(viii) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003). | |
10.8
|
Executive Deferred Compensation Agreement for Larry J. Helling, President and Chief Executive Officer of Cedar Rapids Bank and Trust Company dated January 1, 2004 (incorporated herein by reference to Exhibit 10(ix) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003). | |
10.9
|
Employment Agreement between QCR Holdings, Inc. and Todd A. Gipple dated January 1, 2004 (incorporated herein by reference to Exhibit 10(xi) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003). | |
10.10
|
QCR Holdings, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 5.1 of Registrant’s Form S-8, file No. 333-101356). | |
10.11
|
Dividend Reinvestment Plan of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 5.1 of Registrant’s Form S-3, File No. 333-102699). | |
10.12
|
Indenture by and between QCR Holdings, Inc. / QCR Holdings Statutory Trust II and U.S. Bank National Association, as debenture and institutional trustee, dated February 18, 2004 (incorporated herein by reference to Exhibit 10(i) of Registrant’s Quarterly Report on Form 10Q for the quarter ended March 31, 2004). | |
10.13
|
Indenture by and between QCR Holdings, Inc. / QCR Holdings Statutory Trust III and U.S. Bank National Association, as debenture and institutional trustee, dated February 18, 2004 (incorporated herein by reference to Exhibit 10(ii) of Registrant’s Quarterly Report on Form 10Q for the quarter ended March 31, 2004). | |
10.14
|
Employment Agreement between QCR Holdings, Inc. and Thomas Budd dated June 2004 (incorporated herein by reference to Exhibit 10(i) of Registrant’s Quarterly Report on Form 10Q for the period ended June 30, 2004). | |
10.15
|
Employment Agreement between QCR Holdings, Inc. and Shawn Way dated June 2004 (incorporated herein by reference to Exhibit 10(ii) of Registrant’s Quarterly Report on Form 10Q for the period ended June 30, 2004). | |
10.16
|
Lease Agreement between Quad City Bank and Trust Company and 127 North Wyman Development, L.L.C. dated November 3, 2004 (incorporated herein by reference to Exhibit 10(i) of Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2004). | |
10.17
|
2004 Stock Incentive Plan of QCR Holdings, Inc. (incorporated herein by reference to Exhibit B of Registrant’s Form Pre 14A, filed March 5, 2004, File No. 000-22208). | |
10.18
|
Director Compensation Schedule of QCR Holdings, Inc. (incorporated herein by reference to Registrant’s Form 8-K, filed February 2, 2005, file No. 000-22208). | |
10.19
|
Non-Qualified Supplemental Executive Retirement Agreement between Quad City Bank and Trust Company and Certain Key Executives dated February 1, 2004 (incorporated herein by reference to Exhibit 10.20 of Registrant’s Annual Report on form 10-K for the year ended December 31, 2004). |
83
Table of Contents
| Exhibit Number. | Exhibit Description | |
10.20
|
Non-Qualified Supplemental Executive Retirement Agreement between Cedar Rapids Bank and Trust Company and Certain Key Executives dated February 1, 2004 (incorporated herein by reference to Exhibit 10(xxi) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004). | |
10.21
|
Executive Deferred Compensation Agreement between QCR Holdings, Inc. and Thomas Budd dated July 15, 2004 (incorporated herein by reference to Exhibit 10(xxii) of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004). | |
10.22
|
Deferred Income Plan of Quad City Holdings, Inc. (incorporated herein by reference to Exhibit 99.1 of Registrant’s Form S-8, filed October 21, 1997, File No. 333-38341). | |
10.23
|
Stock Option Plan of Quad City Holdings, Inc. (incorporated herein by reference to Exhibit 10.1 of Registrant’s Form SB-2, File No. 33-67028). | |
10.24
|
1997 Stock Incentive Plan of Quad City Holdings, Inc. (incorporated herein by reference to Exhibit 10.1 of Registrant’s Form S-8, File No. 333-87229). | |
10.25
|
Indenture by and between QCR Holdings, Inc./QCR Holdings Statutory Trust IV and Wells Fargo Bank, National Association, as debenture and institutional trustee, dated May 4, 2005 (incorporated herein by reference to Exhibit 10(i) of Registrant’s Quarterly Report on Form 10Q for the quarter ended March 31, 2005). | |
10.26
|
Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht dated August 26, 2005 (incorporated herein by reference to Exhibit 10(i) of Registrant’s Quarterly Report on Form 10Q for the quarter ended September 30, 2005). | |
10.27
|
Indenture by and between QCR Holdings, Inc./QCR Holdings Statutory Trust V and Wells Fargo Bank, National Association, as debenture and institutional trustee, dated February 24, 2006 (incorporated herein by reference to Exhibit 10.27 of the Registrant’s Annual Report on form 10-K for the year ended December 31, 2005). | |
10.28
|
Employment Agreement by and between QCR Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer, as amended and restated March 21, 2006 (incorporated herein by reference to Exhibit 10(i) of Registrant’s Form 8-K dated March 24, 2006). | |
10.29
|
Amendment Number One to the Non-Qualified Supplemental Executive Retirement Agreement by and between Quad City Bank and Trust Company and Michael A. Bauer, dated March 21, 2006 (incorporated herein by reference to Exhibit 10(ii) of Registrant’s Form 8-K dated March 24, 2006). | |
10.30
|
Quad City Bank and Trust Company Executive Deferred Compensation Agreement by and between Quad City Bank and Trust Company and Michael A. Bauer, as amended and restated on March 21, 2006 (incorporated herein by reference to Exhibit 10(iii) of Registrant’s Form 8-K dated March 24, 2006). | |
10.31
|
Employment Agreement by and between QCR Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer, as amended and restated December 14, 2006 (incorporated herein by reference to Exhibit 10.31 of the Registrant’s Annual Report on form 10-K for the year ended December 31, 2006). | |
21.1
|
Subsidiaries of QCR Holdings, Inc. (exhibit is being filed herewith). |
84
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| Exhibit Number. | Exhibit Description | |
23.1
|
Consent of Independent Registered Public Accounting Firm — McGladrey & Pullen, LLP (exhibit is being filed herewith). | |
31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). | |
31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
85
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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 4, 2008
|
By: | /s/ 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/ James J. Brownson
|
Chairman of the Board of Directors | March 4, 2008 | ||
/s/ Douglas M. Hultquist
|
President, Chief Executive Officer and Director | March 4, 2008 | ||
/s/ Patrick S. Baird
|
Director | March 4, 2008 | ||
/s/ Michael A. Bauer
|
Director | March 4, 2008 | ||
/s/ Larry J. Helling
|
Director | March 4, 2008 | ||
/s/ Mark C. Kilmer
|
Director | March 4, 2008 | ||
/s/ John K. Lawson
|
Director | March 4, 2008 | ||
/s/ Charles M. Peters
|
Director | March 4, 2008 | ||
/s/ Ronald G. Peterson
|
Director | March 4, 2008 | ||
/s/ John A. Rife
|
Director | March 4, 2008 |
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Table of Contents
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 4, 2008
|
By: | /s/ 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 | |||
| Chairman of the Board of Directors | March 4, 2008 | ||||
| President, Chief Executive | March 4, 2008 | ||||
| Officer and Director | |||||
| Director | March 4, 2008 | ||||
| Director | March 4, 2008 | ||||
| Director | March 4, 2008 | ||||
| Director | March 4, 2008 | ||||
| Director | March 4, 2008 | ||||
| Director | March 4, 2008 | ||||
| Director | March 4, 2008 | ||||
| Director | March 4, 2008 | ||||
87
Table of Contents
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 “Iowa Superintendent”),
the State of Illinois Department of Financial and Professional Regulation (the “Illinois DFPR”),
the State of Wisconsin Department of Financial Institutions (the “Wisconsin DFI”), the Board of
Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance
Corporation (the “FDIC”). Furthermore, taxation laws administered by the Internal Revenue Service
and state taxing authorities and securities laws administered by the Securities and Exchange
Commission (the “SEC”) and state securities authorities have an impact on the business of the
Company. The effect of these statutes, regulations and regulatory policies may be significant, and
cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions
regulate, among other things, the scope of business, the kinds and amounts of investments, reserve
requirements, capital levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the respective operations
of the Company and its subsidiaries and is intended primarily for the protection of the
FDIC-insured deposits and depositors of the Banks, rather than shareholders.
The following is a summary of the material elements of the regulatory framework that applies
to the Company and its subsidiaries. It does not describe all of the statutes, regulations and
regulatory policies that apply, nor does it restate all of the requirements of those that are
described. As such, the following is qualified in its entirety by reference to applicable law. Any
change in statutes, regulations or regulatory policies may have a material effect on the business
of the Company and its subsidiaries.
The Company
General. The Company, as the sole shareholder of the Banks (as defined below), is a bank
holding company. As a bank holding company, the Company is registered with, and is subject to
regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the
“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.
A-1
Table of Contents
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 not applied for
approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured
depository institution or its holding company without prior notice to the appropriate federal bank
regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the
outstanding voting securities of a bank or bank holding company, but may arise under certain
circumstances at 10% ownership.
Capital Requirements. Bank holding companies are required to maintain minimum levels of
capital in accordance with Federal Reserve capital adequacy guidelines. If capital levels fall
below the minimum required levels, a bank holding company, among other things, may be denied
approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve’s capital guidelines establish the following minimum regulatory capital
requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of
total assets weighted according to risk; and (ii) a leverage requirement expressed as a percentage
of total assets. The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of
4%. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes
of these capital standards, Tier 1 capital consists primarily of permanent stockholders’ equity
less intangible assets (other than certain loan servicing rights and purchased credit card
relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments that do not qualify as Tier 1 capital and a portion of the company’s allowance
for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements. Higher capital
levels will be required if warranted by the particular circumstances or risk profiles of individual
banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that
additional capital may be required to take adequate account of, among other things, interest rate
risk, or the risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or anticipating significant
growth would be expected to maintain capital ratios, including tangible capital positions (i.e.,
Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31,
2007, 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 unless its net income available to
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common shareholders over the past
year has been sufficient to fully fund the dividends and the prospective rate of earnings retention
appears consistent with its capital needs, asset quality, and overall financial condition. 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
Quad City Bank and Trust Company (“Quad City Bank & Trust”) and Cedar Rapids Bank and Trust
Company (“Cedar Rapids Bank & Trust”) are chartered under Iowa law (collectively, the “Iowa
Banks”); Rockford Bank and Trust Company (“Rockford Bank & Trust”) is chartered under Illinois law;
and First Wisconsin Bank and Trust Company (“First Wisconsin Bank & Trust”) is chartered under
Wisconsin law (collectively, the “Banks”). The deposit accounts of the Banks are insured by the
FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC
regulations. The Banks are also members of the Federal Reserve System (“member banks”).
As Iowa-chartered, FDIC-insured member banks, the Iowa Banks are subject to the examination,
supervision, reporting and enforcement requirements of the Iowa Superintendent, as the chartering
authority for Iowa banks. As an Illinois-chartered, FDIC-insured member bank, Rockford Bank &
Trust is subject to the examination, supervision, reporting and enforcement requirements of the
Illinois DFPR, as the chartering authority for Illinois banks. As a Wisconsin-chartered,
FDIC-insured member bank, First Wisconsin Bank & Trust is subject to the examination, supervision,
reporting and enforcement requirements of the Wisconsin DFI. The Banks are also subject to the
examination, reporting and enforcement requirements of the Federal Reserve, the primary federal
regulator of member banks. In addition, the FDIC, as administrator of the DIF, 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
whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk
classification. An institution’s risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators. Under the regulations of
the FDIC, as presently in effect, insurance assessments range from 0.05% to 0.43% of total deposits
(subject to adjustment by the FDIC and the application of assessment credits, if any, issued by the
FDIC in 2007).
FICO Assessments. The Financing Corporation (“FICO”) is a mixed-ownership governmental
corporation chartered by the former Federal Home Loan Bank Board pursuant to the Federal Savings
and Loan Insurance Corporation Recapitalization Act of 1987 to function as a financing vehicle for
the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued
30-year non-callable bonds of approximately $8.2 billion that mature by 2019. Since 1996, federal
legislation has required that all FDIC-insured depository institutions pay assessments to cover
interest payments on FICO’s outstanding obligations. These FICO assessments are in addition to
amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2007, the
FICO assessment rate was approximately 0.01% of deposits.
Supervisory Assessments. Each of the Banks is required to pay supervisory assessments to its
respective state banking regulator to fund the operations of that agency. The amount of the
assessment payable by each Bank is calculated on the basis of that Bank’s total assets. During the
year ended December 31, 2007, the Iowa Banks paid
supervisory assessments to the Iowa Superintendent totaling $134 thousand, Rockford Bank &
Trust paid supervisory assessments to the Illinois DFPR totaling $36 thousand and First Wisconsin
Bank & Trust paid supervisory assessments to the Wisconsin DFI totaling $1 thousand.
Capital Requirements. Banks are generally required to maintain capital levels in excess of
other
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businesses. The Federal Reserve has established the following minimum capital standards for
state-chartered insured member banks, such as the Banks: (i) a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a
minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum
ratio of Tier 1 capital to total risk-weighted assets of 4%. In general, the components of Tier 1
capital and total capital are the same as those for bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher capital levels will
be required if warranted by the particular circumstances or risk profiles of individual
institutions. For example, regulations of the Federal Reserve provide that additional capital may
be required to take adequate account of, among other things, interest rate risk or the risks posed
by concentrations of credit, nontraditional activities or securities trading activities. Both the
Illinois DFPR’s order issuing a charter to Rockford Bank & Trust and the FDIC’s approval of deposit
insurance for the bank were conditioned upon it maintaining a Tier 1 capital to assets ratio of not
less than 8% until January 3, 2008; and the Federal Reserve’s approval of Rockford Bank & Trust’s
application to become a member bank was conditioned upon the bank maintaining a Tier 1 capital to
assets ratio of not less than 9% until January 3, 2008. In addition, the Federal Reserve
conditioned its approval of the Company’s acquisition of First Wisconsin Bank & Trust upon the
bank’s maintenance of a tangible leverage ratio in excess of 9% through the year 2009.
Further, federal law and regulations provide various incentives for financial institutions to
maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a
financial institution that is “well-capitalized” may qualify for exemptions from prior notice or
application requirements otherwise applicable to certain types of activities and may qualify for
expedited processing of other required notices or applications. Additionally, one of the criteria
that determines a bank holding company’s eligibility to operate as a financial holding company is a
requirement that all of its financial institution subsidiaries be “well-capitalized.” Under the
regulations of the Federal Reserve, in order to be “well-capitalized” a financial institution must
maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier
1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total
assets of 5% or greater.
Federal law also provides the federal banking regulators with broad power to take prompt
corrective action to resolve the problems of undercapitalized institutions. The extent of the
regulators’ powers depends on whether the institution in question is “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case
as defined by regulation. Depending upon the capital category to which an institution is assigned,
the regulators’ corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institution’s asset growth and restricting its activities;
(iii) requiring the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates;
(v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election
of directors of the institution; (vii) requiring that senior executive officers or directors be
dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of
principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the
institution.
As of December 31, 2007: (i) neither of the Iowa Banks was subject to a directive from the
Federal Reserve to increase its capital to an amount in excess of the minimum regulatory capital
requirements; (ii) each of the Iowa Banks exceeded its minimum regulatory capital requirements
under Federal Reserve capital adequacy guidelines; and (iii) each of the Iowa Banks was
“well-capitalized,” as defined by Federal Reserve regulations. As of December 31, 2007, Rockford
Bank & Trust (i) met the capital to assets ratios established by the Illinois DFPR, the FDIC and
the Federal Reserve; and (ii) was “well-capitalized,” as defined by Federal Reserve regulations. As
of December 31, 2007, First Wisconsin Bank & Trust (i) maintained a tangible leverage ratio in
excess of 9%; and (ii) 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.
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Dividend Payments. The primary source of funds for the Company is dividends from the Banks.
In general, the Banks may only pay dividends either out of their historical net income after any
required transfers to surplus or reserves have been made or out of their retained earnings. Before
declaring its first dividend, Rockford Bank & Trust, as a de novo institution, is required by
Illinois law to carry at least one-tenth of its net profits since the issuance of its charter to
its surplus until its surplus is equal to its capital. The Federal Reserve Act also imposes
limitations on the amount of dividends that may be paid by state member banks, such as the Banks.
Generally, a member bank may pay dividends out of its undivided profits, in such amounts and at
such times as the bank’s board of directors deems prudent. Without prior Federal Reserve approval,
however, a state member bank may not pay dividends in any calendar year that, in the aggregate,
exceed the bank’s calendar year-to-date net income plus the bank’s retained net income for the two
preceding calendar years. For at least the first three years of its operation, the ability of
Rockford Bank & Trust to pay dividends is conditioned upon the prior approval of the Federal
Reserve. In addition, First Wisconsin Bank & Trust may not pay dividends until after the year 2009
and two consecutive satisfactory composite CAMELS ratings, unless the prior approval of the Federal
Reserve Bank of Chicago is obtained.
The payment of dividends by any financial institution is affected by the requirement to
maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a
financial institution generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described above, each of the Iowa Banks
exceeded its minimum capital requirements under applicable guidelines as of December 31, 2007. As
of December 31, 2007, approximately $2.1 million would have been available to be paid as dividends
by the Iowa Banks. Notwithstanding the availability of funds for dividends, however, the Federal
Reserve may prohibit the payment of any dividends by the Banks if the Federal Reserve determines
such payment would constitute an unsafe or unsound practice.
Insider Transactions. The Banks are subject to certain restrictions imposed by federal law on
extensions of credit to the Company and its subsidiaries, on investments in the stock or other
securities of the Company and its subsidiaries and the acceptance of the stock or other securities
of the Company or its subsidiaries as collateral for loans made by the Banks. Certain limitations
and reporting requirements are also placed on extensions of credit by the Banks to their respective
directors and officers, to directors and officers of the Company and its subsidiaries, to principal
shareholders of the Company and to “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 any of its subsidiaries or a principal shareholder
of the Company may obtain credit from banks with which the Banks maintain correspondent
relationships.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines that
establish operational and managerial standards to promote the safety and soundness of federally
insured depository institutions. The guidelines set forth standards for internal controls,
information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to achieve those
goals. If an institution fails to comply with any of the standards set forth in the guidelines,
the institution’s primary federal regulator may require the institution to submit a plan for
achieving and maintaining compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has been accepted by its
primary federal regulator, the regulator is required to issue an order directing the institution to
cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator
may restrict the institution’s rate of growth, require the institution to increase its capital,
restrict the rates the institution pays on deposits or require the institution to take any action
the regulator deems appropriate under the circumstances. Noncompliance with the standards
established by the safety and soundness guidelines may also constitute grounds for other
enforcement action by the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. The Iowa Banks have the authority under Iowa law to establish branches
anywhere in the State of Iowa, subject to receipt of all required regulatory approvals. In 1997,
the Company formed a de novo Illinois bank that was merged into Quad City Bank & Trust, resulting
in the Quad City Bank & Trust establishing a branch office in Illinois. Under Illinois law, Quad
City Bank & Trust may continue to establish offices in Illinois to
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the same extent permitted for an
Illinois bank (subject to certain conditions, including certain regulatory notice requirements).
Similarly, Rockford Bank & Trust and Wisconsin Bank & Trust have the authority under Illinois law
and Wisconsin law, respectively, to establish branches anywhere in their home state, subject to
receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states subject to:
(i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law
limitations requiring the merging bank to have been in existence for a minimum period of time (not
to exceed five years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is permitted only in those states the laws of which expressly
authorize such expansion.
State Bank Investments and Activities. Each of the Banks generally is permitted to make
investments and engage in activities directly or through subsidiaries as authorized by the laws of
the state under which it is chartered. 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 $43.9 million or less, the reserve requirement is 3% of total transaction accounts; and
for transaction accounts aggregating in excess of $43.9 million, the reserve requirement is $1.038
million plus 10% of the aggregate amount of total transaction accounts in excess of $43.9 million.
The first $9.3 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.
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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.
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| I. | Distribution of Assets, Liabilities and Stockholders Equity; Interest Differential |
A. and B. Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||
| 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 |
$ | 5,450 | $ | 248 | 4.55 | % | $ | 10,230 | $ | 475 | 4.64 | % | $ | 6,256 | $ | 206 | 3.29 | % | ||||||||||||||||||
Interest-bearing deposits at financial institutions |
6,142 | 346 | 5.63 | 6,440 | 320 | 4.97 | 3,583 | 129 | 3.60 | |||||||||||||||||||||||||||
Investment securities (1) |
209,670 | 10,987 | 5.24 | 185,468 | 8,381 | 4.52 | 159,467 | 6,224 | 3.90 | |||||||||||||||||||||||||||
Gross loans/leases receivable (2) |
1,019,830 | 74,679 | 7.32 | 855,872 | 60,098 | 7.02 | 682,858 | 42,427 | 6.21 | |||||||||||||||||||||||||||
Total interest earning assets |
1,241,092 | 86,260 | 6.95 | 1,058,010 | 69,274 | 6.55 | 852,164 | 48,986 | 5.75 | |||||||||||||||||||||||||||
Noninterest-earning assets: |
||||||||||||||||||||||||||||||||||||
Cash and due from banks |
$ | 37,439 | $ | 35,318 | $ | 29,576 | ||||||||||||||||||||||||||||||
Premises and equipment, net |
31,879 | 27,755 | 23,016 | |||||||||||||||||||||||||||||||||
Less allowance for estimated
losses on loans/leases |
(11,362 | ) | (9,780 | ) | (9,048 | ) | ||||||||||||||||||||||||||||||
Other |
52,433 | 42,234 | 39,198 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 1,351,481 | $ | 1,153,537 | $ | 934,906 | ||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 310,469 | 11,082 | 3.57 | % | $ | 272,484 | 9,082 | 3.33 | % | $ | 198,359 | 3,356 | 1.69 | % | |||||||||||||||||||||
Savings deposits |
31,302 | 651 | 2.08 | 32,065 | 703 | 2.19 | 22,823 | 264 | 1.16 | |||||||||||||||||||||||||||
Time deposits |
413,620 | 20,568 | 4.97 | 380,524 | 17,280 | 4.54 | 299,673 | 9,222 | 3.08 | |||||||||||||||||||||||||||
Short-term borrowings |
143,785 | 5,390 | 3.75 | 97,580 | 3,169 | 3.25 | 98,089 | 2,183 | 2.23 | |||||||||||||||||||||||||||
Federal Home Loan Bank advances |
160,474 | 7,237 | 4.51 | 135,282 | 5,609 | 4.15 | 107,927 | 4,168 | 3.86 | |||||||||||||||||||||||||||
Junior subordinated debentures |
36,085 | 2,623 | 7.27 | 34,796 | 2,490 | 7.16 | 23,842 | 1,587 | 6.66 | |||||||||||||||||||||||||||
Other borrowings |
31,398 | 1,806 | 5.75 | 9,456 | 574 | 6.07 | 11,074 | 501 | 4.52 | |||||||||||||||||||||||||||
Total interest-bearing
liabilities |
1,127,133 | 49,357 | 4.38 | 962,187 | 38,907 | 4.04 | 761,787 | 21,281 | 2.79 | |||||||||||||||||||||||||||
Noninterest-bearing demand |
128,234 | 119,561 | 108,116 | |||||||||||||||||||||||||||||||||
Other noninterest-bearing
liabilities |
21,098 | 14,026 | 12,353 | |||||||||||||||||||||||||||||||||
Total liabilities |
1,276,465 | 1,095,774 | 882,256 | |||||||||||||||||||||||||||||||||
Stockholders’ equity |
75,018 | 57,763 | 52,650 | |||||||||||||||||||||||||||||||||
Total liabilities and
stockholders’ equity |
$ | 1,351,483 | $ | 1,153,537 | $ | 934,906 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 36,903 | $ | 30,367 | $ | 27,705 | ||||||||||||||||||||||||||||||
Net interest spread |
2.57 | % | 2.51 | % | 2.95 | % | ||||||||||||||||||||||||||||||
Net interest margin |
2.97 | % | 2.87 | % | 3.25 | % | ||||||||||||||||||||||||||||||
Ratio of average interest earning
assets to average interest-
bearing liabilities |
110.11 | % | 109.96 | % | 111.86 | % | ||||||||||||||||||||||||||||||
| (1) | Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented. | |
| (2) | Loan/lease fees are not material and are included in interest income from loans/leases receivable. |
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Table of Contents
C. Analysis of Changes of Interest Income/Interest Expense
For the years ended December 31, 2007, 2006 and 2005
| Inc./(Dec.) | Components | |||||||||||
| from | of Change (1) | |||||||||||
| Prior Year | Rate | Volume | ||||||||||
| 2007 vs. 2006 | ||||||||||||
| (Dollars in Thousands) | ||||||||||||
INTEREST INCOME |
||||||||||||
Federal funds sold |
$ | (226 | ) | $ | (8 | ) | $ | (218 | ) | |||
Interest-bearing deposits at other financial institutions |
27 | 43 | (16 | ) | ||||||||
Investment securities (2) |
2,575 | 1,403 | 1,172 | |||||||||
Gross loans/leases receivable (2) (3) |
14,580 | 2,664 | 11,916 | |||||||||
Total change in interest income |
$ | 16,956 | $ | 4,102 | $ | 12,854 | ||||||
INTEREST EXPENSE |
||||||||||||
Interest-bearing demand deposits |
$ | 2,000 | $ | 674 | $ | 1,326 | ||||||
Savings deposits |
(52 | ) | (35 | ) | (17 | ) | ||||||
Time deposits |
3,288 | 1,717 | 1,571 | |||||||||
Short-term borrowings |
2,221 | 546 | 1,675 | |||||||||
Federal Home Loan Bank advances |
1,628 | 521 | 1,107 | |||||||||
Junior subordinated debentures |
133 | 40 | 93 | |||||||||
Other borrowings |
1,232 | (32 | ) | 1,264 | ||||||||
Total change in interest expense |
$ | 10,450 | $ | 3,431 | $ | 7,019 | ||||||
Total change in net interest income |
$ | 6,506 | $ | 671 | $ | 5,835 | ||||||
| Inc./(Dec.) | Components | |||||||||||
| from | of Change (1) | |||||||||||
| Prior Year | Rate | Volume | ||||||||||
| 2006 vs. 2005 | ||||||||||||
| (Dollars in Thousands) | ||||||||||||
INTEREST INCOME |
||||||||||||
Federal funds sold |
$ | 269 | $ | 105 | $ | 164 | ||||||
Interest-bearing
deposits at other
financial
institutions |
191 | 62 | 129 | |||||||||
Investment
securities (2) |
2,158 | 1,062 | 1,096 | |||||||||
Gross loans/leases
receivable (2) (3) |
17,670 | 5,996 | 11,674 | |||||||||
Total
change in
interest
income |
$ | 20,288 | $ | 7,225 | $ | 13,063 | ||||||
INTEREST EXPENSE |
||||||||||||
Interest-bearing
demand deposits |
$ | 5,726 | $ | 4,134 | $ | 1,592 | ||||||
Savings deposits |
439 | 302 | 137 | |||||||||
Time deposits |
8,058 | 5,141 | 2,917 | |||||||||
Short-term
borrowings |
986 | 997 | (11 | ) | ||||||||
Federal Home Loan
Bank advances |
1,441 | 325 | 1,116 | |||||||||
Junior subordinated
debentures |
903 | 127 | 776 | |||||||||
Other borrowings |
73 | 153 | (80 | ) | ||||||||
Total
change in
interest
expense |
$ | 17,626 | $ | 11,179 | $ | 6,447 | ||||||
Total change in net
interest income |
$ | 2,662 | $ | (3,954 | ) | $ | 6,616 | |||||
| (1) | The column “increase/decrease from prior year” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. | |
| (2) | Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented. | |
| (3) | Loan/lease fees are not material and are included in interest income from loans/leases receivable. |
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Table of Contents
II. Investment Portfolio
A. Investment Securities
The following tables present the amortized cost and fair value of investment securities as of
December 31, 2007, 2006 and 2005.
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | (Losses) | Value | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
December 31, 2007 |
||||||||||||||||
Securities held to maturity: |
||||||||||||||||
Other bonds |
$ | 350 | $ | — | $ | — | $ | 350 | ||||||||
Totals |
$ | 350 | $ | — | $ | — | $ | 350 | ||||||||
Securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 3,303 | $ | 59 | $ | — | $ | 3,362 | ||||||||
U.S. gov’t.sponsored agency
securities |
197,714 | 4,032 | (28 | ) | 201,718 | |||||||||||
Mortgage-backed securities |
1,600 | 6 | (8 | ) | 1,598 | |||||||||||
Municipal securities |
25,119 | 490 | (39 | ) | 25,570 | |||||||||||
Corporate securities |
1,865 | 12 | — | 1,877 | ||||||||||||
Trust preferred securities |
200 | — | — | 200 | ||||||||||||
Other securities |
1,201 | 64 | (35 | ) | 1,230 | |||||||||||
Totals |
$ | 231,002 | $ | 4,663 | $ | (110 | ) | $ | 235,555 | |||||||
December 31, 2006 |
||||||||||||||||
Securities held to maturity: |
||||||||||||||||
Other bonds |
$ | 350 | $ | 8 | $ | — | $ | 358 | ||||||||
Totals |
$ | 350 | $ | 8 | $ | — | $ | 358 | ||||||||
Securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 2,107 | $ | 4 | $ | — | $ | 2,111 | ||||||||
U.S. gov’t.sponsored agency
securities |
157,623 | 199 | (843 | ) | 156,979 | |||||||||||
Mortgage-backed securities |
2,084 | — | (52 | ) | 2,032 | |||||||||||
Municipal securities |
28,584 | 372 | (79 | ) | 28,877 | |||||||||||
Corporate securities |
2,367 | 28 | — | 2,395 | ||||||||||||
Trust preferred securities |
450 | 11 | — | 461 | ||||||||||||
Other securities |
1,176 | 400 | (7 | ) | 1,569 | |||||||||||
Totals |
$ | 194,391 | $ | 1,014 | $ | (981 | ) | $ | 194,424 | |||||||
December 31, 2005 |
||||||||||||||||
Securities held to maturity: |
||||||||||||||||
Other bonds |
$ | 150 | $ | 5 | $ | — | $ | 155 | ||||||||
Totals |
$ | 150 | $ | 5 | $ | — | $ | 155 | ||||||||
Securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 100 | $ | — | $ | — | $ | 100 | ||||||||
U.S. gov’t.sponsored agency
securities |
150,115 | 55 | (1,630 | ) | 148,540 | |||||||||||
Mortgage-backed securities |
2,720 | 4 | (54 | ) | 2,670 | |||||||||||
Municipal securities |
18,485 | 368 | (40 | ) | 18,813 | |||||||||||
Corporate securities |
4,672 | 72 | (2 | ) | 4,742 | |||||||||||
Trust preferred securities |
850 | 69 | — | 919 | ||||||||||||
Other securities |
6,163 | 373 | (105 | ) | 6,431 | |||||||||||
Totals |
$ | 183,105 | $ | 941 | $ | (1,831 | ) | $ | 182,215 | |||||||
B-4
Table of Contents
B. Investment Securities, Maturities, and Yields
The following table presents the maturity of securities held on December 31, 2007
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 |
1,199 | 4.06 | % | |||||
After 1 but within 5 years |
2,104 | 4.88 | % | |||||
Total |
$ | 3,303 | 4.58 | % | ||||
U.S. Gov’t.Sponsored Agency securities: |
||||||||
Within 1 year |
$ | 37,150 | 3.92 | % | ||||
After 1 but within 5 years |
33,120 | 5.25 | % | |||||
After 5 but within 10 years |
94,094 | 5.48 | % | |||||
After 10 years |
33,350 | 5.57 | % | |||||
Total |
$ | 197,714 | 5.16 | % | ||||
Mortgage-backed securities: |
||||||||
Within 1 year |
$ | 533 | 4.30 | % | ||||
After 1 but within 5 years |
834 | 4.53 | % | |||||
After 5 but within 10 years |
233 | 6.00 | % | |||||
Total |
$ | 1,600 | 4.67 | % | ||||
Municipal securities: |
||||||||
Within 1 year |
$ | 1,858 | 4.35 | % | ||||
After 1 but within 5 years |
5,996 | 4.90 | % | |||||
After 5 but within 10 years |
7,310 | 4.55 | % | |||||
After 10 years |
9,955 | 4.09 | % | |||||
Total |
$ | 25,119 | 4.44 | % | ||||
Corporate securities: |
||||||||
Within 1 year |
$ | 1,865 | 6.20 | % | ||||
Trust preferred securities: |
||||||||
After 10 years |
$ | 200 | 7.80 | % | ||||
Other bonds: |
||||||||
After 1 but within 5 years |
200 | 5.46 | % | |||||
After 5 but within 10 years |
150 | 5.48 | % | |||||
Total |
$ | 350 | 5.47 | % | ||||
Other securities with no maturity or stated face rate |
$ | 1,201 | ||||||
B-5
Table of Contents
III. Loan/Lease Portfolio
A. Types of Loans/Leases
The composition of the loan/lease portfolio is presented as follows:
| December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
Real estate loans held for sale — residential mortgage |
$ | 6,508 | $ | 6,187 | $ | 2,632 | $ | 3,499 | $ | 3,790 | ||||||||||
Real estate loans — residential mortgage |
69,244 | 68,913 | 54,125 | 52,423 | 29,604 | |||||||||||||||
Real estate loans — construction |
8,787 | 6,534 | 2,811 | 3,608 | 2,254 | |||||||||||||||
Commercial loans |
368,170 | 396,599 | 323,732 | 286,419 | 239,309 | |||||||||||||||
Commercial real estate loans |
499,486 | 350,339 | 269,730 | 246,098 | 196,036 | |||||||||||||||
Direct financing leases |
67,223 | 52,628 | 34,911 | — | — | |||||||||||||||
Installment and other consumer loans |
85,931 | 78,058 | 67,090 | 55,736 | 50,984 | |||||||||||||||
Total loans/leases |
$ | 1,105,349 | $ | 959,258 | $ | 755,031 | $ | 647,783 | $ | 521,977 | ||||||||||
Deferred loan/lease origination costs (fees), net |
1,551 | 1,489 | 1,223 | 568 | 494 | |||||||||||||||
Less allowance for estimated
losses on loans/leases |
(12,024 | ) | (10,612 | ) | (8,884 | ) | (9,262 | ) | (8,643 | ) | ||||||||||
Net loans/leases |
$ | 1,094,876 | $ | 950,135 | $ | 747,370 | $ | 639,089 | $ | 513,828 | ||||||||||
B-6
Table of Contents
III. Loan/Lease Portfolio
B. Maturities and Sensitivities of Loans/Leases to Changes in Interest Rates
| Maturities After One Year | ||||||||||||||||||||
| At December 31, 2007 | 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) | ||||||||||||||||||||
Real estate loans held for sale — residential mortgage |
$ | — | $ | — | $ | 6,508 | $ | 6,508 | $ | — | ||||||||||
Real estate loans — residential mortgage |
2,413 | 331 | 66,500 | 14,452 | 52,379 | |||||||||||||||
Real estate loans — construction |
8,787 | — | — | — | — | |||||||||||||||
Commercial loans |
147,484 | 168,630 | 52,056 | 166,389 | 54,297 | |||||||||||||||
Commercial real estate loans |
139,297 | 243,777 | 116,412 | 307,571 | 52,618 | |||||||||||||||
Direct financing leases |
2,723 | 48,965 | 15,535 | 64,500 | — | |||||||||||||||
Installment and other consumer loans |
31,076 | 47,141 | 7,714 | 36,299 | 18,556 | |||||||||||||||
Total loans/leases |
$ | 331,780 | $ | 508,844 | $ | 264,725 | $ | 595,719 | $ | 177,850 | ||||||||||
| Maturities After One Year | ||||||||||||||||||||
| At December 31, 2006 | 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) | ||||||||||||||||||||
Real estate loans held for sale — residential mortgage |
$ | — | $ | — | $ | 6,187 | $ | 6,187 | $ | — | ||||||||||
Real estate loans — residential mortgage |
2,962 | 159 | 65,792 | 14,837 | 51,114 | |||||||||||||||
Real estate loans — construction |
6,534 | — | — | — | — | |||||||||||||||
Commercial loans |
134,874 | 198,175 | 63,550 | 216,415 | 45,310 | |||||||||||||||
Commercial real estate loans |
119,173 | 175,036 | 56,130 | 191,146 | 40,020 | |||||||||||||||
Direct financing leases |
1,891 | 30,565 | 20,172 | 50,737 | — | |||||||||||||||
Installment and other consumer loans |
30,429 | 43,761 | 3,868 | 32,892 | 14,737 | |||||||||||||||
Total loans/leases |
$ | 295,863 | $ | 447,696 | $ | 215,699 | $ | 512,214 | $ | 151,181 | ||||||||||
B-7
Table of Contents
III. Loan/Lease Portfolio
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans/Leases
The following tables represent Nonaccrual, Past Due, Renegotiated Loans/Leases, and other Real Estate Owned:
| December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
Loans/leases accounted for on nonaccrual basis |
$ | 6,488 | $ | 6,538 | $ | 2,579 | $ | 7,608 | $ | 4,204 | ||||||||||
Accruing loans/leases past due 90 days or more |
500 | 755 | 604 | 1,133 | 756 | |||||||||||||||
Other real estate owned |
496 | 93 | 545 | 1,925 | — | |||||||||||||||
Troubled debt restructurings |
— | — | — | — | — | |||||||||||||||
Totals |
$ | 7,484 | $ | 7,386 | $ | 3,728 | $ | 10,666 | $ | 4,960 | ||||||||||
The policy of the company is to place a loan/lease on nonaccrual status if: (a) payment in full of
interest or principal is not expected, or (b) principal or interest has been in default for a
period of 90 days or more unless the obligation is both in the process of collection and well
secured. Well secured is defined as collateral with sufficient market value to repay principal and
all accrued interest. A debt is in the process of collection if collection of the debt is
proceeding in due course either through legal action, including judgment enforcement procedures, or
in appropriate circumstances, through collection efforts not involving legal action which are
reasonably expected to result in repayment of the debt or in restoration to current status.
2. Potential Problem Loans/Leases. To management’s best knowledge, there are no such significant
loans/leases that have not been disclosed in the above table.
3. Foreign Outstandings. None.
4. Loan/Lease Concentrations. At December 31, 2007, there was a single concentration of
loans/leases exceeding 10%, which is not otherwise disclosed in Item III. A. That concentration is
Lessors of Non-Residential Buildings & Dwellings at 16.5%.
D. Other Interest-Bearing Assets
There are no interest-bearing assets required to be disclosed here.
B-8
Table of Contents
IV. Summary of Loan/Lease Loss Experience
A. Analysis of the Allowance for Estimated Losses on Loans/Leases
The following tables summarize activity in the allowance for estimated losses on loans/leases of
the Company:
| Years ended | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
Average amount of loans/leases outstanding,
before allowance for estimated losses
on loans/leases |
$ | 1,019,830 | $ | 855,872 | $ | 682,858 | $ | 587,450 | $ | 480,314 | ||||||||||
Allowance for estimated losses on loans/leases: |
||||||||||||||||||||
Balance, beginning of fiscal period |
$ | 10,612 | $ | 8,884 | $ | 9,262 | $ | 8,643 | $ | 6,879 | ||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial |
(1,401 | ) | (1,415 | ) | (1,530 | ) | (624 | ) | (1,777 | ) | ||||||||||
Real Estate |
(174 | ) | (45 | ) | (160 | ) | (49 | ) | — | |||||||||||
Installment and other consumer |
(469 | ) | (460 | ) | (356 | ) | (292 | ) | (298 | ) | ||||||||||
Subtotal charge-offs |
(2,044 | ) | (1,920 | ) | (2,046 | ) | (965 | ) | (2,075 | ) | ||||||||||
Recoveries: |
||||||||||||||||||||
Commercial |
327 | 262 | 245 | 137 | 192 | |||||||||||||||
Real Estate |
173 | 52 | 25 | — | — | |||||||||||||||
Installment and other consumer |
92 | 50 | 87 | 75 | 242 | |||||||||||||||
Subtotal recoveries |
592 | 364 | 357 | 212 | 434 | |||||||||||||||
Net charge-offs |
(1,452 | ) | (1,556 | ) | (1,689 | ) | (753 | ) | (1,641 | ) | ||||||||||
Provision charged to expense |
2,864 | 3,284 | 877 | 1,372 | 3,405 | |||||||||||||||
Acquisition of M2 Lease Funds, LLC |
— | — | 434 | — | — | |||||||||||||||
Balance, end of fiscal year |
$ | 12,024 | $ | 10,612 | $ | 8,884 | $ | 9,262 | $ | 8,643 | ||||||||||
Ratio of net charge-offs to average loans/leases
outstanding |
0.14 | % | 0.18 | % | 0.25 | % | 0.13 | % | 0.34 | % | ||||||||||
B-9
Table of Contents
B. Allocation of the Allowance for Estimated Losses on Loans/Leases
The following tables present the allowance for the estimated losses on loans/leases by type of
loans/leases and the percentage of loans/leases in each category to total loans/leases:
| December 31, 2007 | December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||
| % of Loans/Leases | % of Loans/Leases | % of Loans | ||||||||||||||||||||||
| Amount | to Total Loans/Leases | Amount | to Total Loans/Leases | Amount | to Total Loans | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
Real estate loans held for sale — residential mortgage |
$ | 46 | 0.59 | % | $ | 67 | 0.64 | % | $ | 16 | 0.35 | % | ||||||||||||
Real estate loans — residential mortgage |
486 | 6.26 | 356 | 7.18 | 250 | 7.17 | ||||||||||||||||||
Real estate loans — construction |
62 | 0.79 | 40 | 0.68 | 12 | 0.37 | ||||||||||||||||||
Commercial loans |
5,148 | 33.31 | 4,465 | 41.35 | 3,999 | 35.72 | ||||||||||||||||||
Commercial real estate loans |
4,214 | 45.19 | 3,943 | 36.52 | 3,332 | 42.88 | ||||||||||||||||||
Direct financing leases |
874 | 6.09 | 805 | 5.49 | 546 | 4.62 | ||||||||||||||||||
Installment and other consumer loans |
1,184 | 7.77 | 920 | 8.14 | 725 | 8.89 | ||||||||||||||||||
Unallocated |
10 | NA | 16 | NA | 4 | NA | ||||||||||||||||||
Total |
$ | 12,024 | 100.00 | % | $ | 10,612 | 100.00 | % | $ | 8,884 | 100.00 | % | ||||||||||||
| December 31, 2004 | December 31, 2003 | |||||||||||||||
| % of Loans | % of Loans | |||||||||||||||
| Amount | to Total Loans | Amount | to Total Loans | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
Real estate loans held for sale — residential mortgage |
$ | 17 | 0.54 | % | $ | 4 | 0.73 | % | ||||||||
Real estate loans — residential mortgage |
205 | 8.09 | 272 | 5.67 | ||||||||||||
Real estate loans — construction |
21 | 0.56 | 11 | 0.43 | ||||||||||||
Commercial loans |
4,532 | 44.22 | 4,222 | 45.84 | ||||||||||||
Commercial real estate loans |
3,891 | 37.99 | 3,454 | 37.56 | ||||||||||||
Installment and other consumer loans |
591 | 8.60 | 678 | 9.77 | ||||||||||||
Unallocated |
5 | NA | 2 | NA | ||||||||||||
Total |
$ | 9,262 | 100.00 | % | $ | 8,643 | 100.00 | % | ||||||||
B-10
Table of Contents
V. Deposits.
The average amount of and average rate paid for the categories of deposits for the years ended
December 31, 2007, 2006, and 2005 are discussed in the consolidated average balance sheets and can
be found on pages B-2 and B-3 of Appendix B.
Included in interest bearing deposits at December 31, 2007 were certificates of deposit totaling
$244,830,326 that were $100,000 or greater. Maturities of these certificates were as follows:
| December 31, | ||||
| 2007 | ||||
| (Dollars in Thousands) | ||||
One to three months |
$ | 97,555 | ||
Three to six months |
59,727 | |||
Six to twelve months |
32,365 | |||
Over twelve months |
55,183 | |||
Total certificates of
deposit greater than $100,000 |
$ | 244,830 | ||
VI. Return on Equity and Assets.
The following tables present the return on assets and equity and the equity to assets ratio of the
Company:
| Years ended | ||||||||||||
| December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
Average total assets |
$ | 1,351,481 | $ | 1,153,537 | $ | 934,906 | ||||||
Average equity |
75,018 | 57,763 | 52,650 | |||||||||
Net income |
5,777 | 2,802 | 4,810 | |||||||||
Return on average assets |
0.43 | % | 0.24 | % | 0.51 | % | ||||||
Return on average common equity |
9.31 | % | 5.02 | % | 9.14 | % | ||||||
Return on average total equity |
7.70 | % | 4.85 | % | 9.14 | % | ||||||
Dividend payout ratio |
7.77 | % | 14.04 | % | 7.55 | % | ||||||
Average equity to average assets ratio |
5.55 | % | 5.01 | % | 5.63 | % | ||||||
VII. Short Term Borrowings.
The information requested is disclosed in Note 7 to the December 31, 2007 Consolidated Financial
Statements.
B-11