10-K 1 qcr10k802.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002 Commission file number: 0-22208 QCR HOLDINGS, INC. (F/K/A QUAD CITY HOLDINGS, INC.) ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 42-1397595 ------------------------ ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 3551 Seventh Street, Suite 204, Moline, Illinois 61265 ------------------------------------------------------ (Address of principal executive offices) (309) 736-3580 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: -------------------------------------------------------------------- None. Securities registered pursuant to Section 12(g) of the Exchange Act: -------------------------------------------------------------------- Common stock, $1 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] The aggregate market value of the voting common stock held by non-affiliates as of August 21, 2002 was approximately $35,500,000. As of August 21, 2002, the issuer had 2,749,447 shares of common stock outstanding. Documents incorporated by reference: -------------------------------------------------------------------------- Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be held in October 2002. 1 Part I Item 1. Business General. QCR Holdings, Inc. (the "Company") is a multi-bank holding company headquartered in Moline, Illinois that was formed in February 1993 under the laws of the state of Delaware. The Company serves the Quad City and Cedar Rapids communities. Its wholly owned subsidiaries, Quad City Bank and Trust Company, ("Quad City Bank & Trust") which is based in Bettendorf, Iowa and commenced operations in 1994, and Cedar Rapids Bank and Trust Company, ("Cedar Rapids Bank & Trust") which is based in Cedar Rapids, Iowa and commenced operations in 2001, provide full-service commercial and consumer banking and trust and asset management services. The Company also engages in merchant credit card processing through its wholly owned subsidiary, Quad City Bancard, Inc., based in Moline, Illinois. At the annual stockholders meeting held on October 24, 2001, the name of the Company was changed to QCR Holdings, Inc., effective November 1, 2001. Quad City Bank & Trust was capitalized on October 13, 1993 and commenced operations on January 7, 1994. Quad City Bank & Trust is organized as an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation. Quad City Bank & Trust provides full service commercial and consumer banking, and trust and asset management services in the Quad Cities and adjacent communities through its four offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. Cedar Rapids Bank and Trust Company is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation. The Company commenced operations in Cedar Rapids in June 2001 operating as a branch of Quad City Bank & Trust. The Cedar Rapids branch operation then began functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and consumer banking service to Cedar Rapids and adjacent communities through its office located in the GreatAmerica Building in downtown Cedar Rapids, Iowa. Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a Delaware corporation that provides merchant credit card processing services. This operation had previously been a division of Quad City Bank & Trust since July 1994. Currently, approximately 23,700 merchants process transactions with Bancard. On March 29, 1999, Bancard formed its own independent sales organization ("ISO") subsidiary, Allied Merchant Services, Inc. ("Allied"), which generates merchant credit card processing business. Bancard owns 100% of Allied. QCR Holdings Capital Trust I ("Capital Trust") was formed in April 1999 and capitalized in June 1999 in connection with the public offering of $12 million of 9.2% trust preferred capital securities due June 30, 2029, which are callable on June 30, 2004. The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Bancard and 100% of the common securities of Capital Trust, and in addition to such ownership invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with Quad City Bank & Trust. In addition, to its wholly- owned subsidiaries, the Company has an aggregate investment of $255 thousand in four associated companies, Nobel Electronic Transfer, LLC, Nobel Real Estate Investors, LLC, Velie Plantation Holding Company, LLC and Clarity Merchant Services. Inc. The Company and its subsidiaries collectively employed 208 individuals at June 30, 2002. No one customer accounts for more than 10% of revenues, loans or deposits. In August 2002, the Company's board of directors elected to change the Company's fiscla year end from June 30 to December 31. Because of this change, the Company will file a Form 10-K for the transition period between July 1, 2002 and December 31, 2002 and it will hold its annual meetings in April of each year instead of October. Therefore, after the 2002 annual meeting of stockholders being held on October 23, 2002, the 2003 annual meeting will be held in April 2003. The Company's subsidiaries are also expected to change their fiscal years to align their financial reporting with the Company's. 2 Competition. The Company currently has most of its operations in the highly competitive environment of the Quad Cities area. The Cedar Rapids market is also highly competitive with respect to financial services. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. Additionally, the Company competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits. These competitive trends are likely to continue and may increase as a result of the continuing reduction on restrictions on the interstate operations of financial institutions. Under the Gramm-Leach-Bliley Act of 1999, effective in March of 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which the Company and its subsidiary banks conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") regulates the Company and its subsidiaries. In addition, Quad City Bank & Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC"). Business. The Company's principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The deposits of Quad City Bank & Trust and Cedar Rapids Bank & Trust are insured to the maximum amount allowable by the FDIC. The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits and borrowings. Its operating results are affected by merchant credit card fees, trust fees, deposit service charge fees, fees from the sales of residential real estate loans and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses and other administrative expenses. The Company's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Lending. The Company and its subsidiaries provide a broad range of commercial and retail lending and investment services to corporations, partnerships, individuals and government agencies. Quad City Bank & Trust and Cedar Rapids Bank & Trust actively market their services to qualified lending customers. Lending officers actively solicit the business of new borrowers entering their market areas as well as long-standing members of the local business community. The subsidiary banks have established lending policies which include a number of underwriting factors to be considered in making a loan, including location, loan to value ratio, cash flow, interest rate and the credit history of the borrower. Quad City Bank & Trust's current lending limit is approximately $5.7 million. Its loan portfolio is comprised primarily of loans in the areas of commercial, residential real estate and consumer lending. As of June 30, 2002, commercial loans made up approximately 77% of the loan portfolio, while residential mortgages comprised approximately 12% and consumer lending comprised 11%. Cedar Rapids Bank & Trust's current lending limit is approximately $1.5 million. Its loan portfolio is comprised primarily of loans in the areas of commercial, residential real estate and consumer lending. As of June 30, 2002, commercial loans made up approximately 87% of the loan portfolio, while residential mortgages comprised approximately 7% and consumer lending comprised 6%. As part of the loan monitoring activity at both subsidiary banks, credit administration personnel interact with senior bank management weekly. Each of the banks has a loan review committee that meets on a monthly basis to review the loan portfolio. The Company has also instituted a separate loan review function to analyze credits of Quad City Bank & Trust and Cedar Rapids Bank & Trust. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of these situations. 3 As noted above, both subsidiary banks are active commercial lenders. The areas of emphasis include loans to wholesalers, manufacturers, building contractors, developers, business services companies and retailers. Quad City Bank & Trust and Cedar Rapids Bank & Trust provide a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, the subsidiary banks often take personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. A significant portion of the subsidiary banks' commercial business loans has floating interest rates or reprice within one year. Commercial real estate loans are also made. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. Residential mortgage lending has been a focal point of Quad City Bank & Trust and Cedar Rapids Bank & Trust as they continue to build their real estate lending business. As a result of this focus, the subsidiary banks' real estate loan portfolios have grown from approximately $354 thousand at the end of the 1994 fiscal year, to approximately $45.4 million at the end of fiscal 2002. The subsidiary banks currently have 7 mortgage originators. The subsidiary banks sell a significant portion of their real estate loans in the secondary market. They typically sell virtually all of the fixed rate loans that they originate. During fiscal 2002, the subsidiary banks originated $175.5 million of real estate loans and sold $144.3 million of these loans. Generally, the subsidiary banks' residential mortgage loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature in one to five years. The subsidiary banks generally retain these loans in its portfolio. Servicing rights are not presently retained on the loans sold in the secondary market. The consumer lending departments of each bank provide all types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. Appendices. The commercial banking business is a highly regulated business. See Appendix A for a brief summary regarding federal and state statutes and regulations, which are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks. See Appendix B for tables and schedules that show selected comparative statistical information required pursuant to the industry guides promulgated under the Securities Act of 1933 and 1934, relating to the business of the Company. Item 2. Property The main office of Quad City Bank & Trust is in a 6,700 square foot facility, which was completed in January 1994. In March 1994, Quad City Bank & Trust acquired that facility, which is located at 2118 Middle Road in Bettendorf, Iowa. Construction of a second full service banking facility was completed in July 1996 to provide for the convenience of customers and to expand the market territory. Quad City Bank & Trust also owns its portion of that facility which is located at 4500 Brady Street in Davenport, Iowa. The two-story building is in two segments that are separated by an atrium. Quad City Bank & Trust owns the south half of the building, while the northern portion is owned by the developer. Each floor is 6,000 square feet. Quad City Bank & Trust occupies its first floor and utilizes the basement for operational functions, item processing and storage. Currently, approximately 1,500 square feet on the second floor is leased to a professional services firm and approximately 4,500 square feet is vacant and leasable. In addition, the residential real estate department of Quad City Bank & Trust leases approximately 2,500 square feet on the first floor in the north half of the building. 4 Renovation of a third full service banking facility was completed in February 1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near the intersection of 7th Street and John Deere Road in Moline, Illinois near the Rock Island/Moline border. The building is owned by a third party limited liability company and Quad City Bank & Trust and Bancard are its major tenants. The Company has purchased a 20% interest in the company that owns the building. Bancard relocated its operations to the lower level of the 30,000 square foot building in late 1997. The Company relocated its corporate headquarters to the building in February 1998 and occupies approximately 2,000 square feet on the second floor. In March 1999, Quad City Bank & Trust acquired a 3,000 square foot office building adjacent to the Brady Street location. The office space is utilized for various operational and administrative functions. Construction of a fourth full service banking facility was completed in October 2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City Bank & Trust leases approximately 6,000 square feet on the first floor and 2,200 square feet on the lower level of the 24,000 square foot facility. The office opened in October 2000. The Company announced plans, in April 2001, to expand its banking operations to the Cedar Rapids, Iowa market. Initially, from June until mid-September, 2001 the Cedar Rapids operation functioned as a branch of Quad City Bank & Trust while waiting for regulatory approvals for a new state bank charter. On September 14, 2001, the Cedar Rapids branch operation was converted into the new charter and began operations as Cedar Rapids Bank and Trust Company. Cedar Rapids Bank & Trust leases approximately 8,200 square feet in the GreatAmerica Building, 625 First Street, S.E. in Cedar Rapids, which currently serves as its only office. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company. Quad City Bank & Trust and Cedar Rapids Bank & Trust intend to limit their investment in premises to no more than 50% of their capital. The subsidiary banks frequently invest in commercial real estate mortgages and also invest in residential mortgages. Quad City Bank & Trust and Cedar Rapids Bank & Trust have established lending policies which include a number of underwriting factors to be considered in making a loan including, location, loan to value ratio, cash flow, interest rate and credit worthiness of the borrower. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. Item 3. Legal Proceedings Bancard was the holder of an account receivable in the approximate amount of $1,700,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova Information Systems, Inc. ("Nova"), which was acquired by U.S. Bancorp in July 2001. This receivable arose pursuant to Bancard's provision of electronic credit card sales authorization and settlement services to PMT pursuant to a written contract that includes PMT's obligation to indemnify Bancard for credit card chargeback losses arising from those services. PMT failed to timely pay Bancard for monthly invoices, including service charges and substantial chargeback losses, for the period beginning May, 2000. On September 25, 2000, PMT filed a lawsuit in federal court in Los Angeles, California, against Bancard and the Company. This lawsuit alleged tortious acts and breaches of contract by Bancard, the Company, and others and sought recovery from Bancard and the company of not less than $3,600,000 of alleged actual damages, plus punitive damages. Bancard and the Company filed lawsuits in federal and state courts in Davenport, Iowa against PMT. These lawsuits sought a court order compelling PMT to participate in arbitration in Bettendorf, Iowa, as provided for in the pertinent contract documents, and to resolve the disputes between PMT, Bancard and the Company, including the unpaid account receivable. The federal court in Iowa ruled that the arbitration issue be determined by the state court in Iowa. Subsequently, the Iowa District Court of Scott County ruled that all claims, including the tort claims, would be arbitrated in Iowa. Because of that ruling, the California lawsuit was dismissed, and arbitration proceedings were to begin in March 2002. On February 21, 2002, the Company announced settlement of its arbitration dispute with Nova. A settlement amount was paid by Nova to Bancard, which resulted in the collection of the receivable due from Nova, less an amount that approximated the costs of continued arbitration. The effect of the settlement was a reduction in third quarter after-tax earnings of approximately $175 thousand. While management continued to believe that Nova's claims were without merit, a determination was made that a settlement at that time was the most effective option for the Company. 5 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 June 30, 2002. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The common stock, par value $1.00 per share of the Company is traded on The Nasdaq SmallCap Market under the symbol "QCRH". The stock began trading on October 6, 1993. As of June 30, 2002, there were 2,749,447 shares of common stock outstanding held by approximately 2,500 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by The Nasdaq SmallCap Market, for the periods indicated. No cash dividends were declared during the periods indicated. Fiscal 2002 Fiscal 2001 Sales Price Sales Price ------------------- -------------------- High Low High Low ------------------------------------------ First quarter ................. $ 12.500 $ 10.100 $ 17.250 $ 11.313 Second quarter ................ 11.790 10.800 12.250 9.938 Third quarter ................. 13.450 11.180 12.563 9.750 Fourth quarter ................ 15.150 13.000 10.813 9.250 Since its inception, the Company has retained all earnings to finance the growth of the Company, Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Bancard. If and when dividends are declared, the Company will likely be largely dependent upon dividends from Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Bancard for funds to pay dividends on the common stock. Under Iowa law, Quad City Bank & Trust and Cedar Rapids Bank & Trust will be restricted as to the maximum amount of dividends they may pay on their common stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. Quad City Bank & Trust and Cedar Rapids Bank & Trust are members of the Federal Reserve System. The total of all dividends declared by the subsidiary banks in a calendar year may not exceed the total of their net profits of that year combined with their retained net profits of the preceding two years. In addition, the Federal Reserve Board, the Iowa Superintendent and the FDIC are authorized under certain circumstances to prohibit the payment of dividends by Quad City Bank & Trust and Cedar Rapids Bank & Trust. In the case of the Company, further restrictions on dividends may be imposed by the Federal Reserve Board. Item 6. Selected Financial Data The "Selected Consolidated Financial Data" of the Company set forth below is derived in part from, and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto. See Item 8 "Financial Statements and Supplementary Data." Results for past periods are not necessarily indicative of results to be expected for any future period. 6 SELECTED CONSOLIDATED FINANCIAL DATA Year Ended June 30, -------------------------------------------------------- 2002 2001 2000 1999 1998 -------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) Statement of Income Data: Interest income ............ $ 28,520 $ 28,544 $ 24,079 $ 20,116 $ 15,077 Interest expense ........... 12,870 16,612 13,289 11,027 8,342 Net interest income ........ 15,650 11,932 10,790 9,089 6,735 Provision for loan losses .. 2,265 889 1,052 892 902 Noninterest income (1) ..... 7,915 6,313 6,154 5,561 6,148 Noninterest expenses ....... 17,023 13,800 11,467 9,679 7,910 Pre-tax net income ......... 4,277 3,556 4,425 4,079 4,071 Income tax expense ......... 1,315 1,160 1,680 1,614 1,678 Net income ................. 2,962 2,396 2,745 2,465 2,393 Per Common Share Data: Net income-basic ........... $ 1.10 $ 1.06 $ 1.19 $ 0.98 $ 1.00 Net income-diluted ......... 1.08 1.04 1.15 0.93 0.93 Balance Sheet: Total assets ............... $518,828 $400,948 $367,622 $321,346 $250,151 Securities ................. 76,231 56,710 56,129 50,258 33,276 Loans ...................... 390,594 287,865 241,853 197,977 162,975 Allowance for estimated losses on loans .......... 6,111 4,248 3,617 2,895 2,350 Deposits ................... 376,317 302,155 288,067 247,966 197,384 Stockholders' equity: Common ................... 32,578 23,817 20,071 18,473 16,602 Preferred ................ 0 0 0 0 2,500 Key Ratios: Return on average assets ... 0.64% 0.62% 0.82% 0.86% 1.14% Return on average common equity ................... 10.07 10.95 14.17 13.69 16.40 Net interest margin ........ 3.74 3.38 3.56 13.42 3.55 Efficiency ratio (2) ....... 72.20 75.64 67.68 66.07 61.40 Nonperforming assets to total assets ............. 0.44 0.44 0.20 0.51 0.51 Allowance for estimated losses on loans to total loans .................... 1.56 1.48 1.50 1.46 1.44 Net charge-offs to average loans .................... 0.12 0.10 0.16 0.26 0.13 Average common stockholders' equity to average assets . 6.37 5.69 5.77 6.26 6.97 Average stockholders' equity to average assets . 6.37 5.69 5.77 7.05 7.97 Earnings to fixed charges Excluding interest on deposits ............... 1.95 x 1.90 x 2.29 x 2.81 x 3.78 x Including interest on deposits ............... 1.32 1.21 1.33 1.36 1.48 (1) Year ended June 30, 1998 noninterest income includes a pre-tax gain of $2,168 from Bancard's restructuring of an agreement with an independent sales organization (ISO). Year ended June 30, 1999 noninterest income includes amortization of $732 from Bancard's restructuring of an ISO agreement. (2) Noninterest expenses divided by the sum of net interest income before provision for loan losses and noninterest income.
7 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 fiscal years ended June 30, 2002, 2001 and 2000, and financial condition for the fiscal years ended June 30, 2002 and 2001. 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. Quad City Bank & Trust opened in January 1994 with $4.5 million in assets, and the Company has grown to $518.8 million in consolidated assets as of June 30, 2002. Management expects continued opportunities for growth, even though the rate of growth will probably be slower than that experienced to date. The Company reported earnings of $3.0 million or $1.10 basic earnings per share for fiscal 2002 as compared to $2.4 million and $1.06 basic earnings per share for fiscal 2001 and $2.7 million and $1.19 basic earnings per share for fiscal 2000. The 24% increase in fiscal 2002 earnings from fiscal 2001 was attributable primarily to significant increases in both net interest income and noninterest income, partially offset by an increase in noninterest expense. The decrease in fiscal 2001 earnings from fiscal 2000 was attributable to an increase in noninterest expense partially offset by increases in both noninterest income and net interest income. When compared to fiscal 2001, fiscal 2002 reflected significant growth in both net interest income and noninterest income for the Company. For fiscal 2002, net interest and noninterest income improved by 31% and 25%, respectively, for a combined increase of $5.3 million when compared to fiscal 2001. Quad City Bank & Trust generated much of the improvement in net interest margin, as well as a large increase in the gains on sales of residential real estate loans during the year. Offsetting these revenue improvements for the Company were increases in noninterest expense of $3.2 million and the provision for loan losses of $1.4 million. During fiscal 2002, pre-tax costs associated with the Company's operation of the Cedar Rapids Bank & Trust subsidiary were approximately $2.4 million, and were the primary contributors to the climb in noninterest expense. While the after-tax start-up losses at Cedar Rapids Bank & Trust, including the pre-charter losses, were $1.1 million for fiscal 2002, these losses were less than anticipated, and Cedar Rapids Bank and Trust's growth was more rapid than expected. Management remains confident that the decision to enter the Cedar Rapids market will provide significant long-term benefits to the Company. Also impacting noninterest expense for fiscal 2002 were legal costs at Bancard, related to its arbitration proceedings to collect a large customer receivable and the subsequent settlement of the dispute in February 2002. As a result of the settlement, an amount was paid by the customer to Bancard, which resulted in the collection of the receivable, less an amount that approximated the costs of continued arbitration. The Company's results of operations are dependent primarily on net interest income, which is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The Company's average tax equivalent yield on interest earning assets decreased 1.27% for fiscal 2002 as compared to fiscal 2001. With the same comparison, the average cost of interest-bearing liabilities decreased 1.76%, which resulted in a 0.49% increase in the net interest spread of 2.72% at June 30, 2001 to 3.21% % at June 30, 2002. The broadening of the net interest spread created a 0.36% increase in the net interest margin. For fiscal 2002, net interest margin was 3.74% compared to 3.38% for fiscal 2001. Management continues to closely monitor and manage net interest margin. The primary challenge for the subsidiary banks currently, from a profitability standpoint, is to continue these improvements in its net interest margin. Very competitive loan rate environments have resulted in the subsidiary banks' interest margin being below their national peer group. Management continues to address this issue with alternative funding sources and pricing strategies. 8 The Company's operating results are also affected by sources of noninterest income, including merchant credit card fees, trust fees, deposit service charge fees, gains from the sales of residential real estate loans and other income. Operating expenses of the Company include employee compensation and benefits, occupancy and equipment expense and other administrative expenses. The Company's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The majority of the subsidiary banks' loan portfolios are invested in commercial loans. Deposits from commercial customers represent a significant funding source as well. The Company has added facilities and employees to accommodate both its historical growth and anticipated future growth. As such, overhead expenses have had a significant impact on earnings. This trend is likely to continue as Cedar Rapids Bank & Trust moved to its permanent facility in the fall of 2001, and both banks continue to add the facilities and resources necessary to attract and serve additional customers During 1994, Quad City Bank & Trust began to develop internally a merchant credit card processing operation and in 1995 transferred this function to Bancard, a separate subsidiary of the Company. Bancard initially had an arrangement to provide processing services exclusively to customers of a single independent sales organization or ISO. This ISO was sold in 1998, and the purchaser requested a reduction in the term of the contract. Bancard agreed to amend the contract to reduce the term and accept a fixed monthly processing fee of $25 thousand for merchants existing at the time the agreement was signed, and a lower transaction fee for new merchants, in exchange for a payment of $2.9 million, the ability to transact business with other ISOs and the assumption of the credit risk by the ISO. Approximately two thirds of the income from this settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of $732 thousand being recognized during fiscal 1999. Bancard terminated its processing for this ISO in May 2000, eliminating approximately 64% of its average monthly processing volume. Prior to this ISO's termination, Bancard's average monthly processing volume for fiscal 2000 was $91 million. During both fiscal 2001 and 2002, Bancard worked to establish additional ISO relationships and further develop the relationships with existing ISOs successfully rebuilding and expanding processing volumes. Bancard's average monthly dollar volume of transactions processed during fiscal 2001 was $76 million. During fiscal 2002, the average monthly dollar volume of transactions processed by Bancard increased 36% to $104 million. Monthly processing volumes at Bancard during fiscal 2002 climbed to a level above that existing prior to the termination of all processing with the initial ISO. During fiscal 1998, Quad City Bank & Trust expanded its presence in the mortgage banking market by hiring several experienced loan originators and an experienced underwriter. Cedar Rapids Bank & Trust currently has one mortgage loan originator. Quad City Bank & Trust and Cedar Rapids Bank & Trust originate mortgage loans on personal residences and sell the majority of these loans into the secondary market to avoid the interest rate risk associated with long-term fixed rate financing. The subsidiary banks realize revenue from this mortgage banking activity from a combination of loan origination fees and gains on the sale of the loans in the secondary market. During fiscal 2002, the subsidiary banks originated $175.5 million of real estate loans and sold $144.3 million of these loans, which resulted in gains of $2.0 million. The decrease in interest rates during that time caused a significant increase in the subsidiary banks' mortgage origination volume. In fiscal 2001, Quad City Bank & Trust originated $97.6 million of real estate loans and sold $92.9 million, which resulted in gains of $1.1 million. Trust department income continues to be a significant contributor to noninterest income, growing from $1.9 million in fiscal 2000 to $2.1 million in fiscal 2001 and to $2.2 million in fiscal 2002. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. Assets under administration have grown from $617.5 at June 30, 2001 to $665.7 million at June 30, 2002. Growth in the current fiscal year resulted primarily from new trust relationships. The Company's initial public offering during the fourth calendar quarter of 1993 raised approximately $14 million. In order to provide additional capital to support the growth of Quad City Bank & Trust, the Company formed a statutory business trust, which issued $12 million of capital securities to the public for cash in June 1999. In conjunction with the formation of Cedar Rapids Bank & Trust, the Company sold approximately $5.0 million of its common stock through a private placement offering in September 2001, primarily to investors in the Cedar Rapids area. 9 Critical Accounting Policy The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly. Management may report a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Management's Discussion and Analysis section entitled "Financial Condition - Allowance for Loan Losses." Although management believes the levels of the allowance as of both June 30, 2002 and 2001 were adequate to absorb losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. Results of Operations Fiscal 2002 compared with fiscal 2001 Overview. Net income for fiscal 2002 was $3.0 million as compared to net income of $2.4 million in fiscal 2001 for an increase of $567 thousand or 24%. Basic earnings per share for fiscal 2002 were $1.10 as compared to $1.06 for fiscal 2001. The increase in net income was comprised of an increase in net interest income after provision for loan losses of $2.3 million and an increase in noninterest income of $1.6 million partially offset by increases in noninterest expenses of $3.2 million and an increase in federal and state income taxes of $155 thousand. Several factors contributed to the improvement in net income during fiscal 2002. Primary factors included the significant improvement of 36 basis points in net interest margin and the 75% increase in gains on sales of real estate loans. Interest income. Interest income was $28.5 million for fiscal 2001 and fiscal 2002. The stability in interest income was attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, that was offset by the reduction in interest rates. The average yield on interest earning assets for fiscal 2002 was 6.77% as compared to 8.04% for fiscal 2001. Interest expense. Interest expense decreased by $3.7 million, from $16.6 million for fiscal 2001 to $12.9 million for fiscal 2002. The 23% decrease in interest expense was primarily attributable to significant reductions in interest rates partially offset by greater average outstanding balances in interest-bearing liabilities. The average cost on interest bearing liabilities was 3.56% for fiscal 2002 as compared to 5.32% for fiscal 2001. 10 Provision for loan losses. The provision for loan losses is established based on a number of factors, including the local and national economy and the risk associated with the loans in the portfolio. The Company had an allowance for estimated losses on loans of approximately 1.56% of total loans at June 30, 2002 as compared to approximately 1.48% at June 30, 2001. The provision for loan losses increased by $1.4 million, from $900 thousand for fiscal 2001 to $2.3 million for fiscal 2002. During the year, management made monthly provisions for loan losses based upon a number of factors, principally the increase in loans and a detailed analysis of the loan portfolio. For fiscal 2002, commercial loans had total charge-offs of $437 thousand and total recoveries of $101 thousand. Consumer loan charge-offs and recoveries totaled $204 thousand and $138 thousand, respectively, for fiscal 2002. Real estate loans had no charge-off or recovery activity during fiscal 2002. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income. Noninterest income increased by $1.6 million, from $6.3 million for fiscal 2001 to $7.9 million for fiscal 2002. Noninterest income for fiscal 2002 and 2001 consisted of income from the merchant credit card operation, fees from the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 25% increase was primarily due to the increases in gains on sales of loans, merchant credit card fees net of processing costs, and deposit service fees received during the period. During fiscal 2002, merchant credit card fees net of processing costs, increased by $424 thousand to $2.1 million, from $1.7 million for fiscal 2001. The increase was due to a 36% improvement in the volume of credit card transactions processed during fiscal 2002, partially offset by the one-time charge during the third quarter related to an arbitration settlement involving Bancard. For fiscal 2002, trust department fees increased $90 thousand, or 4%, to $2.2 million from $2.1 million for fiscal 2001. The increase was primarily a reflection of the development of existing trust relationships and the addition of new trust relationships during the period, almost entirely offset by the reduced market value of securities held in trust accounts and the resulting impact on the calculation of trust fees. Gains on sales of loans were $2.0 million for fiscal 2002, which reflected an increase of 75%, or $855 thousand, from $1.1 million for fiscal 2001. The increase resulted from a significant decline in mortgage rates over recent months, which was driven by corresponding cuts by the Federal Reserve during calendar 2001. This created significantly more home refinances and home purchases during the fiscal year and the subsequent sale of the majority of these loans into the secondary market. Noninterest expenses. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees for both periods. Noninterest expenses for fiscal 2002 were $17.0 million as compared to $13.8 million for the same period in 2001 for an increase of $3.2 million or 23%. The following table sets forth the various categories of noninterest expenses for the years ended June 30, 2002 and 2001. Years Ended June 30, ------------------------------------ 2002 2001 % Change ------------------------------------ Salaries and employee benefits ......................... $10,077,583 $ 8,014,268 26% Professional and data processing fees .................. 1,410,770 1,159,929 22% Advertising and marketing .............................. 604,002 579,524 4% Occupancy and equipment expense ........................ 2,331,806 1,925,820 21% Stationery and supplies ................................ 476,158 352,441 35% Postage and telephone .................................. 486,053 409,626 19% Other .................................................. 1,636,056 1,358,345 20% ----------------------------------- Total noninterest expenses ............... $17,022,428 $13,799,953 23% ===================================
11 Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For fiscal 2002, total salaries and benefits increased to $10.1 million or $2.1 million over the fiscal 2001 total of $8.0 million. The change was primarily attributable to the addition of employees to staff the Cedar Rapids Bank & Trust operation, which accounted for $1.7 million, or 82%, of the increase. A slight increase in the number of Quad City Bank & Trust employees, and increased incentive compensation to real estate officers proportionate to the increased volumes of gains on sales of loans, comprised the balance of the change. Occupancy and equipment expense increased $406 thousand or 21% for the period. The increase was predominately due to the addition of Quad City Bank & Trust's fourth full service banking facility in late October 2000, and Cedar Rapids Bank & Trust's permanent full service banking facility in September 2001, and the resulting increased levels of rent, utilities, depreciation, maintenance, and other occupancy expenses. Professional and data processing fees increased $251 thousand, or 22%, during fiscal 2002. The increase was primarily attributable to legal fees resulting from an arbitration involving Bancard, combined with the additional professional and data processing fees related to Cedar Rapids Bank & Trust. During fiscal 2002, stationary and supplies increased 35%, or $124 thousand. The addition of Cedar Rapids Bank & Trust accounted for $85 thousand, or 68% of this increase. Other noninterest expense increased $278 thousand, or 20% for the fiscal year. Significantly contributing to this increase was a $170 thousand merchant credit card loss resulting from the settlement of an arbitration dispute between Bancard and Nova Information Services, Inc. A settlement amount was paid to Bancard, which was the receivable due from Nova less an amount that approximated the costs of continued arbitration. Also contributing to the increase in noninterest expense were increased insurance expense and increased expense incurred by subsidiary banks for service charges from upstream banks. Income tax expense. The provision for income taxes was $1.3 million for fiscal 2002 compared to $1.2 million for fiscal 2001, an increase of $155 thousand or 13%. The increase was primarily attributable to increased income before income taxes of $722 thousand or 20% for fiscal 2002, partially offset by a reduction in the Company's effective tax rate for fiscal 2002 of 30.7% versus 32.6% for fiscal 2001. Fiscal 2001 compared with fiscal 2000 Overview. Net income for fiscal 2001 was $2.4 million as compared to net income of $2.7 million in fiscal 2000 for a decrease of $300,000 or 13%. Basic earnings per share for fiscal 2001 were $1.06 as compared to $1.19 for fiscal 2000. The decrease in net income was comprised of an increase in noninterest expenses of $2.3 million partially offset by an increase in net interest income after provision for loan losses of $1.3 million, an increase in noninterest income of $200,000 and a decrease in federal and state income taxes of $500,000. Several factors contributed to the reduction in net income. These factors included the opening of the Company's fourth full-service banking facility on Utica Ridge Road in Davenport, a reduction in processing volumes and profitability at Quad City Bancard and initial start-up expenses associated with the Company's expansion to the Cedar Rapids market. Interest income. Interest income increased by $4.4 million, from $24.1 million for fiscal 2000 to $28.5 million for fiscal 2001. The 19% rise in interest income was basically attributable to greater average outstanding balances in interest-earning assets, principally loans receivable. Despite the Federal Reserve's dramatic reduction in short-term interest rates by 2.75% between January and June of 2001, the average yield on interest earning assets for fiscal 2001 was 8.04% as compared to 7.91% for fiscal 2000. Interest expense. Interest expense increased by $3.3 million, from $13.3 million for fiscal 2000 to $16.6 million for fiscal 2001. The 25% increase in interest expense was primarily attributable to greater average outstanding balances in interest-bearing liabilities and higher interest rates. Despite the Federal Reserve's dramatic reduction in short-term interest rates by 2.75% between January and June of 2001, the average cost on interest bearing liabilities was 5.32% for fiscal 2001 as compared to 4.90% for 2000. 12 Provision for loan losses. The provision for loan losses is established based on a number of factors, including the local and national economy and the risk associated with the loans in the portfolio. The Company had an allowance for estimated losses on loans of approximately 1.48% of total loans at June 30, 2001 as compared to approximately 1.50% at June 30, 2000. The provision for loan losses decreased by $200,000, from $1.1 million for fiscal 2000 to $900,000 for fiscal 2001. During the year, management made monthly provisions for loan losses based upon the increase in loans and a detailed analysis of the loan portfolio. For fiscal 2001, commercial loans combined for total charge-offs of $87,000 and total recoveries of $2,000. Consumer loan charge-offs and recoveries totaled $214,000 and $39,000, respectively, for fiscal 2001. Indirect auto loans accounted for a majority of the consumer loan charge-offs. Because asset quality is a priority for the Company and its subsidiaries, management made the decision in the first quarter of fiscal 1999 to downscale indirect auto loan activity based on charge-off history. The average balance in the indirect auto loan portfolio for fiscal 2001 was $3.4 million compared to $8.2 million for fiscal 2000. This 59% decrease in the average portfolio brought with it a 56% decrease in the net charge-offs of indirect auto loans. Net charge-offs for the indirect auto loan portfolio were $46,000 for fiscal 2001 compared to $77,000 for fiscal 2000, for a decrease of $31,000. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income. Noninterest income increased by $200,000, from $6.1 million for fiscal 2000 to $6.3 million for fiscal 2001. Noninterest income for fiscal 2001 and 2000 consisted of income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 3% increase was primarily due to an increase in gains on sales of loans, and increased trust fees and deposit service fees received during the period, offset by the decrease in merchant credit card fees. During fiscal 2001, merchant credit card fees, net of processing costs, decreased by $600,000 to $1.7 million, from $2.3 million for fiscal 2000. The decrease was due to decreased volumes of credit card transactions processed during fiscal 2001. As previously discussed, Bancard terminated processing for its largest ISO in May 2000. For fiscal 2001, trust department fees increased $200,000, or 10%, to $2.1 million from $1.9 million for fiscal 2000. The increase was primarily a reflection of the development of additional trust relationships during the period. Gains on sales of loans were $1.1 million for fiscal 2001, which reflected an increase of 159%, or $700,000, from $400,000 for fiscal 2000. The increase resulted from a dramatic decline in interest rates between January and June 2001, which was driven by corresponding cuts by the Federal Reserve during the first half of calendar 2001. This created significantly more home refinances and home purchases during the fiscal year and the subsequent sale of the majority of these loans into the secondary market. Noninterest expenses. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees for both periods. Noninterest expenses for fiscal 2001 were $13.8 million as compared to $11.5 million for the same period in 2000 for an increase of $2.3 million or 20%. The following table sets forth the various categories of noninterest expenses for the years ended June 30, 2001 and 2000. Years Ended June 30, ------------------------------------ 2001 2000 % Change ------------------------------------ Salaries and employee benefits ......................... $ 8,014,268 $ 6,878,213 17% Professional and data processing fees .................. 1,159,929 860,216 35% Advertising and marketing .............................. 579,524 410,106 41% Occupancy and equipment expense ........................ 1,925,820 1,580,911 22% Stationery and supplies ................................ 352,441 324,219 9% Postage and telephone .................................. 409,626 361,623 13% Other .................................................. 1,358,345 1,052,173 29% ----------------------------------- Total noninterest expenses ............... $13,799,953 $11,467,461 20% ===================================
13 Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For fiscal 2001, total salaries and benefits increased to $8.0 million or $1.1 million over the fiscal 2000 total of $6.9 million. The change was primarily attributable to the addition of new Quad City Bank & Trust employees during the period. Advertising and marketing increased $200,000 or 41%. The increase was the result of the development and start-up of Quad City Bank & Trust's new website (qcbt.com), the establishment of an online partnership with America Online, Inc. creating local access to that website, and media expenses incurred in support of marketing efforts for Quad City Bank & Trust's Utica location and various Quad City Bank & Trust products and departments. Professional and data processing fees increased $300,000 or 35%. The increase was primarily attributable to legal fees resulting from an arbitration involving Bancard, combined with increased fees to outside consultants addressing compliance, efficiency and profitability issues for Quad City Bank & Trust. Other noninterest expense increased $300,000 or 29% for the fiscal year. The increase was primarily the result of increased service charges from upstream banks incurred by Quad City Bank & Trust and increased expenses related to Bancard's cardholder program. Income tax expense. The provision for income taxes was $1.2 million for fiscal 2001 compared to $1.7 million for fiscal 2000, a decrease of $500,000 or 31%. The decrease was primarily attributable to decreased net income generated in fiscal 2001 compared to fiscal 2000, and a reduction in the effective tax rate for fiscal 2001 of 32.6% versus 38.0% for fiscal 2000. Financial Condition Total assets of the Company increased by $117.9 million or 29% to $518.8 million at June 30, 2002 from $400.9 million at June 30, 2001. The growth primarily resulted from an increase in the loan portfolio funded by deposits received from customers and by proceeds from Federal Home Loan Bank advances and short-term borrowings. Cash and Cash Equivalent Assets. Cash and due from banks increased by $6.0 million or 30% to $26.2 million at June 30, 2002 from $20.2 million at June 30, 2001. Cash and due from banks represented both cash maintained at the subsidiary banks , as well as funds that the Company and its subsidiaries had deposited in other banks in the form of demand deposits. Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold decreased by $7.0 million or 90% to $760 thousand at June 30, 2002 from $7.8 million at June 30, 2001. The decrease was attributable to the Company's ongoing efforts to monitor and manage net interest margin. Certificates of deposit at financial institutions decreased by $3.2 million or 31% to $7.3 million at June 30, 2002 from $10.5 million at June 30, 2001. During fiscal 2002, the certificate of deposit portfolio had 50 maturities totaling $4.9 million and 17 purchases totaling $1.7 million. Due to strong loan demand, the subsidiary banks reduced their deposits in other banks in the form of certificates of deposit. Investments. Securities increased by $19.5 million or 34% to $76.2 million at June 30, 2002 from $56.7 million at June 30, 2001. The net increase was the result of a number of transactions in the securities portfolio. The Company purchased additional securities, classified as available for sale, in the amount of $29.9 million and classified as held to maturity, of $100 thousand, and recognized an increase in unrealized gains on securities available for sale, before applicable income tax of $1.2 million. These increases were partially offset by paydowns of $1.8 million that were received on mortgage-backed securities, proceeds from the sales of securities available for sale of $101 thousand, proceeds from calls and maturities of $9.7 million, and amortization of premiums, net of the accretion of discounts, of $163 thousand. Certain investment securities of the subsidiary banks are purchased with the intent to hold the securities until they mature. These held to maturity securities, comprised of municipal securities and other bonds, were recorded at amortized cost at June 30, 2002 and June 30, 2001. The balance at June 30, 2002 was $425 thousand, a decrease of $151 thousand from $576 thousand at June 30, 2001. Market values at June 30, 2002 and June 30, 2001 were $437 thousand and $583 thousand, respectively. All of both the Company's and Cedar Rapids Bank & Trust's and a majority of Quad City Bank & Trust's securities are placed in the available for sale category as the securities may be liquidated to provide cash for operating, investing or financing purposes. These securities were reported at fair value and increased by $19.7 million, or 35%, to $75.8 million at June 30, 2002, from $56.1 million at June 30, 2001. The amortized cost of such securities at June 30, 2002 and June 30, 2001 was $73.7 million and $55.3 million, respectively. 14 The Company does not use any financial instruments referred to as derivatives to manage interest rate risk and as of June 30, 2002 there existed no security in the investment portfolio (other than U.S. Government and U.S. Government agency securities) that exceeded 10% of stockholders' equity at that date. Loans. Total gross loans receivable increased by $102.7 million or 36% to $390.6 million at June 30, 2002 from $287.9 million at June 30, 2001. The increase was the result of the origination or purchase of $556.5 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $402 thousand and loan repayments or sales of loans of $453.3 million. During fiscal 2002, Quad City Bank & Trust contributed $452.3 million, or 81%, and Cedar Rapids Bank & Trust contributed $104.2 million, or 19% of the company's loan originations or purchases. The majority of residential real estate loans originated by the subsidiary banks were sold on the secondary market to avoid the interest rate risk associated with long-term fixed rate loans. As of June 30, 2002, Quad City Bank & Trust's legal lending limit was approximately $5.7 million and Cedar Rapids Bank & Trust's legal lending limit was approximately $1.5 million. Allowance for Loan Losses. The allowance for estimated losses on loans was $6.1 million at June 30, 2002 compared to $4.2 million at June 30, 2001 for an increase of $1.9 million or 44%. The adequacy of the allowance for estimated losses on loans was determined by management based on factors that included the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions and other factors that, in management's judgment, deserved evaluation in estimating loan losses. To ensure that an adequate allowance was maintained, provisions were made based on the increase in loans and a detailed analysis of the loan portfolio. The loan portfolio was reviewed and analyzed monthly with specific detailed reviews completed on all credits risk-rated less than "fair quality" and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance for estimated losses on loans was monitored by the credit administration staff, and reported to management and the board of directors. Net charge-offs for the years ended June 30, 2002 and 2001, were $402 thousand and $260 thousand respectively. One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the total loan portfolio. Provisions were made monthly to ensure that an adequate level was maintained. The allowance for estimated losses on loans as a percentage of total loans was 1.56 % at June 30, 2002 and 1.48% at June 30, 2001. Although management believes that the allowance for estimated losses on loans at June 30, 2002 was at a level adequate to absorb losses on existing loans, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan losses in the future. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. Along with other financial institutions, management shares a concern for the outlook of the economy during the remainder of calendar 2002. A slowdown in economic activity beginning in 2001 severely impacted several major industries as well as the economy as a whole. Even though there are numerous indications of emerging strength, it is not certain that this strength is sustainable. In addition, consumer confidence may still be negatively impacted by the recent substantial decline in equity prices. These events could still adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Company could experience increases in problem assets, delinquencies and losses on loans, and require further increases in the provision. Nonperforming Assets. The policy of the Company is to place a loan on nonaccrual status if: (a) payment in full of interest or principal is not expected or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status. 15 Nonaccrual loans were $1.6 million at June 30, 2002 compared to $1.2 million at June 30, 2001 for an increase of $328 thousand or 27%. The increase in nonaccrual loans was comprised of increases in commercial loans of $760 thousand partially offset by decreases in both real estate loans of $407 thousand and in consumer loans of $25 thousand. The increase in nonaccrual commercial loans was due primarily to the addition of a single, fully collateralized loan at Quad City Bank & Trust with an outstanding balance of $737 thousand. Nonaccrual loans at June 30, 2002 consisted primarily of loans that were well collateralized and were not expected to result in material losses and represented less than one half of one percent of the Company's loan portfolio. All of the Company's nonperforming assets are located in the loan portfolio at Quad City Bank & Trust. The loans in the Cedar Rapids Bank & Trust loan portfolio have been made fairly recently, and none of the loans have been categorized as nonperforming assets. As the loan portfolio at Cedar Rapids Bank & Trust matures, it is likely that there will be nonperforming loans or charge-offs associated with the portfolio. As of June 30, 2002 and 2001, past due loans of 30 days or more amounted to $4.3 million and $3.2 million, respectively. Past due loans as a percentage of gross loans receivable remained unchanged at 1.1% for both June 30, 2002 and June 30, 2001. Other Assets. Premises and equipment increased by $548 thousand or 6% to $9.2 million at June 30, 2002 from $8.7 million at June 30, 2001. The increase resulted from the purchase of additional furniture, fixtures and equipment offset by depreciation expense. Additional information regarding the composition of this account and related accumulated depreciation is described in footnote 5 to the consolidated financial statements. Accrued interest receivable on loans, securities, and interest-bearing cash accounts increased by $263 thousand or 9% to $3.1 million at June 30, 2002 from $2.9 million at June 30, 2001. The increase was primarily due to greater average outstanding balances in interest-bearing assets. Other assets increased by $948 thousand or 9% to $11.5 million at June 30, 2002 from $10.6 million at June 30, 2001. The three largest components of other assets at June 30, 2002 were $3.0 million in Federal Reserve Bank and Federal Home Loan Bank stock, $2.6 million in cash surrender value of life insurance contracts and $2.4 million in prepaid Visa/Mastercard processing fees Other assets also included accrued trust department fees, other miscellaneous receivables, and various prepaid expenses. Deposits. Deposits increased by $74.1 million or 25% to $376.3 million at June 30, 2002 from $302.2 million at June 30, 2001. The increase resulted from a $12.8 million net increase in noninterest-bearing, NOW, money market and other savings accounts and a $61.3 million net increase in certificates of deposit. Short-term Borrowings. Short-term borrowings increased by $6.3 million or 22% from $28.3 million as of June 30, 2001 to $34.6 million as of June 30, 2002. The subsidiary banks offer short-term repurchase agreements to some of their significant deposit customers. Also, on occasion, the subsidiary banks must purchase Federal funds for short-term funding needs from the Federal Reserve Bank, or from a correspondent bank. Short-term borrowings were comprised of customer repurchase agreements of $29.1 million and $28.3 million at June 30, 2002 and 2001, respectively, as well as federal funds purchased from correspondent banks of $5.5 million at June 30, 2002 and none at June 30, 2001. FHLB Advances and Other Borrowings. FHLB advances increased $22.7 million or 76% from $29.7 million as of June 30, 2001 to $52.4 million as of June 30, 2002. As of June 30, 2002, the subsidiary banks held $2.6 million of FHLB stock in aggregate. As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. Both Quad City Bank & Trust and Cedar Rapids Bank & Trust utilized FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provided a less costly source of funds than customer deposits. In June 1999, the Company issued 1,200,000 shares of trust preferred securities through its newly formed Capital Trust subsidiary. On the Company's financial statements, these securities are listed as company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures and were $12,000,000 at both June 30, 2002 and 2001. Under current regulatory guidelines, these securities are considered to be Tier 1 capital, with certain limitations that are applicable to the Company. 16 Other liabilities increased by $971 thousand or 20% to $5.9 million as of June 30, 2002 from $4.9 million as of June 30, 2001. Other liabilities were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At June 30, 2002, the largest single component of other liabilities was $1.9 million of interest payable. Stockholders' Equity. Common stock of $2.3 million as of June 30, 2001 increased by $484 thousand, or 21%, to $2.8 million at June 30, 2002. The increase was primarily the result of the Company's private placement of 475,424 additional shares of common stock at $11.00 per share in September 2001. The funds received as a result of this issuance were largely from residents of the Cedar Rapids area and were used as partial funding for the capitalization of Cedar Rapids Bank & Trust. During fiscal 2001, the Company acquired 18,650 treasury shares at a total cost of $255 thousand. Additional paid-in capital increased to $16.7 million as of June 30, 2002 from $12.1 million at June 30, 2001. The increase of $4.6 million, or 37%, resulted primarily from proceeds received in excess of the $1.00 per share par value, net of issuance costs, for the 475,424 shares of common stock issued as the result of the Company's private placement offering. Retained earnings increased by $3.0 million or 31% to $12.7 million as of June 30, 2002 from $9.7 million as of June 30, 2001. The increase reflected net income for the year. Accumulated other comprehensive income consisting of unrealized gains on securities available for sale, net of related income taxes, was a $1.3 million gain as of June 30, 2002 as compared to a $506 thousand gain as of June 30, 2001. The increase in the gain was attributable to the increase during the period in the fair value of the securities identified as available for sale, primarily as a result of a decline in market interest rates. In April 2000, the Company announced that the board of directors approved a stock repurchase program enabling the Company to repurchase approximately 60,000 shares of its common stock. This stock repurchase program was completed in the fall of 2000 and at both June 30, 2002 and 2001, the Company had acquired 60,146 shares at a total cost of $855 thousand. The weighted average cost of the shares was $14.21. Liquidity Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $34.2 million at June 30, 2002, compared with $38.5 million at June 30, 2001. Quad City Bank & Trust and Cedar Rapids Bank & Trust have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities. The liquidity of the Company is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities was $3.5 million for fiscal 2002 compared to net cash used in operating activities of $1.7 million for fiscal 2001. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $110.6 million for fiscal 2002 and $21.9 million for fiscal 2001. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from Federal Home Loan Bank advances and short-term borrowings was $113.1 million for fiscal 2002 compared to $28.7 million for fiscal 2001. Net cash used in operating activities was $1.7 million for fiscal 2001 compared to $4.2 million net cash provided by operating activities for fiscal 2000. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $21.9 million for fiscal 2001 and $46.1 million for fiscal 2000. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from Federal Home Loan Bank advances, for fiscal 2001 was $28.7 million and for fiscal 2000 was $48.5 million, consisting primarily of deposit growth and proceeds from short-term borrowings. 17 The Company has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. At June 30, 2002, the subsidiary banks had seven unused lines of credit totaling $36.0 million of which $4.0 million was secured and $32.0 million was unsecured. At June 30, 2002, the Company also had a secured line of credit for $10.0 million, of which $5.0 million had been used as partial funding for the capitalization of Cedar Rapids Bank and Trust. At June 30, 2001, Quad City Bank & Trust had six unused lines of credit totaling $31.0 million of which $8.0 million was secured and $23.0 million was unsecured. Also at June 30, 2001, the Company had an unused line of credit for $3.0 million, which was secured. Impact of Inflation and Changing Prices The consolidated financial statements and the accompanying notes have been prepared in accordance with Generally Accepted Accounting Principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement 141, "Business Combinations" and Statement 142, "Goodwill and Other Intangible Assets". Statement 141 eliminates the pooling method for accounting for business combinations; requires that intangible assets that meet certain criteria be reported separately from goodwill; and requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142 eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life; and requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. For the Company, the provisions of the Statements were adopted and approved by the board of directors in September 2001. Implementation of the standards has not had a material effect on the Company's consolidated financial statements. The Financial Accounting Standards Board has issued Statement 143, "Accounting for Asset Retirement Obligations" and Statement 144, " Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement 144 supersedes FASB Statement 121 and the accounting and reporting provisions of APB Opinion No. 30. Statement 144 establishes a single accounting model for long-lived assets to be disposed of by sale at the lower of its carrying amount or its fair value less costs to sell and to cease depreciation/amortization. For the Company, the provisions of Statement 143 and 144 are effective July 1, 2002. Implementation of the Statements is not expected to have a material impact on the Company's financial statements. The Financial Accounting Standards Board has issued Statement 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds FASB Statements No. 4 and 64, relative to debt extinguishments and provides that gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. The Statement amends FASB Statement No. 13, "Accounting for Leases" to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Finally, the Statement rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers" and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of the Statement relative to accounting for leases were effective for transactions occurring after May 15, 2002. Implementation of these provisions of the Statement had no impact on the Company's consolidated financial statements. For the Company, the provisions of the Statement relative to accounting for debt extinguishment are effective July 1, 2002. Implementation of these provisions of the Statement is not expected to have a material impact on the Company's consolidated financial statements. 18 Forward Looking Statements Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "bode," "predict," "suggest," "appear," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following: o The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. o The economic impact of the terrorist attacks that occurred on September 11th, as well as any future threats and attacks, and the response of the United States to any such threats and attacks. o The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. o The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of the Board of Governors of the Federal Reserve System. o The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. o The inability of the Company to obtain new customers and to retain existing customers. o The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. o Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. o The ability of the Company to develop and maintain secure and reliable electronic systems. o The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. o Consumer spending and saving habits which may change in a manner that affects the Company's business adversely. o Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. o The costs, effects and outcomes of existing or future litigation. o Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board. o The ability of the Company to manage the risks associated with the foregoing as well as anticipated. 19 These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income. In an attempt to manage its exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank . Management also reviews Quad City Bank & Trust and Cedar Rapids Bank & Trust's securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting the Company's asset/liability position, the board and management attempt to manage the Company's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board and management may decide to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates. One approach used to quantify interest rate risk is the net portfolio value analysis. In essence, this analysis calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance-sheet contracts. The following table sets forth, at June 30, 2002 and June 30, 2001, an analysis of the Company's interest rate risk as measured by the estimated changes in the net portfolio value resulting from instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis points). Change in Estimated Increase Interest Estimated (Decrease) in NPV --------------------------------------------------------------- Rates NPV Amount Amount Percent --------------------------------------------------------------------------------------------------------------------- (Basis points) June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) +200 $ 40,931 $ 24,705 $ (2,754) $ (4,282) (6.30)% (14.77)% --- $ 43,685 $ 28,987 -200 $ 46,162 $ 27,572 $ 2,477 $ (1,415) 5.67% (4.88)%
The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the board of directors, the Company does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. 20 Item 8. Financial Statements QCR HOLDINGS, INC. Index to Consolidated Financial Statements INDEPENDENT AUDITOR'S REPORT FINANCIAL STATEMENTS Consolidated balance sheets as of June 30, 2002 and 2001 Consolidated statements of income for the years ended June 30, 2002, 2001, and 2000 Consolidated statements of changes in stockholders' equity for the years ended June 30, 2002, 2001 and 2000 Consolidated statements of cash flows for the years ended June 30, 2002, 2001, and 2000 Notes to consolidated financial statements 21 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders QCR Holdings, Inc. Moline, Illinois We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. (formerly known as Quad City Holdings, Inc.) and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended June 30, 2002, 2001, and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QCR Holdings, Inc. and subsidiaries as of June 30, 2002 and 2001, and the results of their operations and their cash flows for the years ended June 30, 2002, 2001, and 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP Davenport, Iowa July 26, 2002 22 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2002 and 2001 ASSETS 2002 2001 ----------------------------------------------------------------------------------------------------- Cash and due from banks ............................................ $ 26,207,676 $ 20,217,219 Federal funds sold ................................................. 760,000 7,775,000 Certificates of deposit at financial institutions .................. 7,272,213 10,512,585 Securities held to maturity, at amortized cost (fair value 2002 $437,116; 2001 $583,411) (Note 3) ........................... 425,440 575,559 Securities available for sale, at fair value (Note 3) .............. 75,805,678 56,134,521 ------------------------------ 76,231,118 56,710,080 ------------------------------ Loans receivable, held for sale (Note 4) ........................... 8,498,345 5,823,820 Loans receivable, held for investment (Note 4) ..................... 382,095,469 282,040,946 Less allowance for estimated losses on loans (Note 4) ............ (6,111,454) (4,248,182) ------------------------------ 384,482,360 283,616,584 ------------------------------ Premises and equipment, net (Note 5) ............................... 9,206,761 8,658,883 Accrued interest receivable ........................................ 3,125,992 2,863,178 Other assets ....................................................... 11,542,375 10,594,405 ------------------------------ Total assets ............................................... $ 518,828,495 $ 400,947,934 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY ----------------------------------------------------------------------------------------------------- Liabilities: Deposits: Noninterest-bearing ............................................ $ 65,384,902 $ 52,582,264 Interest-bearing ............................................... 310,932,407 249,572,960 ------------------------------ Total deposits (Note 6) .................................... 376,317,309 302,155,224 Short-term borrowings (Note 7) ..................................... 34,628,709 28,342,542 Federal Home Loan Bank advances (Note 8) ........................... 52,414,323 29,712,759 Other borrowings (Note 9) .......................................... 5,000,000 -- Company Obligated Mandatorily Redeemable Preferred Securities of subsidiary trust holding solely subordinated debentures (Note 10) 12,000,000 12,000,000 Other liabilities .................................................. 5,890,551 4,919,949 ------------------------------ Total liabilities .......................................... 486,250,892 377,130,474 ------------------------------ Commitments and Contingencies (Note 16) Stockholders' Equity (Notes 14 and 15): Preferred stock, stated value of $1 per share; shares authorized 250,000; shares issued none ......................... -- -- Common stock, $1 par value; shares authorized 5,000,000; June 2002 - shares issued 2,809,593 and outstanding 2,749,447; June 2001 - 2,325,566 and 2,265,420, respectively ... 2,809,593 2,325,566 Additional paid-in capital ....................................... 16,684,605 12,148,759 Retained earnings ................................................ 12,654,202 9,691,749 Accumulated other comprehensive income ........................... 1,283,739 505,922 ------------------------------ 33,432,139 24,671,996 Less cost of 60,146 common shares acquired for the treasury ........ 854,536 854,536 ------------------------------ Total stockholders' equity ................................. 32,577,603 23,817,460 ------------------------------ Total liabilities and stockholders' equity ................. $ 518,828,495 $ 400,947,934 ==============================
See Notes to Consolidated Financial Statements. 23 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 2002, 2001, and 2000 2002 2001 2000 -------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans ..................................... $ 23,718,322 $ 22,970,407 $ 18,364,812 Interest and dividends on securities: Taxable ...................................................... 3,166,323 3,067,722 3,214,722 Nontaxable ................................................... 429,138 290,990 233,793 Interest on certificates of deposit at financial institutions .. 589,946 701,663 753,630 Interest on federal funds sold ................................. 258,256 1,267,062 1,488,267 Other interest ................................................. 358,152 246,092 23,974 ------------------------------------------- Total interest income .................................... 28,520,137 28,543,936 24,079,198 ------------------------------------------- Interest expense: Interest on deposits ........................................... 8,894,578 13,022,210 10,125,235 Interest on company obligated mandatorily redeemable preferred securities ......................................... 1,133,506 1,134,541 1,137,402 Interest on short-term borrowings .............................. 2,640,655 2,454,998 2,025,956 Interest on other borrowings ................................... 201,415 -- -- ------------------------------------------- Total interest expense ................................... 12,870,154 16,611,749 13,288,593 ------------------------------------------- Net interest income ...................................... 15,649,983 11,932,187 10,790,605 Provision for loan losses (Note 4) ............................... 2,264,965 889,670 1,051,818 ------------------------------------------- Net interest income after provision for loan losses ...... 13,385,018 11,042,517 9,738,787 ------------------------------------------- Noninterest income: Merchant credit card fees, net of processing costs ............. 2,097,209 1,673,444 2,346,296 Trust department fees .......................................... 2,161,677 2,071,971 1,884,310 Deposit service fees ........................................... 994,630 816,489 600,219 Gains on sales of loans, net ................................... 1,991,437 1,136,572 438,799 Securities gains (losses), net ................................. 6,433 (14,047) (28,221) Other .......................................................... 663,273 628,639 913,013 ------------------------------------------- Total noninterest income ................................. 7,914,659 6,313,068 6,154,416 ------------------------------------------- Noninterest expenses: Salaries and employee benefits ................................. 10,077,583 8,014,268 6,878,213 Professional and data processing fees .......................... 1,410,770 1,159,929 860,216 Advertising and marketing ...................................... 604,002 579,524 410,106 Occupancy and equipment expense ................................ 2,331,806 1,925,820 1,580,911 Stationery and supplies ........................................ 476,158 352,441 324,219 Postage and telephone .......................................... 486,053 409,626 361,623 Other .......................................................... 1,636,056 1,358,345 1,052,173 ------------------------------------------- Total noninterest expenses ............................... 17,022,428 13,799,953 11,467,461 ------------------------------------------- Income before income taxes ............................... 4,277,249 3,555,632 4,425,742 Federal and state income taxes (Note 11) ......................... 1,314,796 1,159,900 1,680,215 ------------------------------------------- Net income ............................................... $ 2,962,453 $ 2,395,732 $ 2,745,527 =========================================== Earnings per common share (Note 15): Basic .......................................................... $ 1.10 $ 1.06 $ 1.19 Diluted ........................................................ $ 1.08 $ 1.04 $ 1.15 Weighted average common shares outstanding ..................... 2,685,996 2,268,465 2,309,453 Weighted average common and common equivalent shares outstanding 2,743,805 2,314,334 2,385,840
See Notes to Consolidated Financial Statements. 24 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended June 30, 2002, 2001, and 2000 Accumulated Additional Other Common Paid-In Retained Comprehensive Treasury Stock Capital Earnings Income (Loss) Stock Total ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1999 ....................... $2,296,251 $11,959,080 $ 4,550,490 $ (332,350) $ -- $18,473,471 Comprehensive income: Net income ............................... -- -- 2,745,527 -- -- 2,745,527 Other comprehensive (loss), net of tax (Note 2) ............................... -- -- -- (766,168) -- (766,168) ------------ Comprehensive income ................. 1,979,359 ------------ Proceeds from issuance of 37,310 shares of common stock, as a result of warrants and stock options exercised (Note 13) .... 37,310 219,544 -- -- -- 256,854 Exchange of 8,145 shares of common stock in connection with options exercised (8,145) (111,818) -- -- -- (119,963) Tax benefit of nonqualified stock options exercised ................................ -- 81,178 -- -- -- 81,178 Purchase of 41,496 shares of common stock for the treasury ......................... -- -- -- -- (599,480) (599,480) ----------------------------------------------------------------------------------- Balance, June 30, 2000 ....................... 2,325,416 12,147,984 7,296,017 (1,098,518) (599,480) 20,071,419 Comprehensive income: Net income ............................... -- -- 2,395,732 -- -- 2,395,732 Other comprehensive gain, net of tax (Note 2) ............................... -- -- -- 1,604,440 -- 1,604,440 ------------ Comprehensive income ................. 4,000,172 ------------ Proceeds from issuance of 150 shares of common stock as a result of stock options exercised (Note 13) .............. 150 775 -- -- -- 925 Purchase of 18,650 shares of common stock for the treasury ......................... -- -- -- -- (255,056) (255,056) ----------------------------------------------------------------------------------- Balance, June 30, 2001 ....................... 2,325,566 12,148,759 9,691,749 505,922 (854,536) 23,817,460 Comprehensive income: Net income ............................... -- -- 2,962,453 -- -- 2,962,453 Other comprehensive gain, net of tax (Note 2) ............................... -- -- -- 777,817 -- 777,817 ------------ Comprehensive income ................. 3,740,270 ------------ Proceeds from issuance of 23,375 shares of common stock as a result of stock options exercised (Note 13) .............. 23,375 133,607 -- -- -- 156,982 Exchange of 14,772 shares of common stock in connection with options exercised (14,772) (171,291) -- -- -- (186,063) Proceeds from issuance of 475,424 shares of common stock .......................... 475,424 4,513,198 -- -- -- 4,988,622 Tax benefit of nonqualified stock options exercised ................................ -- 60,332 -- -- -- 60,332 ----------------------------------------------------------------------------------- Balance, June 30, 2002 ....................... $2,809,593 $16,684,605 $12,654,202 $1,283,739 $(854,536) $ 32,577,603 ===================================================================================
See Notes to Consolidated Financial Statements. 25 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2002, 2001, and 2000 2002 2001 2000 ------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income .............................................. $ 2,962,453 $ 2,395,732 $ 2,745,527 Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation .......................................... 923,747 768,310 633,418 Provision for loan losses ............................. 2,264,965 889,670 1,051,818 Deferred income taxes ................................. (634,045) (362,995) (398,971) Amortization of offering costs on subordinated debentures ........................................... 29,506 29,506 29,453 Amortization of premiums on securities, net ........... 162,642 60,062 62,539 Investment securities (gains) losses, net ............. (6,433) 14,047 28,221 Loans originated for sale ............................. (146,973,634) (97,605,425) (36,774,571) Proceeds on sales of loans ............................ 146,290,546 94,039,651 38,124,921 Net gains on sales of loans ........................... (1,991,437) (1,136,572) (438,799) Tax benefit of nonqualified stock options exercised ... 60,332 -- 81,178 (Increase) in accrued interest receivable ............. (262,814) (230,058) (626,617) (Increase) decrease in other assets ................... (283,790) (1,166,767) 170,192 Increase (decrease) in other liabilities .............. 970,602 633,631 (528,780) ---------------------------------------------- Net cash provided by (used in) operating activities 3,512,640 (1,671,208) 4,159,529 ---------------------------------------------- Cash Flows from Investing Activities: Net decrease in federal funds sold ...................... 7,015,000 18,330,000 13,020,000 Net (increase) decrease in certificates of deposit at financial institutions ................................ 3,240,372 2,263,878 (241,270) Purchase of securities available for sale ............... (29,934,923) (17,003,552) (23,659,480) Purchase of securities held to maturity ................. (100,000) -- (50,000) Proceeds from calls and maturities of securities ........ 9,702,500 15,045,000 6,200,000 Proceeds from paydowns on securities .................... 1,789,042 1,537,072 1,389,269 Proceeds from sales of securities available for sale .... 101,285 1,262,841 5,191,661 Purchase of life insurance contracts .................... (401,087) -- (2,023,543) Increase in cash value of life insurance contracts ...... (115,888) (87,840) (14,640) Net loans originated and held for investment ............ (100,456,216) (41,568,458) (45,117,584) Purchase of premises and equipment, net ................. (1,471,625) (1,713,387) (795,423) ---------------------------------------------- Net cash used in investing activities ............. (110,631,540) (21,934,446) (46,101,010) ---------------------------------------------- Cash Flows from Financing Activities: Net increase in deposit accounts ........................ 74,162,085 14,088,468 40,100,877 Net increase in short-term borrowings ................... 6,286,167 7,570,818 11,085,847 Proceeds from Federal Home Loan Bank advances ........... 25,000,000 16,750,000 8,000,000 Payments on Federal Home Loan Bank advances ............. (2,298,436) (9,462,639) (10,180,492) Proceeds from other borrowings .......................... 5,000,000 -- -- Purchase of treasury stock .............................. -- (255,056) (599,480) Proceeds from issuance of common stock, net ............. 4,959,541 925 136,891 ----------------------------------------------- Net cash provided by financing activities ......... $ 113,109,357 $ 28,692,516 $ 48,543,643 -----------------------------------------------
(Continued) 26 QCR HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended June 30, 2002, 2001, and 2000 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------- Net increase in cash and due from banks ................... $ 5,990,457 $ 5,086,862 $ 6,602,162 Cash and due from banks: Beginning ....................................................... 20,217,219 15,130,357 8,528,195 -------------------------------------------- Ending .......................................................... $ 26,207,676 $ 20,217,219 $ 15,130,357 ============================================ Supplemental Disclosures of Cash Flow Information, cash payments for: Interest ........................................................ $ 13,405,861 $ 16,069,527 $ 13,024,589 Income taxes .................................................... 1,363,292 1,480,894 2,001,216 Supplemental Schedule of Noncash Investing Activities: Change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net 777,817 1,604,440 (766,168) Due (from broker) to broker for (call) purchase of securities available for sale ................................. -- (1,000,000) -- Exchange of shares of common stock in connection with options exercised ........................................ (186,063) -- (119,963)
See Notes to Consolidated Financial Statements. 27 QCR HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 1. Nature of Business and Significant Accounting Policies Nature of business: QCR Holdings, Inc. (Company) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (Quad City Bank & Trust), Cedar Rapids Bank and Trust Company (Cedar Rapids Bank & Trust), Quad City Bancard, Inc. (Bancard), Allied Merchant Services, Inc. (Allied), and QCR Holdings Capital Trust I (Capital Trust). Effective November 1, 2001, the Company changed its name to QCR Holdings, Inc. from Quad City Holdings, Inc. Quad City Bank & Trust is a commercial bank that serves the Quad Cities and adjacent communities and is chartered and regulated by the state of Iowa, is insured and subject to regulation by the Federal Deposit Insurance Corporation and is a member of and regulated by the Federal Reserve System. Cedar Rapids Bank & Trust serves Cedar Rapids and adjacent communities and is chartered and regulated by the state of Iowa, is insured and subject to regulation by the Federal Deposit Insurance Corporation and is a member of and regulated by the Federal Reserve System. Bancard is an entity formed in April 1995 to conduct the Company's merchant credit card operation and is regulated by the Federal Reserve System. Allied was formed in March 1999 by Bancard as a captive independent sales organization that markets merchant credit card processing services. Allied is a wholly-owned subsidiary of Bancard. QCR Capital Trust I was capitalized in June 1999 for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred Securities. Significant accounting policies: Accounting estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for estimated losses on loans is inherently subjective as it requires material estimates that are susceptible to significant change. The fair value disclosure of financial instruments is an estimate that can be computed within a range. Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and amounts due from banks. Cash flows from federal funds sold, certificates of deposit at financial institutions, loans, deposits, and short-term borrowings are treated as net increases or decreases. Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $5,580,000 and $3,641,000 as of June 30, 2002 and 2001, respectively. Investment securities: Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. 28 Loans held for sale: Residential mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Loans and allowance for estimated losses on loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for estimated losses on loans. Interest is credited to earnings as earned based on the principal amount outstanding. The allowance for estimated losses on loans is maintained at the level considered adequate by management of the Company and the subsidiary banks to provide for losses that are probable. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance, the Company and the subsidiary banks consider the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions, and other factors that in management's judgment deserve evaluation. Loans are considered impaired when, based on current information and events, it is probable the Company and the bank involved will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to an impaired loan is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Company and the Banks recognize interest income on impaired loans on a cash basis. Direct loan origination fees and costs are deferred and the net amounts amortized as an adjustment of the related loan's yield. Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded. Transfers of financial assets: Transfers of financial assets are accounted for as sales, only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives. Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company. Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Trust assets: Trust assets held by the subsidiary banks in a fiduciary, agency, or custodial capacity for its customers, other than cash on deposit at the Banks, are not included in the accompanying consolidated financial statements since such items are not assets of the Banks. Earnings per common share: Basic earnings per share is computed by dividing net income by the weighted average number of common stock shares outstanding for the respective period. Diluted earnings per share is computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding for the respective period. Reclassification: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders' equity, to conform with the current year presentation. 29 Note 2. Comprehensive Income Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale. Other comprehensive income (loss) is comprised as follows: Tax Before Expense Net Tax (Benefit) of Tax ----------------------------------------- Year ended June 30, 2002: Unrealized gains on securities available for sale: Unrealized holding gains arising during the year ........ $ 1,241,584 $ 459,716 $ 781,868 Less, reclassification adjustment for gains included in net income ................................ 6,433 2,382 4,051 ----------------------------------------- Other comprehensive income .......................... $ 1,235,151 $ 457,334 $ 777,817 ========================================= Year ended June 30, 2001: Unrealized gains (losses) on securities available for sale: Unrealized holding gains arising during the year ........ $ 2,482,453 $ 887,041 $ 1,595,412 Less, reclassification adjustment for (losses) included in net income ................................ (14,047) (5,019) (9,028) ----------------------------------------- Other comprehensive income .......................... $ 2,496,500 $ 892,060 $ 1,604,440 ========================================= Year ended June 30, 2000: Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the year ..... $(1,195,285) $ (410,590) $ (784,695) Less, reclassification adjustment for (losses) included in net income ................................ (28,221) (9,694) (18,527) ----------------------------------------- Other comprehensive (loss) .......................... $(1,167,064) $ (400,896) $ (766,168) =========================================
30 Note 3. Investment Securities The amortized cost and fair value of investment securities as of June 30, 2002 and 2001 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ----------------------------------------------------------- June 30, 2002: Securities held to maturity: Municipal securities ....... $ 250,440 $ 7,598 $ -- $ 258,038 Other bonds ................ 175,000 4,078 -- 179,078 ----------------------------------------------------------- $ 425,440 $ 11,676 $ -- $ 437,116 =========================================================== Securities available for sale: U.S. Treasury securities ... $ 1,024,062 $ 9,239 $ -- $ 1,033,301 U.S. agency securities ..... 42,250,426 1,088,265 -- 43,338,691 Mortgage-backed securities . 5,758,421 124,191 -- 5,882,612 Municipal securities ....... 13,663,785 538,002 (15,213) 14,186,574 Corporate securities ....... 9,291,237 190,623 (6,309) 9,475,551 Trust preferred securities . 1,349,796 111,034 (14,405) 1,446,425 Other securities ........... 407,756 39,047 (4,279) 442,524 ----------------------------------------------------------- $ 73,745,483 $ 2,100,401 $ (40,206) $ 75,805,678 =========================================================== June 30, 2001: Securities held to maturity: Municipal securities ....... $ 500,559 $ 4,638 $ -- $ 505,197 Other bonds ................ 75,000 3,214 -- 78,214 ----------------------------------------------------------- $ 575,559 $ 7,852 $ -- $ 583,411 =========================================================== Securities available for sale: U.S. agency securities ..... $ 31,787,602 $ 626,091 $ (104) $ 32,413,589 Mortgage-backed securities . 5,509,433 17,646 (18,797) 5,508,282 Municipal securities ....... 11,892,825 144,098 (39,556) 11,997,367 Corporate securities ....... 4,577,918 31,014 (13,185) 4,595,747 Trust preferred securities . 1,148,488 94,897 (14,405) 1,228,980 Other securities ........... 393,211 19,075 (21,730) 390,556 ----------------------------------------------------------- $ 55,309,477 $ 932,821 $ (107,777) $ 56,134,521 ===========================================================
All sales of securities during the years ended June 30, 2002, 2001, and 2000 were from securities identified as available for sale. Information on proceeds received, as well as the gains and losses from the sale of those securities is as follows: 2002 2001 2000 ------------------------------------ Proceeds from sales of securities ....... $ 101,285 $1,262,841 $5,191,661 Gross gains from sales of securities .... 10,093 11,831 22,366 Gross losses from sales of securities ... 3,660 25,878 50,587 31 The amortized cost and fair value of securities as of June 30, 2002 by contractual maturity are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the mortgage-backed securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary. Other securities are excluded from the maturity categories as there is no fixed maturity date. Amortized Cost Fair Value --------------------------- Securities held to maturity: Due in one year or less ...................... $ 25,000 $ 25,830 Due in one year through five years ........... 400,440 411,286 --------------------------- $ 425,440 $ 437,116 =========================== Securities available for sale: Due in one year or less ...................... $12,199,886 $12,365,027 Due after one year through five years ........ 35,355,599 36,329,261 Due after five years ......................... 20,023,821 20,786,254 --------------------------- 67,579,306 69,480,542 Mortgage-backed securities ................... 5,758,421 5,882,612 Other securities ............................. 407,756 442,524 --------------------------- $73,745,483 $75,805,678 =========================== As of June 30, 2002 and 2001, investment securities with a carrying value of $49,391,310 and $37,120,191, respectively, were pledged on public deposits and for other purposes as required or permitted by law. Note 4. Loans Receivable The composition of the loan portfolio as of June 30, 2002 and 2001 is presented as follows: 2002 2001 ----------------------------- Commercial ..................................... $305,019,327 $209,932,804 Real estate loans held for sale ................ 8,498,345 5,823,820 Real estate - mortgage ......................... 34,033,494 32,191,024 Real estate - construction ..................... 2,861,123 2,568,283 Installment and other consumer ................. 40,036,886 37,361,458 ----------------------------- 390,449,175 287,877,389 Plus deferred loan origination costs (fees), net 144,639 (12,623) Less allowance for estimated losses on loans ... (6,111,454) (4,248,182) ----------------------------- $384,482,360 $283,616,584 ============================= 32 Loans on nonaccrual status amounted to $1,559,609 and $1,231,741 as of June 30, 2002 and 2001, respectively. Foregone interest income and cash interest collected on nonaccrual loans was not material during the years ended June 30, 2002, 2001, and 2000. Changes in the allowance for estimated losses on loans for the years ended June 30, 2002, 2001, and 2000 are presented as follows: 2002 2001 2000 ----------------------------------------- Balance, beginning ......................... $ 4,248,182 $ 3,617,401 $ 2,895,457 Provisions charged to expense ............ 2,264,965 889,670 1,051,818 Loans charged off ........................ (641,156) (300,463) (426,708) Recoveries on loans previously charged off 239,463 41,574 96,834 ----------------------------------------- Balance, ending ............................ $ 6,111,454 $ 4,248,182 $ 3,617,401 =========================================
Impaired loans were not material as of June 30, 2002 and 2001. Loans are made in the normal course of business to directors, officers, and their related interests. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other persons. An analysis of the changes in the aggregate amount of these loans during the years ended June 30, 2002 and 2001 was as follows: 2002 2001 ----------------------------- Balance, beginning ............................. $ 19,383,492 $ 6,918,805 Net increase due to change in related parties -- 11,439,009 Advances ..................................... 11,004,085 6,509,174 Repayments ................................... (7,580,788) (5,483,496) ----------------------------- Balance, ending ................................ $ 22,806,789 $ 19,383,492 ============================= Note 5. Premises and Equipment The following summarizes the components of premises and equipment as of June 30, 2002 and 2001: 2002 2001 ----------------------------- Land ....................................... $ 813,400 $ 813,400 Buildings .................................. 5,951,141 5,536,999 Furniture and equipment .................... 6,329,732 5,307,283 ----------------------------- 13,094,273 11,657,682 Less accumulated depreciation .............. 3,887,512 2,998,799 ----------------------------- $ 9,206,761 $ 8,658,883 ============================= Certain facilities are leased under operating leases. Rental expense was $795,768, $615,058, and $451,097 for the years ended June 30, 2002, 2001, and 2000, respectively. Future minimum rental commitments under noncancelable leases on a fiscal year basis were as follows as of June 30, 2002: Year ending June 30: 2003 $ 540,000 2004 514,000 2005 512,000 2006 496,000 2007 324,000 Thereafter 337,000 ----------- $ 2,723,000 =========== 33 Note 6. Deposits The aggregate amount of certificates of deposit each with a minimum denomination of $100,000, was $62,919,139 and $50,298,560 as of June 30, 2002 and 2001, respectively. As of June 30, 2002, the scheduled maturities of certificates of deposit were as follows: Year ending June 30: 2003 $134,994,069 2004 26,533,924 2005 15,240,894 2006 1,165,866 2007 820,816 ------------ $178,755,569 ============ Note 7. Short-Term Borrowings Short-term borrowings as of June 30, 2002 of $34,628,709 consisted of $29,128,709 of overnight repurchase agreements with customers and $5,500,000 of federal funds purchased. Short-term borrowings as of June 30, 2001 of $28,342,542 consisted entirely of overnight repurchase agreements with customers. Information concerning repurchase agreements is summarized as follows as of June 30, 2002 and 2001: 2002 2001 -------------------------- Average daily balance during the year ............. $27,243,789 $21,584,795 Average daily interest rate during the year ....... 1.93% 4.40% Maximum month-end balance during the year ......... 31,262,688 28,342,542 Weighted average rate as of June 30 ............... 2.16% 4.34% Securities underlying the agreements as of June 30: Carrying value .................................. $44,909,718 $28,947,957 Fair value ...................................... 44,909,718 28,947,957 The securities underlying the agreements as of June 30, 2002 and 2001 were under the Company's control in safekeeping at third-party financial institutions. Note 8. Federal Home Loan Bank Advances The Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As of June 30, 2002 and 2001, the Banks held $2,622,100 and $1,487,000, respectively, of FHLB stock. Maturity and interest rate information on advances from the FHLB as of June 30, 2002 and 2001 is as follows: June 30, 2002 ---------------------------- Weighted Average Amount Due Interest Rate ---------------------------- Maturity: Year ending June 30: 2003 $ 9,704,780 5.55% 2004 13,740,148 3.76 2005 5,250,000 4.22 2006 700,000 6.28 2007 3,410,000 5.38 Thereafter 19,609,395 4.73 ----------- Total FHLB advances $52,414,323 4.64 =========== 34 Of the advances maturing after June 30, 2007, $19,000,000 have options which allow the Banks the right, but not the obligation, to "put" the advances back to the FHLB. June 30, 2001 --------------------------- Weighted Average Amount Due Interest Rate ---------------------------- Maturity: Year ending June 30: 2002 $ 1,995,266 6.97% 2003 7,894,786 6.35 2004 1,815,009 5.90 2005 750,000 5.90 2006 700,000 6.28 Thereafter 16,557,698 5.12 ----------- Total FHLB advances $29,712,759 5.67 =========== Advances from the FHLB are collateralized by 1-to-4 unit residential, home equity 2nd mortgages, commercial real estate, and business loans equal to 135%, 175%, 175%, and 250%, respectively, of total outstanding notes. Note 9. Other Borrowings As of June 30, 2002, the Company has a $10,000,000 revolving credit note, which is secured by all the outstanding stock of Quad City Bank & Trust. The note, which expires July 1, 2004, has a balance outstanding of $5,000,000 as of June 30, 2002. Interest is payable quarterly at the adjusted LIBOR rates as defined in the credit note agreement. As of June 30, 2002, the interest rate was 4.1%. As of June 30, 2001, the Company had a revolving credit note for $3,000,000, which was secured by all the outstanding stock of Quad City Bank & Trust. There was no outstanding balance on this note as of June 30, 2001. The revolving credit note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various operating ratios. As of June 30, 2002, the subsidiary banks had seven unused lines of credit totaling $36,000,000 of which $4,000,000 was secured and $32,000,000 was unsecured. As of June 30, 2001, Quad City Bank & Trust had six unused lines of credit totaling $31,000,000 of which $8,000,000 was secured and $23,000,000 was unsecured. Note 10. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures The Company issued all of the 1,200,000 authorized shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities of QCR Holdings Capital Trust I Holding Solely Subordinated Debentures. Distributions are paid quarterly. Cumulative cash distributions are calculated at a 9.2% annual rate. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarters, but not beyond June 30, 2029. At the end of any deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on June 30, 2029; however, the Company has the option to shorten the maturity date to a date not earlier than June 30, 2004. The redemption price is $10 per capital security plus any accrued and unpaid distributions to the date of redemption. Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Company's indebtedness and senior to the Company's capital stock. The debentures are included on the balance sheets as liabilities; however, for regulatory purposes, approximately $10,900,000 and $8,000,000 of the capital securities are allowed in the calculation of Tier I capital as of June 30, 2002 and 2001, respectively, with the remainder allowed as Tier II capital. The capital securities are traded on the American Stock Exchange under the symbol "CQP.PR.A". 35 Note 11. Federal and State Income Taxes Federal and state income tax expense was comprised of the following components for the years ended June 30, 2002, 2001, and 2000: Year Ended June 30, -------------------------------------------------- 2002 2001 2000 -------------------------------------------------- Current ............... $ 1,948,841 $ 1,522,895 $ 2,079,186 Deferred .............. (634,045) (362,995) (398,971) -------------------------------------------------- $ 1,314,796 $ 1,159,900 $ 1,680,215 ================================================== A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended June 30, 2002, 2001, and 2000: Year Ended June 30, ---------------------------------------------------------------- 2002 2001 2000 --------------------- -------------------- ------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ---------------------------------------------------------------- Computed "expected" tax expense ............... $ 1,497,037 35.0% $1,244,471 35.0% $1,549,010 35.0% Effect of graduated tax rates (42,772) (1.0) (35,556) (1.0) (44,257) (1.0) Tax exempt income, net ...... (196,870) (4.6) (147,396) (4.1) (132,769) (3.0) State income taxes, net of federal benefit ........... 215,833 5.0 132,546 3.7 172,445 3.9 Other ....................... (158,432) (3.7) (34,165) (1.0) 135,786 3.1 ---------------------------------------------------------------- $ 1,314,796 30.7% $1,159,900 32.6% $1,680,215 38.0% ================================================================
The net deferred tax assets included with other assets on the balance sheet consisted of the following as of June 30, 2002 and 2001: 2002 2001 ----------------------- Deferred tax assets: Deferred compensation ............................... $ 383,129 $ 180,863 Loan and credit card losses ......................... 2,281,753 1,701,189 Other ............................................... 62,406 65,651 ----------------------- 2,727,288 1,947,703 ----------------------- Deferred tax liabilities: Net unrealized gains on securities available for sale 776,456 319,122 Premises and equipment .............................. 566,993 469,893 Investment securities accretion ..................... 38,803 35,500 Other ............................................... 97,075 51,938 ----------------------- 1,479,327 876,453 ----------------------- Net deferred tax asset ........................ $1,247,961 $1,071,250 ======================= 36 The change in deferred income taxes was reflected in the financial statements as follows for the years ended June 30, 2002, 2001, and 2000: 2002 2001 2000 ------------------------------------ Provision for income taxes .............. $(634,045) $(362,995) $(398,971) Statement of stockholders' equity- accumulated other comprehensive income, unrealized gains (losses) on securities available for sale, net . 457,334 892,060 (400,896) ------------------------------------ $(176,711) $ 529,065 $(799,867) ==================================== 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 June 30, 2002, 2001, and 2000 were as follows: 2002 2001 2000 ------------------------------------ Matching contribution ................ $318,457 $240,960 $155,237 Discretionary contribution ........... 49,000 41,500 50,000 ------------------------------------ $367,457 $282,460 $205,237 ==================================== The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company's matching contribution differs by officer and is a maximum of between $10,000 and $20,000 annually. Interest is computed at The Wall Street Journal prime rate and also differs by officer, with a minimum of 6% and a maximum of 12%. Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. During the years ended June 30, 2002, 2001, and 2000 the Company expensed $67,273, $27,791, and $41,860, respectively, related to the agreements. As of June 30, 2002 and 2001 the liability related to the agreements totals $253,923 and $139,651, respectively. Note 13. Stock Based Compensation Stock option and incentive plans: The Company's Board of Directors and its stockholders adopted in June 1993 the QCR Holdings, Inc. Stock Option Plan (Stock Option Plan). Up to 150,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive stock options or nonqualified stock options granted under the Stock Option Plan. The Company's Board of Directors adopted in November 1996 the QCR Holdings, Inc. 1997 Stock Incentive Plan (Stock Incentive Plan). Up to 150,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock options and restricted stock granted under the Stock Incentive Plan. The Stock Option Plan and the Stock Incentive Plan are administered by the compensation committee appointed by the Board of Directors (Committee). 37 The number and exercise price of options granted under the Stock Option Plan and the Stock Incentive Plan is determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for incentive stock options. All options have a 10-year life and will vest and become exercisable from 1-to-5 years after the date of the grant. Only nonqualified stock options have been issued to date. In the case of nonqualified stock options, the Stock Option Plan and the Stock Incentive Plan provide for the granting of "Tax Benefit Rights" to certain participants at the same time as these participants are awarded nonqualified options. Each Tax Benefit Right entitles a participant to a cash payment equal to the excess of the fair market value of a share of common stock on the exercise date over the exercise price of the related option multiplied by the difference between the rate of tax on ordinary income over the rate of tax on capital gains (federal and state). As permitted under generally accepted accounting principles, grants under the plan are accounted for following the provisions of APB Opinion No. 25 and its related interpretations. Accordingly, no compensation cost has been recognized for grants made to date. Had compensation cost been determined based on the fair value method prescribed in FASB Statement No. 123, reported net income and earnings per common share would have been reduced to the proforma amounts shown below for the years ending June 30: 2002 2001 2000 ------------------------------------------------- Net income: As reported ............ $ 2,962,453 $ 2,395,732 $ 2,745,527 Pro forma .............. 2,872,271 2,325,404 2,690,807 Earnings per share: Basic: As reported .......... $ 1.10 $ 1.06 $ 1.19 Pro forma ............ 1.07 1.03 1.17 Diluted: As reported .......... 1.08 1.04 1.15 Pro forma ............ 1.05 1.00 1.13 In determining compensation cost using the fair value method prescribed in Statement No. 123, the value of each grant is estimated at the grant date with the following weighted-average assumptions for grants during the years ended June 30, 2002, 2001, and 2000: dividend rate of 0%: risk-free interest rates based upon current rates at the date of grant (5.21% to 6.81%); expected lives of 10 years, and expected price volatility of 20.74% to 24.81%. A summary of the stock option plans as of June 30, 2002, 2001, and 2000 and changes during the years ended on those dates is presented below: 2002 2001 2000 ------------------ ------------------- ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------- Outstanding, beginning ........ 236,437 $10.22 189,005 $10.24 190,171 $ 9.36 Granted ..................... 18,325 14.50 50,200 10.52 25,900 14.83 Exercised ................... (23,375) 6.72 (150) 6.17 (26,060) 6.69 Forfeited ................... (3,349) 13.00 (2,618) 17.10 (1,006) 17.80 -------- ------- ------- Outstanding, ending ........... 228,038 10.89 236,437 10.22 189,005 10.24 ======== ======= ======= Exercisable, ending ........... 139,090 153,390 138,834 Weighted average fair value per option of options granted during the year ............. $ 7.27 $ 5.17 $ 7.68
38 A further summary of options outstanding as of June 30, 2002 is presented below: Options Outstanding ------------------------------------- Options Exercisable Weighted ----------------------- Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price ----------------------------------------------------------------------------------------- $6.00 to $6.83 86,870 2.61 $ 6.67 86,870 $ 6.67 $7.83 to $8.83 8,565 3.93 8.75 8,565 8.75 $10.00 to $11.67 49,950 8.94 10.50 7,150 10.64 $12.69 to $13.25 11,000 7.58 13.07 4,400 13.07 $13.33 to $13.67 21,495 5.00 13.67 17,430 13.66 $14.08 to $16.13 30,520 9.15 15.35 3,380 15.76 $17.75 to $21.33 19,638 6.50 20.24 11,295 20.50 ------- ------- 228,038 139,090 ======= =======
Stock appreciation rights: Additionally, the Stock Incentive Plan allows the granting of stock appreciation rights (SARs). SARs are rights entitling the grantee to receive cash having a fair market value equal to the appreciation in the market value of a stated number of shares from the date of grant. Like options, the number and exercise price of SARs granted is determined by the Committee. The SARs will vest 20% per year, and the term of the SARs may not exceed 10 years from the date of the grant. As of June 30, 2002, 2001, and 2000 there were 90,850, 90,850, and 52,050 SARs, respectively, outstanding, with 48,820, 28,200, and 17,490, respectively, exercisable. Note 14. Regulatory Capital Requirements and Restrictions on Dividends The Company (on a consolidated basis) and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2002 and 2001, that the Company and the Banks met all capital adequacy requirements to which they are subject. 39 As of June 30, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Banks' categories. The Company and the Banks' actual capital amounts and ratios as of June 30, 2002 and 2001 are also presented in the table. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------------------------------------- As of June 30, 2002: Company: Total risk-based capital ... $48,688 11.3% $34,373 8.0% N/A N/A Tier 1 risk-based capital .. 42,153 9.8 17,187 4.0 N/A N/A Leverage ratio ............. 42,153 8.3 20,432 4.0 N/A N/A Quad City Bank & Trust: Total risk-based capital ... $37,546 10.0% $29,951 8.0% $37,439 10.0% Tier 1 risk-based capital .. 32,857 8.8 14,975 4.0 22,463 6.0 Leverage ratio ............. 32,857 7.4 17,721 4.0 22,151 5.0 Cedar Rapids Bank & Trust (A): Total risk-based capital ... $10,230 20.6% $ 3,973 8.0% $ 4,966 10.0% Tier 1 risk-based capital .. 9,608 19.4 1,986 4.0 2,980 6.0 Leverage ratio ............. 9,608 16.3 2,358 4.0 2,947 5.0 As of June 30, 2001: Company: Total risk-based capital ... $39,351 12.2% $25,863 8.0% N/A N/A Tier 1 risk-based capital .. 31,228 9.7 12,932 4.0 N/A N/A Leverage ratio ............. 31,228 7.8 16,044 4.0 N/A N/A Quad City Bank & Trust: Total risk-based capital ... $32,506 10.2% $25,464 8.0% $31,830 10.0% Tier 1 risk-based capital .. 28,524 9.0 12,732 4.0 19,098 6.0 Leverage ratio ............. 28,524 7.3 15,693 4.0 19,616 5.0 (A) As a denovo bank, Cedar Rapids Bank & Trust may not, without the prior consent of the Federal Reserve Bank, pay dividends until after the first three years of operations and two consecutive satisfactory CAMELS ratings. In addition, the Bank is required to maintain a tangible Tier I leverage ratio of at least 9% throughout its first three years of operations.
Federal Reserve Board policy provides that a bank holding company should not pay dividends unless (i) the dividends can be fully funded out of net income from the company's net earnings over the prior year and (ii) the prospective rate of earnings retention appears consistent with the company's (and its subsidiaries') capital needs, asset quality, and overall financial condition. In addition, the Delaware General Corporation Law restricts the Company from paying dividends except out of its surplus, or in the case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. 40 The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. In addition, the Banks, as members of the Federal Reserve System, will be prohibited from paying dividends to the extent such dividends declared in any calendar year exceed the total of its net profits of that year combined with its retained net profits of the preceding two years, or are otherwise determined to be an "unsafe and unsound practice" by the Federal Reserve Board. Note 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 June 30, 2002, 2001, and 2000: 2002 2001 2000 ------------------------------------ Net income ................................. $2,962,453 $2,395,732 $2,745,527 ==================================== Weighted average common shares outstanding . 2,685,996 2,268,465 2,309,453 Weighted average common shares issuable upon exercise of stock options ................ 57,809 45,869 76,387 ------------------------------------ Weighted average common and common equivalent shares outstanding ............ 2,743,805 2,314,334 2,385,840 ====================================
Note 16. Commitments and Contingencies In the normal course of business, the Banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of June 30, 2002 and 2001, commitments to extend credit aggregated $153,487,000 and $91,893,000, respectively. As of June 30, 2002 and 2001, standby letters of credit aggregated $3,984,000 and $1,686,000, respectively. Management does not expect that all of these commitments will be funded. Bancard is subject to the risk of chargebacks from cardholders and the merchant being incapable of refunding the amount charged back. Management attempts to mitigate such risk by regular monitoring of merchant activity and in appropriate cases, holding cash reserves deposited by the merchant. The Company also has a guarantee to MasterCard International Incorporated, which is backed up by a performance bond in the amount of $1,000,000. As of June 30, 2002 there were no significant pending liabilities. Aside from cash on-hand and in-vault, the majority of the Company's cash is maintained at upstream correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal funds sold exceeded federal insured limits by $13,379,699 and $15,146,866 as of June 30, 2002 and 2001, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks. 41 Note 17. Quarterly Results of Operations (Unaudited) Year Ended June 30, 2002 ----------------------------------------------- September December March June 2001 2001 2002 2002 ----------------------------------------------- Total interest income ........ $6,950,044 $6,895,756 $7,081,985 $7,592,352 Total interest expense ....... 3,520,220 3,113,305 3,129,885 3,106,744 ----------------------------------------------- Net interest income .. 3,429,824 3,782,451 3,952,100 4,485,608 Provision for loan losses .... 408,490 631,375 497,500 727,600 Noninterest income ........... 1,847,654 2,192,586 1,828,673 2,045,746 Noninterest expenses ......... 3,925,786 4,319,128 4,395,187 4,382,327 ----------------------------------------------- Net income before income taxes ......... 943,202 1,024,534 888,086 1,421,427 Federal and state income taxes 294,965 335,161 274,003 410,667 ----------------------------------------------- Net income ........... $ 648,237 $ 689,373 $ 614,083 $1,010,760 =============================================== Earnings per common share: Basic ...................... $ 0.26 $ 0.25 $ 0.22 $ 0.37 Diluted .................... 0.26 0.24 0.22 0.36 Year Ended June 30, 2001 ----------------------------------------------- September December March June 2000 2000 2001 2001 ----------------------------------------------- Total interest income ........ $6,978,039 $7,264,701 $7,279,539 $7,021,657 Total interest expense ....... 4,119,175 4,323,023 4,313,369 3,856,182 ----------------------------------------------- Net interest income .. 2,858,864 2,941,678 2,966,170 3,165,475 Provision for loan losses .... 176,075 343,800 148,374 221,421 Noninterest income ........... 1,372,085 1,415,496 1,632,061 1,893,426 Noninterest expenses ......... 3,077,638 3,466,171 3,471,466 3,784,678 ----------------------------------------------- Net income before income taxes ......... 977,236 547,203 978,391 1,052,802 Federal and state income taxes 316,987 203,258 355,520 284,135 ----------------------------------------------- Net income ........... $ 660,249 $ 343,945 $ 622,871 $ 768,667 =============================================== Earnings per common share: Basic ........................ $ 0.29 $ 0.15 $ 0.28 $ 0.34 Diluted ...................... 0.28 0.15 0.27 0.34 Year Ended June 30, 2000 ----------------------------------------------- September December March June 1999 1999 2000 2000 ----------------------------------------------- Total interest income ........ $5,800,637 $5,935,251 $5,952,519 $6,390,791 Total interest expense ....... 3,102,826 3,329,541 3,299,703 3,556,523 ----------------------------------------------- Net interest income .. 2,697,811 2,605,710 2,652,816 2,834,268 Provision for loan losses .... 274,700 296,800 85,600 394,718 Noninterest income ........... 1,372,113 1,623,759 1,624,409 1,534,135 Noninterest expenses ......... 2,773,541 2,727,889 2,960,061 3,005,970 ----------------------------------------------- Net income before income taxes ......... 1,021,683 1,204,780 1,231,564 967,715 Federal and state income taxes 389,035 461,860 471,890 357,430 ----------------------------------------------- Net income ........... $ 632,648 $ 742,920 $ 759,674 $ 610,285 =============================================== Earnings per common share: Basic ...................... $ 0.28 $ 0.32 $ 0.33 $ 0.26 Diluted .................... 0.26 0.31 0.32 0.26 42 Note 18. Parent Company Only Financial Statements The following is condensed financial information of QCR Holdings, Inc. (parent company only): Condensed Balance Sheets June 30, ---------------------------- ASSETS 2002 2001 ------------------------------------------------------------------------------------- Cash and due from banks .............................. $ 607,477 $ 723,209 Securities available for sale, at fair value ......... 1,262,449 1,419,536 Investment in Quad City Bank and Trust Company ....... 33,998,168 28,986,909 Investment in Cedar Rapids Bank and Trust Company .... 9,683,719 -- Investment in Quad City Bancard, Inc. ................ 2,435,057 3,296,760 Investment in QCR Holdings Capital Trust I ........... 390,432 390,432 Net loans receivable ................................. 20,952 145,106 Other assets ......................................... 2,118,031 1,517,166 ---------------------------- Total assets ................................. $ 50,516,285 $ 36,479,118 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------------------------------------------------------- Liabilities: COMR preferred securities of subsidiary trust ...... $ 12,000,000 $ 12,000,000 Other borrowings ................................... 5,000,000 -- Other liabilities .................................. 938,682 661,658 ---------------------------- Total liabilities ............................ 17,938,682 12,661,658 ---------------------------- Stockholders' Equity: Common stock ....................................... 2,809,593 2,325,566 Additional paid-in capital ......................... 16,684,605 12,148,759 Retained earnings .................................. 12,654,202 9,691,749 Accumulated other comprehensive income ............. 1,283,739 505,922 Less cost of common shares acquired for the treasury (854,536) (854,536) ---------------------------- Total stockholders' equity ................... 32,577,603 23,817,460 ---------------------------- Total liabilities and stockholders' equity ... $ 50,516,285 $ 36,479,118 ============================
Condensed Statements of Income Year Ended June 30, ----------------------------------------- 2002 2001 2000 ------------------------------------------------------------------------------------------------------- Total interest income ..................................... $ 102,458 $ 170,319 $ 197,387 Investment securities gains (losses), net ................. 6,433 (25,753) 21,983 Equity in net (loss) of Cedar Rapids Bank and Trust Company (892,383) -- -- Equity in net income of Quad City Bank and Trust Company .. 5,133,113 3,471,422 2,808,058 Equity in net income of Quad City Bancard, Inc. ........... 111,057 184,234 596,224 Equity in net income of QCR Holdings Capital Trust I ...... -- -- 10,432 Other ..................................................... 70,067 (7,745) 233,927 ----------------------------------------- Total income ...................................... 4,530,745 3,792,477 3,868,011 ----------------------------------------- Interest expense .......................................... 1,334,921 1,134,541 1,137,402 Other ..................................................... 1,028,905 958,504 583,282 ----------------------------------------- Total expenses .................................... 2,363,826 2,093,045 1,720,684 ----------------------------------------- Income before income tax benefit .................. 2,166,919 1,699,432 2,147,327 Income tax benefit ........................................ 795,534 696,300 598,200 ----------------------------------------- Net income ........................................ $ 2,962,453 $ 2,395,732 $ 2,745,527 =========================================
43 Condensed Statements of Cash Flows Year Ended June 30, -------------------------------------------- 2002 2001 2000 ---------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income .............................................. $ 2,962,453 $ 2,395,732 $ 2,745,527 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Distributions in excess of (less than) earnings of: Quad City Bank and Trust Company .................... (4,333,113) (3,471,422) (2,808,058) Cedar Rapids Bank and Trust Company ................. 892,383 -- -- Quad City Bancard, Inc. ............................. 861,703 132,266 (596,224) QCR Holdings Capital Trust I ........................ -- -- (10,432) Depreciation .......................................... 252 1,121 2,123 Provision for loan losses ............................. (1,835) (3,790) 6,000 Investment securities (gains) losses, net ............. (6,433) 25,753 (21,983) Tax benefit of nonqualified stock options exercised ... 60,332 -- 81,178 (Increase) decrease in accrued interest receivable .... 4,016 (2,802) (20,140) (Increase) decrease in other assets ................... (608,624) 317,712 130,943 Increase (decrease) in other liabilities .............. 277,024 457,834 (137,454) -------------------------------------------- Net cash provided by (used in) operating activities 108,158 (147,596) (628,520) -------------------------------------------- Cash Flows from Investing Activities: Purchase of securities available for sale ............... (18,205) (269,279) (1,228,400) Proceeds from sale of securities available for sale ..... 101,285 99,247 250,426 Proceeds from calls and maturities of securities ........ 107,500 -- -- Capital infusion, Cedar Rapids Bank and Trust Company ......................................... (10,500,000) -- -- Capital infusion, Quad City Bancard, Inc. ............... -- (900,000) (500,000) Net loans (originated) repaid ........................... 125,989 391,127 (538,443) ------------------------------------------- Net cash (used in) investing activities ........... (10,183,431) (678,905) (2,016,417) ------------------------------------------- Cash Flows from Financing Activities: Proceeds from other borrowings .......................... 5,000,000 -- -- Purchase of treasury stock .............................. -- (255,056) (599,480) Proceeds from issuance of common stock, net ............. 4,959,541 925 136,891 ------------------------------------------- Net cash provided by (used in) financing activities ........................................ 9,959,541 (254,131) (462,589) ------------------------------------------- Net (decrease) in cash and due from banks ......... (115,732) (1,080,632) (3,107,526) Cash and due from banks: Beginning ............................................... 723,209 1,803,841 4,911,367 -------------------------------------------- Ending .................................................. $ 607,477 $ 723,209 $ 1,803,841 ============================================
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. 44 The following methods and assumptions were used by the Company in estimating the fair value of their financial instruments. Cash and due from banks, federal funds sold, and certificates of deposit at financial institutions: The carrying amounts reported in the balance sheets for cash and due from banks, federal funds sold, and certificates of deposit at financial institutions equal their fair values. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: The fair values for variable rate loans equal their carrying values. The fair values for all other types of loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Accrued interest receivable and payable: The fair value of accrued interest receivable and payable is equal to its carrying value. Deposits: The fair values disclosed for demand deposits equal their carrying amounts, which represents the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits. Short-term borrowings: The fair value for short-term borrowings is equal to its carrying value. Federal Home Loan Bank advances and Company Obligated Mandatorily Redeemable Preferred Securities: The fair value of the Company's Federal Home Loan Bank advances and Company obligated mandatorily redeemable preferred securities is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Other borrowings: The fair value for variable rate other borrowings is equal to its carrying value. Commitments to extend credit: The fair value of these commitments is not material. The carrying values and estimated fair values of the Company's financial instruments as of June 30, 2002 and 2001 are presented as follows: 2002 2001 --------------------------- --------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------------------------------------------------- Cash and due from banks ......................... $ 26,207,676 $ 26,207,676 $ 20,217,219 $ 20,217,219 Federal funds sold .............................. 760,000 760,000 7,775,000 7,775,000 Certificates of deposit at financial institutions 7,272,213 7,272,213 10,512,585 10,512,585 Investment securities: Held to maturity .............................. 425,440 437,116 575,559 583,411 Available for sale ............................ 75,805,678 75,805,678 56,134,521 56,134,521 Loans receivable, net ........................... 384,482,360 388,248,360 283,616,584 289,206,000 Accrued interest receivable ..................... 3,125,992 3,125,992 2,863,178 2,863,178 Deposits ........................................ 376,317,309 378,049,309 302,155,224 302,813,000 Short-term borrowings ........................... 34,628,709 34,628,709 28,342,542 28,342,542 Federal Home Loan Bank advances ................. 52,414,323 52,543,323 29,712,759 29,977,000 Other borrowings ................................ 5,000,000 5,000,000 -- -- Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures ........ 12,000,000 12,464,746 12,000,000 12,206,596 Accrued interest payable ........................ 1,858,414 1,858,414 2,394,489 2,394,489
45 Note 20. Business Segment Information Selected financial information on the Company's business segments is presented as follows for the years ended June 30, 2002, 2001, and 2000: Year Ended June 30, ----------------------------------------------- 2002 2001 2000 ----------------------------------------------- Commercial banking: Revenue ...................... $ 31,834,976 $ 30,786,066 $ 25,563,964 Net income ................... 3,151,538 2,599,978 2,446,654 Assets ....................... 512,831,887 394,223,857 361,927,225 Depreciation ................. 888,186 724,330 584,872 Capital expenditures ......... 1,453,335 1,702,763 751,653 Merchant credit card processing: Revenue ...................... 2,263,866 1,883,540 2,520,136 Net income ................... 343,552 220,890 674,800 Assets ....................... 3,061,251 3,672,002 1,998,280 Depreciation ................. 35,309 42,859 46,423 Capital expenditures ......... 15,270 10,624 43,770 Trust management: Revenue ...................... 2,161,677 2,071,971 1,884,310 Net income ................... 540,942 523,670 463,353 Assets ....................... N/A N/A N/A Depreciation ................. N/A N/A N/A Capital expenditures ......... N/A N/A N/A All other: Revenue ...................... 174,277 115,427 265,204 Net (loss) ................... (1,073,579) (948,806) (839,280) Assets ....................... 2,935,357 3,052,075 3,696,110 Depreciation ................. 252 1,121 2,123 Capital expenditures ......... 3,020 -- --
46 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item is set forth under the caption "Election of Directors" in the Proxy Statement, and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is set forth under the caption "Executive Compensation" in the Proxy Statement, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is set forth under the caption "Security Ownership of Certain Beneficial Owners" in the Proxy Statement, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Transactions with Management" in the Proxy Statement, and is incorporated herein by reference. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements These documents are listed in the Index to Consolidated Financial Statements under Item 8. (a) 2. Financial Statement Schedules Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the consolidated financial statements and the accompanying notes thereto. (a) 3. Exhibits The following exhibits are either filed as a part of this Annual Report on Form 10-k or are incorporated herein by reference: Exhibit Number. Exhibit Description ----------------------------------------------------------------------- 3.1 Certificate of Incorporation of QCR Holdings, Inc., as amended (incorporated herein by reference to Exhibit 3.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 3.2 Bylaws of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 of Registrant's Form SB-2, File No. 33-67028). 4.1 Specimen Stock Certificate of QCR Holdings, Inc (incorporated herein by reference to Exhibit 4.1 of Registrant's Form SB-2, File No. 33-67028). 10.1 Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer dated July 1, 2000 (incorporated herein by reference to Exhibit 10.1 of Registrant's Annual Report or Form 10-K for the year ended June 30, 2000). 10.2 Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated July 1, 2000 (incorporated herein by reference to Exhibit 10.2 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 47 10.3 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Michael A. Bauer dated June 28, 2000 (incorporated herein by reference to Exhibit 10.3 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.4 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Douglas M. Hultquist dated June 28, 2000 (incorporated herein by reference to Exhibit 10.4 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.5 Lease Agreement between Quad City Bank and Trust Company and 56 Utica L.L.C. (incorporated herein by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.6 Employment Agreement between Quad City Bank and Trust Company and Larry J. Helling dated April 11, 2001 (incorporated herein by reference to Exhibit 10.6 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2001). 10.7 Lease Agreement between Quad City Bank and Trust Company and Ryan Companies (incorporated herein by reference to Exhibit 10.7 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2001). 10.8 Executive Deferred Compensation Agreement dated January 2002 for Todd A. Gipple, Executive Vice President and Chief Financial Officer of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.9 Executive Deferred Compensation Agreement dated July 2001 for Larry J. Helling, President and Chief Executive Officer of Cedar Rapids Bank and Trust Company (incorporated herein by reference to Exhibit 10.2 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.10 Indenture by and between QCR Holdings, Inc. and First Union Trust Company, National Association, as trustee, dated June 9, 1999 (incorporated by reference to Exhibit 4.1 of Registrant's Form S-2, file No. 33-77889). 12.1 Statement re: Computation of Ratios (exhibit is being filed herewith). 21.1 Subsidiaries of QCR Holdings, Inc. (exhibit is being filed herewith). 23.1 Consent of Independent Accountant - McGladrey and Pullen LLP (exhibit is being filed herewith). 99.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (exhibit is being filed herewith). 99.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (exhibit is being filed herewith). 48 (b) Reports on Form 8-K The Company filed a current report on Form 8-K with the Securities and Exchange Commission on May 2, 2002 under Item 5, which reported information on earnings for the third quarter ended March 31, 2002 in the format of a press release. The Company filed a current report on Form 8-K with the Securities and Exchange Commission on August 5, 2002 under Item 5, which reported information on earnings for the fourth quarter ended June 30, 2002 in the format of a press release. The Company filed a current report on Form 8-K with the Securities and Exchange Commission on August 27, 2002 under Item 8, which reported the change of the Company's fiscal year from June 30 to December 31, effective at the end of calendar 2002. (c) Exhibits Exhibits to the Form 10-K required by Item 601 of Regulation S-K are attached or incorporated herein by reference as stated in the Index to Exhibits. (d) Financial Statements Excluded from Annual Report to Shareholders Pursuant to Rule 14a3(b) Not applicable 49 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: August 28, 2002 By: /s/ Douglas M. Hultquist ------------------------------------- Douglas M. Hultquist President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date ----------------------------------------------------------------------------------------------- /s/ Michael A. Bauer Chairman of the Board of Directors August 28, 2002 ---------------------------- Michael A. Bauer /s/ Douglas M. Hultquist President, Chief Executive August 28, 2002 ---------------------------- and Financial Officer and Director Douglas M. Hultquist /s/ Richard R. Horst Director and Secretary August 28, 2002 ---------------------------- Richard R. Horst /s/ James J. Brownson Director August 28, 2002 ---------------------------- James J. Brownson /s/ Larry J. Helling Director August 28, 2002 ---------------------------- Larry J. Helling /s/ John K. Lawson Director August 28, 2002 ---------------------------- John K. Lawson /s/ Ronald G. Peterson Director August 28, 2002 ---------------------------- Ronald G. Peterson /s/ Henry Royer Director August 28, 2002 ---------------------------- Henry Royer /s/ John W. Schricker Director August 28, 2002 ---------------------------- John W. Schricker
50 Appendix A SUPERVISION AND REGULATION General Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of QCR Holdings, Inc. (the "Company") may be affected not only by management decisions and general economic conditions, but also by the requirements of state and federal statutes and by the regulations and policies of various bank regulatory authorities, including the Iowa Superintendent of Banking (the "Superintendent"), the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Federal Deposit Insurance Corporation (the "FDIC"). Furthermore, taxation laws enforced by the Internal Revenue Service and state taxing authorities and securities laws enforced by the Securities and Exchange Commission (the "SEC") and state securities authorities have an impact on the business of the Company. The effect of applicable 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 deposit funds and the depositors, rather than the 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 the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries. Recent Regulatory Developments After the events of September 11, 2001, financial institutions became the focus of a number of legislative and regulatory initiatives intended to impede the funding of terrorist activities. On July 23, 2002, the federal bank regulatory agencies issued a joint notice of proposed rulemaking that requires financial institutions: (i) to the extent reasonable and practicable, to implement reasonable procedures to verify the identity of any person seeking to open an account; (ii) to maintain records of the information used to verify the person's identity; and (iii) to determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency. The rule applies to each of the Company's banking subsidiaries. The Company General. The Company, as the sole shareholder of the Banks (Quad City Bank and Trust Company, Bettendorf, Iowa, and Cedar Rapids Bank and Trust Company, Cedar Rapids, Iowa), 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, 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. 51 Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control banks. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the voting shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain 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 which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which 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." Under current regulations of the Federal Reserve, this authority would permit the Company to engage in a variety of banking-related businesses, including but not limited to 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 activities and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, the Company has neither applied for nor received approval to operate as a financial holding company. Federal law also prohibits any person or company from acquiring "control" of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. "Control" is defined in certain cases as the acquisition of 10% or more of the outstanding shares of a bank or a bank holding company. Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline 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 risk-weighted assets; 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 which do not qualify as Tier 1 capital and a portion of the company's allowance for loan and lease losses. 52 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 June 30, 2002, the Company had regulatory capital in excess of the Federal Reserve's minimum requirements. Dividends. 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 Delaware General Corporation Law (the "DGCL") allows the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, a Federal Reserve policy statement provides that a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Federal Securities Regulation. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Banks General. The Banks are Iowa-chartered banks, the deposit accounts of which are insured by the FDIC's Bank Insurance Fund ("BIF"). The Banks are members of the Federal Reserve System ("member banks"). As Iowa-chartered banks, the Banks are subject to the examination, supervision, reporting and enforcement requirements of the Superintendent, the chartering authority for Iowa banks. As member banks, the Banks are subject to examination, supervision, reporting and enforcement requirements of the Federal Reserve, which under federal law is designated as the primary federal regulator of member banks. The FDIC, as administrator of the BIF, also has regulatory authority over the Banks. Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the fiscal year ended June 30, 2002, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period commencing July 1, 2002, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution: (i) has engaged or is engaging in unsafe or unsound practices; (ii) is in an unsafe or unsound condition to continue operations; or (iii) has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of the Banks. 53 FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has been used to cover interest payments due on the outstanding obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the fiscal year ended June 30, 2002, the FICO assessment rate for BIF and SAIF members was approximately 0.02% of deposits. Supervisory Assessments. All Iowa banks are required to pay supervisory assessments to the Superintendent to fund the operations of the Superintendent. During the fiscal year ended June 30, 2002, the Banks paid supervisory assessments to the Superintendent totaling $93,476. Capital Requirements. The Federal Reserve has established the following minimum capital standards for state-chartered Federal Reserve System member banks, such as the Banks: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital and total capital under the Federal Reserve's capital guidelines for bank holding companies (see "--The Company--Capital Requirements"). 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, the regulations of the Federal Reserve provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, federal law and regulations provide various incentives to 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 June 30, 2002: (i) neither of the Banks was subject to a directive from the Federal Reserve to increase its capital to an amount in excess of the minimum regulatory capital requirements; (ii) each of the Banks exceeded its minimum regulatory capital requirements under applicable capital adequacy guidelines; and (iii) each of the Banks was "well-capitalized," as defined by applicable regulations. 54 Dividends. The primary source of funds for the Company is dividends from the Banks. The Iowa Banking Act provides that Iowa banks may not pay dividends in an amount greater than their undivided profits. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state member banks, such as the Banks. Generally, member banks may pay dividends out of their undivided profits, in such amounts and at such times, as the banks' boards of directors deem prudent. Without prior Federal Reserve approval, however, state member banks may not pay dividends in any calendar year that, in the aggregate, exceed the banks' calendar year-to-date net income plus the banks' retained net income for the two preceding calendar years. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Banks exceeded its minimum capital requirements under applicable guidelines as of June 30, 2002. As of June 30, 2002, approximately $107,000 was available to be paid as dividends to the Company by the Banks. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the Banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice. Insider Transactions. The Banks are subject to certain restrictions imposed by federal law on extensions of credit to the Company 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. 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 stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Banks maintain a correspondent relationship. 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. Until 2001, an Iowa state bank could only establish a bank office within the boundaries of the counties contiguous to, or cornering upon, the county in which the principal place of business of the bank was located. Further, Iowa law prohibited an Iowa bank from establishing new branches in a municipality other than the municipality in which the bank's principal place of business was located, if another bank already operated one or more offices in the municipality in which the branch was to be located. Under a recent change to the Iowa Banking Act, until June 30, 2004, Iowa banks, such as the Banks, have authority under Iowa law to establish up to three new branches at any location in Iowa, subject to regulatory approval, in addition to any branches established under the branching rules described above. Beginning July 1, 2004, Iowa banks may establish any number of branches at any location in Iowa, subject to regulatory approval. 55 Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle- Neal Act"), both state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Iowa permits interstate bank mergers, subject to certain restrictions, including a prohibition against interstate mergers involving an Iowa bank that has been in existence and continuous operation for fewer than five years. In 1997, the Company formed a de novo Illinois bank that was merged into the Quad City Bank and Trust Company, resulting in the Quad City Bank and Trust Company establishing a branch office in Illinois. Under Illinois law, the Quad City Bank and Trust Company may continue to establish offices in Illinois to the same extent permitted for an Illinois bank (subject to certain conditions, including certain regulatory notice requirements). State Bank Investments and Activities. The Banks are generally permitted to make investments and engage in activities directly or through subsidiaries as authorized by Iowa law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank, unless the bank meets, and continues to meet, its minimum regulatory capital requirements, and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Banks. Federal Reserve System. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $41.3 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $41.3 million, the reserve requirement is $1.239 million plus 10% of the aggregate amount of total transaction accounts in excess of $41.3 million. The first $5.7 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. 56 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 the QCR Holdings, Inc. ("the Company") for the periods shown. 57 I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential. A and B. Consolidated Average Balance Sheets and Analysis of Net Interest Earnings Years Ended June 30, ----------------------------------------------------------------------------------------------- 2002 2001 2000 ------------------------------ ------------------------------ ------------------------------- Interest Average Interest Average Interest Average Average Earned Yield Or Average Earned Yield Or Average Earned Yield Or Balance Or Paid Cost Balance Or Paid Cost Balance Or Paid Cost ----------------------------------------------------------------------------------------------- (Dollars in Thousands) ASSETS Interest earnings assets: Federal funds sold .............. $ 8,831 $ 258 2.92% $ 21,404 $ 1,267 5.92% $ 27,068 $ 1,488 5.50% Certificates of deposit at other financial institutions .. 9,233 590 6.39 11,102 702 6.32 11,967 754 6.30 Investment securities (1) ....... 68,019 3,789 5.57 57,454 3,477 6.05 56,898 3,539 6.22 Net loans receivable (1) (2) .... 329,578 23,718 7.20 261,404 22,971 8.79 209,311 18,365 8.77 Other interest earning assets ... 8,642 386 4.47 4,915 245 4.98 477 24 5.03 ------------------- ------------------- ------------------- Total interest earning assets . 424,303 28,741 6.77 356,279 28,662 8.04 305,721 24,170 7.91 Noninterest-earning assets: Cash and due from banks ......... $ 18,665 $ 15,085 $ 13,699 Premises and equipment .......... 9,308 8,295 7,612 Other ........................... 8,777 5,231 8,822 -------- -------- -------- Total assets .................. $ 461,053 $ 384,890 $ 335,854 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits $ 104,021 1,962 1.89% $ 86,639 2,918 3.37% $ 81,979 2,709 3.30% Savings deposits ................ 8,597 112 1.30 6,707 132 1.97 6,112 125 2.05 Time deposits ................... 164,542 6,821 4.15 159,822 9,972 6.24 134,245 7,291 5.43 Short-term borrowings ........... 27,466 592 2.16 22,477 992 4.41 14,530 665 4.58 Federal Home Loan Bank advances . 41,310 2,048 4.96 24,324 1,463 6.01 22,048 1,361 6.17 COMR ............................ 12,000 1,134 9.45 12,000 1,135 9.46 12,000 1,137 9.48 Other borrowings ................ 3,846 201 5.23 0 0 0.00 0 0 0.00 ------------------- ------------------ ------------------ Total interest-bearing liabilities ................. 361,782 12,870 3.56 311,969 16,612 5.32 270,914 13,288 4.90 Noninterest-bearing demand ...... 59,715 45,902 40,072 Other noninterest-bearing liabilities ................... 10,143 5,133 5,492 Total liabilities ............... 431,640 363,004 316,478 Stockholders' equity ............ 29,413 21,886 19,376 -------- -------- -------- Total liabilities and stockholders' equity ........ $ 461,053 $ 384,890 $ 335,854 ======== ======== ======== Net interest income ............. $ 15,871 $ 12,050 $ 10,882 ======== ======= ======= Net interest spread ............. 3.21% 2.72% 3.00% ===== ===== ===== Net interest margin ............. 3.74% 3.38% 3.56% ===== ===== ===== Ratio of average interest earning assets to average interest- bearing liabilities ........... 117.28% 114.20% 112.85% ======== ======== ======== (1) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented. (2) Loan fees are not material and are included in interest income from loans receivable.
58 C. Analysis of Changes of Interest Income/Interest Expense For the years ended June 30, 2002, 2001 and 2000 Components Inc./(Dec.) of Change (1) from ----------------- Prior Year Rate Volume ------------------------------ 2002 vs. 2001 ------------------------------ (Dollars in thousands) INTEREST INCOME Federal funds sold ................................................ $(1,009) $ (467) $ (542) Certificates of deposit at other financial institutions ........... (112) 7 (119) Investment securities (2) ......................................... 312 (292) 604 Net loans receivable (2) (3) ...................................... 747 (4,604) 5,351 Other interest earning assets ..................................... 141 (27) 168 ----------------------------- Total change in interest income ........................... $ 79 $ (5,383) $ 5,462 ----------------------------- INTEREST EXPENSE Interest-bearing demand deposits .................................. $ (956) $(1,461) $ 505 Savings deposits .................................................. (20) (52) 32 Time deposits ..................................................... (3,151) (3,438) 287 Short-term borrowings ............................................. (400) (586) 186 Federal Home Loan Bank advances ................................... 585 (293) 878 COMR .............................................................. (1) (1) 0 Other borrowings .................................................. 201 0 201 ----------------------------- Total change in interest expense .......................... $(3,742) $(5,831) $ 2,089 ----------------------------- Total change in net interest income ............................... $ 3,821 $ 448 $ 3,373 ============================= Components Inc./(Dec.) of Change (1) from ----------------- Prior Year Rate Volume ------------------------------ 2001 vs. 2000 ------------------------------ (Dollars in thousands) INTEREST INCOME Federal funds sold ................................................ $ (221) $ 108 $ (329) Certificates of deposit at other financial institutions ........... (52) 3 55 Investment securities (2) ......................................... (62) (97) 35 Net loans receivable (2) (3) ...................................... 4,606 28 4,578 Other interest earning assets ..................................... 221 0 221 ----------------------------- Total change in interest income ........................... $ 4,492 $ 42 $ 4,450 ----------------------------- INTEREST EXPENSE Interest-bearing demand deposits .................................. $ 209 $ 53 $ 156 Savings deposits .................................................. 7 (5) 12 Time deposits ..................................................... 2,681 1,176 1,505 Short-term borrowings ............................................. 327 (25) 352 Federal Home Loan Bank advances ................................... 102 (36) 138 COMR .............................................................. (2) (2) 0 Other borrowings .................................................. 0 0 0 ----------------------------- Total change in interest expense .......................... $ 3,324 $ 1,161 $ 2,163 ----------------------------- Total change in net interest income ............................... $ 1,168 $(1,119) $ 2,287 ============================= (1) The column "increase/decrease from prior year" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. (2) Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 34% tax rate in each year presented. (3) Loan fees are not material and are included in interest income from loans receivable.
59 II. Investment Portfolio. A. Investment Securities The following table presents the amortized cost and fair value of investment securities held on June 30, 2002, 2001 and 2000. Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------------------------------------------------ June 30, 2002 ------------- Securities held to maturity: Municipal securities .................... $ 250,440 $ 7,598 $ 0 $ 258,038 Other bonds ............................. 175,000 4,078 0 179,078 ------------------------------------------------------ Totals .............................. $ 425,440 $ 11,676 $ 0 $ 437,116 ====================================================== Securities available for sale: U.S. Treasury securities ................ $ 1,024,062 $ 9,239 $ 0 $ 1,033,301 U.S. agency securities .................. 42,250,426 1,088,265 0 43,338,691 Mortgage-backed securities .............. 5,758,421 124,191 0 5,882,612 Municipal securities .................... 13,663,785 538,002 (15,213) 14,186,574 Corporate securities .................... 9,291,237 190,623 (6,309) 9,475,551 Trust preferred securities .............. 1,349,796 111,034 (14,405) 1,446,425 Other securities ........................ 407,756 39,047 (4,279) 442,524 ------------------------------------------------------ Totals .............................. $73,745,483 $2,100,401 $ (40,206) $75,805,678 ====================================================== June 30, 2001 ------------- Securities held to maturity: Municipal securities .................... $ 500,559 $ 4,638 $ 0 $ 505,197 Other bonds ............................. 75,000 3,214 0 78,214 ------------------------------------------------------ Totals .............................. $ 575,559 $ 7,852 $ 0 $ 583,411 ====================================================== Securities available for sale: U.S. agency securities .................. $31,787,602 $ 626,091 $ (104) $32,413,589 Mortgage-backed securities .............. 5,509,433 17,646 (18,797) 5,508,282 Municipal securities .................... 11,892,825 144,098 (39,556) 11,997,367 Corporate securities .................... 4,577,918 31,014 (13,185) 4,595,747 Trust preferred securities .............. 1,148,488 94,897 (14,405) 1,228,980 Other securities ........................ 393,211 19,075 (21,730) 390,556 ------------------------------------------------------ Totals .............................. $55,309,477 $ 932,821 $ (107,777) $56,134,521 ====================================================== June 30, 2000 ------------- Securities held to maturity: Municipal securities .................... $ 499,988 $ 0 $ (8,769) $ 491,219 Other bonds ............................. 75,000 0 (982) 74,018 ------------------------------------------------------ Totals .............................. $ 574,988 $ 0 $ (9,751) $ 565,237 ====================================================== Securities available for sale: U.S. treasury securities ................ $ 3,000,406 $ 0 $ (11,607) $ 2,988,799 U.S. agency securities .................. 40,199,557 23,275 (1,018,786) 39,204,046 Mortgage-backed securities .............. 7,006,906 0 (297,413) 6,709,493 Municipal securities .................... 5,821,229 0 (300,577) 5,520,652 Trust preferred securities .............. 919,495 0 (49,780) 869,715 Other securities ........................ 277,925 1,474 (18,042) 261,357 ------------------------------------------------------ Totals .............................. $57,225,518 $ 24,749 $(1,696,205) $55,554,062 ======================================================
60 B. Investment Securities Maturities and Yields The following table presents the maturity of securities held on June 30, 2002 and the weighted average rates by range of maturity: Average Amount Yield ------------------------ U.S. Treasury securities: After 1 but within 5 years ..................... $ 1,024,062 3.20% ======================== U.S. agency securities: Within 1 year .................................. $12,099,886 5.08% After 1 but within 5 years ..................... 23,575,610 5.21% After 5 but within 10 years .................... 6,574,930 5.86% ------------------------ Total ..................................... $42,250,426 5.27% ======================== Mortgage-backed securities: After 1 but within 5 years ..................... $ 505,326 5.87% After 5 but within 10 years .................... 2,685,246 5.29% After 10 years ................................. 2,567,849 5.93% ------------------------ Total ..................................... $ 5,758,421 5.62% ======================== Municipal securities: Within 1 year .................................. $ 100,000 7.21% After 1 but within 5 years ..................... 3,588,759 6.15% After 5 but within 10 years .................... 5,536,120 6.43% After 10 years ................................. 4,689,346 7.65% ------------------------ Total ..................................... $13,914,225 6.77% ======================== Corporate securities: After 1 but within 5 years ..................... $ 7,417,608 5.71% After 5 but within 10 years .................... 1,873,629 6.10% ------------------------ Total ..................................... $ 9,291,237 5.79% ======================== Trust preferred securities: After 10 years ................................. $ 1,349,796 8.71% ======================== Other bonds: Within 1 year .................................. $ 25,000 6.30% After 1 but within 5 years ..................... 50,000 6.60% After 5 but within 10 years .................... 50,000 5.30% After 10 years ................................. 50,000 6.55% ------------------------ Total ..................................... $ 175,000 6.17% ======================== Other securities with no maturity or stated face rate $ 407,756 =========== The Company does not use any financial instruments referred to as derivatives to manage interest rate risk. C. Investment Concentrations At June 30, 2002, there existed no security in the investment portfolio above (other than U.S. Government, U.S. Government agencies, and corporations) that exceeded 10% of stockholders' equity at that date. 61 III. Loan Portfolio. The composition of the loan portfolio at June 30, 2002, 2001, 2000, 1999, and 1998 is presented as follows: 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------- Commercial ...................... $305,019,327 $209,932,804 $167,733,209 $136,258,237 $ 99,170,654 Real estate loans held for sale . 8,498,345 5,823,820 1,121,474 2,033,025 4,766,243 Real estate - construction ...... 2,861,123 2,568,283 3,463,682 3,367,458 1,798,257 Real estate - mortgage........... 34,033,494 32,191,024 35,179,905 25,558,861 24,581,017 Installment and other consumer .. 40,036,886 37,361,458 34,405,138 30,810,455 32,732,322 -------------------------------------------------------------------------------- Total loans ................ 390,449,175 287,877,389 241,903,408 198,028,036 163,048,493 Plus deferred loan origination costs, net of fees ......... 144,639 (12,623) (50,557) (51,344) (73,357) Less allowance for estimated losses on loans ............ (6,111,454) (4,248,182) (3,617,401) (2,895,457) (2,349,838) -------------------------------------------------------------------------------- Net loans .................. $384,482,360 $283,616,584 $238,235,450 $195,081,235 $160,625,298 ================================================================================
B. Maturities and Sensitivities of Loans to Changes in Interest Rates Maturities After One Year -------------------------------- At June 30, 2002 Due in one Due after one Due after Predetermined Adjustable year or less through 5 years 5 years interest rates interest rates -------------------------------------------------------------------------------- Commercial ...................... $105,905,915 $165,129,672 $ 33,983,740 $152,204,339 $ 46,909,073 Real estate loans held for sale . 0 0 8,498,345 8,498,345 0 Real estate - construction ...... 2,780,131 80,992 0 80,992 0 Real estate - mortgage........... 2,462,190 539,934 31,031,370 6,174,785 25,396,519 Installment and other consumer... 10,482,995 26,184,317 3,369,574 23,793,966 5,759,925 -------------------------------------------------------------------------------- Totals ..................... $121,631,231 $191,934,915 $ 76,883,029 $190,752,427 $ 78,065,517 ================================================================================
C. Risk Elements The following table represents Nonaccrual, Past Due, Renegotiated Loans, and other Real Estate owned at June 30, 2002, 2001, 2000, 1999, and 1998. 2002 2001 2000 1999 1998 ----------------------------------------------------------------- Loans accounted for on nonaccrual basis ........ $1,559,609 $1,231,741 $ 382,745 $1,287,727 $1,025,761 Accruing loans past due 90 days or more ........ 707,853 494,827 352,376 238,046 259,277 Other real estate owned ........................ 0 47,687 0 119,600 0 Troubled debt restructurings ................... 0 0 0 0 0 ------------------------------------------------------------------ Total ..................................... $2,267,462 $1,774,255 $ 735,121 $1,645,373 $1,285,038 ==================================================================
The policy of the Company is to place a loan on nonaccrual status if: (a) payment in full of interest or principal is not expected, or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status. 2. Potential Problem Loans. To management's best knowledge, there are no such significant loans that have not been disclosed in the above table. 3. Foreign Outstandings. None 62 4. Loan Concentrations. At June 30, 2002, there were no concentration of loans exceeding 10% of total loans which are not otherwise disclosed in Item III. A. D. Other Interest-Bearing Assets There are no other interest-bearing assets required to be disclosed here. IV. Summary of Loan Loss Experience. A. Analysis of the Allowance for Estimated Losses on Loans The following table summarizes activity in the allowance for estimated losses on loans of the Company for the fiscal years ending June 30, 2002, 2001, 2000, 1999, and 1998: 2002 2001 2000 1999 1998 ------------------------------------------------------------------------- Average amount of loans outstanding, before allowance for estimated losses on loans .............................. $338,484,164 $262,237,267 $212,497,181 $184,756,698 $141,974,417 Allowance for estimated losses on loans: Balance, beginning of fiscal year ........ 4,248,182 3,617,401 2,895,457 2,349,838 1,632,500 Charge-offs: Commercial ......................... (437,048) (86,936) (43,295) (104,596) (62,763) Real estate ........................ 0 0 (6,822) (25,142) 0 Installment and other consumer ..... (204,108) (213,527) (376,591) (348,777) (142,471) ------------------------------------------------------------------------- Subtotal charge-offs ............... (641,156) (300,463) (426,708) (478,515) (205,234) ------------------------------------------------------------------------- Recoveries: Commercial ......................... 101,191 2,100 762 53,314 13,146 Real estate ........................ 0 0 0 0 0 Installment and other consumer ..... 138,272 39,474 96,072 79,020 7,450 ------------------------------------------------------------------------- Subtotal recoveries ................ 239,463 41,574 96,834 132,334 20,596 ------------------------------------------------------------------------- Net charge-offs .................... (401,693) (258,889) (329,874) (346,181) (184,638) Provision charged to expense ............. 2,264,965 889,670 1,051,818 891,800 901,976 ------------------------------------------------------------------------- Balance, end of fiscal year .............. $ 6,111,454 $ 4,248,182 $ 3,617,401 $ 2,895,457 $ 2,349,838 ========================================================================= Ratio of net charge-offs to average loans outstanding ........................... .12% 0.10% 0.16% 0.19% 0.13%
63 B. Allocation of the Allowance for Estimated Losses on Loans The following table presents the allowance for estimated losses on loans by type of loans and the percentage of loans in each category to total loans for the fiscal years ending June 30, 2002, 2001, 2000, 1999, and 1998: % % % Of Loans Of Loans Of Loans to Total to Total to Total Amount Loans Amount Loans Amount Loans ---------------------- -------------------- --------------------- 2002 2001 2000 ---------------------- -------------------- --------------------- Commercial ............................. $5,239,506 78.12% $3,231,286 72.92% $2,863,319 69.33% Real estate loans held for sale ........ 1,392 2.18% 0 2.02% 0 0.46% Real estate - construction ............. 14,306 0.73% 0 0.89% 8,659 1.43% Real estate - mortgage ................. 301,928 8.72% 182,365 11.18% 121,530 14.55% Installment and other consumer ......... 554,322 10.25% 834,531 12.99% 617,893 14.23% Unallocated ............................ 0 N/A 0 N/A 6,000 N/A ---------------------- -------------------- --------------------- Total ............................. $6,111,454 100.00% $4,248,182 100.00% $3,617,401 100.00% ====================== ==================== ===================== 1999 1998 --------------------- --------------------- Commercial ............................. $2,164,668 68.80% $1,213,439 60.82% Real estate loans held for sale ........ 0 1.03% 0 2.92% Real estate - construction ............. 8,419 1.70% 4,496 1.10% Real estate - mortgage ................. 94,274 12.91% 74,702 15.08% Installment and other consumer.......... 578,937 15.56% 515,489 20.08% Unallocated ............................ 49,159 N/A 541,712 N/A --------------------- --------------------- Total ............................. $2,895,457 100.00% $2,349,838 100.00% ===================== =====================
V. Deposits. The average amount of and average rate paid for the categories of deposits for the years 2002, 2001, and 2000 are disclosed in the consolidated average balance sheets and can be found on page 2 of Appendix B. Included in interest bearing deposits at June 30, 2002, 2001, and 2000 were certificates of deposit totaling $62,919,139, $50,298,560, and $50,814,599 respectively, that were $100,000 or greater. Maturities of these certificates were as follows: 2002 2001 2000 ----------------------------------------- One to three months ................. $18,222,577 $20,948,861 $24,105,269 Three to six months ................. 11,202,328 11,487,826 11,176,203 Six to twelve months ................ 24,463,968 12,972,591 11,781,428 Over twelve months .................. 9,030,266 4,889,281 3,751,699 ----------------------------------------- Total certificates of deposit greater than $100,000 . $62,919,139 $50,298,560 $50,814,599 ========================================= VI. Return on Equity and Assets. The following table presents the return on assets and equity and the equity to assets ratio of the Company for the years ended June 30, 2002, 2001, and 2000. 2002 2001 2000 -------------------------------------------- Average total assets ................... $461,053,211 $384,890,061 $335,854,396 Average equity ......................... 29,412,548 21,886,477 19,375,865 Net income ............................. 2,962,453 2,395,732 2,745,527 Return on average assets ............... .64% .62% .82% Return on average equity ............... 10.07% 10.95% 14.17% Average equity to average assets ratio . 6.37% 5.69% 5.77%
VII. Short Term Borrowings. The information requested is disclosed in the Notes to Consolidated Financial Statements in Note 7. 64