QCR HOLDINGS INC
10-Ks and 10-Qs
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Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009.
Commission file number: 0-22208
QCR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
|
Delaware
(State of incorporation) |
42-1397595
(I.R.S. Employer Identification No.) |
3551 7th Street, Moline, Illinois 61265
(Address of principal executive offices)
(Address of principal executive offices)
(309) 736-3580
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common stock, $1.00 Par Value The NASDAQ Global Market
Common stock, $1.00 Par Value The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Exchange Act:
Preferred Share Purchase Rights
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant, based on the last sales price quoted on The NASDAQ Capital Market on June 30, 2009, the
last business day of the registrant’s most recently completed second fiscal quarter, was
approximately $39,850,370.
As of February 26, 2010, the Registrant had outstanding 4,582,791 shares of common stock, $1.00 par
value per share.
Documents incorporated by reference:
Part III of Form 10-K — Proxy statement for annual meeting of stockholders to be held in May 2010.
Part III of Form 10-K — Proxy statement for annual meeting of stockholders to be held in May 2010.
QCR HOLDINGS, INC. AND SUBSIDIARIES
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| Exhibit 31.1 | ||||||||
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| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
| Exhibit 99.1 | ||||||||
| Exhibit 99.2 | ||||||||
2
Table of Contents
| Item 1. |
Business
|
General.
QCR Holdings, Inc. (the “Company”) is a multi-bank holding company headquartered in
Moline, Illinois that was formed in February 1993 under the laws of the state of Delaware. The
Company serves the Quad City, Cedar Rapids, and Rockford communities through the following three
wholly-owned banking subsidiaries, which provide full-service commercial and consumer banking and
trust and asset management services:
| • |
Quad City Bank and Trust Company (“Quad City Bank & Trust”), which is based in
Bettendorf, Iowa and commenced operations in 1994;
|
| • |
Cedar Rapids Bank and Trust Company (“Cedar Rapids Bank & Trust”), which is based in
Cedar Rapids, Iowa and commenced operations in 2001; and
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| • |
Rockford Bank and Trust Company (“Rockford Bank & Trust”), which is based in Rockford,
Illinois and commenced operations in 2005.
|
The
Company also engages in direct financing lease contracts through the
80% equity investment by
Quad City Bank & Trust in m2 Lease Funds, LLC, based in Brookfield, Wisconsin, and in real estate
holdings through its 73% equity investment in Velie Plantation Holding Company, LLC, based in
Moline, Illinois.
Quad City Bancard, Inc. (“Bancard”), previously a wholly-owned subsidiary of the Company, conducted
the Company’s credit card issuing operation. Effective December 31, 2009, Bancard was dissolved
and liquidated. The credit card issuing operation was merged in as a department of Quad City Bank
& Trust.
During 2008, Bancard sold its merchant credit card acquiring business. The resulting gain on sale,
net of taxes and related expenses, was approximately $3.0 million. The current and comparative
financial results associated with the merchant credit card acquiring business have been reflected
as discontinued operations throughout the annual report.
On December 31, 2008, the Company sold its Milwaukee, Wisconsin subsidiary, First Wisconsin Bank
and Trust Company (“First Wisconsin Bank & Trust”), for $13.7 million which resulted in a pre-tax
gain on sale of approximately $495 thousand. The current and comparative financial results
associated with First Wisconsin Bank & Trust have been reflected as discontinued operations
throughout the annual report.
Subsidiary Banks.
Quad City Bank & Trust was capitalized on October 13, 1993 and commenced
operations on January 7, 1994. Quad City Bank & Trust is an Iowa-chartered commercial bank that is
a member of the Federal Reserve System with depository accounts insured by the Federal Deposit
Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. Quad City Bank & Trust
provides full service commercial and consumer banking and trust and asset management services in
the Quad Cities and adjacent communities through its five offices that are located in Bettendorf
and Davenport, Iowa and in Moline, Illinois. Quad City Bank & Trust has the 80% equity investment
in m2 Lease Funds. Quad City Bank & Trust, on a consolidated basis with m2 Lease Funds, had total
segment assets of $975.8 million and $908.6 million as of December 31, 2009 and 2008, respectively.
See Financial Statement Note 22 for additional business segment information.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal
Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law.
The Company commenced operations in Cedar Rapids in June 2001 operating as a branch of Quad City
Bank & Trust. The Cedar Rapids branch operation then began functioning under the Cedar Rapids Bank
& Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and
consumer banking and trust and asset management services to Cedar Rapids, Iowa and adjacent
communities through its two facilities. The headquarters for Cedar Rapids Bank & Trust is located
in downtown Cedar Rapids, and its first branch location is located in northern Cedar Rapids. Cedar
Rapids Bank & Trust had total segment assets of $542.7 million and $468.3 million as of December
31, 2009 and 2008, respectively. See Financial Statement Note 22 for additional business segment
information.
3
Table of Contents
Rockford Bank & Trust is an Illinois-chartered commercial bank that is a member of the Federal
Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law.
The Company commenced operations in Rockford, Illinois in September 2004 operating as a branch of
Quad City Bank & Trust, and that operation began functioning under the Rockford Bank & Trust
charter in January 2005. It provides full-service commercial and consumer banking and trust and
asset management services to Rockford and adjacent communities through its original office located
in downtown Rockford and its branch facility located on Guilford Road at Alpine Road in Rockford.
Rockford Bank & Trust had total segment assets of $265.8 million and $228.0 million as of December
31, 2009 and 2008, respectively. See Financial Statement Note 22 for additional business segment
information.
Operating Subsidiaries.
On August 26, 2005, Quad City Bank & Trust acquired 80% of the membership
units of m2 Lease Funds. John Engelbrecht, the President and Chief Executive Officer of m2 Lease
Funds, retained 20% of the membership units. m2 Lease Funds, which is based in Brookfield,
Wisconsin, is engaged in the business of leasing machinery and equipment to commercial and
industrial businesses under direct financing lease contracts.
Beginning in 1998, the Company held a 20% equity investment in Velie Plantation Holding Company.
In 2006, the Company acquired an additional 37% of the membership units bringing its total equity
investment to 57% in aggregate. During 2009, the Company acquired an additional 16% of the
membership units to bring its total equity investment to 73% in aggregate. Velie Plantation
Holding Company is engaged in holding the real estate property known as the Velie Plantation
Mansion in Moline, Illinois.
On January 1, 2008, Quad City Bank & Trust acquired 100% of the membership units of CMG Investment
Advisors, LLC, which is an investment management and advisory company.
Trust Preferred Subsidiaries.
Following is a listing of the Company’s non-consolidated
subsidiaries formed for the issuance of trust preferred securities, including pertinent information
as of December 31, 2009 and 2008:
| Interest | Interest | |||||||||||||||
| Rate as | Rate as | |||||||||||||||
| of | of | |||||||||||||||
| Name | Date Issued | Amount Issued | Interest Rate | 12/31/09 | 12/31/08 | |||||||||||
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QCR Holdings Statutory Trust II
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February 2004 | $ | 12,372,000 | 6.93%* | 6.93 | % | 6.93 | % | ||||||||
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QCR Holdings Statutory Trust III
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February 2004 | 8,248,000 | 2.85% over 3-month LIBOR | 3.10 | % | 6.61 | % | |||||||||
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QCR Holdings Statutory Trust IV
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May 2005 | 5,155,000 | 1.80% over 3-month LIBOR | 2.08 | % | 6.62 | % | |||||||||
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QCR Holdings Statutory Trust V
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February 2006 | 10,310,000 | 6.62%** | 6.62 | % | 6.62 | % | |||||||||
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$ | 36,085,000 | ||||||||||||||
| * |
Rate is fixed until March 31, 2011, then becomes variable based on 3-month LIBOR plus 2.85%,
reset quarterly.
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| ** |
Rate is fixed until April 7, 2011, then becomes variable based on 3-month LIBOR plus 1.55%, reset
quarterly.
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Securities issued by Trust II mature in thirty years, but are callable at par anytime after seven
years from issuance. Securities issued by Trust III, Trust IV, and Trust V mature in thirty years,
but are callable at par anytime after five years from issuance.
4
Table of Contents
Other Ownership Interests.
The Company invests limited amounts of its capital in stocks of
financial institutions and mutual funds. In addition to its wholly-owned and majority-owned
subsidiaries, the Company owns a 20% equity position in Nobel Real Estate Investors, LLC. In June
2005, Cedar Rapids Bank & Trust entered into a joint venture as a 50% owner of Cedar Rapids
Mortgage Company, LLC.
The Company and its subsidiaries collectively employed 343 and 345 full-time equivalents (“FTEs”)
at December 31, 2009 and 2008, respectively.
Business.
The Company’s principal business consists of attracting deposits and investing those
deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the
maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily
on net interest income, which is the difference between the interest earned on its loans/leases and
securities and the interest paid on deposits and borrowings. The Company’s operating results are
affected by economic and competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities, as described more fully in this Form 10-K. Its
operating results also can be affected by trust fees, deposit service charge fees, fees from the
sale of residential real estate loans and other income. Operating expenses include employee
compensation and benefits, occupancy and equipment expense, professional and data processing fees,
advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease
expenses and other administrative expenses.
The Board of Governors of the Federal Reserve System (the “Federal Reserve”) is the primary federal
regulator of the Company and its subsidiaries. In addition, Quad City Bank & Trust and Cedar
Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking (the “Iowa
Superintendent”), and Rockford Bank & Trust is regulated by the State of Illinois Department of
Financial and Professional Regulation (“the Illinois DFPR”). The FDIC, as administrator of the
Deposit Insurance Fund, has regulatory authority over the subsidiary banks.
Lending/Leasing.
The Company and its subsidiaries provide a broad range of commercial and retail
lending and investment services to corporations, partnerships, individuals and government agencies.
The subsidiary banks actively market their services to qualified lending and deposit clients.
Officers actively solicit the business of new clients 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, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit
history of the borrower.
In accordance with Iowa regulation, the legal lending limit to one borrower for Quad City Bank &
Trust and Cedar Rapids Bank & Trust, calculated as 15% of aggregate capital, was $14.5 million and
$8.3 million, respectively, as of December 31, 2009. In accordance with Illinois regulation, the
legal lending limit to one borrower for Rockford Bank & Trust, calculated as 25% of aggregate
capital, totaled $7.5 million as of December 31, 2009.
As part of the loan monitoring activity at the three subsidiary banks, credit administration
personnel interact closely with senior bank management. The Company has a separate in-house loan
review function to analyze credits of the subsidiary banks. To complement the in-house loan
review, an independent third-party performs external loan reviews. Management has attempted to
identify problem loans at an early stage and to aggressively seek a resolution of these situations.
As noted above, the subsidiary banks are active commercial lenders. The current areas of emphasis
include loans to wholesalers, manufacturers, building contractors, business services companies,
other banks, and retailers. The banks provide a wide range of business loans, including lines of
credit for working capital and operational purposes, and term loans for the acquisition of
facilities, equipment and other purposes. Collateral for these loans generally includes accounts
receivable, inventory, equipment and real estate. In addition, the subsidiary banks often take
personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted
by the overall financial condition of the borrower. Terms of commercial business loans generally
range from one to five years. Some of the subsidiary banks’ commercial business loans have
floating interest rates or reprice within one year. The banks also make commercial real estate
loans. Collateral for these loans generally includes the underlying real estate and improvements,
and may include additional assets of the borrower.
5
Table of Contents
The following table presents total loans/leases by type and subsidiary as of December 31, 2009 and
2008. Residential real estate loans held for sale are included in residential real estate loans
below.
| Quad City | m2 | Cedar Rapids | Rockford | Intercompany | Consolidated | |||||||||||||||||||||||||||||||||||||||
| Bank & Trust | Lease Funds | Bank & Trust | Bank & Trust | Elimination | Total | |||||||||||||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | $ | $ | % | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
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As of December 31, 2009:
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Commercial and industrial loans
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$ | 217,873 | 39 | % | $ | — | 0 | % | $ | 148,420 | 39 | % | $ | 75,243 | 36 | % | $ | — | $ | 441,536 | 35 | % | ||||||||||||||||||||||
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Commercial real estate loans
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261,902 | 47 | % | — | 0 | % | 188,750 | 49 | % | 107,634 | 51 | % | (2,279 | ) | 556,007 | 45 | % | |||||||||||||||||||||||||||
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Direct financing leases
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— | 0 | % | 90,059 | 98 | % | — | 0 | % | — | 0 | % | — | 90,059 | 7 | % | ||||||||||||||||||||||||||||
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Residential real estate loans
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33,221 | 6 | % | — | 0 | % | 21,982 | 6 | % | 15,405 | 7 | % | — | 70,608 | 6 | % | ||||||||||||||||||||||||||||
|
Installment and other consumer loans
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48,057 | 9 | % | — | 0 | % | 24,075 | 6 | % | 12,139 | 6 | % | — | 84,271 | 7 | % | ||||||||||||||||||||||||||||
|
Deferred loan/lease origination
costs, net of fees
|
64 | 0 | % | 2,206 | 2 | % | (427 | ) | 0 | % | (4 | ) | 0 | % | — | 1,839 | 0 | % | ||||||||||||||||||||||||||
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$ | 561,117 | 100 | % | $ | 92,265 | 100 | % | $ | 382,800 | 100 | % | $ | 210,417 | 100 | % | $ | (2,279 | ) | $ | 1,244,320 | 100 | % | |||||||||||||||||||||
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As of December 31, 2008:
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Commercial and industrial loans
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$ | 236,023 | 40 | % | $ | — | 0 | % | $ | 133,191 | 38 | % | $ | 69,903 | 36 | % | $ | — | $ | 439,117 | 36 | % | ||||||||||||||||||||||
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Commercial real estate loans
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254,848 | 43 | % | — | 0 | % | 175,481 | 49 | % | 98,757 | 52 | % | (2,418 | ) | 526,668 | 43 | % | |||||||||||||||||||||||||||
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Direct financing leases
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— | 0 | % | 79,408 | 98 | % | — | 0 | % | — | 0 | % | — | 79,408 | 7 | % | ||||||||||||||||||||||||||||
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Residential real estate loans
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44,480 | 8 | % | — | 0 | % | 22,608 | 6 | % | 12,141 | 6 | % | — | 79,229 | 7 | % | ||||||||||||||||||||||||||||
|
Installment and other consumer loans
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54,151 | 9 | % | — | 0 | % | 23,597 | 7 | % | 10,793 | 6 | % | — | 88,541 | 7 | % | ||||||||||||||||||||||||||||
|
Deferred loan/lease origination
costs, net of fees
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118 | 0 | % | 1,864 | 2 | % | (299 | ) | 0 | % | 44 | 0 | % | — | 1,727 | 0 | % | |||||||||||||||||||||||||||
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$ | 589,620 | 100 | % | $ | 81,272 | 100 | % | $ | 354,578 | 100 | % | $ | 191,638 | 100 | % | $ | (2,418 | ) | $ | 1,214,690 | 100 | % | |||||||||||||||||||||
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The subsidiary banks sell the majority of their residential real estate loans in the secondary market. The following table presents the originations and sales of residential real estate loans for the Company.
| For the year ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (dollars in thousands) | ||||||||||||
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Originations of residential real estate loans
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$ | 157,180 | $ | 116,662 | $ | 134,965 | ||||||
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Sales of residential real estate loans
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$ | 141,619 | $ | 87,907 | $ | 103,640 | ||||||
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Percentage of sales to originations
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90 | % | 75 | % | 77 | % | ||||||
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 or adjust in one to five years,
and then retain these loans in their portfolios. Servicing rights are not presently retained on
the loans sold in the secondary market.
The consumer lending departments of each bank provide many types of consumer loans including motor
vehicle, home improvement, home equity, signature loans and small personal credit lines.
m2 Lease Funds leases machinery and equipment to commercial and industrial customers under direct
financing leases.
Competition.
The Company currently operates in the highly competitive Quad City, Cedar Rapids, and
Rockford markets. Competitors include not only other commercial banks, credit unions, thrift
institutions, and mutual funds, but also, insurance companies, finance companies, brokerage firms,
investment banking companies, and a variety of other financial services and advisory companies.
Many of these competitors are not subject to the same regulatory restrictions as the Company. Many
of these unregulated competitors compete across geographic boundaries and provide customers
increasing access to meaningful alternatives to banking services. The Company competes in markets
with a number of much larger financial institutions with substantially greater resources and larger
lending limits.
6
Table of Contents
Appendices.
The commercial banking business is a highly regulated business. See Appendix A for a
summary of the federal and state statutes and regulations that are applicable to the Company and
its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by
bank regulatory agencies are intended primarily for the protection of depositors rather than
stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative statistical information
relating to the business of the Company required to be presented pursuant to federal securities
laws. Consistent with the information presented in Form 10-K, results are presented for the fiscal
years ended December 31, 2009, 2008, 2007, 2006, and 2005 and have been reclassified, as
appropriate, for discontinued operations.
Internet Site, Securities Filings and Governance Documents.
The Company maintains Internet sites
for itself and its three banking subsidiaries. The Company makes available free of charge through
these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
after it electronically files such material with, or furnishes it to, the Securities and Exchange
Commission. Also available are many of our corporate governance documents, including our Code of
Conduct and Ethics Policy. The sites are
www.qcrh.com
,
www.qcbt.com
,
www.crbt.com
, and
www.rkfdbank.com
.
| Item 1A. |
Risk Factors
|
In addition to the other information in this Annual Report on Form 10-K, stockholders or
prospective investors should carefully consider the following risk factors:
Our business may be adversely affected by the continued downturn in the United States economy and
the difficult market conditions in our industry.
Since 2007, the United States economy has experienced a severe downturn that continued in 2009.
Business activity across a wide range of industries and regions is greatly reduced, and many
businesses and local governments are experiencing serious difficulty in remaining profitable due to
the lack of consumer spending and the lack of liquidity in the credit markets. Over the past few
years, unemployment in the United States has increased significantly.
As a result of this economic downturn, many lending institutions, including us, have experienced
declines in the performance of their loans, including commercial loans, commercial real estate
loans and consumer loans. In addition, the values of real estate collateral supporting many
commercial loans and home mortgages have declined and may continue to decline. Moreover,
competition among depository institutions for deposits and quality loans has increased
significantly. Bank and bank holding company stock prices have been negatively affected, and the
ability of banks and bank holding companies to raise capital or borrow in the debt markets has
become more difficult in recent years.
If the current weak economic conditions continue or worsen, our business, growth and profitability
are likely to suffer. A continued downturn in economic conditions could affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in delinquencies and
default rates, which may impact our charge-offs and provision for credit losses. A worsening of
these conditions would likely exacerbate the adverse effects of these difficult market conditions
on us and others in the financial services industry.
Overall, during the past year, the general business environment has had an adverse effect on our
business, and there can be no assurance that the environment will improve in the near term. Until
conditions improve, we expect our business, financial condition and results of operations to be
adversely affected.
7
Table of Contents
Our business is concentrated in and dependent upon the continued growth and welfare of the Quad
City, Cedar Rapids, and Rockford markets.
We operate primarily in the Quad City, Cedar Rapids, and Rockford markets, and as a result, our
financial condition, results of operations and cash flows are subject to changes in the economic
conditions in those areas. We have developed a particularly strong presence in Bettendorf, Cedar
Rapids and Davenport, Iowa and Moline and Rockford, Illinois and their surrounding communities.
Our success depends upon the business activity, population, income levels, deposits and real estate
activity in these markets. Although our customers’ business and financial interests may extend well
beyond these market areas, adverse economic conditions that affect these market areas could reduce
demand for our products and services, affect the ability of our customers to repay their loans to
us, increase the levels of our non-performing and problem loans, and generally affect our financial
condition and results of operations. Because of our geographic concentration, we are less able than
other regional or national financial institutions to diversify our credit risks across multiple
markets.
Liquidity risks could affect operations and jeopardize our business, results of operations and
financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings,
the sale of loans and other sources could have a substantial negative effect on our liquidity. Our
primary sources of funds consist of cash from operations, deposits, investment maturities and
calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from
the Federal Reserve Bank or other correspondent banks, FHLB advances, wholesale and customer
repurchase agreements, brokered time deposits, and the ability to borrow at the Federal Reserve
Bank’s Discount Window. Our access to funding sources in amounts adequate to finance or capitalize
our activities or on terms that are acceptable to us could be impaired by factors that affect us
directly or the financial services industry or economy in general, such as further disruptions in
the financial markets or negative views and expectations about the prospects for the financial
services industry.
Since late 2007, the financial services industry and the credit markets generally have been
materially and adversely affected by significant declines in asset values and by a lack of
liquidity. The liquidity issues have been particularly acute for regional and community banks, as
many of the larger financial institutions have significantly curtailed their lending to regional
and community banks to reduce their exposure to the risks of other banks. In addition, many of the
larger correspondent lenders have reduced or even eliminated federal funds lines for their
correspondent customers. Furthermore, regional and community banks generally have less access to
the capital markets than do the national and super-regional banks because of their smaller size and
limited analyst coverage. Any decline in available funding could adversely impact our ability to
originate loans/leases, invest in securities, meet our expenses, pay dividends to our shareholders,
or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any
of which could have a material adverse impact on our liquidity, business, results of operations and
financial condition.
We face intense competition in all phases of our business from other banks and financial
institutions.
The banking and financial services businesses in our markets are highly competitive. Our
competitors include large regional banks, local community banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies, finance companies,
money market mutual funds, credit unions and other non-bank financial services providers. Many of
these competitors are not subject to the same regulatory restrictions as we are. Many of our
unregulated competitors compete across geographic boundaries and are able to provide customers with
a feasible alternative to traditional banking services. Additionally, if the regulatory trend
toward reducing restrictions on the interstate operations of financial institutions continues, we
will continue to experience increased competition as a result.
Increased competition in our markets may result in a decrease in the amounts of our loans and
deposits, reduced spreads between loan rates and deposit rates or loan terms that are more
favorable to the borrower. Any of these results could have a material adverse effect on our
ability to grow and remain profitable. If increased competition causes us to significantly
discount the interest rates we offer on loans or increase the amount we pay on deposits, our net
interest income could be adversely impacted. If increased competition causes us to modify our
underwriting standards, we could be exposed to higher losses from lending activities.
Additionally, many of our competitors are much larger in total assets and capitalization, have
greater access to capital markets, have larger lending limits and offer a broader range of
financial services than we can offer.
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Our community banking strategy relies heavily on our subsidiaries’ independent management teams,
and the unexpected loss of key managers may adversely affect our operations.
We rely heavily on the success of our bank subsidiaries’ independent management teams.
Accordingly, much of our success to date has been influenced strongly by our ability to attract and
to retain senior management experienced in banking and financial services and familiar with the
communities in our market areas. Our ability to retain the executive officers, current management
teams, branch managers and loan officers of our operating subsidiaries will continue to be
important to the successful implementation of our strategy. It is also critical, as we manage our
existing portfolio and grow, to be able to attract and retain qualified additional management and
loan officers with the appropriate level of experience and knowledge about our market areas to
implement our community-based operating strategy. The unexpected loss of services of any key
management personnel, or the inability to recruit and retain qualified personnel in the future,
could have an adverse effect on our business, financial condition and results of operations.
The American Recovery and Reinvestment Act of 2009 that was signed into law in February 2009
includes extensive new restrictions on our ability to pay retention awards, bonuses and other
incentive compensation during the period in which we have any outstanding securities held by the
U.S. Treasury that were issued under the Capital Purchase Program. Many of the restrictions may not
be limited to our senior executives and could cover other employees whose contributions to revenue
and performance can be significant. The limitations may adversely affect our ability to recruit and
retain these key employees in addition to our senior executive officers, especially if we are
competing for talent against institutions that are not subject to the same restrictions. The
Federal Reserve, and perhaps the FDIC, are contemplating proposed rules governing the compensation
practices of financial institutions and these rules, if adopted, may make it more difficult to
attract and retain the people we need to operate our businesses and limit our ability to promote
our objectives through our compensation and incentive programs.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain
sufficient capital, whether due to losses, an inability to raise additional capital or otherwise,
our financial condition, liquidity and results of operations, as well as our ability to maintain
regulatory compliance, would be adversely affected.
The Company and each of its banking subsidiaries are required by federal and state regulatory
authorities to maintain adequate levels of capital to support their operations. Our ability to
raise additional capital, when and if needed, will depend on conditions in the capital markets,
economic conditions and a number of other factors, including investor perceptions regarding the
banking industry and market condition, and governmental activities, many of which are outside our
control, and on our financial condition and performance. Accordingly, we cannot assure you that we
will be able to raise additional capital if needed or on terms acceptable to us. Our failure to
meet these capital and other regulatory requirements could affect customer confidence, our ability
to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and
preferred stock and to make distributions on our trust preferred securities, our ability to make
acquisitions, and our business, results of operations and financial condition.
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Interest rates and other conditions impact our results of operations.
Our profitability is in large part a function of the spread between the interest rates earned on
investments and loans/leases and the interest rates paid on deposits and other interest bearing
liabilities. Like most banking institutions, our net interest spread and margin will be affected
by general economic conditions and other factors, including fiscal and monetary policies of the
federal government, that influence market interest rates and our ability to respond to changes in
such rates. At any given time, our assets and liabilities will be such that they are affected
differently by a given change in interest rates. As a result, an increase or decrease in rates,
the length of loan/lease terms or the mix of adjustable and fixed rate loans/leases in our
portfolio could have a positive or negative effect on our net income, capital and liquidity. We
measure interest rate risk under various rate scenarios and using specific criteria and
assumptions. A summary of this process, along with the results of our net interest income
simulations is presented at “Quantitative and Qualitative Disclosures about Market Risk” included
under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate
sensitivity is reasonable and effectively managed,
significant fluctuations in interest rates may have an adverse effect on our business, financial
condition and results of operations.
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual
borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of
collateral and risks resulting from changes in economic and industry conditions. We attempt to
minimize our credit risk through prudent loan application approval procedures, careful monitoring
of the concentration of our loans within specific industries and periodic independent reviews of
outstanding loans by our credit review department and an external third party. However, we cannot
assure you that such approval and monitoring procedures will reduce these credit risks.
The majority of our subsidiary banks’ loan portfolios are invested in commercial and industrial and
commercial real estate loans, and we focus on lending to small to medium-sized businesses. The
size of the loans we can offer to commercial customers is less than the size of the loans that our
competitors with larger lending limits can offer. This may limit our ability to establish
relationships with the area’s largest businesses. Smaller companies tend to be at a competitive
disadvantage and generally have limited operating histories, less sophisticated internal record
keeping and financial planning capabilities and fewer financial resources than larger companies. As
a result, we may assume greater lending risks than financial institutions that have a lesser
concentration of such loans and tend to make loans to larger, more established businesses.
Collateral for these loans generally includes accounts receivable, inventory, equipment and real
estate. However, depending on the overall financial condition of the borrower, some loans are made
on an unsecured basis. In addition to commercial and commercial real estate loans, our subsidiary
banks are also active in residential mortgage and consumer lending. Should the economic climate
worsen, our borrowers may experience financial difficulties, and the level of non-performing loans,
charge-offs and delinquencies could rise, which could negatively impact our business.
Commercial and industrial loans make up a large portion of our loan/lease portfolio.
Commercial and industrial loans/leases were $441.5 million, or approximately 35% of our total
loan/lease portfolio, as of December 31, 2009. Our commercial and industrial loans are primarily
made based on the identified cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment
and real estate. Credit support provided by the borrower for most of these loans and the
probability of repayment is based on the liquidation value of the pledged collateral and
enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal
guarantee on commercial loans. As a result, in the case of loans secured by accounts receivable,
the availability of funds for the repayment of these loans may be substantially dependent on the
ability of the borrower to collect amounts due from its customers. The collateral securing these
loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on
the success of the business. In addition, a continued decline in the United States economy or a
prolonged recovery period could harm or continue to harm the businesses of our commercial and
industrial customers and reduce the value of the collateral securing these loans.
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Our loan/lease portfolio has a significant concentration of commercial real estate loans, which
involve risks specific to real estate value.
Commercial real estate lending comprises a significant portion of our lending business.
Specifically, commercial real estate loans were $556.0 million, or approximately 45% of our total
loan/lease portfolio, as of December 31, 2009. Of this amount, $158.9 million, or approximately
29%, is owner-occupied. The market value of real estate securing our commercial real estate loans
can fluctuate significantly in a short period of time as a result of market conditions in the
geographic area in which the real estate is located. Adverse developments affecting real estate
values in one or more of our markets could increase the credit risk associated with our loan
portfolio. Additionally, real estate lending typically involves higher loan principal amounts and
the repayment of the loans generally is dependent, in large part, on sufficient income from the
properties securing the loans to cover operating expenses and debt service. Economic events
or governmental regulations outside of the control of the borrower or lender could negatively
impact the future cash flow and market values of the affected properties.
The problems that have occurred in the residential real estate and mortgage markets throughout much
of the United States have begun to spread to the commercial real estate market. In our market
areas, we have generally experienced a downturn in credit performance by our commercial real estate
loan customers, and in light of the uncertainty that exists in the economy and credit markets,
there can be no guarantee that we will not experience further deterioration in the performance of
commercial real estate and other real estate loans in the future. In such case, we may not be able
to realize the amount of security that we anticipated at the time of originating the loan, which
could cause us to increase our provision for loan losses and adversely affect our operating
results, financial condition and/or capital.
Our allowance for loan/lease losses may prove to be insufficient to absorb potential losses in our
loan/lease portfolio.
We established our allowance for loan/lease losses in consultation with management of our
subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease
losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible
to changes in economic, operating and other conditions, including changes in interest rates, which
may be beyond our control, and such losses may exceed current estimates. At December 31, 2009, our
allowance for loan/lease losses as a percentage of total gross loans/leases was 1.81% and as a
percentage of total nonperforming loans/leases was approximately 75%. Because of the concentration
of commercial and industrial and commercial real estate loans in our loan portfolio, which tend to
be larger in amount than residential real estate loans, the movement of a small number of loans to
nonperforming status can have a significant impact on these ratios. Although management believes
that the allowance for loan/lease losses as of December 31, 2009 was adequate to absorb losses on
any existing loans/leases that may become uncollectible, in light of the current economic
environment, we cannot predict loan/lease losses with certainty, and we cannot assure you that our
allowance for loan/lease losses will prove sufficient to cover actual loan/lease losses in the
future, particularly if economic conditions worsen beyond what management currently expects.
Additional provisions to the allowance for loan/lease losses and loan/lease losses in excess of our
allowance for loan/lease losses may adversely affect our business, financial condition and results
of operations.
Increases in FDIC insurance premiums may have a material adverse effect on the Company’s earnings.
Recently, higher levels of bank failures have dramatically increased resolution costs of the FDIC
and depleted the Deposit Insurance Fund. In addition, the FDIC instituted two temporary programs
in 2008 to further insure customer deposits at FDIC-member banks through December 31, 2009: (1)
deposit accounts are now insured up to $250,000 per customer (up from $100,000), and (2)
non-interest bearing transactional accounts (as defined by the FDIC) are fully insured (unlimited
coverage) for those institutions who opted into the program. These programs have placed additional
stress on the Deposit Insurance Fund. On May 20, 2009, the FDIC extended the $250,000 per customer
insurance limit through December 31, 2013. On August 26, 2009, the FDIC extended the unlimited
insurance on non-interest bearing transaction accounts through June 30, 2010.
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In order to maintain a strong funding position and restore reserve ratios of the Deposit Insurance
Fund, the FDIC increased assessment rates of insured institutions uniformly by 7 cents for every
$100 of deposits beginning with the first quarter of 2009, with additional changes effective April
1, 2009, which required riskier institutions to pay a larger share of premiums by factoring in rate
adjustments based on secured liabilities and unsecured debt levels.
On May 22, 2009, the FDIC adopted a final rule that imposed a special assessment on all insured
depository institutions. Pursuant to the final rule, the FDIC imposed on the Company’s subsidiary
banks special assessments in the total amount of $794,000, which was due and payable on September
30, 2009.
On November 12, 2009, the FDIC adopted a final rule that required insured depository institutions
to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011, and 2012. On December 30, 2009, our subsidiary banks
paid the FDIC a total of $8.8 million in prepaid assessments.
These actions by the FDIC significantly increased our noninterest expense in 2009 and are expected
to increase our costs for the foreseeable future.
We have a continuing need for technological change, and we may not have the resources to
effectively implement new technology.
The financial services industry continues to undergo rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to enabling us to better
serve our customers, the effective use of technology increases efficiency and the potential for
cost reduction. Our future success will depend in part upon our ability to address the needs of
our customers by using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional efficiencies in our operations as we
continue to grow our market share. Many of our larger competitors have substantially greater
resources to invest in technological improvements. As a result, they may be able to offer
additional or superior products to those that we will be able to offer, which would put us at a
competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able
to effectively implement new technology-driven products and services or be successful in marketing
such products and services to our customers.
System failure or breaches of our network security could subject us to increased operating costs as
well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems.
Our operations are dependent upon our ability to protect our computer equipment against damage from
physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as
well as from security breaches, denial of service attacks, viruses, worms and other disruptive
problems caused by hackers. Any damage or failure that causes an interruption in our operations
could have a material adverse effect on our financial condition and results of operations.
Computer break-ins, phishing and other disruptions could also jeopardize the security of
information stored in and transmitted through our computer systems and network infrastructure,
which may result in significant liability to us and may cause existing and potential customers to
refrain from doing business with us. Although we, with the help of third-party service providers,
intend to continue to implement security technology and establish operational procedures to prevent
such damage, there can be no assurance that these security measures will be successful. In
addition, advances in computer capabilities, new discoveries in the field of cryptography or other
developments could result in a compromise or breach of the algorithms we and our third-party
service providers use to encrypt and protect customer transaction data. A failure of such security
measures could have a material adverse effect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee
fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or
regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include
hiding unauthorized activities from us, improper or unauthorized activities on behalf of our
customers or improper use of confidential information. It is not always possible to prevent
employee errors and misconduct, and the precautions we take to prevent and detect this activity may
not be effective in all cases. Employee errors could also subject us to financial claims for
negligence.
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We maintain a system of internal controls and insurance coverage to mitigate against operational
risks, including data processing system failures and errors and customer or employee fraud. Should
our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not
insured or exceeds applicable insurance limits, such failure could have a material adverse effect
on our business, financial condition and results of operations.
Government regulation can result in limitations on our operations.
We operate in a highly regulated environment and are subject to supervision and regulation by a
number of governmental regulatory agencies, including Treasury, the Federal Reserve, the FDIC, the
Iowa Superintendent, and the Illinois DFPR. Regulations adopted by these agencies, which are
generally intended to provide protection for depositors and customers rather than for the benefit
of stockholders, govern a comprehensive range of matters relating to ownership and control of our
shares, our acquisition of other companies and businesses, permissible activities for us to engage
in, maintenance of adequate capital levels and other aspects of our operations. These bank
regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations
of law.
In addition, as a result of ongoing challenges facing the United States economy, the potential
exists for new laws and regulations regarding lending and funding practices and liquidity standards
to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns
and trends identified in examinations, including the expected issuance of many formal or informal
enforcement actions or orders. The laws and regulations applicable to the banking industry could
change at any time and we cannot predict the effects of these changes on our business and
profitability. Increased regulation could increase our cost of compliance and adversely affect
profitability. For example, new legislation or regulation may limit the manner in which we may
conduct our business, including our ability to offer new products, obtain financing, attract
deposits, make loans and achieve satisfactory interest spreads.
Failure to pay interest on our debt or dividends on our preferred stock may adversely impact our
ability to pay common stock dividends.
As of December 31, 2009, we had $36.1 million of junior subordinated debentures held by four
business trusts that we control. Interest payments on the debentures, which totaled $2.1 million
for 2009, must be paid before we pay dividends on our capital stock, including our common stock.
We have the right to defer interest payments on the debentures for up to 20 consecutive quarters.
However, if we elect to defer interest payments, all deferred interest must be paid before we may
pay dividends on our capital stock. As of December 31, 2009, the Company had 568 shares of
non-cumulative perpetual preferred stock issued and outstanding. Although these non-cumulative
preferred shares will accrue no dividends, dividends will be payable on the preferred shares if
declared, but no dividends may be declared on the Company’s common stock unless and until dividends
have been declared on the outstanding shares. Deferral, of either interest payments on the
debentures or preferred dividends on the preferred shares, could cause a subsequent decline in the
market price of our common stock because the Company would not be able to pay dividends on its
common stock.
In addition, on February 13, 2009, we issued shares of cumulative perpetual senior preferred stock
to Treasury as part of the Capital Purchase Program. The terms of the senior preferred stock
restrict the payment of dividends on shares of our common stock. Without the prior consent of
Treasury, we are prohibited from increasing common stock dividends for the first three years while
Treasury holds the senior preferred stock. Further, we are prohibited from continuing to pay
dividends on our common stock unless we have fully paid all required dividends on the senior
preferred stock. Although we expect to be able to pay all required dividends on the senior
preferred stock (and to continue to pay dividends on common stock at current levels), there is no
guarantee that we will be able to do so.
Declines in asset values may result in impairment charges and adversely affect the value of our
investments, financial performance and capital.
The market value of investments in our securities portfolio has become increasingly volatile over
the past year, and as of December 31, 2009, we had gross unrealized losses of $2.3 million in our
investment portfolio (more than offset by gross unrealized gains of $2.5 million). The market value
of investments may be affected by factors other than the underlying performance of the servicer of
the securities or the mortgages underlying the securities, such as ratings downgrades, adverse
changes in the business climate and a lack of liquidity in the secondary market for certain
investment securities. On a quarterly basis, we formally evaluate investments and other assets for
impairment indicators. We may be required to record additional impairment charges if our
investments suffer a decline in value that is considered other-than-temporary. If we determine that
a significant impairment has occurred, we would be required to charge against earnings the
credit-related portion of the other-than-temporary impairment, which could have a material adverse
effect on our results of operations in the periods in which the write-offs occur.
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We cannot predict the effect on our operations of recent legislative and regulatory initiatives
that were enacted in response to the ongoing financial crisis.
United States federal, state and foreign governments have taken or are considering taking
extraordinary actions in an attempt to deal with the worldwide financial crisis. To the extent
adopted, many of these actions have been in effect for only a limited time, and have produced
limited or no relief to the capital, credit and real estate markets. There is no assurance that
these actions or other actions under consideration will ultimately be successful.
In the United States, the federal government adopted the Emergency Economic Stabilization Act of
2008 and the American Recovery and Reinvestment Act of 2009. With authority granted under these
laws, the Treasury proposed a financial stability plan that is intended to:
| • |
invest in financial institutions and purchase troubled assets and mortgages from
financial institutions for the purpose of stabilizing and providing liquidity to the United
States financial markets;
|
| • |
temporarily increase the limit on FDIC deposit insurance coverage to $250,000 per
depositor through December 31, 2009 (which was recently extended to December 31, 2013 under
the Helping Families Save Their Homes Act of 2009); and
|
| • |
provide for various forms of economic stimulus, including to assist homeowners
restructure and lower mortgage payments on qualifying loans.
|
Numerous other actions have been taken by the United States Congress, the Federal Reserve, the
Treasury, the FDIC, the SEC and others to address the liquidity and credit crisis that has followed
the sub-prime mortgage crisis that commenced in 2007, including the financial stability plan
adopted by the Treasury. In addition, President Obama recently announced a financial regulatory
reform proposal, and the House and Senate are expected to consider competing proposals over the
coming years.
There can be no assurance that the financial stability plan proposed by the Treasury, the other
proposals under consideration or any other legislative or regulatory initiatives will be effective
at dealing with the ongoing economic crisis and improving economic conditions globally, nationally
or in our markets, or that the measures adopted will not have adverse consequences. The terms and
costs of these activities, or the failure of these actions to help stabilize the financial markets,
asset prices, market liquidity and a continuation or worsening of current financial market and
economic conditions could materially and adversely affect our business, results of operations,
financial condition and the trading prices of our securities.
Changes in future rules applicable to participants in the Capital Purchase Program could adversely
affect our business, results of operations and financial condition.
On February 13, 2009, we issued shares of perpetual senior preferred stock to Treasury as part of
the Capital Purchase Program. The rules and policies applicable to recipients of capital under the
Capital Purchase Program continue to evolve and their scope, timing and effect cannot be predicted.
Any changes in these rules and policies could adversely affect our business, results of operations
and financial condition.
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Any redemption of the securities sold to the U.S. Treasury to avoid these restrictions would
require prior Federal Reserve and Treasury approval. Based on guidelines recently issued by the
Federal Reserve, institutions seeking to redeem Capital Purchase Program preferred stock must
demonstrate an ability to access the long-term debt markets, successfully demonstrate access to
public equity markets and meet a number of additional requirements and considerations before such
institutions can redeem any securities sold to the Treasury.
The limitations on bonuses, retention awards, severance payments, and incentive compensation
applicable to participants in the Capital Purchase Program may adversely affect our ability to
retain key employees.
For so long as any of the equity securities we issued to the U.S. Treasury under the Capital
Purchase Program remain outstanding, we are subject to limitations on the payment of bonuses,
retention awards, severance payments, and other incentive compensation to the Company’s five senior
executive officers and up to the next 20 highest paid employees. These limitations may adversely
affect our ability to recruit and retain key employees, including our executive officers,
especially if we are competing for talent against institutions that are not subject to the same
limitations.
| Item 1B. |
Unresolved Staff Comments
|
There are no unresolved staff comments.
15
Table of Contents
| Item 2. |
Properties
|
The following table is a listing of the Company’s operating facilities for its subsidiary banks:
| Facility | ||||||
| Square | Facility Owned or | |||||
| Facility Address | Footage | Leased | ||||
|
|
||||||
|
Quad City Bank & Trust
|
||||||
|
|
||||||
|
2118 Middle Road in Bettendorf, IA
|
6,700 | Owned | ||||
|
4500 Brady Street in Davenport, IA
|
36,000 | Owned | ||||
|
3551 7
th
Street in Moline, IL
|
30,000 | Owned * | ||||
|
5515 Utica Ridge Road in Davenport, IA **
|
6,000 | Leased | ||||
|
1700 Division Street in Davenport, IA
|
12,000 | Owned | ||||
|
|
||||||
|
Cedar Rapids Bank & Trust
|
||||||
|
|
||||||
|
500 1
st
Avenue NE, Suite 100 in
Cedar Rapids, IA
|
36,000 | Owned | ||||
|
5400 Council Street in Cedar Rapids, IA
|
5,900 | Owned | ||||
|
|
||||||
|
Rockford Bank & Trust
|
||||||
|
|
||||||
|
127 North Wyman Street in Rockford, IL
|
7,800 | Leased | ||||
|
4571 Guilford Road in Rockford, IL
|
20,000 | Owned | ||||
| * |
The building is owned by Velie Plantation Holding Company, in which the Company has a 73%
interest.
|
|
| ** |
Effective April 1, 2010, Quad City Bank & Trust is moving the branch operations currently
located at 5515 Utica Ridge Road in Davenport, Iowa to 5405 Utica Ridge Road in Davenport, Iowa.
The new facility is leased and will have 7,400 square feet available.
|
The subsidiary banks intend to limit their investment in premises to no more than 50% of their
capital. Management believes that the facilities are of sound construction, in good operating
condition, are appropriately insured and are adequately equipped for carrying on the business of
the Company.
No individual real estate property or mortgage amounts to 10% or more of consolidated assets.
| Item 3. |
Legal Proceedings
|
There are no material pending legal proceedings to which the Company or its subsidiaries is a party
other than ordinary routine litigation incidental to their respective businesses.
| Item 4. |
[Reserved]
|
16
Table of Contents
| Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Market Information.
The common stock, par value $1.00 per share, of the Company is listed on The
NASDAQ Global Market under the symbol “QCRH”. The stock began trading on NASDAQ on October 6,
1993. The Company transferred its listing from the NASDAQ Capital Market to the NASDAQ Global
Market on March 1, 2010. As of December 31, 2009, there were 4,553,290 shares of common stock
outstanding held by approximately 2,600 holders of record. The following table sets forth the high
and low sales prices of the common stock, as reported by NASDAQ for the periods indicated.
| 2009 Sales Price | 2008 Sales Price | 2007 Sales Price | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
First quarter
|
$ | 11.930 | $ | 7.120 | $ | 17.020 | $ | 14.150 | $ | 17.900 | $ | 15.280 | ||||||||||||
|
Second quarter
|
11.000 | 7.760 | 16.200 | 12.130 | 17.750 | 15.150 | ||||||||||||||||||
|
Third quarter
|
10.980 | 9.470 | 16.200 | 9.700 | 16.430 | 13.760 | ||||||||||||||||||
|
Fourth quarter
|
10.490 | 7.060 | 14.240 | 9.440 | 16.000 | 14.250 | ||||||||||||||||||
Dividends on Common Stock.
On April 21, 2009, the Company declared a cash dividend of $0.04
per share, or $181 thousand, which was paid on July 6, 2009, to stockholders of record as of June
22, 2009. On November 5, 2009, the Company declared a cash dividend of $0.04 per share, or $182
thousand, which was paid on January 6, 2010, to stockholders of record as of December 21, 2009. In
the future, it is the Company’s intention to continue to consider the payment of dividends on a
semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income
to help provide the capital for continued growth, but believes that operating results have reached
a level that can sustain dividends to stockholders as well.
The Company is heavily dependent on dividend payments from its subsidiary banks to make dividend
payments on the Company’s preferred and common stock. Under applicable state laws, the banks are
restricted as to the maximum amount of dividends that they may pay on their common stock. Iowa and
Illinois law provide that state-chartered banks in those states may not pay dividends in excess of
their undivided profits.
The Company’s ability to pay dividends to its stockholders may be affected by both general
corporate law considerations and policies of the Federal Reserve applicable to bank holding
companies. The payment of dividends by any financial institution or its holding company is affected
by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines
and regulations, and a financial institution generally is prohibited from paying any dividends if,
following payment thereof, the institution would be undercapitalized.
The Company also has certain contractual restrictions on its ability to pay dividends. The Company
has issued junior subordinated debentures in four private placements. Under the terms of the
debentures, the Company may be prohibited, under certain circumstances, from paying dividends on
shares of its common stock. During the fourth quarters of 2006 and 2007, the Company issued shares
of non-cumulative perpetual preferred stock. Also, under the terms of this preferred stock, the
Company may be prohibited, under certain circumstances, from paying dividends on shares of its
common stock. None of these circumstances currently exist.
In addition, as a result of the Company’s issuance of the preferred stock to the U.S. Treasury on
February 13, 2009 under the Capital Purchase Program, the ability of the Company to declare or pay
dividends on its common stock is subject to restrictions, including the restriction on increasing
dividends from the last semi-annual cash dividend declared prior to October 14, 2008, which was
$0.04 per share. This restriction will terminate on the earlier of (a) the third anniversary of
the date of issuance of the preferred stock and (b) the date on which the preferred stock has been
redeemed in whole or the U.S. Treasury has transferred all of the preferred stock to one or more
third parties. Further, the ability of the Company to declare or pay dividends on its common stock
will be subject to restrictions in the event that the Company fails to declare and pay full
dividends on the preferred stock issued to the U.S. Treasury.
17
Table of Contents
Purchase of Equity Securities by the Company.
There were no purchases of equity securities by the
Company for the year ended December 31, 2009. On December 31, 2008, the Company repurchased
121,246 shares of its common stock. The common stock was repurchased at $13.25 per share for a
total cost of $1,606,510.
Stockholder Return Performance Graph.
The following graph indicates, for the period commencing
December 31, 2004 and ending December 31, 2009, a comparison of cumulative total returns for the
Company, the NASDAQ Composite Index and the SNL Bank NASDAQ Index prepared by SNL Securities,
Charlottesville, Virginia. The graph was prepared at the Company’s request by SNL Securities. The
information assumes that $100 was invested at the closing price in December 31, 2004 in the common
stock of the Company and each index, and that all dividends were reinvested.
| Period Ending | ||||||||||||||||||||||||
| Index | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | ||||||||||||||||||
|
QCR Holdings, Inc.
|
100.00 | 94.18 | 84.81 | 68.79 | 48.59 | 40.93 | ||||||||||||||||||
|
NASDAQ Composite
|
100.00 | 101.37 | 111.03 | 121.92 | 72.49 | 104.31 | ||||||||||||||||||
|
SNL Bank NASDAQ
|
100.00 | 96.95 | 108.85 | 85.45 | 62.06 | 50.34 | ||||||||||||||||||
| Item 6. |
Selected Financial Data
|
The following “Selected Consolidated Financial Data” of the Company is derived in part from, and
should be read in conjunction with, our consolidated financial statements and the accompanying
notes thereto. See Item 8 “Financial Statements.” Results for past periods are not necessarily
indicative of results to be expected for any future period. All periods reported have been
reclassified, as appropriate, for discontinued operations comparative purposes.
18
Table of Contents
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
(dollars in thousands, except per share data)
| Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
STATEMENT OF INCOME DATA
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Continuing Operations:
|
||||||||||||||||||||
|
Interest income
|
$ | 85,308 | $ | 84,652 | $ | 82,491 | $ | 68,803 | $ | 48,688 | ||||||||||
|
Interest expense
|
34,949 | 40,524 | 48,139 | 38,907 | 21,281 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net interest income
|
50,359 | 44,128 | 34,352 | 29,896 | 27,407 | |||||||||||||||
|
Provision for loan/lease losses
|
16,976 | 9,222 | 2,336 | 3,284 | 877 | |||||||||||||||
|
Non-interest income
|
15,644 | 14,426 | 13,499 | 10,998 | 9,106 | |||||||||||||||
|
Non-interest expense
|
46,731 | 42,334 | 35,734 | 34,063 | 28,922 | |||||||||||||||
|
Income tax expense
|
247 | 1,735 | 2,893 | 724 | 2,121 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income from continuing operations
|
2,049 | 5,263 | 6,888 | 2,823 | 4,593 | |||||||||||||||
|
|
||||||||||||||||||||
|
Discontinued Operations:
|
||||||||||||||||||||
|
Income (loss) from discontinued operations, before taxes
|
— | 2,580 | (1,221 | ) | 378 | 456 | ||||||||||||||
|
Income tax expense (benefit)
|
— | 846 | (498 | ) | 133 | 161 | ||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from discontinued operations
|
— | 1,734 | (723 | ) | 245 | 295 | ||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
2,049 | 6,997 | 6,165 | 3,068 | 4,888 | |||||||||||||||
|
Less: net income attributable to noncontrolling interests
|
277 | 288 | 388 | 266 | 78 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income attributable to QCR Holdings, Inc.
|
1,772 | 6,709 | 5,777 | 2,802 | 4,810 | |||||||||||||||
|
Less: preferred stock dividends and discount accretion
|
3,844 | 1,785 | 1,072 | 164 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc. common
stockholders
|
(2,072 | ) | 4,924 | 4,705 | 2,638 | 4,810 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
PER COMMON SHARE DATA
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from continuing operations — BASIC (1)
|
$ | (0.46 | ) | $ | 0.69 | $ | 1.19 | $ | 0.52 | $ | 1.00 | |||||||||
|
Income (loss) from discontinued operations — BASIC (1)
|
— | 0.38 | (0.16 | ) | 0.05 | 0.06 | ||||||||||||||
|
Net income (loss) — BASIC (1)
|
(0.46 | ) | 1.07 | 1.03 | 0.57 | 1.06 | ||||||||||||||
|
Income (loss) from continuing operations — DILUTED (1)
|
(0.46 | ) | 0.69 | 1.18 | 0.52 | 0.98 | ||||||||||||||
|
Income (loss) from discontinued operations — DILUTED (1)
|
— | 0.37 | (0.16 | ) | 0.05 | 0.06 | ||||||||||||||
|
Net income (loss) — DILUTED (1)
|
(0.46 | ) | 1.06 | 1.02 | 0.57 | 1.04 | ||||||||||||||
|
Cash dividends declared
|
0.08 | 0.08 | 0.08 | 0.08 | 0.08 | |||||||||||||||
|
Dividend payout ratio
|
(17.39 | )% | 7.48 | % | 7.77 | % | 14.04 | % | 7.55 | % | ||||||||||
|
|
||||||||||||||||||||
|
BALANCE SHEET DATA
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 1,779,646 | $ | 1,605,629 | $ | 1,476,564 | $ | 1,271,675 | $ | 1,042,614 | ||||||||||
|
Securities
|
370,520 | 256,076 | 220,557 | 194,774 | 182,365 | |||||||||||||||
|
Total loans/leases
|
1,244,320 | 1,214,690 | 1,056,988 | 960,747 | 756,254 | |||||||||||||||
|
Allowance for estimated losses on loans/leases
|
22,505 | 17,809 | 11,315 | 10,612 | 8,884 | |||||||||||||||
|
Deposits
|
1,089,323 | 1,058,959 | 884,005 | 875,447 | 698,504 | |||||||||||||||
|
Stockholders’ equity:
|
||||||||||||||||||||
|
Preferred
|
58,578 | 20,158 | 20,158 | 12,884 | — | |||||||||||||||
|
Common
|
67,017 | 72,337 | 67,629 | 59,361 | 55,118 | |||||||||||||||
|
|
||||||||||||||||||||
|
KEY RATIOS
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Return on average assets (2)
|
0.10 | % | 0.43 | % | 0.43 | % | 0.24 | % | 0.51 | % | ||||||||||
|
Return on average common stockholders’ equity (3)
|
(2.84 | ) | 7.07 | 7.40 | 4.65 | 9.08 | ||||||||||||||
|
Return on average total stockholder’s equity (2)
|
1.43 | 7.47 | 7.55 | 4.77 | 9.08 | |||||||||||||||
|
Net interest margin, tax equivalent yield (4)
|
3.15 | 3.27 | 2.86 | 2.87 | 3.25 | |||||||||||||||
|
Efficiency ratio (5)
|
70.80 | 72.30 | 74.68 | 83.30 | 79.21 | |||||||||||||||
|
Nonperforming assets to total assets
|
2.27 | 1.58 | 0.51 | 0.58 | 0.36 | |||||||||||||||
|
Allowance for estimated losses on loans/leases to total loans/leases
|
1.81 | 1.47 | 1.07 | 1.10 | 1.17 | |||||||||||||||
|
Net charge-offs to average loans/leases
|
1.05 | 0.24 | 0.14 | 0.18 | 0.25 | |||||||||||||||
|
Average total stockholders’ equity to average total assets
|
7.18 | 5.78 | 5.66 | 5.09 | 6.63 | |||||||||||||||
| (1) |
Income (loss) amounts are attributable to QCR Holdings, Inc.
|
|
| (2) |
Numerator is net income attributable to QCR Holdings, Inc.
|
|
| (3) |
Numerator is net income (loss) available to QCR Holdings, Inc. common stockholders
|
|
| (4) |
Interest earned and yields on nontaxable investments ar determined on a tax equivalent basis using a 34% tax rate
|
|
| (5) |
Non-interest expenses divided by the sum of net interest income before provision for loan/lease losses and non-interest income
|
19
Table of Contents
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion provides additional information regarding our operations for the
twelve-month periods ending December 31, 2009, 2008, and 2007, and our financial condition at
December 31, 2009 and 2008. This discussion should be read in conjunction with “Selected
Consolidated Financial Data” and our consolidated financial statements and the accompanying notes
thereto included or incorporated by reference elsewhere in this document.
OVERVIEW
The Company was formed in February 1993 for the purpose of organizing Quad City Bank & Trust. Over
the past seventeen years, the Company has grown to include two additional banking subsidiaries and
a number of nonbanking subsidiaries. As of December 31, 2009, the Company had $1.78 billion in
consolidated assets, including $1.24 billion in total loans/leases and $1.09 billion in deposits.
The Company recognized net income attributable to QCR Holdings, Inc. of $1.8 million, or diluted
earnings per share of ($0.46) after preferred stock dividends and discount accretion of $3.8
million for the year ended December 31, 2009. For the same period in 2008, the Company reported
net income attributable to QCR Holdings, Inc. of $6.7 million, or diluted earnings per share of
$1.06 after preferred stock dividends of $1.8 million. By comparison, for 2007, the Company
realized net income attributable to QCR Holdings, Inc. of $5.8 million, or diluted earnings per
share of $1.02 after preferred stock dividends of $1.1 million. As previously reported in 2008,
the Company sold its merchant credit card acquiring business and its Milwaukee, Wisconsin bank
subsidiary, First Wisconsin Bank & Trust. As a result, the Company recognized income from
discontinued operations totaling $1.7 million for the year ended December 31, 2008.
For 2009, income from continuing operations attributable to QCR Holdings, Inc. were $1.8 million,
or diluted earnings per share of ($0.46), compared to $5.0 million, or diluted earnings per share
of $0.69, for 2008, and $6.5 million, or diluted earnings per share of $1.18, for 2007. The
Company experienced an increase in net interest income year-over-year of $6.2 million, or 14%.
Additionally, the Company sold securities during the year which realized gains totaling $1.5
million. More than offsetting these items, the Company’s provision for loan/lease losses increased
$7.8 million, or 84%, from $9.2 million for the year ended December 31, 2008 to $17.0 million for
the year ended December 31, 2009. Significant increases in FDIC insurance expense and loan/lease
expense related to nonperforming assets were the primary contributors to an increase in
non-interest expense of $4.4 million, or 10%.
20
Table of Contents
As noted above, the Company’s net interest income grew significantly in 2009 compared to 2008.
Specifically, on a tax equivalent basis, net interest income grew $6.2 million, or 14%, from $44.6
million to $50.8 million. Of this increase, $1.3 million was attributable to the recognition of
interest income for cash interest payments previously received on a commercial loan which had been
deferred pending the resolution of a contingency which was resolved in the third quarter of 2009.
For 2009, average earning assets increased by $245.9 million, or 18%, and average interest-bearing
liabilities increased by $159.0 million, or 13%, when compared with average balances for 2008. A
comparison of yields, spreads and margins from 2009 to 2008 shows the following (on a tax
equivalent basis):
| • |
The average yield on interest-earning assets decreased 91 basis points from 6.23%
to 5.32%.
|
| • |
The average cost of interest-bearing liabilities decreased 76 basis points from
3.25% to 2.49%.
|
| • |
The net interest spread declined 15 basis points from 2.98% to 2.83%.
|
| • |
The net interest margin declined 12 basis points from 3.27% to 3.15%.
|
Net interest income, on a tax equivalent basis, significantly increased $9.7 million, or 28%, from
$34.9 million for 2007 to $44.6 million for 2008. For 2008, average earning assets increased by
$148.0 million, or 12%, and average interest-bearing liabilities increased by $135.9 million, or
12%, when compared with average balances for 2007. A comparison of yields, spreads and margins
from 2008 to 2007 shows the following (on a tax equivalent basis):
| • |
The average yield on interest-earning assets decreased 59 basis points from 6.82%
to 6.23%.
|
| • |
The average cost of interest-bearing liabilities decreased 108 basis points from
4.33% to 3.25%.
|
| • |
The net interest spread improved 49 basis points from 2.49% to 2.98%.
|
| • |
The net interest margin improved 41 basis points from 2.86% to 3.27%.
|
The Company’s management closely monitors and manages net interest margin. From a profitability
standpoint, an important challenge for the Company’s subsidiary banks and majority-owned leasing
company is the improvement of their net interest margins. Management continually addresses this
issue with pricing strategies and the use of alternative funding sources.
21
Table of Contents
The Company’s average balances, interest income/expense, and rates earned/paid on major balance
sheet categories, as well as the components of change in net interest income, are presented in the
following tables:
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| 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
|
$ | 45,850 | $ | 134 | 0.29 | % | $ | 5,631 | $ | 100 | 1.78 | % | $ | 5,450 | $ | 248 | 4.55 | % | ||||||||||||||||||
|
Interest-bearing deposits at
at financial institutions
|
31,090 | 313 | 1.01 | 5,313 | 165 | 3.11 | 6,142 | 346 | 5.63 | |||||||||||||||||||||||||||
|
Investment securities (1)
|
312,043 | 12,180 | 3.90 | 230,342 | 12,279 | 5.33 | 204,364 | 10,605 | 5.19 | |||||||||||||||||||||||||||
|
Gross loans/leases receivable (2) (3)
|
1,222,493 | 73,145 | 5.98 | 1,124,255 | 72,566 | 6.45 | 1,001,633 | 71,796 | 7.17 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest earning assets
|
1,611,476 | 85,772 | 5.32 | 1,365,541 | 85,110 | 6.23 | 1,217,589 | 82,995 | 6.82 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Noninterest-earning assets:
|
||||||||||||||||||||||||||||||||||||
|
Cash and due from banks
|
$ | 30,521 | $ | 32,651 | $ | 36,880 | ||||||||||||||||||||||||||||||
|
Premises and equipment, net
|
30,868 | 31,535 | 31,705 | |||||||||||||||||||||||||||||||||
|
Less allowance for estimated
losses on loans/leases
|
(21,831 | ) | (13,770 | ) | (11,178 | ) | ||||||||||||||||||||||||||||||
|
Other
|
73,613 | 136,791 | 76,486 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 1,724,647 | $ | 1,552,748 | $ | 1,351,482 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing demand deposits
|
$ | 366,687 | 3,834 | 1.05 | % | $ | 299,417 | 5,709 | 1.91 | % | $ | 305,699 | 10,790 | 3.53 | % | |||||||||||||||||||||
|
Savings deposits
|
48,596 | 323 | 0.66 | 57,955 | 806 | 1.39 | 31,300 | 651 | 2.08 | |||||||||||||||||||||||||||
|
Time deposits
|
511,359 | 14,217 | 2.78 | 443,122 | 17,379 | 3.92 | 404,544 | 19,786 | 4.89 | |||||||||||||||||||||||||||
|
Short-term borrowings
|
113,614 | 712 | 0.63 | 154,456 | 2,962 | 1.92 | 141,778 | 5,217 | 3.68 | |||||||||||||||||||||||||||
|
Federal Home Loan Bank advances
|
212,494 | 9,082 | 4.27 | 193,119 | 8,525 | 4.41 | 160,474 | 7,237 | 4.51 | |||||||||||||||||||||||||||
|
Junior subordinated debentures
|
36,085 | 2,016 | 5.59 | 36,085 | 2,389 | 6.62 | 36,085 | 2,623 | 7.27 | |||||||||||||||||||||||||||
|
Other borrowings
|
117,271 | 4,765 | 4.06 | 62,975 | 2,754 | 4.37 | 31,398 | 1,835 | 5.84 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-bearing
liabilities
|
1,406,106 | 34,949 | 2.49 | 1,247,129 | 40,524 | 3.25 | 1,111,278 | 48,139 | 4.33 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Noninterest-bearing demand deposits
|
171,968 | 135,860 | 125,117 | |||||||||||||||||||||||||||||||||
|
Other noninterest-bearing
liabilities
|
22,759 | 79,956 | 38,511 | |||||||||||||||||||||||||||||||||
|
Total liabilities
|
1,600,833 | 1,462,945 | 1,274,906 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Stockholders’ equity
|
123,814 | 89,803 | 76,576 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities and
stockholders’ equity
|
$ | 1,724,647 | $ | 1,552,748 | $ | 1,351,482 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 50,823 | $ | 44,586 | $ | 34,856 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest spread
|
2.83 | % | 2.98 | % | 2.49 | % | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest margin
|
3.15 | % | 3.27 | % | 2.86 | % | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Ratio of average interest earning
assets to average interest-
bearing liabilities
|
114.61 | % | 109.49 | % | 109.57 | % | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) |
Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented.
|
|
| (2) |
Loan/lease fees are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
|
|
| (3) |
Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
|
22
Table of Contents
For the years ended December 31, 2009, 2008 and 2007
| Inc./(Dec.) | Components | |||||||||||
| from | of Change (1) | |||||||||||
| Prior Year | Rate | Volume | ||||||||||
| 2009 vs. 2008 | ||||||||||||
| (dollars in thousands) | ||||||||||||
|
INTEREST INCOME
|
||||||||||||
|
Federal funds sold
|
$ | 34 | $ | (147 | ) | $ | 181 | |||||
|
Interest-bearing deposits at other
financial institutions
|
148 | (178 | ) | 326 | ||||||||
|
Investment securities (2)
|
(99 | ) | (3,790 | ) | 3,691 | |||||||
|
Gross loans/leases receivable (2) (3) (4)
|
579 | (5,510 | ) | 6,089 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total change in interest income
|
$ | 662 | $ | (9,625 | ) | $ | 10,287 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
INTEREST EXPENSE
|
||||||||||||
|
Interest-bearing demand deposits
|
$ | (1,875 | ) | $ | (2,965 | ) | $ | 1,090 | ||||
|
Savings deposits
|
(483 | ) | (369 | ) | (114 | ) | ||||||
|
Time deposits
|
(3,162 | ) | (5,568 | ) | 2,406 | |||||||
|
Short-term borrowings
|
(2,250 | ) | (1,616 | ) | (634 | ) | ||||||
|
Federal Home Loan Bank advances
|
557 | (277 | ) | 834 | ||||||||
|
Junior subordinated debentures
|
(373 | ) | (373 | ) | — | |||||||
|
Other borrowings
|
2,011 | (208 | ) | 2,219 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total change in interest expense
|
$ | (5,575 | ) | $ | (11,376 | ) | $ | 5,801 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Total change in net interest income
|
$ | 6,237 | $ | 1,751 | $ | 4,486 | ||||||
|
|
||||||||||||
| Inc./(Dec.) | Components | |||||||||||
| from | of Change (1) | |||||||||||
| Prior Year | Rate | Volume | ||||||||||
| 2008 vs. 2007 | ||||||||||||
| (dollars in thousands) | ||||||||||||
|
INTEREST INCOME
|
||||||||||||
|
Federal funds sold
|
$ | (148 | ) | $ | (156 | ) | $ | 8 | ||||
|
Interest-bearing deposits at other
financial institutions
|
(181 | ) | (139 | ) | (42 | ) | ||||||
|
Investment securities (2)
|
1,674 | 296 | 1,378 | |||||||||
|
Gross loans/leases receivable (2) (3) (4)
|
770 | (7,537 | ) | 8,307 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total change in interest income
|
$ | 2,115 | $ | (7,536 | ) | $ | 9,651 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
INTEREST EXPENSE
|
||||||||||||
|
Interest-bearing demand deposits
|
$ | (5,081 | ) | $ | (4,863 | ) | $ | (218 | ) | |||
|
Savings deposits
|
155 | (267 | ) | 422 | ||||||||
|
Time deposits
|
(2,407 | ) | (4,172 | ) | 1,765 | |||||||
|
Short-term borrowings
|
(2,255 | ) | (2,687 | ) | 432 | |||||||
|
Federal Home Loan Bank advances
|
1,288 | (156 | ) | 1,444 | ||||||||
|
Junior subordinated debentures
|
(234 | ) | (234 | ) | — | |||||||
|
Other borrowings
|
919 | (555 | ) | 1,474 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total change in interest expense
|
$ | (7,615 | ) | $ | (12,934 | ) | $ | 5,319 | ||||
|
|
||||||||||||
|
|
||||||||||||
|
Total change in net interest income
|
$ | 9,730 | $ | 5,398 | $ | 4,332 | ||||||
|
|
||||||||||||
| (1) |
The column “Inc/(Dec) from Prior Year” is segmented into the changes attributable to variations in volume
and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and
rate changes have been proportionately allocated to rate and volume.
|
|
| (2) |
Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a
34% tax rate in each year presented.
|
|
| (3) |
Loan/lease fees are included in interest income from loans/leases receivable in accordance with accounting and
regulatory guidance.
|
|
| (4) |
Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with
accounting and regulatory guidance.
|
23
Table of Contents
The Company’s operating results are also impacted by various sources of non-interest income,
including trust department fees, deposit service fees, gains from the sales of residential real
estate loans, investment advisory and management fees, and other income. More than offsetting
these items, the Company incurs non-interest expenses which include salaries and employee benefits,
occupancy and equipment expense, professional and data processing fees, FDIC and other insurance
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.
CRITICAL ACCOUNTING POLICIES
The Company’s financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America. The financial information contained within these
statements is, to a significant extent, financial information that is based on approximate measures
of the financial effects of transactions and events that have already occurred.
Based on its consideration of accounting policies that involve the most complex and subjective
decisions and assessments, management has identified its most critical accounting policy to be that
related to the allowance for loan/lease losses (also referred to as ‘allowance for estimated losses
on loans/leases’). The Company’s allowance for loan/lease loss methodology incorporates a variety
of risk considerations, both quantitative and qualitative in establishing an allowance for
loan/lease loss that management believes is appropriate at each reporting date. Quantitative
factors include the Company’s historical loss experience, delinquency and charge-off trends,
collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases,
and other factors. Quantitative factors also incorporate known information about individual
loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors
include the general economic environment in the Company’s markets, including economic conditions
throughout the Midwest, and in particular, the economic health of certain industries. Size and
complexity of individual credits in relation to loan/lease structure, existing loan/lease policies
and pace of portfolio growth are other qualitative factors that are considered in the methodology.
As the Company adds new
products and increases the complexity of its loan/lease portfolio, it enhances its methodology
accordingly. Management may report a materially different amount for the provision for loan/lease
losses in the statement of operations to change the allowance for loan/lease losses if its
assessment of the above factors were different. The discussion regarding the Company’s allowance
for loan/lease losses should be read in conjunction with the Company’s financial statements and the
accompanying notes presented elsewhere in this Form 10-K, as well as the portion of this
Management’s Discussion and Analysis section entitled “Financial Condition — Allowance for
Estimated Losses on Loans/Leases.” Although management believed the level of the allowance as of
December 31, 2009 was adequate to absorb losses inherent in the loan/lease portfolio, a decline in
local economic conditions, or other factors, could result in increasing losses that cannot be
reasonably predicted at this time.
The Company’s assessment of other-than-temporary impairment of its available-for-sale securities
portfolio is another critical accounting policy as a result of the level of judgment required by
management. Available-for-sale securities are evaluated to determine whether declines in fair
value below their cost are other-than-temporary. In estimating other-than-temporary impairment
losses management considers a number of factors including, but not limited to, (1) the length of
time and extent to which the fair value has been less than amortized cost, (2) the financial
condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the
intent of the Company to not sell the security prior to recovery and whether it is not
more-likely-than-not that the Company will be required to sell the security prior to recovery. The
discussion regarding the Company’s assessment of other-than-temporary impairment should be read in
conjunction with the Company’s financial statements and the accompanying notes presented elsewhere
in this Form 10-K. For the year ended December 31, 2009, the Company’s evaluation determined that
11 publicly traded equity securities experienced declines in fair value that were
other-than-temporary. As a result, the Company wrote down the value of these securities and
recognized losses in the amount of $206,369. For the years ended December 31, 2008 and 2007, the
Company did not recognize other-than-temporary impairment of any equity securities. For 2009, 2008
and 2007, the Company did not recognize other-than-temporary impairment of any debt securities.
24
Table of Contents
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, and 2007
Overview
.
Net income attributable to QCR Holdings, Inc. for 2009 was $1.8 million, or
diluted earnings per share of ($0.46) after preferred stock dividends and discount accretion of
$3.8 million, compared to $6.7 million, or diluted earnings per share of $1.06 after preferred
stock dividends of $1.8 million, for 2008. During 2008, the Company sold its merchant credit card
acquiring business and Milwaukee banking subsidiary resulting in income from discontinued
operations, net of taxes, of $1.7 million, or $0.37 per share (on a diluted basis). The Company
was successful in improving its net interest income by $6.2 million, or 14%, from $44.2 million for
2008 to $50.4 million for 2009. More than offsetting this increase, the Company’s provision for
loan/lease losses for 2009 increased $7.8 million, or 84%, from 2008. Additionally, FDIC and other
insurance expense increased $2.3 million, or 175%, during 2009. Loan/lease expenses related to
carrying higher levels of nonperforming assets increased $1.2 million, or 164%, on a year-over-year
basis.
Net income attributable to QCR Holdings, Inc. for 2008 was $6.7 million compared to $5.8 million
for 2007, which is an increase of $931 thousand, or 16%. Diluted earnings per share for 2008 was
$1.06 compared to $1.02 for 2007. During 2008, the Company sold its merchant credit card acquiring
business and Milwaukee banking subsidiary resulting in income from discontinued operations, net of
taxes, of $1.7 million, or $0.37 per share (on a diluted basis). The Company was successful in
improving its net interest income during 2008 as net interest income grew $9.8 million, or 28%,
from 2007. Offsetting these increases, the Company’s provision for loan/lease losses for 2008
increased $6.9 million, or 295%, from 2007, and noninterest expenses for 2008 increased $6.6
million, or 18%, from 2007.
Interest income
.
Interest income increased $656 thousand, or 1%, from $84.7 million for
2008 to $85.3 million for 2009. Excluding the impact of the $1.3 million positive one-time
adjustment to interest income in the third quarter of 2009, interest income experienced a slight
decrease of $617 thousand, or 1%. As a result of the economic recession
and a historically low interest rate environment in 2009, the decline in yield on interest-earnings
assets outpaced the increase in interest income from the growth realized across all
interest-earning asset types.
Interest income increased $2.2 million, or 3%, from $82.5 million for 2007 to $84.7 million for
2008. As a result of the deteriorating economy and a significant declining interest rate
environment in 2008, the majority of the increase in interest income was a result of growth in
interest-earning assets, principally loans and leases.
Interest expense
.
Interest expense decreased $5.6 million, or 14%, from $40.5 million for
2008 to $34.9 million for 2009. With the economic recession and historically low levels of
interest rates for 2009, the Company managed down its funding costs as the average cost on interest
bearing liabilities decreased 76 basis points from 3.25% for 2008 down to 2.49% for 2009.
Interest expense decreased $7.6 million, or 16%, from $48.1 million for 2007 to $40.5 million for
2008. With the economic recession and drop in rates during 2008, the Company was successful in
managing its cost of funds as the average cost on interest bearing liabilities decreased 108 basis
points from 4.33% for 2007 down to 3.25% for 2008.
25
Table of Contents
Provision for loan/lease losses
.
The provision for loan/lease losses is established based
on a number of factors, including the Company’s historical loss experience, delinquencies and
charge-off trends, the local and national economy and the risk associated with the loans/leases in
the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company had an allowance for estimated losses on loans/leases of 1.81% of total gross
loans/leases at December 31, 2009, compared to 1.47% of total gross loans/leases at December 31,
2008, and compared to approximately 1.07% of total gross loans/leases at December 31, 2007.
The Company’s provision for loan/lease losses increased significantly from $9.2 million for 2008 to
$17.0 million for 2009. This increase was the result of the following:
| • |
The Company experienced continued degradation within the loan/lease portfolio.
Specifically, the Company’s nonperforming loans/leases grew $8.9 million, or 43%, from
$21.1 million at December 31, 2008 to $30.0 million at December 31, 2009. The majority of
these nonperforming loans/leases required specific reserves.
|
| • |
Due to the economic recession and related uncertainty as to the severity and duration of
its impact on the national and local economies, the Company continued to increase the
qualitative factors impacting the allowance for estimate losses on loans/leases.
|
| • |
The Company grew its loan/lease portfolio 2% during 2009 as gross loans/leases increased
$29.6 million.
|
During 2008, the Company’s provision for loan/lease losses increased significantly from $2.3
million for 2007 to $9.2 million. This increase was a result of the following:
| • |
The Company grew its loan portfolio 15% during 2008 as gross loans/leases increased from
$1.1 billion as of December 31, 2007 to $1.2 billion as of December 31, 2008.
|
| • |
Due to the economic recession and related uncertainty as to the severity and duration of
its impact on the national and local economies, the Company increased the qualitative
factors impacting the allowance for estimate losses on loans/leases.
|
| • |
The Company experienced some degradation in specific commercial credits within the loan
portfolio that required specific reserves.
|
26
Table of Contents
Non-interest income
.
The following tables set forth the various categories of non-interest
income for the years ended December 31, 2009, 2008 and 2007.
| Years Ended | ||||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
|
|
||||||||||||||||
|
Credit card fees, net of processing costs
|
$ | 930,435 | $ | 987,769 | $ | (57,334 | ) | (5.8 | )% | |||||||
|
Trust department fees
|
2,883,482 | 3,333,812 | (450,330 | ) | (13.5 | ) | ||||||||||
|
Deposit service fees
|
3,319,967 | 3,134,869 | 185,098 | 5.9 | ||||||||||||
|
Gains on sales of loans, net
|
1,677,312 | 1,068,545 | 608,767 | 57.0 | ||||||||||||
|
Securities gains, net
|
1,488,391 | 199,500 | 1,288,891 | 646.1 | ||||||||||||
|
Other-than-temporary impairment losses on
securities
|
(206,369 | ) | — | (206,369 | ) | (100.0 | ) | |||||||||
|
Gains on sales of foreclosed assets
|
177,736 | 394,103 | (216,367 | ) | (54.9 | ) | ||||||||||
|
Earnings on bank-owned life insurance
|
1,243,324 | 1,016,864 | 226,460 | 22.3 | ||||||||||||
|
Investment advisory and management fees, gross
|
1,507,557 | 1,975,236 | (467,679 | ) | (23.7 | ) | ||||||||||
|
Other
|
2,621,599 | 2,315,531 | 306,068 | 13.2 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 15,643,434 | $ | 14,426,229 | $ | 1,217,205 | 8.4 | % | ||||||||
|
|
||||||||||||||||
| Years Ended | ||||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2008 | 2007 | $ Change | % Change | |||||||||||||
|
|
||||||||||||||||
|
Credit card fees, net of processing costs
|
$ | 987,769 | $ | 746,725 | $ | 241,044 | 32.3 | % | ||||||||
|
Trust department fees
|
3,333,812 | 3,672,501 | (338,689 | ) | (9.2 | ) | ||||||||||
|
Deposit service fees
|
3,134,869 | 2,606,724 | 528,145 | 20.3 | ||||||||||||
|
Gains on sales of loans, net
|
1,068,545 | 1,219,800 | (151,255 | ) | (12.4 | ) | ||||||||||
|
Securities gains, net
|
199,500 | — | 199,500 | 100.0 | ||||||||||||
|
Gains on sales of foreclosed assets
|
394,103 | 1,007 | 393,096 | 39,036.3 | ||||||||||||
|
Gains on sales of other assets
|
— | 435,791 | (435,791 | ) | (100.0 | ) | ||||||||||
|
Earnings on bank-owned life insurance
|
1,016,864 | 846,071 | 170,793 | 20.2 | ||||||||||||
|
Investment advisory and management fees,
gross
|
1,975,236 | 1,575,887 | 399,349 | 25.3 | ||||||||||||
|
Other
|
2,315,531 | 2,394,893 | (79,362 | ) | (3.3 | ) | ||||||||||
|
|
||||||||||||||||
|
|
$ | 14,426,229 | $ | 13,499,399 | $ | 926,830 | 6.9 | % | ||||||||
|
|
||||||||||||||||
| • |
Trust department fees continue to be a significant contributor to non-interest
income. Income is generated primarily from fees charged based on assets under
administration for corporate and personal trusts and for custodial services. Total
trust assets under administration were $1.22 billion at December 31, 2009 compared to
$811.9 million at December 31, 2008 and compared to $1.19 billion at December 31,
2007. Although the value of trust assets under administration rebounded at the end of
2009, many of the investments experienced downward volatility throughout 2008 and
2009. The fee income recognized was based on the values throughout the years.
|
| • |
Deposit service fees have increased significantly over the past two years. This
increase was primarily a result of an increase in NSF (non-sufficient funds or
overdraft) charges related to demand deposit accounts at the Company’s subsidiary
banks. The amount and number of demand deposit accounts have increased in each of
2008 and 2009. Service charges and NSF charges related to the Company’s demand
deposit accounts were the main components of deposit service fees.
|
27
Table of Contents
| • |
Gains on sales of loans, net, increased 57.0% in 2009 compared to 2008 which more than
reversed the 12.4% decrease in 2008 compared to 2007. This consists primarily of sales
of residential mortgages to the secondary market. In 2009, loan origination and sales
activity for these loan types increased as a result of the reduction in interest rates
and the resulting increase in residential mortgage refinancing transactions. The
Company sells the majority of residential mortgages it originations. For 2008, loan
origination and sales activity slowed with the beginning of the recession and crisis in
the mortgage industry.
|
| • |
In 2009, the Company identified several U.S. government-sponsored agency securities
with favorable market positions which were sold at pre-tax gains totaling $1.5
million. These gains were partially offset as the Company wrote down the value of
11 publicly-traded equity securities owned by the Holding Company which had
experienced declines in fair value deemed to be other-than-temporary. The Company
recognized losses in the amount of $206 thousand for these write-downs.
|
| • |
Investment advisory and management fees increased 25.3% in 2008 over 2007 which was
effectively offset by a 23.7% decrease in 2009 compared to 2008. Similar to trust
department fees, these fees are largely determined based on the value of the
investments managed. The increase for 2008 was largely attributable to the
acquisition of CMG Investment Advisors, LLC, a wholly-owned subsidiary of Quad City
Bank & Trust, which occurred in the first quarter of 2008. For 2009, with the
economic recession, many of these investments experienced declines in market value.
|
28
Table of Contents
Non-interest expenses
.
The following tables set forth the various categories of
non-interest expenses for the years ended December 31, 2009, 2008 and 2007 and 2006.
| Years Ended | ||||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
|
|
||||||||||||||||
|
Salaries and employee benefits
|
$ | 26,882,185 | $ | 26,124,160 | $ | 758,025 | 2.9 | % | ||||||||
|
Professional and data
processing fees
|
4,829,667 | 4,801,087 | 28,580 | 0.6 | ||||||||||||
|
Advertising and marketing
|
991,243 | 1,296,651 | (305,408 | ) | (23.6 | ) | ||||||||||
|
Occupancy and equipment expense
|
5,372,101 | 5,091,545 | 280,556 | 5.5 | ||||||||||||
|
Stationery and supplies
|
528,959 | 518,639 | 10,320 | 2.0 | ||||||||||||
|
Postage and telephone
|
1,060,690 | 933,508 | 127,182 | 13.6 | ||||||||||||
|
Bank service charges
|
481,223 | 559,614 | (78,391 | ) | (14.0 | ) | ||||||||||
|
FDIC and other insurance
|
3,626,027 | 1,316,710 | 2,309,317 | 175.4 | ||||||||||||
|
Loan/lease expense
|
1,997,583 | 757,315 | 1,240,268 | 163.8 | ||||||||||||
|
Other
|
960,979 | 934,460 | 26,519 | 2.8 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 46,730,657 | $ | 42,333,689 | $ | 4,396,968 | 10.4 | % | ||||||||
|
|
||||||||||||||||
| Years Ended | ||||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2008 | 2007 | $ Change | % Change | |||||||||||||
|
|
||||||||||||||||
|
Salaries and employee benefits
|
$ | 26,124,160 | $ | 21,976,683 | $ | 4,147,477 | 18.9 | % | ||||||||
|
Professional and data processing fees
|
4,801,087 | 3,469,331 | 1,331,756 | 38.4 | ||||||||||||
|
Advertising and marketing
|
1,296,651 | 1,115,864 | 180,787 | 16.2 | ||||||||||||
|
Occupancy and equipment expense
|
5,091,545 | 4,717,054 | 374,491 | 7.9 | ||||||||||||
|
Stationery and supplies
|
518,639 | 513,210 | 5,429 | 1.1 | ||||||||||||
|
Postage and telephone
|
933,508 | 936,032 | (2,524 | ) | (0.3 | ) | ||||||||||
|
Bank service charges
|
559,614 | 565,092 | (5,478 | ) | (1.0 | ) | ||||||||||
|
FDIC and other insurance
|
1,316,710 | 995,955 | 320,755 | 32.2 | ||||||||||||
|
Loss on sale of premises and
equipment
|
— | 223,308 | (223,308 | ) | (100.0 | ) | ||||||||||
|
Loan/lease expense
|
757,315 | 358,107 | 399,208 | 111.5 | ||||||||||||
|
Other
|
934,460 | 863,339 | 71,121 | 8.2 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 42,333,689 | $ | 35,733,975 | $ | 6,599,714 | 18.5 | % | ||||||||
|
|
||||||||||||||||
| • |
Salaries and employee benefits, which is the largest component of non-interest
expenses, experienced a modest increase of $758 thousand, or 2.9%, in 2009 compared to
2008. This slight increase is primarily the result of customary annual salary and benefits
increases for the majority of the Company’s employees. The Company’s employee base has
stabilized over the past year as FTEs have remained relatively flat from 345 at December
31, 2008 to 343 at December 31, 2009. Salaries and employee benefits increased $4.1
million in 2008 compared to 2007. This increase was primarily due to an increase in the
number of FTEs from 326 at December 31, 2007, to 345 at December 31, 2008. The large
majority of these employee additions were attributable to the Company’s expansion in its
existing markets.
|
29
Table of Contents
| • |
Professional and data processing fees remained flat during 2009. In 2008, professional
and data processing fees increased 38.4% over 2007. The primary contributors to the
year-over-year increase in 2008 were legal, consulting, and data processing fees incurred
at the subsidiary banks. Fees incurred for data processing experienced an increase as the
number of customers and volume of transactions have grown. In addition, the Company
incurred significant expenses for consulting and legal services for work on troubled
loans/leases, amendments of compensation agreements in compliance with a new regulation,
and the evaluation of the EESA.
|
| • |
FDIC and other insurance expense experienced significant increases in each of the last
two years. The reasons for these increases were twofold and both related to expenses for
FDIC insurance. First, the FDIC introduced its new premium pricing system and assessment
methodology for deposit insurance coverage for all depository institutions in 2007. The
system was further modified in 2009. The result was increased premium cost for the
subsidiary banks. Second, the FDIC required a one-time special assessment from all insured
depository institutions, including the subsidiary banks, for the second quarter of 2009
which amounted to $794 thousand of additional expense. Management expects FDIC assessments
will continue to be higher than historical levels.
|
| • |
Loan/lease expense increased significantly over the past two years. In conjunction with
the increase in nonperforming assets over the past two years, the Company has incurred
increased carrying costs and workout expenses related to these nonperforming assets.
|
Income tax expense
.
The provision for income taxes from continuing operations was $247
thousand for the year ended December 31, 2009 compared to $1.7 million for the year ended December
31, 2008 for a decrease of $1.5 million, or 86%. The decrease was the result of a decrease in
income from continuing operations before income taxes of $4.7 million, or 67%, for 2009 when
compared to 2008. Additionally, primarily due to a decrease in the proportionate share of taxable
income to total income from year to year, the Company experienced a decrease in the effective tax
rate from 24.8% for 2008 to 10.8% for 2009.
The provision for income taxes from continuing operations was $1.7 million for the year ended
December 31, 2008 compared to $2.9 million for the year ended December 31, 2007 for a decrease of
$1.2 million, or 40%. The decrease was the result of a decrease in income from continuing
operations before income taxes of $2.8 million, or 28%, for 2008 when compared to 2007.
Additionally, primarily due to a decrease in the proportionate share of taxable income to total
income from year to year, the Company experienced a decrease in the effective tax rate from 29.7%
for 2007 to 24.8% for 2008.
Discontinued
operations
.
The Company did not recognize any income or loss from
discontinued operations for the year ended December 31, 2009.
Income from discontinued operations for the year ended December 31, 2008 totaled $1.7 million which
was a significant improvement from the loss from discontinued operations of $723 thousand incurred
for the year ended December 31, 2007. The gain on sale of the merchant credit card acquiring
business, after taxes, of approximately $3.0 million more than offset the increase in operating
loss by First Wisconsin Bank & Trust, before taxes, of $1.2 million.
30
Table of Contents
FINANCIAL CONDITION
Overview
.
Total assets of the Company increased by $174.0 million, or 11%, to $1.78
billion at December 31, 2009 from $1.61 billion at December 31, 2008. Total assets of the Company
increased by $129.1 million, or 9%, to $1.61 billion at December 31, 2008 from $1.48 billion at
December 31, 2007. The growth in 2009 primarily resulted from an increase in the securities and
loans/leases portfolios funded by increases in noninterest-bearing deposits and customer repurchase
agreements, wholesale repurchase agreements, and the issuance of preferred stock.
Investments.
The composition of the Company’s securities portfolio is managed to meet
liquidity needs while prioritizing the impact on asset-liability position and maximizing return.
The Company’s securities available for sale portfolio consists largely of U.S. Treasury and
government sponsored agency securities. Residential mortgage-backed securities represents less
than 1% of the entire portfolio as of December 31, 2009 and 2008, respectively. The Company has
not invested in corporate mortgage-backed securities.
Securities increased $114.4 million, or 45%, to $370.5 million at December 31, 2009, from $256.1
million at December 31, 2008. The increase largely consisted of U.S. government sponsored agency
securities and was the result of increased collateral needs for the customer and wholesale
repurchase agreements at the subsidiary banks.
Securities increased by $35.5 million, or 16%, to $256.1 million at December 31, 2008, from $220.6
million at December 31, 2007. This increase was primarily investments of U.S. government sponsored
agency securities and resulted to support the collateral needs of the subsidiary banks.
See Note 4 to the consolidated financial statements for additional information regarding the
Company’s investments.
Loans/Leases
.
Total loans/leases grew by $29.6 million, or 2% from $1.21 billion at
December 31, 2008 to $1.24 billion at December 31, 2009. Compared to 2007, total loans/leases grew
by $157.7 million, or 15%, to $1.21 billion at December 31, 2008, from $1.06 billion at December
31, 2007.
The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the
following table.
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Real estate loans held for sale — residential mortgage
|
$ | 6,135 | 1 | % | $ | 7,377 | 1 | % | $ | 6,508 | 1 | % | $ | 6,187 | 1 | % | $ | 2,632 | 0 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Real estate loans — residential mortgage
|
61,561 | 5 | % | 69,466 | 6 | % | 68,281 | 6 | % | 68,913 | 7 | % | 54,125 | 7 | % | |||||||||||||||||||||||||
|
Real estate loans — construction
|
2,912 | 0 | % | 2,385 | 0 | % | 8,539 | 1 | % | 6,534 | 1 | % | 2,811 | 0 | % | |||||||||||||||||||||||||
|
Commercial and industrial loans
|
441,536 | 35 | % | 439,117 | 36 | % | 353,401 | 33 | % | 396,599 | 41 | % | 323,732 | 43 | % | |||||||||||||||||||||||||
|
Commercial real estate loans
|
556,007 | 45 | % | 526,669 | 43 | % | 472,284 | 45 | % | 350,339 | 37 | % | 269,730 | 36 | % | |||||||||||||||||||||||||
|
Direct financing leases
|
90,059 | 7 | % | 79,408 | 7 | % | 67,224 | 6 | % | 52,628 | 5 | % | 34,911 | 5 | % | |||||||||||||||||||||||||
|
Installment and other consumer loans
|
84,271 | 7 | % | 88,540 | 7 | % | 79,220 | 8 | % | 78,058 | 8 | % | 67,090 | 9 | % | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total loans/leases
|
$ | 1,242,481 | 100 | % | $ | 1,212,962 | 100 | % | $ | 1,055,457 | 100 | % | $ | 959,258 | 100 | % | $ | 755,031 | 100 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Plus deferred loan/lease origination costs, net of fees
|
1,839 | 1,727 | 1,531 | 1,489 | 1,223 | |||||||||||||||||||||||||||||||||||
|
Less allowance for estimated losses on loans/leases
|
(22,505 | ) | (17,809 | ) | (11,315 | ) | (10,612 | ) | (8,884 | ) | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Net loans/leases
|
$ | 1,221,815 | $ | 1,196,880 | $ | 1,045,673 | $ | 950,135 | $ | 747,370 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
Consistent with the intention of the U.S. Treasury’s Capital Purchase Program, the Company is
committed to providing transparency surrounding its utilization of the proceeds from participation
in the Capital Purchase Program including its lending activities and support of the existing
communities served. A summary of activity for the year ended December 31, 2009 is presented in the
table on the following page.
31
Table of Contents
The majority of residential real estate loans originated by the Company were sold on the secondary
market to avoid the interest rate risk associated with long term fixed rate loans. Loans
originated for this purpose were classified as held for sale and are included in the residential
real estate loans in the following table.
| For the twelve months ended December 31, 2009 | ||||||||||||||||||||||||
| Quad City | m2 | Cedar Rapids | Rockford | Intercompany | Consolidated | |||||||||||||||||||
| Bank & Trust | Lease Funds | Bank & Trust | Bank & Trust | Elimination | Total | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2008:
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Commercial and industrial loans
|
$ | 236,023 | $ | — | $ | 133,191 | $ | 69,903 | $ | — | $ | 439,117 | ||||||||||||
|
Commercial real estate loans
|
254,848 | — | 175,481 | 98,757 | (2,418 | ) | 526,668 | |||||||||||||||||
|
Direct financing leases
|
— | 79,408 | — | — | — | 79,408 | ||||||||||||||||||
|
Residential real estate loans
|
44,480 | — | 22,608 | 12,141 | — | 79,229 | ||||||||||||||||||
|
Installment and other consumer loans
|
54,151 | — | 23,597 | 10,793 | — | 88,541 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
589,502 | 79,408 | 354,877 | 191,594 | (2,418 | ) | 1,212,963 | |||||||||||||||||
|
Plus deferred loan/lease origination costs, net of fees
|
118 | 1,864 | (299 | ) | 44 | 1,727 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 589,620 | $ | 81,272 | $ | 354,578 | $ | 191,638 | $ | (2,418 | ) | $ | 1,214,690 | |||||||||||
|
|
||||||||||||||||||||||||
|
ORIGINATION OF NEW LOANS:
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Commercial and industrial loans
|
55,432 | 11,300 | 46,693 | 25,892 | — | 139,317 | ||||||||||||||||||
|
Commercial real estate loans
|
47,583 | — | 48,597 | 20,535 | — | 116,715 | ||||||||||||||||||
|
Direct financing leases
|
— | 27,515 | — | — | — | 27,515 | ||||||||||||||||||
|
Residential real estate loans
|
46,812 | — | 33,146 | 26,878 | — | 106,836 | ||||||||||||||||||
|
Installment and other consumer loans
|
10,852 | — | 3,661 | 2,925 | — | 17,438 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 160,679 | $ | 38,815 | $ | 132,097 | $ | 76,230 | $ | — | $ | 407,821 | ||||||||||||
|
|
||||||||||||||||||||||||
|
PAYMENTS/MATURITIES/SALES, NET OF ADVANCES OR
RENEWALS ON EXISTING LOANS:
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Commercial and industrial loans
|
(73,582 | ) | (11,300 | ) | (31,464 | ) | (20,552 | ) | — | (136,898 | ) | |||||||||||||
|
Commercial real estate loans
|
(40,529 | ) | — | (35,328 | ) | (11,658 | ) | 139 | (87,376 | ) | ||||||||||||||
|
Direct financing leases
|
— | (16,864 | ) | — | — | — | (16,864 | ) | ||||||||||||||||
|
Residential real estate loans
|
(58,071 | ) | — | (33,772 | ) | (23,614 | ) | — | (115,457 | ) | ||||||||||||||
|
Installment and other consumer loans
|
(16,946 | ) | — | (3,183 | ) | (1,579 | ) | — | (21,708 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | (189,128 | ) | $ | (28,164 | ) | $ | (103,747 | ) | $ | (57,403 | ) | $ | 139 | (378,303 | ) | ||||||||
|
|
||||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2009:
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Commercial and industrial loans
|
217,873 | — | 148,420 | 75,243 | — | 441,536 | ||||||||||||||||||
|
Commercial real estate loans
|
261,902 | — | 188,750 | 107,634 | (2,279 | ) | 556,007 | |||||||||||||||||
|
Direct financing leases
|
— | 90,059 | — | — | — | 90,059 | ||||||||||||||||||
|
Residential real estate loans
|
33,221 | — | 21,982 | 15,405 | — | 70,608 | ||||||||||||||||||
|
Installment and other consumer loans
|
48,057 | — | 24,075 | 12,139 | — | 84,271 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
561,053 | 90,059 | 383,227 | 210,421 | (2,279 | ) | 1,242,481 | |||||||||||||||||
|
Plus deferred loan/lease origination costs, net of fees
|
64 | 2,207 | (427 | ) | (4 | ) | — | 1,839 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 561,116 | $ | 92,266 | $ | 382,800 | $ | 210,417 | $ | (2,279 | ) | 1,244,320 | ||||||||||||
|
|
||||||||||||||||||||||||
The following table sets forth the remaining maturities by loan/lease type as of December 31, 2009.
Maturities are based on contractual dates.
| Maturities After One Year | ||||||||||||||||||||
| Due in one | Due after one | Due after | Predetermined | Adjustable | ||||||||||||||||
| year or less | through 5 years | 5 years | interest rates | interest rates | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Real estate loans held for sale — mortgage
|
$ | — | $ | — | $ | 6,135 | $ | 6,135 | $ | — | ||||||||||
|
Real estate loans — residential mortgage
|
815 | 572 | 60,174 | 8,249 | 52,497 | |||||||||||||||
|
Real estate loans — construction
|
2,912 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Commercial and industrial loans
|
158,732 | 227,742 | 55,062 | 182,688 | 100,116 | |||||||||||||||
|
Commercial real estate loans
|
103,332 | 356,815 | 95,860 | 375,428 | 77,247 | |||||||||||||||
|
Direct financing leases
|
5,972 | 71,888 | 12,199 | 84,087 | 0 | |||||||||||||||
|
Installment and other consumer loans
|
27,813 | 47,733 | 8,725 | 12,347 | 44,111 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 299,576 | $ | 704,750 | $ | 238,155 | $ | 668,934 | $ | 273,971 | ||||||||||
|
|
||||||||||||||||||||
32
Table of Contents
Allowance for Estimated Losses on Loans/Leases
.
The allowance for estimated losses on
loans/leases was $22.5 million at December 31, 2009, compared to $17.8 million at December 31,
2008, for an increase of $4.7 million, or 26%. The allowance for estimated losses on loans/leases
was $17.8 million at December 31, 2008, compared to $11.3 million at December 31, 2007, for an
increase of $6.5 million, or 57%. The Company incurred net charge-offs totaling $12.3 million for
the year ending December 31, 2009. This was a significant increase from $2.7 million for the year
ending December 31, 2008 and from $1.6 million for the year ending December 31, 2007. The
following table summarizes the activity in the allowance for estimated losses on loans/leases.
| Years ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
|
Average amount of loans/leases outstanding,
before allowance for estimated losses on loans/leases
|
$ | 1,222,493 | $ | 1,124,255 | $ | 1,001,633 | $ | 855,872 | $ | 682,858 | ||||||||||
|
|
||||||||||||||||||||
|
Allowance for estimated losses on loans/leases:
|
||||||||||||||||||||
|
Balance, beginning of fiscal period
|
$ | 17,809 | $ | 11,315 | $ | 10,612 | $ | 8,884 | $ | 9,262 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Commercial and industrial
|
(7,510 | ) | (1,205 | ) | (754 | ) | (1,245 | ) | (1,097 | ) | ||||||||||
|
Commercial real estate
|
(2,824 | ) | (805 | ) | (300 | ) | (95 | ) | (432 | ) | ||||||||||
|
Direct financing leases
|
(1,255 | ) | (264 | ) | (527 | ) | (75 | ) | (1 | ) | ||||||||||
|
Residential real estate *
|
(314 | ) | (326 | ) | (174 | ) | (45 | ) | (160 | ) | ||||||||||
|
Installment and other consumer
|
(2,104 | ) | (1,085 | ) | (469 | ) | (460 | ) | (356 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Subtotal charge-offs
|
(14,007 | ) | (3,685 | ) | (2,224 | ) | (1,920 | ) | (2,046 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial and industrial
|
344 | 313 | 160 | 260 | 95 | |||||||||||||||
|
Commercial real estate
|
98 | 420 | 167 | 2 | 124 | |||||||||||||||
|
Direct financing leases
|
52 | — | — | — | 26 | |||||||||||||||
|
Residential real estate *
|
40 | 81 | 173 | 52 | 25 | |||||||||||||||
|
Installment and other consumer
|
1,193 | 143 | 92 | 50 | 87 | |||||||||||||||
|
|
||||||||||||||||||||
|
Subtotal recoveries
|
1,727 | 957 | 592 | 364 | 357 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net charge-offs
|
(12,280 | ) | (2,728 | ) | (1,632 | ) | (1,556 | ) | (1,689 | ) | ||||||||||
|
Provision charged to expense
|
16,976 | 9,222 | 2,335 | 3,284 | 877 | |||||||||||||||
|
Acquisition of m2 Lease Funds, LLC
|
— | — | — | — | 434 | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance, end of fiscal year
|
$ | 22,505 | $ | 17,809 | $ | 11,315 | $ | 10,612 | $ | 8,884 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Ratio of net charge-offs to average loans/leases outstanding
|
1.00 | % | 0.24 | % | 0.16 | % | 0.18 | % | 0.25 | % | ||||||||||
| * |
Residential real estate includes construction, if any
|
The adequacy of the allowance for estimated losses on loans/leases was determined by management
based on factors that included the overall composition of the loan/lease portfolio, types of
loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and
doubtful credits, economic conditions and other factors that, in management’s judgment, deserved
evaluation in estimating loan/lease losses. To ensure that an adequate allowance was maintained,
provisions were made based on the increase in loans/leases and a detailed analysis of the
loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed monthly with specific
detailed reviews completed on all credits risk-rated less than “fair quality” and carrying
aggregate exposure in excess of $100 thousand. The Company experienced continued degradation
within the loan/lease portfolio during 2009. Specifically, the Company’s nonperforming
loans/leases grew $8.9 million, or 43%, from $21.1 million at December 31, 2008 to $30.0 million at
December 31, 2009. The majority of these nonperforming loans/leases required specific reserves.
Additionally, due to the continued uncertainty regarding the national economy and the impact on
local markets, the Company increased the qualitative reserve factors applied to all loans and
leases within the reserve adequacy calculations for all of the subsidiary banks and the leasing
company. As a direct result, the allowance for estimated losses on loans/leases as a percentage of
total gross loans/leases was 1.81% at December 31, 2009, which was a significant increase from
1.47% at December 31, 2008, and 1.07% at December 31, 2007. The adequacy of the allowance for
estimated losses on loans/leases was monitored by the credit administration staff and reported to
management and the board of directors.
33
Table of Contents
The following table presents the allowance for estimated losses on loans/leases by type and the
percentage of type to total loans/leases.
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Real estate loans held for sale — residential mortgage
|
$ | 64 | 0 | % | $ | 64 | 1 | % | $ | 46 | 1 | % | $ | 67 | 1 | % | $ | 16 | 0 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Real estate loans — residential mortgage
|
643 | 5 | % | 605 | 6 | % | 472 | 6 | % | 356 | 7 | % | 250 | 7 | % | |||||||||||||||||||||||||
|
Real estate loans — construction
|
30 | 0 | % | 21 | 0 | % | 62 | 1 | % | 40 | 1 | % | 12 | 0 | % | |||||||||||||||||||||||||
|
Commercial and industrial loans
|
6,239 | 36 | % | 8,260 | 36 | % | 4,697 | 33 | % | 4,465 | 41 | % | 3,999 | 43 | % | |||||||||||||||||||||||||
|
Commercial real estate loans
|
11,147 | 45 | % | 6,255 | 43 | % | 4,064 | 45 | % | 3,943 | 37 | % | 3,332 | 36 | % | |||||||||||||||||||||||||
|
Direct Financing leases
|
1,681 | 7 | % | 1,402 | 7 | % | 874 | 6 | % | 805 | 5 | % | 546 | 5 | % | |||||||||||||||||||||||||
|
Installment and other consumer loans
|
2,407 | 7 | % | 1,195 | 7 | % | 1,090 | 8 | % | 920 | 8 | % | 725 | 9 | % | |||||||||||||||||||||||||
|
Unallocated
|
294 | NA | 7 | NA | 10 | NA | 16 | NA | 4 | NA | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
$ | 22,505 | 100 | % | $ | 17,809 | 100 | % | $ | 11,315 | 100 | % | $ | 10,612 | 100 | % | $ | 8,884 | 100 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
% — Represents the percentage of the certain type of loan/lease to total loans/leases
Although management believed that the allowance for estimated losses on loans/leases at December
31, 2009 was at a level adequate to absorb probable losses on existing loans/leases, there can be
no assurance that such losses will not exceed the estimated amounts or that the Company will not be
required to make additional provisions for loan/lease losses in the future. Unpredictable future
events could adversely affect cash flows for both commercial and individual borrowers, which could
cause the Company to experience increases in problem assets, delinquencies and losses on
loans/leases, and require additional increases in the provision. Asset quality is a priority for
the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks
and leasing company with the intention to improve the overall quality of the Company’s loan/lease
portfolio.
Nonperforming Assets
.
The table below presents the amounts of nonperforming assets.
| As of December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Nonaccrual loans/leases (1)
|
$ | 28,742 | $ | 20,828 | $ | 6,488 | $ | 6,538 | $ | 2,579 | ||||||||||
|
Accruing loans/leases past due 90 days or more
|
89 | 222 | 500 | 755 | 604 | |||||||||||||||
|
Troubled debt restructures
|
1,201 | — | — | — | — | |||||||||||||||
|
Other real estate owned
|
9,286 | 3,857 | 496 | 93 | 545 | |||||||||||||||
|
Other repossessed assets (2)
|
1,071 | 450 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 40,389 | $ | 25,357 | $ | 7,484 | $ | 7,386 | $ | 3,728 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Nonperforming loans/leases to total loans/leases
|
2.41 | % | 1.73 | % | 0.66 | % | 0.76 | % | 0.42 | % | ||||||||||
|
Nonperforming assets to total loans/leases plus reposessed property
|
3.22 | % | 2.08 | % | 0.71 | % | 0.77 | % | 0.49 | % | ||||||||||
|
Nonperforming assets to total assets
|
2.27 | % | 1.58 | % | 0.51 | % | 0.58 | % | 0.36 | % | ||||||||||
| (1) |
Includes government guaranteed portion
|
|
| (2) |
Company previously excluded repossessed assets from nonperforming assets. Company
adjusted amounts reported in prior periods presented to reflect a consistent comparison.
The adjustments did not have a significant impact on loan covenant compliance or other
previously presented disclosures.
|
34
Table of Contents
The policy of the Company is to place a loan/lease on nonaccrual status if: (a) payment in full of
interest or principal is not expected; or (b) principal or interest has been in default for a
period of 90 days or more unless the obligation is both in the process of collection and well
secured. A loan/lease is well secured if it is secured by 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.
The Company experienced an increase in nonperforming assets of $15.0 million, or 59%, from $25.4
million at December 31, 2008 to $40.4 million at December 31, 2009. During 2008, the Company’s
nonperforming assets increased $17.9 million, or 239%, from $7.5 million as of December 31, 2007,
to $25.4 million as of December 31, 2008. The large majority of the Company’s nonperforming assets
consist of nonaccrual loans/leases and other real estate owned. For those nonaccrual loans/leases,
management has thoroughly reviewed these loans/leases and has provided specific reserves as
appropriate. Other real estate owned is carried at the lower of carrying amount or fair value less
costs to sell. As previously noted, the Company’s allowance for estimated losses on loans/leases
to total loans/leases increased to 1.81% at December 31, 2009 from 1.47% at December 31, 2008.
Deposits
.
Deposits increased by $30.4 million, or 3%, during 2009. Deposits increased by
$175.0 million, or 20%, to $1.1 billion at December 31, 2008, from $884.0 million at December 31,
2007. The table below presents the composition of the Company’s deposit portfolio.
| As of December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (dollars in thousands) | ||||||||||||
|
|
||||||||||||
|
Non-interest bearing demand deposits
|
$ | 207,844 | $ | 161,126 | $ | 160,533 | ||||||
|
Interest bearing demand deposits
|
393,732 | 355,990 | 300,681 | |||||||||
|
Savings deposits
|
34,195 | 31,756 | 33,337 | |||||||||
|
Time deposits
|
382,798 | 386,097 | 341,581 | |||||||||
|
Brokered time deposits
|
70,754 | 123,990 | 47,873 | |||||||||
|
|
||||||||||||
|
|
$ | 1,089,323 | $ | 1,058,959 | $ | 884,005 | ||||||
|
|
||||||||||||
The Company experienced growth in non-interest bearing demand deposits during 2009 of $46.7
million, or 29%. This increase and the Company’s overall strong liquidity position have allowed
the Company to reduce the level of brokered time deposits which have decreased $53.2 million, or
43%, during 2009. Excluding brokered time deposits, the Company’s deposits increased $83.6
million, or 9%, during 2009.
Short-term Borrowings
.
The subsidiary banks offer overnight repurchase agreements to some
of their major customers. Also, the subsidiary banks purchase Federal funds for short-term funding
needs from the Federal Reserve Bank, or from their correspondent banks. The table below presents
the composition of the Company’s short-term borrowings.
| As of December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (dollars in thousands) | ||||||||||||
|
|
||||||||||||
|
Overnight repurchase agreements with customers
|
$ | 94,090 | $ | 68,107 | $ | 80,264 | ||||||
|
Federal funds purchased
|
56,810 | 33,350 | 89,940 | |||||||||
|
|
||||||||||||
|
|
$ | 150,900 | $ | 101,457 | $ | 170,204 | ||||||
|
|
||||||||||||
See Note 8 of the consolidated financial statements for additional information on the Company’s
short-term borrowings.
35
Table of Contents
FHLB Advances and Other Borrowings
.
FHLB advances decreased $2.8 million, or 1%, during
2009. FHLB advances increased $49.9 million, or 30%, from $168.8 million as of December 31, 2007,
to $218.7 million as of December 31, 2008. As of December 31, 2009 and 2008, the subsidiary banks
held $11.8 million of FHLB stock in
aggregate. As a result of their memberships in the FHLB of Des Moines and Chicago, the subsidiary
banks have the ability to borrow funds for short-term or long-term purposes under a variety of
programs. The subsidiary banks utilized FHLB advances for loan matching as a hedge against the
possibility of rising interest rates or when these advances provided a less costly source of funds
than customer deposits. See Note 9 to the consolidated financial statements for additional
information regarding FHLB advances.
Other borrowings increased significantly over the past two years. During 2009, other borrowings
grew $64.5 million, or 85%, to $140.1 million at December 31, 2009. For 2008, the Company
experienced a similar increase as other borrowings increased by $27.9 million, or 58%, from $47.7
million at December 31, 2007, to $75.6 million at December 31, 2008. The increases for both years
are largely a result of the introduction and increased utilization of wholesale structured
repurchase agreements as an alternative funding source to FHLB advances and customer deposits.
Additional information regarding other borrowings is described in Note 10 to the consolidated
financial statements.
Stockholders’ Equity
.
Stockholders’ equity increased $33.1 million, or 36%, during 2009.
The majority of this increase resulted from the Company’s participation in the Capital Purchase
Program whereby the Company issued $38.1 million, net of issuance costs, of cumulative perpetual
preferred stock to the U.S. Treasury. Additionally, net income attributable to QCR Holdings,
Inc. of $1.8 million increased retained earnings; however, this was more than offset by declaration
and accrual of preferred stock dividends and discount accretion totaling $3.8 million, and
declaration of common stock dividends of $363 thousand. The detail of the preferred stock
dividends is as follows:
| • |
$1.1 million for the quarterly dividends on the outstanding shares of Series B
Non-Cumulative Perpetual Preferred Stock at a stated rate of 8.00%,
|
| • |
$712 thousand for the quarterly dividends on the outstanding shares of Series C
Non-Cumulative Perpetual Preferred Stock at a stated rate of 9.50%, and
|
| • |
$2.0 million for the quarterly dividends on the outstanding shares of Series D
Cumulative Perpetual Preferred Stock at a stated rate of 5.00%, including the related
discount accretion.
|
Lastly, the available for sale portion of the securities portfolio experienced a decrease in fair
value of $3.5 million, net of tax, for 2009 as a result of the increase in market rates at the end
of the year.
Stockholders’ equity increased $4.7 million from $87.8 million as of December 31, 2007 to $92.5
million as of December 31, 2008. Net income of $6.7 million for 2008 increased retained earnings.
This increase was offset by the declaration of preferred stock dividends totaling $1.8 million, and
the declaration of common stock dividends totaling $370 thousand. Specifically regarding the
preferred stock dividends declared, $1.1 million represented the quarterly dividends on the
outstanding shares of Series B Non-Cumulative Perpetual Preferred Stock at a stated rate of 8.00%,
and $712 thousand was the amount of the quarterly dividends on the outstanding shares of Series C
Non-Cumulative Perpetual Preferred Stock at a stated rate of 9.50%. Additionally, the available
for sale portion of the securities portfolio experienced an increase in fair value of $817
thousand, net of tax, for 2008 as a result of the decrease in long-term interest rates.
See Note 12 to the consolidated financial statements for additional information regarding the
Company’s preferred stock.
36
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability of the Company to meet maturing obligations and its existing
commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide
for customers’ credit needs. The Company monitors liquidity risk through contingency planning
stress testing on a regular basis. The Company seeks to avoid over concentration of funding
sources and to establish and maintain contingent funding facilities that can be drawn upon if
normal funding sources become unavailable. One source of liquidity is cash and short-term assets,
such as interest-bearing deposits in other banks and Federal funds sold, which totaled $71.8
million at December 31, 2009, $56.3 million at December 31, 2008, and $53.6 million at December 31,
2007.
The subsidiary banks have a variety of sources of short-term liquidity available to them, including
Federal funds purchased from correspondent banks, FHLB advances, structured wholesale repurchase
agreements, brokered certificates of deposits, lines of credit, borrowing at the Federal Reserve
Discount Window, sales of securities available for sale, 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. At December 31, 2009, the subsidiary banks had
20 lines of credit with upstream correspondent banks totaling $156.1 million, of which $26.6
million is secured and $129.5 million is unsecured. At December 31, 2009, $135.1 million was
available. Additionally, the Company has a single $20.0 million secured revolving credit note with
a maturity of April 2, 2010. As of December 31, 2009, the Company had $15.0 million available as
the note carried an outstanding balance of $5.0 million. See Note 10 to the consolidated financial
statements for additional information regarding the lines of credit and revolving credit note.
Throughout its history, the Company has secured additional capital through various resources
including approximately $36.1 million through the issuance of trust preferred securities and $58.2
million through the issuance of preferred stock, of which $38.1 million was issued on February 13,
2009 as part of the Company’s participation in the Capital Purchase Program. The board of
directors and management believed it was prudent to participate in the Capital Purchase Program
because (1) the cost of capital under this program was significantly lower than the cost of capital
otherwise available to the Company at the time, and (2) despite being well-capitalized, additional
capital under this program provided the Company additional capacity to meet future capital needs
that may arise in this current uncertain economic environment. See Financial Statement Notes 11
and 12 for information on the issuance of trust preferred securities, and preferred stock,
respectively.
On or
about March 15, 2010, the Company expects to issue approximately $2.0 million of 6.0% Series A
Subordinated Notes due September 1, 2018, to certain accredited investors in a private placement
transaction. The transaction also includes the issuance of detachable warrants to purchase
approximately 40,000 shares of the Company’s common stock at an
exercise price per share equal to the greater of $10.00 or the market
price of the common stock on the closing date. The Company intends to
contribute such proceeds to Rockford Bank & Trust to further
strengthen its capital position.
As of December 31, 2009 and 2008, the Company and subsidiary banks remained well-capitalized in
accordance with regulatory capital requirements administered by the federal banking authorities.
See Financial Statement Note 16 for detail of the capital amounts and ratios for the Company and
subsidiary banks.
37
Table of Contents
COMMITMENTS, CONTINGENCIES, CONTRACTUAL OBLIGATIONS, AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the subsidiary banks make various commitments and incur certain
contingent liabilities that are not presented in the accompanying consolidated financial
statements. The commitments and contingent liabilities include various guarantees, commitments to
extend credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon
extension of credit, is based upon management’s credit evaluation of the counter-party. Collateral
held varies but may include accounts receivable, marketable securities, inventory, property, plant
and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee
the performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements and, generally, have terms of one year, or less. The
credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The banks hold collateral, as described above, supporting
those commitments if deemed necessary. In the event the customer does not perform in accordance
with the terms of the agreement with the third party, the banks would be required to fund the
commitments. The maximum potential amount of future payments the banks could be required to make
is represented by the contractual amount. If the commitment is funded, the banks would be entitled
to seek recovery from the customer. At December 31, 2009 and 2008, no amounts had been recorded as
liabilities for the banks’ potential obligations under these guarantees.
As of December 31, 2009 and 2008, commitments to extend credit aggregated $476.5 million and $494.8
million, respectively. As of December 31, 2009 and 2008, standby letters of credit aggregated
$17.8 million and $15.2 million, respectively. Management does not expect that all of these
commitments will be funded.
Additional information regarding commitments, contingencies, and off-balance sheet arrangements is
described in Note 18 of the consolidated financial statements.
38
Table of Contents
The Company has various financial obligations, including contractual obligations and commitments,
which may require future cash payments. The following table presents, as of December 31, 2009,
significant fixed and determinable contractual obligations to third parties by payment date.
Further discussion of the nature of each obligation is included in the referenced note to the
consolidated financial statements.
| Financial | Payments Due by Period | |||||||||||||||||||||||
| Statement | One Year | |||||||||||||||||||||||
| Description | Note Reference | Total | or Less | 2 - 3 Years | 4 - 5 Years | After 5 Years | ||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Deposits without a stated maturity
|
N/A | $ | 636,196 | $ | 636,196 | $ | — | $ | — | $ | — | |||||||||||||
|
|
||||||||||||||||||||||||
|
Certificates of deposit
|
7 | 453,127 | 360,284 | 85,249 | 7,594 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Short-term borrowings
|
8 | 150,900 | 150,900 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
FHLB advances
|
9 | 215,850 | 8,100 | 63,750 | 15,500 | 128,500 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Other borrowings
|
10 | 140,060 | 5,060 | 45,000 | — | 90,000 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Junior subordinated debentures
|
11 | 36,085 | — | — | — | 36,085 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Rental commitments
|
6 | 2,345 | 381 | 655 | 635 | 674 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating contracts
|
N/A | 8,760 | 2,784 | 3,135 | 2,841 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total contractual cash obligations
|
$ | 1,643,323 | $ | 1,163,705 | $ | 197,789 | $ | 26,570 | $ | 255,259 | ||||||||||||||
|
|
||||||||||||||||||||||||
Purchase obligations represent obligations under agreements to purchase goods or services that are
enforceable and legally binding on the Company and that specify all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. The Company had no purchase obligations at December 31,
2009. The Company’s operating contract obligations represent short and long-term lease payments
for data processing equipment and services, software, and other equipment and professional
services.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and the accompanying notes have been prepared
in accordance with U.S. generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollar amounts without considering
the changes in the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company’s operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company’s performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
39
Table of Contents
IMPACT OF NEW ACCOUNTING STANDARDS
On June 12, 2009, FASB issued two related accounting pronouncements changing the accounting
principles and disclosures requirements related to securitizations and special-purpose entities.
Specifically, these pronouncements eliminate the concept of a “qualifying special-purpose entity”,
change the requirements for derecognizing financial assets and change how a company determines when
an entity is insufficiently capitalized or is not controlled through voting (or similar rights)
should be consolidated. These pronouncements also expand existing disclosure requirements to
include more information about transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related to transferred
financial assets. These pronouncements are effective as of the beginning of each reporting
entity’s first annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The recognition and measurement provisions regarding transfers
of financial assets shall be applied to transfers that occur on or after the effective date. The
Company adopted these new pronouncements on January 1, 2010, as required. Transfers of financial
assets include participation loans/leases sold by the Company’s banking subsidiaries and leasing
company. For agreements of participation loans/leases sold that contain language that fail to meet
the definition of a participating interest and/or surrender of control by the selling institution,
the Company is not allowed to recognize the sale and is required to record as a secured borrowing.
Management intends to minimize the frequency of these situations. As a result, the adoption is not
expected to have a material impact to the financial statements taken as a whole.
On April 9, 2009, FASB issued three related accounting pronouncements intended to provide
additional application guidance and enhance disclosures regarding fair value measurements and
impairments of securities. In particular, these pronouncements: (1) provide guidelines for making
fair value measurements more consistent with the existing accounting principles when the volume and
level of activity for the asset or liability have decreased significantly; (2) enhance consistency
in financial reporting by increasing the frequency of fair value disclosures; and (3) modify
existing general standards of accounting for and disclosure of other-than-temporary impairment
losses for impaired debt securities.
All three pronouncements were effective for interim and annual periods ending after June 15, 2009.
Entities were permitted to early adopt these pronouncements for interim and annual periods ending
after March 15, 2009, but had to adopt all three pronouncements concurrently. The Company adopted
these pronouncements for the quarterly reporting period ending June 30, 2009, as required. See
Note 21 to the consolidated financial statements for additional information regarding fair value
measurements of financial assets and liabilities, and Note 4 for additional information for
investment securities. The adoption of these pronouncements did not have a material impact on the
Company’s consolidated financial statements taken as a whole.
40
Table of Contents
FORWARD LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and
written statements of the Company and its management may contain, forward-looking statements,
within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with
respect to the financial condition, results of operations, plans, objectives, future performance
and business of the Company. Forward-looking statements, which may be based upon beliefs,
expectations and assumptions of the Company’s management and on information currently available to
management, are generally identifiable by the use of words such as “believe,” “expect,”
“anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,”
“may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally,
all statements in this document, including forward-looking statements, speak only as of the date
they are made, and the Company undertakes no obligation to update any statement in light of new
information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. The factors that could have a material adverse effect on the operations and
future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section
included under Item 1A. of Part I of this Form 10-K. In addition to the risk factors described in
that section, there are other factors that may impact any public company, including ours, which
could have a material adverse effect on the operations and future prospects of the Company and its
subsidiaries. These additional factors include, but are not limited to, the following:
| • |
The economic impact of past and any future terrorist attacks, acts of war or threats
thereof and the response of the United States to any such threats and attacks.
|
| • |
The costs, effects and outcomes of existing or future litigation.
|
| • |
Changes in accounting policies and practices, as may be adopted by state and federal
regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange
Commission or the Public Company Accounting Oversight Board.
|
| • |
The ability of the Company to manage the risks associated with the foregoing as well as
anticipated.
|
These risks and uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
41
Table of Contents
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. Internal asset/liability management teams consisting of members of the subsidiary banks’
management meet weekly to manage the mix of assets and liabilities to maximize earnings and
liquidity and minimize interest rate and other risks. Management also reviews the subsidiary
banks’ securities portfolios, formulates investment strategies, and oversees the timing and
implementation of transactions to assure attainment of the board’s objectives in the most effective
manner. Notwithstanding the Company’s interest rate risk management activities, the potential for
changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the board and management attempt to manage the
Company’s interest rate risk while maintaining or enhancing net interest margins. At times,
depending on the level of general interest rates, the relationship between long-term and short-term
interest rates, market conditions and competitive factors, the board and management may decide to
increase the Company’s interest rate risk position somewhat in order to increase its net interest
margin. The Company’s results of operations and net portfolio values remain vulnerable to
increases in interest rates and to fluctuations in the difference between long-term and short-term
interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a
detailed and dynamic simulation model used to quantify the estimated exposure of net interest
income to sustained interest rate changes. This simulation model captures the impact of changing
interest rates on the interest income received and interest expense paid on all interest sensitive
assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity
analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no
balance sheet growth and various interest rate scenarios including no change in rates; 200, 400,
and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where
interest-bearing assets and liabilities reprice at their earliest possible repricing date. The
model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the
200 basis point upward shift and 100 basis point downward shift. For the 400 basis point upward
shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four (24)
month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata
shift in interest rates over a twelve-month period where the short-end of the yield curve shifts
upward greater than the long-end of the yield curve. The asset/liability management committee of
the board of directors has established policy limits of a 10% decline in the value of net interest
income for the 200 basis point upward shift and the 100 basis point downward shift. Application of
the simulation model analysis at December 31, 2009 demonstrated
a 5.10% decrease in net interest income
in year one with a 200 basis point increase in interest rates, and a 0.90% decrease in net interest
income in year one with a 100 basis point decrease in interest rates. The simulation is within the
board-established policy limit of a 10% decline in value for both scenarios.
Interest rate risk is considered to be one of the most significant market risks affecting the
Company. For that reason, the Company engages the assistance of a national consulting firm and its
risk management system to monitor and control the Company’s interest rate risk exposure. Other
types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not
arise in the normal course of the Company’s business activities.
42
Table of Contents
QCR Holdings, Inc.
Index to Consolidated Financial Statements
| 44 | ||||
|
|
||||
|
Financial Statements
|
||||
|
|
||||
| 45 | ||||
|
|
||||
| 46-47 | ||||
|
|
||||
| 48 | ||||
|
|
||||
| 49-50 | ||||
|
|
||||
| 51-93 |
43
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
QCR Holdings, Inc.
QCR Holdings, Inc.
We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and subsidiaries
as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2009. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of QCR Holdings, Inc. and subsidiaries as of December 31,
2009 and 2008, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in
which it accounts for noncontrolling interests effective January 1, 2009.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), QCR Holdings, Inc. and subsidiaries’ internal control over financial
reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated March 5, 2010 expressed an unqualified opinion on the effectiveness of QCR
Holdings, Inc. and subsidiaries’ internal control over financial reporting.
Davenport, Iowa
March 5, 2010
March 5, 2010
McGladrey & Pullen, LLP is a member firm of RSM International —
an affiliation of separate and independent legal entities.
an affiliation of separate and independent legal entities.
44
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
December 31, 2009 and 2008
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 35,878,046 | $ | 33,464,074 | ||||
|
Federal funds sold
|
6,598,333 | 20,695,898 | ||||||
|
Interest-bearing deposits at financial institutions
|
29,329,413 | 2,113,904 | ||||||
|
|
||||||||
|
Securities held to maturity, at amortized cost (Note 4)
|
350,000 | 350,000 | ||||||
|
Securities available for sale, at fair value (Note 4)
|
370,170,459 | 255,726,415 | ||||||
|
|
||||||||
|
|
370,520,459 | 256,076,415 | ||||||
|
|
||||||||
|
|
||||||||
|
Loans receivable, held for sale (Note 5)
|
6,135,130 | 7,377,648 | ||||||
|
Loans/leases receivable, held for investment (Note 5)
|
1,238,184,436 | 1,207,311,984 | ||||||
|
|
||||||||
|
|
1,244,319,566 | 1,214,689,632 | ||||||
|
Less allowance for estimated losses on loans/leases (Note 5)
|
(22,504,734 | ) | (17,809,170 | ) | ||||
|
|
||||||||
|
|
1,221,814,832 | 1,196,880,462 | ||||||
|
|
||||||||
|
|
||||||||
|
Premises and equipment, net (Note 6)
|
31,454,893 | 31,389,267 | ||||||
|
Goodwill
|
3,222,688 | 3,222,688 | ||||||
|
Accrued interest receivable
|
7,565,513 | 7,835,835 | ||||||
|
Bank-owned life insurance
|
29,694,077 | 27,450,751 | ||||||
|
Prepaid FDIC insurance
|
7,801,076 | — | ||||||
|
Other assets
|
35,766,777 | 26,499,720 | ||||||
|
|
||||||||
|
Total assets
|
$ | 1,779,646,107 | $ | 1,605,629,014 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest-bearing
|
$ | 207,843,554 | $ | 161,126,120 | ||||
|
Interest-bearing
|
881,479,172 | 897,832,478 | ||||||
|
|
||||||||
|
Total deposits (Note 7)
|
1,089,322,726 | 1,058,958,598 | ||||||
|
|
||||||||
|
Short-term borrowings (Note 8)
|
150,899,571 | 101,456,950 | ||||||
|
Federal Home Loan Bank advances (Note 9)
|
215,850,000 | 218,695,000 | ||||||
|
Other borrowings (Note 10)
|
140,059,841 | 75,582,634 | ||||||
|
Junior subordinated debentures (Note 11)
|
36,085,000 | 36,085,000 | ||||||
|
Other liabilities
|
21,834,093 | 22,355,661 | ||||||
|
|
||||||||
|
Total liabilities
|
1,654,051,231 | 1,513,133,843 | ||||||
|
|
||||||||
|
|
||||||||
|
Commitments and Contingencies (Note 18)
|
||||||||
|
|
||||||||
|
Stockholders’ Equity (Note 16):
|
||||||||
|
Preferred stock (Note 12), $1 par value, shares authorized 250,000
|
38,805 | 568 | ||||||
|
December 2009 - 38,805 shares issued and outstanding
|
||||||||
|
December 2008 - 568 shares issued and outstanding
|
||||||||
|
Common stock, $1 par value; shares authorized 10,000,000
|
4,674,536 | 4,630,883 | ||||||
|
December 2009 - 4,674,536 shares issued and 4,553,290 outstanding
|
||||||||
|
December 2008 - 4,630,883 shares issued and 4,509,637 outstanding
|
||||||||
|
Additional paid-in capital
|
82,194,330 | 43,090,268 | ||||||
|
Retained earnings
|
38,458,477 | 40,893,304 | ||||||
|
Accumulated other comprehensive income
|
135,608 | 3,628,360 | ||||||
|
Noncontrolling interests
|
1,699,630 | 1,858,298 | ||||||
|
|
||||||||
|
|
127,201,386 | 94,101,681 | ||||||
|
Treasury stock, December 2009 and 2008 - 121,246 common shares, at cost
|
1,606,510 | 1,606,510 | ||||||
|
|
||||||||
|
Total stockholders’ equity
|
125,594,876 | 92,495,171 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 1,779,646,107 | $ | 1,605,629,014 | ||||
|
|
||||||||
See Notes to Consolidated Financial Statements.
45
Table of Contents
QCR
Holdings, Inc.
and Subsidiaries
and Subsidiaries
Years Ended December 31, 2009, 2008, and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Interest and dividend income:
|
||||||||||||
|
Loans/leases, including fees
|
$ | 73,145,289 | $ | 72,565,834 | $ | 71,796,172 | ||||||
|
Securities:
|
||||||||||||
|
Taxable
|
10,748,012 | 10,878,219 | 9,060,317 | |||||||||
|
Nontaxable
|
967,940 | 942,667 | 1,039,623 | |||||||||
|
Interest-bearing deposits at financial institutions
|
313,113 | 165,312 | 346,382 | |||||||||
|
Federal funds sold
|
133,723 | 99,814 | 248,055 | |||||||||
|
|
||||||||||||
|
Total interest and dividend income
|
85,308,077 | 84,651,846 | 82,490,549 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest expense:
|
||||||||||||
|
Deposits
|
18,374,065 | 23,894,324 | 31,227,361 | |||||||||
|
Short-term borrowings
|
711,801 | 2,962,169 | 5,216,576 | |||||||||
|
Federal Home Loan Bank advances
|
9,082,039 | 8,524,772 | 7,237,026 | |||||||||
|
Other borrowings
|
4,764,812 | 2,754,097 | 1,835,464 | |||||||||
|
Junior subordinated debentures
|
2,016,449 | 2,388,574 | 2,622,531 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
34,949,166 | 40,523,936 | 48,138,958 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net interest income
|
50,358,911 | 44,127,910 | 34,351,591 | |||||||||
|
Provision for loan/lease losses (Note 5)
|
16,975,517 | 9,221,670 | 2,335,518 | |||||||||
|
|
||||||||||||
|
Net interest income after provision for loan/lease losses
|
33,383,394 | 34,906,240 | 32,016,073 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Noninterest income:
|
||||||||||||
|
Credit card fees, net of processing costs
|
930,435 | 987,769 | 746,725 | |||||||||
|
Trust department fees
|
2,883,482 | 3,333,812 | 3,672,501 | |||||||||
|
Deposit service fees
|
3,319,967 | 3,134,869 | 2,606,724 | |||||||||
|
Gains on sales of loans, net
|
1,677,312 | 1,068,545 | 1,219,800 | |||||||||
|
Securities gains, net
|
1,488,391 | 199,500 | — | |||||||||
|
Other-than-temporary impairment losses on securities
|
(206,369 | ) | — | — | ||||||||
|
Gains on sales of foreclosed assets
|
177,736 | 394,103 | 1,007 | |||||||||
|
Gains on sales of other assets
|
— | — | 435,791 | |||||||||
|
Earnings on bank-owned life insurance
|
1,243,324 | 1,016,864 | 846,071 | |||||||||
|
Investment advisory and management fees, gross
|
1,507,557 | 1,975,236 | 1,575,887 | |||||||||
|
Other
|
2,621,599 | 2,315,531 | 2,394,893 | |||||||||
|
|
||||||||||||
|
Total noninterest income
|
15,643,434 | 14,426,229 | 13,499,399 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Noninterest expenses:
|
||||||||||||
|
Salaries and employee benefits
|
26,882,185 | 26,124,160 | 21,976,683 | |||||||||
|
Professional and data processing fees
|
4,829,667 | 4,801,087 | 3,469,331 | |||||||||
|
Advertising and marketing
|
991,243 | 1,296,651 | 1,115,864 | |||||||||
|
Occupancy and equipment expense
|
5,372,101 | 5,091,545 | 4,717,054 | |||||||||
|
Stationery and supplies
|
528,959 | 518,639 | 513,210 | |||||||||
|
Postage and telephone
|
1,060,690 | 933,508 | 936,032 | |||||||||
|
Bank service charges
|
481,223 | 559,614 | 565,092 | |||||||||
|
FDIC and other insurance
|
3,626,027 | 1,316,710 | 995,955 | |||||||||
|
Loss on sale of premises and equipment
|
— | — | 223,308 | |||||||||
|
Loan/lease expense
|
1,997,583 | 757,315 | 358,107 | |||||||||
|
Other
|
960,979 | 934,460 | 863,339 | |||||||||
|
|
||||||||||||
|
Total noninterest expenses
|
46,730,657 | 42,333,689 | 35,733,975 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income from continuing operations before income taxes
|
2,296,171 | 6,998,780 | 9,781,497 | |||||||||
|
Federal and state income tax expense from continuing operations (Note 13)
|
247,340 | 1,735,717 | 2,893,421 | |||||||||
|
|
||||||||||||
|
Income from continuing operations
|
2,048,831 | 5,263,063 | 6,888,076 | |||||||||
|
|
||||||||||||
(Continued)
46
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008, and 2007
Years Ended December 31, 2009, 2008, and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Discontinued operations (Note 2)
|
||||||||||||
|
Operating income from merchant credit card acquiring business
|
— | 361,160 | 409,569 | |||||||||
|
Gain on sale of merchant credit card acquiring business
|
— | 4,645,213 | — | |||||||||
|
Operating loss from First Wisconsin Bank & Trust
|
— | (2,921,371 | ) | (1,630,105 | ) | |||||||
|
Gain on sale of First Wisconsin Bank & Trust
|
— | 494,664 | — | |||||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations before income taxes
|
— | 2,579,666 | (1,220,536 | ) | ||||||||
|
Federal and state income tax expense (benefit) from discontinued operations
|
— | 845,435 | (497,728 | ) | ||||||||
|
|
||||||||||||
|
Income (loss) from discontinued operations
|
$ | — | $ | 1,734,231 | $ | (722,808 | ) | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income
|
$ | 2,048,831 | $ | 6,997,294 | $ | 6,165,268 | ||||||
|
Less: net income attributable to noncontrolling interests
|
276,923 | 288,436 | 387,791 | |||||||||
|
|
||||||||||||
|
Net income attributable to QCR Holdings, Inc.
|
$ | 1,771,908 | $ | 6,708,858 | $ | 5,777,477 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Amounts attributable to QCR Holdings, Inc.:
|
||||||||||||
|
Income from continuing operations
|
$ | 1,771,908 | $ | 4,974,627 | $ | 6,500,285 | ||||||
|
Income (loss) from discontinued operations
|
— | 1,734,231 | (722,808 | ) | ||||||||
|
|
||||||||||||
|
Net income
|
$ | 1,771,908 | $ | 6,708,858 | $ | 5,777,477 | ||||||
|
Less: preferred stock dividends and discount accretion
|
$ | 3,843,924 | 1,784,500 | 1,072,000 | ||||||||
|
|
||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
|
$ | (2,072,016 | ) | $ | 4,924,358 | $ | 4,705,477 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic earnings (loss) per common share (Note 17):
|
||||||||||||
|
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
|
$ | (0.46 | ) | $ | 0.69 | $ | 1.19 | |||||
|
Income (loss) from discontinued operations attributable to QCR Holdings, Inc.
|
— | 0.38 | (0.16 | ) | ||||||||
|
|
||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | (0.46 | ) | $ | 1.07 | $ | 1.03 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted earnings (loss) per common share (Note 17):
|
||||||||||||
|
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
|
$ | (0.46 | ) | $ | 0.69 | $ | 1.18 | |||||
|
Income (loss) from discontined operations attributable to QCR Holdings, Inc.
|
— | 0.37 | (0.16 | ) | ||||||||
|
|
||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | (0.46 | ) | $ | 1.06 | $ | 1.02 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
4,540,792 | 4,617,057 | 4,581,919 | |||||||||
|
Weighted average common and common equivalent
shares outstanding
|
4,540,792 | 4,634,537 | 4,599,568 | |||||||||
|
|
||||||||||||
|
Cash dividends declared per common share
|
$ | 0.08 | $ | 0.08 | $ | 0.08 | ||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
47
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2009, 2008, and 2007
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||
| Preferred | Common | Paid-In | Retained | Comprehensive | Noncontrolling | Treasury | ||||||||||||||||||||||||||
| Stock | Stock | Capital | Earnings | Income | Interests | Stock | Total | |||||||||||||||||||||||||
|
Balance, December 31, 2006
|
$ | 268 | $ | 4,560,629 | $ | 34,293,511 | $ | 32,000,213 | $ | 27,959 | $ | 1,362,820 | $ | — | $ | 72,245,400 | ||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | 5,777,477 | — | 387,791 | — | 6,165,268 | ||||||||||||||||||||||||
|
Other comprehensive income, net of tax (Note 3)
|
— | — | — | — | 2,783,581 | — | — | 2,783,581 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Comprehensive income
|
8,948,849 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Common cash dividends declared, $0.08 per share
|
— | — | — | (367,124 | ) | — | — | — | (367,124 | ) | ||||||||||||||||||||||
|
Preferred cash dividends declared
|
— | — | — | (1,072,000 | ) | — | — | — | (1,072,000 | ) | ||||||||||||||||||||||
|
Proceeds from issuance of 300 shares of preferred stock
|
300 | — | 7,273,279 | — | — | — | — | 7,273,579 | ||||||||||||||||||||||||
|
Proceeds from issuance of 19,834 shares of
common stock as a result of stock purchased
under the Employee Stock Purchase Plan (Note 15)
|
— | 19,834 | 259,054 | — | — | — | — | 278,888 | ||||||||||||||||||||||||
|
Proceeds from issuance of 19,069 shares of common
stock as a result of stock options exercised (Note 15)
|
— | 19,069 | 154,007 | — | — | — | — | 173,076 | ||||||||||||||||||||||||
|
Exchange of 1,788 shares of common
stock in connection with options exercised
|
— | (1,788 | ) | (28,643 | ) | — | — | — | — | (30,431 | ) | |||||||||||||||||||||
|
Tax benefit of nonqualified stock options exercised
|
— | — | 22,370 | — | — | — | — | 22,370 | ||||||||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 343,796 | — | — | — | — | 343,796 | ||||||||||||||||||||||||
|
Other adjustments to noncontrolling interests
|
— | — | — | — | — | (29,748 | ) | — | (29,748 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance, December 31, 2007
|
$ | 568 | $ | 4,597,744 | $ | 42,317,374 | $ | 36,338,566 | $ | 2,811,540 | $ | 1,720,863 | $ | — | $ | 87,786,655 | ||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | 6,708,858 | — | 288,436 | — | 6,997,294 | ||||||||||||||||||||||||
|
Other comprehensive income, net of tax (Note 3)
|
— | — | — | — | 816,820 | — | — | 816,820 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Comprehensive income
|
7,814,114 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Common cash dividends declared, $0.08 per share
|
— | — | — | (369,620 | ) | — | — | — | (369,620 | ) | ||||||||||||||||||||||
|
Preferred cash dividends declared
|
— | — | — | (1,784,500 | ) | — | — | — | (1,784,500 | ) | ||||||||||||||||||||||
|
Proceeds from issuance of 22,767 shares of
common stock as a result of stock purchased
under the Employee Stock Purchase Plan (Note 15)
|
— | 22,767 | 246,037 | — | — | — | — | 268,804 | ||||||||||||||||||||||||
|
Proceeds from issuance of 7,305 shares of common
stock as a result of stock options exercised
|
— | 7,305 | 82,410 | — | — | — | — | 89,715 | ||||||||||||||||||||||||
|
Exchange of 1,933 shares of common
stock in connection with options exercised (Note 15)
|
— | (1,933 | ) | (27,284 | ) | — | — | — | — | (29,217 | ) | |||||||||||||||||||||
|
Tax benefit of nonqualified stock options exercised
|
— | — | 1,611 | — | — | — | — | 1,611 | ||||||||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 475,120 | — | — | — | — | 475,120 | ||||||||||||||||||||||||
|
Restricted stock award
|
— | 5,000 | (5,000 | ) | — | — | — | — | — | |||||||||||||||||||||||
|
Other adjustments to noncontrolling interests
|
— | — | — | — | — | (151,001 | ) | — | (151,001 | ) | ||||||||||||||||||||||
|
Purchase of 121,246 shares of common stock for
the treasury
|
— | — | — | — | — | — | (1,606,510 | ) | (1,606,510 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance, December 31, 2008
|
$ | 568 | $ | 4,630,883 | $ | 43,090,268 | $ | 40,893,304 | $ | 3,628,360 | $ | 1,858,298 | $ | (1,606,510 | ) | $ | 92,495,171 | |||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | 1,771,908 | — | 276,923 | — | 2,048,831 | ||||||||||||||||||||||||
|
Other comprehensive loss, net of tax (Note 3)
|
— | — | — | — | (3,492,752 | ) | — | — | (3,492,752 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Comprehensive loss
|
(1,443,921 | ) | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Common cash dividends declared, $0.08 per share
|
— | — | — | (362,811 | ) | — | — | — | (362,811 | ) | ||||||||||||||||||||||
|
Preferred cash dividends declared and accrued
|
— | — | — | (3,467,989 | ) | — | — | — | (3,467,989 | ) | ||||||||||||||||||||||
|
Discount accretion on cumulative preferred stock
|
— | — | 375,935 | (375,935 | ) | — | — | — | — | |||||||||||||||||||||||
|
Proceeds from issuance of 38,237 shares of preferred
stock and common stock warrant
|
38,237 | — | 38,014,586 | — | — | — | — | 38,052,823 | ||||||||||||||||||||||||
|
Proceeds from issuance of 28,575 shares of
common stock as a result of stock purchased
under the Employee Stock Purchase Plan (Note 15)
|
— | 28,575 | 205,585 | — | — | — | — | 234,160 | ||||||||||||||||||||||||
|
Exchange of 830 shares of common stock in connection
with payroll taxes for restricted stock (Note 15)
|
— | (830 | ) | (6,889 | ) | — | — | — | — | (7,719 | ) | |||||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 609,713 | — | — | — | — | 609,713 | ||||||||||||||||||||||||
|
Restricted stock awards
|
— | 15,908 | (15,908 | ) | — | — | — | — | — | |||||||||||||||||||||||
|
Purchase of noncontrolling interests
|
— | — | (78,960 | ) | — | — | (231,040 | ) | — | (310,000 | ) | |||||||||||||||||||||
|
Other adjustments to noncontrolling interests
|
— | — | — | — | — | (204,551 | ) | — | (204,551 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance, December 31, 2009
|
$ | 38,805 | $ | 4,674,536 | $ | 82,194,330 | $ | 38,458,477 | $ | 135,608 | $ | 1,699,630 | $ | (1,606,510 | ) | $ | 125,594,876 | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
48
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Years Ended December 31, 2009, 2008, and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income
|
$ | 2,048,831 | $ | 6,997,294 | $ | 6,165,268 | ||||||
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||
|
Depreciation
|
2,780,190 | 2,624,433 | 2,293,874 | |||||||||
|
Provision for loan/lease losses related to continuing operations
|
16,975,517 | 9,221,670 | 2,335,518 | |||||||||
|
Provision for loan/lease losses related to discontinuing operations
|
— | 1,699,112 | 528,384 | |||||||||
|
Deferred income taxes
|
(356,893 | ) | (1,816,719 | ) | 472,393 | |||||||
|
Amortization of offering costs on subordinated debentures
|
14,317 | 14,317 | 14,317 | |||||||||
|
Stock-based compensation expense
|
512,963 | 298,921 | 21,348 | |||||||||
|
Gains on sale of foreclosed assets, net
|
(177,736 | ) | (394,103 | ) | (1,007 | ) | ||||||
|
Gains on sale of other assets
|
— | — | (435,791 | ) | ||||||||
|
Gain on sale of merchant credit card acquiring business
|
— | (4,645,213 | ) | — | ||||||||
|
Gain on sale of First Wisconsin Bank & Trust
|
— | (494,664 | ) | — | ||||||||
|
Amortization of premiums (accretion of discounts) on securities, net
|
2,044,767 | 133,819 | (92,868 | ) | ||||||||
|
Securities gains, net
|
(1,488,391 | ) | (199,500 | ) | — | |||||||
|
Other-than-temporary impairment losses on securities
|
206,369 | — | — | |||||||||
|
Loans originated for sale
|
(140,376,155 | ) | (88,775,395 | ) | (103,958,168 | ) | ||||||
|
Proceeds on sales of loans
|
143,295,985 | 88,975,272 | 104,860,392 | |||||||||
|
Net gains on sales of loans
|
(1,677,312 | ) | (1,068,545 | ) | (1,219,800 | ) | ||||||
|
Loss on sale of premises and equipment
|
— | — | 223,308 | |||||||||
|
Decrease (increase) in accrued interest receivable
|
270,322 | (350,007 | ) | (804,259 | ) | |||||||
|
Increase in prepaid FDIC insurance
|
(7,801,076 | ) | — | — | ||||||||
|
Increase in other assets
|
(1,374,070 | ) | (3,115,370 | ) | (3,524,814 | ) | ||||||
|
(Decrease) increase in other liabilities
|
(660,397 | ) | (2,810,645 | ) | 3,185,676 | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
14,237,231 | 6,294,677 | 10,063,771 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Net decrease (increase) in federal funds sold
|
14,097,565 | (31,775,898 | ) | (4,300,000 | ) | |||||||
|
Net (increase) decrease in interest-bearing deposits at
financial institutions
|
(27,215,509 | ) | 2,980,577 | (2,965,952 | ) | |||||||
|
Proceeds from sale of foreclosed assets
|
1,358,351 | 1,376,007 | 93,901 | |||||||||
|
Proceeds from sale of other assets
|
— | — | 500,000 | |||||||||
|
Proceeds from sale of merchant credit card acquiring business, net
|
— | 4,732,009 | — | |||||||||
|
Proceeds from sale of First Wisconsin Bank & Trust, net
|
— | 13,324,553 | — | |||||||||
|
Activity in securities portfolio:
|
||||||||||||
|
Purchases
|
(316,260,882 | ) | (140,985,829 | ) | (129,121,827 | ) | ||||||
|
Calls, maturities and redemptions
|
169,176,856 | 102,733,654 | 92,041,150 | |||||||||
|
Paydowns
|
406,998 | 736,057 | 562,361 | |||||||||
|
Sales
|
25,966,885 | 285,000 | — | |||||||||
|
Activity in bank-owned life insurance:
|
||||||||||||
|
Purchases
|
(1,000,002 | ) | — | (9,165,341 | ) | |||||||
|
Increase in cash value
|
(1,243,324 | ) | (1,016,864 | ) | (846,071 | ) | ||||||
|
Net loans/leases originated and held for investment
|
(50,077,380 | ) | (195,569,104 | ) | (147,780,355 | ) | ||||||
|
Purchase of premises and equipment
|
(2,845,816 | ) | (2,258,536 | ) | (2,261,028 | ) | ||||||
|
Purchase of intangible asset
|
— | — | (887,542 | ) | ||||||||
|
Net increase in cash related to discontinued operations, held for sale
|
— | (1,789,295 | ) | (705,890 | ) | |||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(187,636,258 | ) | (247,227,669 | ) | (204,836,594 | ) | ||||||
|
|
||||||||||||
(Continued)
49
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2008, 2007, and 2006
and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2008, 2007, and 2006
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Net increase in deposit accounts
|
$ | 30,364,128 | $ | 227,545,345 | $ | 53,979,951 | ||||||
|
Net increase (decrease) in short-term borrowings
|
49,442,621 | (68,160,318 | ) | 71,511,889 | ||||||||
|
Activity in Federal Home Loan Bank advances:
|
||||||||||||
|
Advances
|
11,500,000 | 68,145,000 | 71,400,000 | |||||||||
|
Payments
|
(14,345,000 | ) | (18,265,006 | ) | (54,443,743 | ) | ||||||
|
Net increase in other borrowings
|
64,477,207 | 27,892,512 | 43,928,486 | |||||||||
|
Tax benefit of nonqualified stock options exercised
|
— | 1,611 | 22,370 | |||||||||
|
Payment of cash dividends on common and preferred stock
|
(3,595,221 | ) | (1,974,870 | ) | (1,334,012 | ) | ||||||
|
Proceeds from issuance of Series D Cumulative Perpetual Preferred
Stock and common stock warrant, net
|
38,052,823 | — | — | |||||||||
|
Proceeds from issuance of Series C Cumulative Perpetual Preferred
Stock, net
|
— | — | 7,273,579 | |||||||||
|
Proceeds from issuance of common stock, net
|
226,441 | 329,302 | 421,533 | |||||||||
|
Purchase of noncontrolling interests
|
(310,000 | ) | ||||||||||
|
Purchase of treasury stock
|
— | (1,606,510 | ) | — | ||||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
175,812,999 | 233,907,066 | 192,760,053 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and due from banks
|
2,413,972 | (7,025,926 | ) | (2,012,770 | ) | |||||||
|
Cash and due from banks, beginning
|
33,464,074 | 40,490,000 | 42,502,770 | |||||||||
|
|
||||||||||||
|
Cash and due from banks, ending
|
$ | 35,878,046 | $ | 33,464,074 | $ | 40,490,000 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental Disclosures of Cash Flow Information,
cash payments for:
|
||||||||||||
|
Interest
|
$ | 36,536,869 | $ | 40,526,554 | $ | 49,277,295 | ||||||
|
Income and franchise taxes
|
2,557,505 | 2,306,448 | 1,960,408 | |||||||||
|
|
||||||||||||
|
Supplemental Schedule of Noncash Investing Activities:
|
||||||||||||
|
Change in accumulated other comprehensive income (loss), unrealized
gains (losses) on securities available for sale, net
|
(3,492,752 | ) | 816,820 | 2,783,581 | ||||||||
|
Exchange of shares of common stock in connection with payroll
taxes for restricted stock and options exercised
|
(7,719 | ) | (29,217 | ) | (30,431 | ) | ||||||
|
Transfers of loans to other real estate owned
|
6,924,975 | 4,467,520 | 496,376 | |||||||||
|
|
||||||||||||
|
Proceeds from sale of First Wisconsin Bank & Trust, net
|
$ | — | $ | 13,324,553 | $ | — | ||||||
|
Assets sold:
|
||||||||||||
|
Cash and due from banks
|
— | 2,495,185 | — | |||||||||
|
Federal funds sold
|
— | 17,700,000 | — | |||||||||
|
Interest-bearing deposits at financial institutions
|
— | 1,567 | — | |||||||||
|
Securities available for sale, at fair value
|
— | 18,460,320 | — | |||||||||
|
Loans/leases receivable held for investment
|
— | 80,169,171 | — | |||||||||
|
Less: Allowance for estimated losses on loans/leases
|
— | (1,122,496 | ) | — | ||||||||
|
Premises and equipment, net
|
— | 468,522 | — | |||||||||
|
Goodwill
|
— | — | — | |||||||||
|
Intangilbe assets
|
— | 887,542 | — | |||||||||
|
Accrued interest receivable
|
— | 478,729 | — | |||||||||
|
Bank-owned life insurance
|
— | 2,453,660 | — | |||||||||
|
Other assets
|
— | 882,028 | — | |||||||||
|
|
||||||||||||
|
Total Assets
|
$ | — | $ | 122,874,228 | $ | — | ||||||
|
|
||||||||||||
|
Liabilities sold:
|
||||||||||||
|
Noninteresting-bearing deposits
|
$ | — | $ | 8,943,882 | $ | — | ||||||
|
Interest-bearing deposits
|
— | 89,070,083 | — | |||||||||
|
Short-term borrowings
|
— | 13,578,572 | — | |||||||||
|
Other liabilities
|
— | (368,528 | ) | — | ||||||||
|
|
||||||||||||
|
Total liabilities
|
$ | — | $ | 111,224,009 | $ | — | ||||||
|
Accrued expenses related to sale of First Wisconsin Bank & Trust
|
— | 1,179,670 | — | |||||||||
|
|
||||||||||||
|
Gain on sale of First Wisconsin Bank & Trust
|
$ | — | $ | 494,664 | $ | — | ||||||
|
|
||||||||||||
See Notes to Consolidated Financial Statements.
50
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Nature of business
:
QCR Holdings, Inc. (the Company) is a bank holding company providing bank and bank related services
through its subsidiaries, Quad City Bank and Trust Company (Quad City Bank & Trust), Cedar Rapids
Bank and Trust Company (Cedar Rapids Bank & Trust), Rockford Bank and Trust Company (Rockford Bank
& Trust), Quad City Bancard, Inc. (Bancard), m2 Lease Funds, LLC (m2 Lease Funds), Velie Plantation
Holding Company, LLC (Velie Plantation Holding Company), QCR Holdings Statutory Trust II (Trust
II), QCR Holdings Statutory Trust III (Trust III), QCR Holdings Statutory Trust IV (Trust IV), and
QCR Holdings Statutory Trust V (Trust V). Quad City Bank & Trust is a commercial bank that serves
the Iowa and Illinois Quad Cities and adjacent communities. Cedar Rapids Bank & Trust is a
commercial bank that serves Cedar Rapids, Iowa, and adjacent communities. Rockford Bank & Trust is
a commercial bank that serves Rockford, Illinois, and adjacent communities.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are chartered and regulated by the state of
Iowa, and Rockford Bank & Trust is chartered and regulated by the state of Illinois. All three
subsidiary banks are insured and subject to regulation by the Federal Deposit Insurance Corporation
(FDIC), and are members of and regulated by the Federal Reserve System. m2 Lease Funds, which is
an 80% owned subsidiary, based in the Milwaukee, Wisconsin area is engaged in the business of
direct financing lease contracts. Velie Plantation Holding Company, LLC, which is a 73% owned
subsidiary, is engaged in holding the real estate property known as the Velie Plantation Mansion in
Moline, Illinois. Trust II, Trust III, Trust IV and Trust V were formed for the purpose of issuing
various trust preferred securities (see Note 11).
Quad City Bancard, Inc. (Bancard), previously a wholly-owned subsidiary of the Company, conducted
the Company’s credit card issuing operation and prior to the August 28, 2008 sale of the business,
the Company’s merchant acquiring operations. Effective December 31, 2009, Bancard was liquidated.
The credit card issuing operation was merged into the correspondent banking department of Quad City
Bank & Trust in 2009.
As noted above, during 2008 Bancard sold its merchant credit card acquiring business. The current
and comparative results related to the merchant credit card acquiring business have been reflected
as discontinued operations (see Note 2).
On December 31, 2008, the Company sold its Wisconsin-chartered bank, First Wisconsin Bank & Trust
Company (First Wisconsin Bank & Trust). The comparative results related to First Wisconsin Bank &
Trust have been reflected as discontinued operations (see Note 2).
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. Material
estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for estimated losses on loans/leases, other-than-temporary
impairment of securities, and the fair value of financial instruments.
Principles of consolidation
: The accompanying consolidated financial statements include
the accounts of the Company and its subsidiaries, except Trust II, Trust III, Trust IV and Trust V,
which do not meet the criteria for consolidation. All material intercompany accounts and
transactions have been eliminated in consolidation. The results of discontinued operations have
been reported separately in the consolidated financial statements and the previously reported
financial statements have been reclassified.
51
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Presentation of cash flows
: For purposes of reporting cash flows, cash and due from banks
include cash on hand and non-interest bearing amounts due from banks. Cash flows from federal
funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, and
short-term and other borrowings are treated as net increases or decreases.
Cash and due from banks
: The subsidiary banks are required by federal banking regulations
to maintain certain cash and due from bank reserves. The reserve requirement was approximately
$270,000 and $250,000 as of December 31, 2009 and 2008, respectively.
Investment securities
: Investment securities held to maturity are those debt securities
that the Company has the ability and intent to hold until maturity regardless of changes in market
conditions, liquidity needs, or changes in general economic conditions. Such securities are
carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability
or intent to hold to maturity is not present for certain specified securities, such securities are
considered available for sale as the Company intends to hold them for an indefinite period of time
but not necessarily to maturity. Any decision to sell a security classified as available for sale
would be based on various factors, including movements in interest rates, changes in the maturity
mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations,
and other factors. Securities available for sale are carried at fair value. Unrealized gains or
losses, net of taxes, are reported as increases or decreases in accumulated other comprehensive
income. Realized gains or losses, determined on the basis of the cost of specific securities sold,
are included in earnings.
All securities are evaluated to determine whether declines in fair value below their amortized cost
are other-than-temporary.
In estimating other-than-temporary impairment losses on available for sale debt securities,
management considers a number of factors including, but not limited to, (1) the length of time and
extent to which the fair value has been less than amortized cost, (2) the financial condition and
near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the
Company to not sell the security prior to recovery and whether it is not more-likely-than-not that
it will be required to sell the security prior to recovery. If the Company does not intend to sell
the security, and it is not more-likely-than-not the entity will be required to sell the security
before recovery of its amortized cost basis, the Company will recognize the credit component of an
other-than-temporary impairment of a debt security in earnings and the remaining portion in other
comprehensive income. For held to maturity debt securities, the amount of an other-than-temporary
impairment recorded in other comprehensive income for the noncredit portion would be amortized
prospectively over the remaining life of the security on the basis of the timing of future
estimated cash flows of the security.
In estimating other-than-temporary impairment losses on available for sale equity securities
management considers factors (1), (2) and (3) above as well as whether the Company has the intent
and the ability to hold the security until its recovery. If the Company (a) intends to sell an
impaired equity security and does not expect the fair value of the security to fully recover before
the expected time of sale, or (b) does not have the ability to hold the security until it’s
recovery, the security is deemed other-than-temporarily impaired and the impairment is charged to
earnings. The Company recognizes an impairment loss through earnings if based upon other factors
the loss is deemed to be other-than-temporary even if the decision to sell has not been made.
Loans receivable, held for sale
: Residential real estate loans which are originated and
intended for resale in the secondary market in the foreseeable future are classified as held for
sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As
assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these
loans are classified as operating activities in the statement of cash flows.
52
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Loans receivable, held for investment
: Loans that management has the intent and ability to
hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for
investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the
allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans.
Interest is credited to earnings as earned based on the principal amount outstanding. Deferred
direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s
yield. As assets held for and used in the production of services, the origination and collection
of these loans are classified as an investing activity in the statement of cash flows.
When collection of loan payments is considered doubtful, income recognition is ceased and the loan
receivable is placed on nonaccrual status. Previously recorded but uncollected amounts of
interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status.
Cash collected on nonaccrual loans is applied to principal.
Direct finance leases receivable, held for investment
: The Company leases machinery and
equipment to customers under leases that qualify as direct financing leases for financial reporting
and as operating leases for income tax purposes. Under the direct financing method of accounting,
the minimum lease payments to be received under the lease contract, together with the estimated
unguaranteed residual values (approximately 3% to 15% of the cost of the related equipment), are
recorded as lease receivables when the lease is signed and the lease property delivered to the
customer. The excess of the minimum lease payments and residual values over the cost of the
equipment is recorded as unearned lease income. Unearned lease income is recognized over the term
of the lease on a basis that results in an approximate level rate of return on the unrecovered
lease investment. Lease income is recognized on the interest method. Residual is the estimated
fair market value of the equipment on lease at lease termination. In estimating the equipment’s
fair value at lease termination, the Company relies on historical experience by equipment type and
manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.
The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts
the Company will ultimately realize could differ from the estimated amounts.
When collection of lease payments is considered doubtful, income recognition is ceased and the
lease receivable is placed on nonaccrual status. Previously recorded but uncollected amounts of
interest on nonaccrual leases are reversed at the time the lease is placed on nonaccrual status.
Cash collected on nonaccrual leases is applied to principal.
The Company defers and amortizes fees and certain incremental direct costs over the contractual
term of the lease as an adjustment to the yield. These initial direct leasing costs generally
approximate 4% of the leased asset’s cost. The unamortized direct costs are recorded as a
reduction of unearned lease income.
Allowance for estimated losses on loans/leases
: The allowance for estimated losses on
loans/leases is established as losses are estimated to have occurred through a provision for
loan/lease losses charged to earnings. Loan/lease losses are charged against the allowance when
management believes the uncollectability of a loan/lease balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for estimated losses on loans/leases is evaluated on a regular basis by management
and is based upon management’s periodic review of the collectability of the loans/leases in light
of historical experience, the nature and volume of the loan/lease portfolio, adverse situations
that may affect the borrower’s/lessee’s ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more information becomes
available.
53
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The allowance for estimated losses on loans/leases consists of specific and general components.
The specific component relates to loans/leases that are classified as impaired. For those loans
that are classified as impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan/lease is lower than the carrying
value of that loan/lease. The general component covers nonclassified loans/leases and is based on
historical charge-off experience and expected loss given default derived from the Company’s
internal risk rating process. Other adjustments may be made to the allowance for pools of
loans/leases after an assessment of internal or external influences on credit quality that are not
fully reflected in the historical loss or risk rating data.
A loan/lease is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan/lease agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans/leases that experience
insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan/lease and the
borrower/lessee, including the length of the delay, the reasons for the delay, the
borrower’s/lessee’s prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a case-by-case basis by either the present
value of expected future cash flows discounted at the loan’s/lease’s effective interest rate, the
loan’s/lease’s obtainable market price, or the fair value of the collateral if the loan/lease is
collateral dependent.
Large groups of smaller balance homogenous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and residential loans for
impairment disclosures, unless such loans are the subject of a restructuring agreement due to
financial difficulties of the borrower.
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 of the assets.
Goodwill
: The Company has recorded goodwill from the purchase of 80% of m2 Lease Funds.
The goodwill is not being amortized, but is evaluated at least annually for impairment. An
impairment charge is recognized when the calculated fair value of the reporting unit, including
goodwill, is less than its carrying amount. Based on the annual analysis completed as of July 31,
2009, the Company believes that no goodwill impairment existed.
Bank-owned life insurance
: Bank-owned life insurance is carried at cash surrender value
with increases/decreases reflected as income/expense in the statement of income.
54
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Prepaid FDIC insurance:
In November 2009, the FDIC adopted a final rule amending the
assessment regulations to require insured depository institutions to prepay their quarterly
risk-based assessment for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. The
payment, which was made in December 2009, was recorded as a prepaid asset and is being amortized
over the assessment period.
Restricted investment securities
: Included within other assets are restricted investment
securities totaling $15,210,100 and $14,059,600 at December 31, 2009 and 2008, respectively. These
restricted securities represent Federal Home Loan Bank and Federal Reserve Bank common stock. The
stock is carried at cost. These equity securities are “restricted” in that they can only be sold
back to the respective institution or another member institution at par. Therefore, they are less
liquid than other tradable equity securities. The Company views its investment in restricted stock
as a long-term investment. Accordingly, when evaluating for impairment, the value is determined
based on the ultimate recovery of the par value, rather than recognizing temporary declines in
value. There have been no other-than-temporary write-downs recorded on these securities.
Foreclosed assets
: Assets acquired through, or in lieu of, loan foreclosures, which are
included in other assets on the consolidated balance sheets are held for sale and are recorded at
the lower of cost or fair value. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount or fair value less costs
to sell.
Noncontrolling interests
: Effective January 1, 2009, in accordance with ASC 810,
“Noncontrolling Interests in Consolidated Financial Statements,” the Company presents
noncontrolling interests (previously shown as minority interest) as a component of equity on the
consolidated balance sheets. Minority interest expense is no longer separately reported as a
reduction to net income on the consolidated income statement, but is instead shown below net income
under the heading “net income attributable to noncontrolling interests.” The presentation
requirements of ASC 810, as applied to the current year, were applied retrospectively for prior
years presented.
55
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Treasury stock
: Treasury stock is accounted for by the cost method, whereby shares of
common stock reacquired are recorded at their purchase price. When treasury stock is reissued, any
difference between the sales proceeds, or fair value when issued for business combinations, and the
cost is recognized as a charge or credit to additional paid-in capital.
Stock-based compensation plans:
At December 31, 2009, the Company had four stock-based
employee compensation plans, which are described more fully in Note 15.
The Company accounts for stock-based compensation with measurement of compensation cost for all
stock-based awards at fair value on the grant date and recognition of compensation over the
requisite service period for awards expected to vest.
During the years ended December 31, 2009, 2008, and 2007, the Company recognized additional
stock-based compensation expense related to stock options, stock purchases, and stock appreciation
rights of $512,963, $298,921, and $21,348, respectively. As required, management made an estimate
of expected forfeitures and is recognizing compensation costs only for those equity awards expected
to vest.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option
grants with the following assumptions for the indicated periods:
| 2009 | 2008 | 2007 | ||||
|
|
||||||
|
Dividend yield
|
.78% to 1.04% | 0.49% to 0.68% | 0.46% to 0.53% | |||
|
Expected volatility
|
24.70% to 38.72% | 23.58% to 25.13% | 24.33% to 24.74% | |||
|
Risk-free interest rate
|
3.27% to 4.12% | 3.27% to 4.34% | 4.53% to 5.06% | |||
|
Expected life of option grants
|
6 years | 6 years | 6 years | |||
|
Weighted-average grant date fair value
|
$2.71 | $5.05 | $5.80 |
The Company also uses the Black-Scholes option pricing model to estimate the fair value of stock
purchase grants with the following assumptions for the indicated periods:
| 2009 | 2008 | 2007 | ||||
|
|
||||||
|
Dividend yield
|
.80% | 0.56% to 0.64% | 0.45% to 0.50% | |||
|
Expected volatility
|
28.80% to 34.14% | 19.40% to 23.91% | 13.98% to 17.80% | |||
|
Risk-free interest rate
|
.22% to .36% | 1.98% to 3.41% | 4.94% to 5.04% | |||
|
Expected life of option grants
|
3 to 6 months | 3 to 6 months | 3 to 6 months | |||
|
Weighted-average grant date fair value
|
$1.64 | $2.00 | $2.36 |
The fair value is amortized on a straight-line basis over the vesting periods of the grants
and will be adjusted for subsequent changes in estimated forfeitures. The expected dividend yield
assumption is based on the Company’s current expectations about its anticipated dividend policy.
Expected volatility is based on historical volatility of the Company’s common stock price. The
risk-free interest rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant. The expected life of grants is derived
using the “simplified” method and represents the period of time that options are expected to be
outstanding. Historical data is used to estimate forfeitures used in the model. Two separate
groups of employees (employees subject to broad based grants, and executive employees and
directors) are used.
56
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (Continued)
As of December 31, 2009, there was $561,307 of unrecognized compensation cost related to share
based payments, which is expected to be recognized over a weighted average period of 2.6 years.
The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of the Company’s common stock for the 52,520 options that
were in-the-money at December 31, 2009. The aggregate intrinsic value at December 31, 2009 was
$68,321 on options outstanding and $66,431 on options exercisable. During the years ended December
31, 2008 and 2007, the aggregate intrinsic value of options exercised under the Company’s stock
option plans was $19,352 and $142,817, respectively, determined as of the date of the option
exercise. No options were exercised during 2009.
Income taxes
: The Company files its tax return on a consolidated basis with its
subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes
under which income taxes or credits which result from the inclusion of the subsidiaries in the
consolidated tax return are paid to or received from the parent company.
Deferred income taxes are provided under the liability method whereby deferred tax assets are
recognized for deductible temporary differences and net operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and their
tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period during which, based on
all available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that
is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional
income taxes in the statement of income.
Trust assets
: Trust assets held by the subsidiary banks in a fiduciary, agency, or
custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not
included in the accompanying consolidated financial statements since such items are not assets of
the subsidiary banks.
Earnings per common share
: See Note 17 for a complete description and calculation of basic
and diluted earnings per common share.
Reclassifications
: Certain amounts in the prior year financial statements have been
reclassified, with no effect on net income or stockholders’ equity, to conform with the current
period presentation.
57
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
New accounting pronouncements
: On June 12, 2009, FASB issued two related accounting
pronouncements changing the accounting principles and disclosures requirements related to
securitizations and special-purposed entities. Specifically, these pronouncements eliminate the
concept of a “qualifying special-purpose entity”, change the requirements for derecognizing
financial assets and change how a company determines when an entity is insufficiently capitalized
or is not controlled through voting (or similar rights) should be consolidated. These
pronouncements also expand existing disclosure requirements to include more information about
transfers of financial assets, including securitization transactions, and where companies have
continuing exposure to the risks related to transferred financial assets. These pronouncements are
effective as of the beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter. Earlier application is prohibited. The
recognition and measurement provisions regarding transfers of financial assets shall be applied to
transfers that occur on or after the effective date. The Company adopted these new pronouncements
on January 1, 2010, as required. Transfers of financial assets include participation loans/leases
sold by the Company’s banking and leasing subsidiaries. For agreements of participation
loans/leases sold that contain language that fail to meet the definition of a participating
interest and/or surrender of control by the selling institution, the Company is not allowed to
recognize the sale and is required to record as a secured borrowing. Management intends to
minimize the frequency of these situations. As a result, the adoption is not expected to have a
material impact to the financial statements taken as a whole.
On April 9, 2009, FASB issued three related accounting pronouncements intended to provide
additional application guidance and enhance disclosures regarding fair value measurements and
impairments of securities. In particular, these pronouncements: (1) provide guidelines for making
fair value measurements more consistent with the existing accounting principles when the volume and
level of activity for the asset or liability have decreased significantly; (2) enhance consistency
in financial reporting by increasing the frequency of fair value disclosures and (3) modify
existing general standards of accounting for and disclosure of other-than-temporary impairment
(“OTTI”) losses for impaired debt securities.
All three pronouncements were effective for interim and annual periods ending after June 15,
2009. Entities were permitted to early adopt these pronouncements for interim and annual periods
ending after March 15, 2009, but had to adopt all three pronouncements concurrently. The Company
adopted these pronouncements for the quarterly reporting period ending June 30, 2009, as required.
See Note 21 for additional information regarding fair value measurements of financial assets and
liabilities, and Note 4 for additional information for investment securities. The adoption of
these pronouncements did not have a material impact on the Company’s consolidated financial
statements taken as a whole.
Subsequent events
: The Company has evaluated all subsequent events through
the date of issuance of the consolidated financial statements.
Sale of Merchant Credit Card Acquiring Business
. On August 29, 2008, the Company’s
subsidiary, Quad City Bancard, Inc., sold its merchant credit card acquiring business for $5.2
million and recorded an after-tax gain of approximately $3.0 million. Consequently, the business
related to merchant credit card acquiring has been accounted for as discontinued operations. The
assets and liabilities related to the merchant credit card acquiring business were not significant
as of December 31, 2008.
58
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The results from discontinued operations of the merchant credit card acquiring business for the
years ending December 31, 2008 and 2007 are presented in the following table. There is no 2009
activity.
| 2008 | 2007 | |||||||
|
|
||||||||
|
Credit card fees, net of processing costs
|
$ | 693,445 | $ | 985,267 | ||||
|
Non-interest expense
|
332,285 | 575,698 | ||||||
|
|
||||||||
|
Income from discontinued operations,
excluding gain on sale, before income taxes
|
$ | 361,160 | $ | 409,569 | ||||
|
Gain on sale of discontinued operations
before income taxes
|
4,645,213 | — | ||||||
|
|
||||||||
|
Income from discontinued operations,
before income taxes
|
$ | 5,006,373 | $ | 409,569 | ||||
|
Income tax expense
|
1,775,716 | 144,963 | ||||||
|
|
||||||||
|
Income from discontinued operations, net of taxes
|
$ | 3,230,657 | $ | 264,606 | ||||
|
|
||||||||
Sale of First Wisconsin Bank & Trust
. On December 31, 2008, the Company sold First
Wisconsin Bank & Trust, its wholly-owned commercial banking subsidiary which served the Milwaukee,
Wisconsin market. The transaction involved the sale of 100% of the stock of First Wisconsin Bank &
Trust for $13.7 million and resulted in a pre-tax gain on sale of approximately $495,000. The
activity related to First Wisconsin Bank & Trust is accounted for as discontinued operations.
The assets and liabilities of First Wisconsin Bank & Trust as of December 31, 2008 are presented as
a supplemental disclosure in the Consolidated Statement of Cash Flows.
The results from discontinued operations of First Wisconsin Bank & Trust for the years ending
December 31, 2008 and 2007 are presented in the following table. There is no 2009 activity.
| 2008 | 2007 | |||||||
|
|
||||||||
|
Interest income
|
$ | 5,292,678 | $ | 2,584,994 | ||||
|
Interest expense
|
2,853,182 | 1,217,136 | ||||||
|
|
||||||||
|
Net interest income
|
2,439,496 | 1,367,858 | ||||||
|
Provision for loan losses
|
1,699,112 | 528,384 | ||||||
|
|
||||||||
|
Net interest income after provision for loan losses
|
740,384 | 839,474 | ||||||
|
Noninterest income
|
515,432 | 257,807 | ||||||
|
Noninterest expense
|
4,177,187 | 2,727,386 | ||||||
|
|
||||||||
|
Loss from discontinued operations,
excluding gain on sale, before income taxes
|
(2,921,371 | ) | (1,630,105 | ) | ||||
|
Gain on sale of discontinued operations before
|
494,664 | — | ||||||
|
|
||||||||
|
income taxes
|
(2,426,707 | ) | (1,630,105 | ) | ||||
|
Income tax benefit
|
(930,281 | ) | (642,691 | ) | ||||
|
|
||||||||
|
Loss from discontinued operations, net of taxes
|
$ | (1,496,426 | ) | $ | (987,414 | ) | ||
|
|
||||||||
59
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Comprehensive income (loss) is the total of net income and other comprehensive income (loss), which
for the Company is comprised entirely of unrealized gains and losses on securities available for
sale.
Other comprehensive income (loss) for the years ended December 31, 2009, 2008, and 2007 is
comprised as follows:
| Tax | ||||||||||||
| Before | Expense | Net | ||||||||||
| Tax | (Benefit) | of Tax | ||||||||||
|
|
||||||||||||
|
Year ended December 31, 2009:
|
||||||||||||
|
Unrealized gains (losses) on securities available for sale:
|
||||||||||||
|
Unrealized holding (losses) arising during the period
|
$ | (3,953,187 | ) | $ | (1,293,749 | ) | $ | (2,659,438 | ) | |||
|
Less reclassification adjustment for net gains
included in net income
|
1,282,022 | 448,708 | 833,314 | |||||||||
|
|
||||||||||||
|
Other comprehensive loss
|
$ | (5,235,209 | ) | $ | (1,742,457 | ) | $ | (3,492,752 | ) | |||
|
|
||||||||||||
|
|
||||||||||||
|
Year ended December 31, 2008:
|
||||||||||||
|
Unrealized gains on securities available for sale:
|
||||||||||||
|
Unrealized holding gains arising during the period
|
$ | 1,100,541 | $ | 154,046 | $ | 946,495 | ||||||
|
Less reclassification adjustment for gains
included in net income
|
199,500 | 69,825 | 129,675 | |||||||||
|
|
||||||||||||
|
Other comprehensive income
|
$ | 901,041 | $ | 84,221 | $ | 816,820 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Year ended December 31, 2007:
|
||||||||||||
|
Unrealized gains on securities available for sale:
|
||||||||||||
|
Unrealized holding gains arising during the period
|
$ | 4,519,576 | $ | 1,735,995 | $ | 2,783,581 | ||||||
|
Less reclassification adjustment for gains
included in net income
|
— | — | — | |||||||||
|
|
||||||||||||
|
Other comprehensive income
|
$ | 4,519,576 | $ | 1,735,995 | $ | 2,783,581 | ||||||
|
|
||||||||||||
60
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QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The amortized cost and fair value of investment securities as of December 31, 2009 and 2008 are
summarized as follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | (Losses) | Value | |||||||||||||
|
December 31, 2009:
|
||||||||||||||||
|
Securities held to maturity,
other bonds
|
$ | 350,000 | $ | — | $ | — | $ | 350,000 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. govt. sponsored agency securities
|
$ | 345,623,347 | $ | 1,525,150 | $ | (2,124,049 | ) | $ | 345,024,448 | |||||||
|
Residential mortgage-backed securities
|
481,460 | 14,847 | — | 496,307 | ||||||||||||
|
Municipal securities
|
22,005,875 | 922,942 | (79,025 | ) | 22,849,792 | |||||||||||
|
Trust preferred securities
|
200,000 | — | (100,800 | ) | 99,200 | |||||||||||
|
Other securities
|
1,641,759 | 66,737 | (7,784 | ) | 1,700,712 | |||||||||||
|
|
||||||||||||||||
|
|
$ | 369,952,441 | $ | 2,529,676 | $ | (2,311,658 | ) | $ | 370,170,459 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2008:
|
||||||||||||||||
|
Securities held to maturity,
other bonds
|
$ | 350,000 | $ | — | $ | — | $ | 350,000 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. Treasury securities
|
$ | 4,318,194 | $ | 71,351 | $ | — | $ | 4,389,545 | ||||||||
|
U.S. govt. sponsored agency securities
|
220,560,286 | 5,773,091 | (90,217 | ) | 226,243,160 | |||||||||||
|
Residential mortgage-backed securities
|
802,485 | 6,071 | (1,417 | ) | 807,139 | |||||||||||
|
Municipal securities
|
23,259,460 | 307,946 | (219,181 | ) | 23,348,225 | |||||||||||
|
Trust preferred securities
|
200,000 | — | (35,000 | ) | 165,000 | |||||||||||
|
Other securities
|
1,132,763 | 18,045 | (377,462 | ) | 773,346 | |||||||||||
|
|
||||||||||||||||
|
|
$ | 250,273,188 | $ | 6,176,504 | $ | (723,277 | ) | $ | 255,726,415 | |||||||
|
|
||||||||||||||||
61
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment Securities (Continued)
Gross unrealized losses and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, as of December 31, 2009
and 2008, are summarized as follows:
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
|
December 31, 2009:
|
||||||||||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||||||||||
|
U.S. govt. sponsored
agency securities
|
$ | 172,292,005 | $ | (2,001,229 | ) | $ | 2,877,180 | $ | (122,820 | ) | $ | 175,169,185 | $ | (2,124,049 | ) | |||||||||
|
Municipal securities
|
2,629,191 | (40,245 | ) | 1,086,919 | (38,780 | ) | 3,716,110 | (79,025 | ) | |||||||||||||||
|
Trust preferred securities
|
— | — | 99,200 | (100,800 | ) | 99,200 | (100,800 | ) | ||||||||||||||||
|
Other securities
|
32,179 | (5,926 | ) | 1,842 | (1,858 | ) | 34,021 | (7,784 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 174,953,375 | $ | (2,047,400 | ) | $ | 4,065,141 | $ | (264,258 | ) | $ | 179,018,516 | $ | (2,311,658 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008:
|
||||||||||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||||||||||
|
U.S. govt. sponsored
agency securities
|
$ | 8,003,720 | $ | (90,217 | ) | $ | — | $ | — | $ | 8,003,720 | $ | (90,217 | ) | ||||||||||
|
Residential mortgage-backed securities
|
630,974 | (1,417 | ) | — | — | 630,974 | (1,417 | ) | ||||||||||||||||
|
Municipal securities
|
8,001,415 | (219,181 | ) | — | — | 8,001,415 | (219,181 | ) | ||||||||||||||||
|
Trust preferred securities
|
165,000 | (35,000 | ) | — | — | 165,000 | (35,000 | ) | ||||||||||||||||
|
Other securities
|
84,264 | (57,316 | ) | 407,630 | (320,146 | ) | 491,894 | (377,462 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 16,885,373 | $ | (403,131 | ) | $ | 407,630 | $ | (320,146 | ) | $ | 17,293,003 | $ | (723,277 | ) | |||||||||
|
|
||||||||||||||||||||||||
At December 31, 2009, the investment portfolio included 340 securities. Of this number, 126
securities have current unrealized losses with aggregate depreciation of 1% from the amortized cost
basis. Nine of these securities have had unrealized losses for twelve months or more. All of the
debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an
evaluation of the available evidence, including the recent changes in market rates, credit rating
information and information obtained from regulatory filings, management believes the declines in
fair value for these debt securities are temporary. In addition, the Company does not intend to
sell these securities and/or it is not more-likely-than-not that the Company will be required to
sell these debt securities before their anticipated recovery. At December 31, 2009 and 2008, the
Company’s equity securities represent less than 1% of the total portfolio.
62
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The Company has not recognized other-than-temporary impairment on any debt securities for the years
ended December 31, 2009 and 2008.
For the year ended December 31, 2009, the Company’s evaluation determined that 11 publicly-traded
equity securities experienced declines in fair value that were other-than-temporary. As a result,
the Company wrote down the value of these securities and recognized losses in the amount of
$206,369. For the year ended December 31, 2008, the Company did not recognize other-than-temporary
impairment on any equity securities.
All sales of securities, as applicable, for the years ended December 31, 2009, 2008 and 2007,
respectively, were from securities identified as available for sale. Information on proceeds
received, as well as the gains and losses from the sale of those securities is as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Proceeds from sales of securities
|
$ | 25,966,885 | $ | 285,000 | $ | — | ||||||
|
Gross gains from sales of securities
|
1,488,391 | 199,500 | — | |||||||||
|
Gross losses from sales of securities
|
— | — | — | |||||||||
The amortized cost and fair value of securities as of December 31, 2009 by contractual
maturity are shown below. Expected maturities of residential mortgage-backed securities may differ
from contractual maturities because the residential mortgages underlying the residential
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
|
$ | 50,000 | $ | 50,000 | ||||
|
Due after one year through five years
|
250,000 | 250,000 | ||||||
|
Due after five years
|
50,000 | 50,000 | ||||||
|
|
||||||||
|
|
$ | 350,000 | $ | 350,000 | ||||
|
|
||||||||
|
|
||||||||
|
Securities available for sale:
|
||||||||
|
Due in one year or less
|
$ | 15,598,658 | $ | 15,751,625 | ||||
|
Due after one year through five years
|
156,281,061 | 156,978,458 | ||||||
|
Due after five years
|
195,949,503 | 195,243,357 | ||||||
|
|
||||||||
|
|
$ | 367,829,222 | $ | 367,973,440 | ||||
|
Residential mortgage-backed securities
|
481,460 | 496,307 | ||||||
|
Other securities
|
1,641,759 | 1,700,712 | ||||||
|
|
||||||||
|
|
$ | 369,952,441 | $ | 370,170,459 | ||||
|
|
||||||||
As of December 31, 2009 and 2008, investment securities with a carrying value of $365,266,357
and $251,710,014, respectively, were pledged on securities sold under agreements to repurchase and
for other purposes as required or permitted by law.
63
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The composition of the loan/lease portfolio as of December 31, 2009 and 2008 is presented as
follows:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Real estate loans held for sale — residential mortgage
|
$ | 6,135,130 | $ | 7,377,648 | ||||
|
|
||||||||
|
Real estate loans — residential mortgage
|
61,560,878 | 69,465,924 | ||||||
|
Real estate loans — construction
|
2,912,123 | 2,385,187 | ||||||
|
Commercial and industrial loans
|
441,535,998 | 439,116,945 | ||||||
|
Commercial real estate loans
|
556,006,759 | 526,668,290 | ||||||
|
Direct financing leases
|
90,058,839 | 79,408,464 | ||||||
|
Installment and other consumer loans
|
84,270,687 | 88,540,397 | ||||||
|
|
||||||||
|
|
1,242,480,414 | 1,212,962,855 | ||||||
|
Plus deferred loan/lease orgination costs, net of fees
|
1,839,152 | 1,726,777 | ||||||
|
|
||||||||
|
|
1,244,319,566 | 1,214,689,632 | ||||||
|
Less allowance for estimated losses on loans/leases
|
(22,504,734 | ) | (17,809,170 | ) | ||||
|
|
||||||||
|
|
$ | 1,221,814,832 | $ | 1,196,880,462 | ||||
|
|
||||||||
Loans/leases on nonaccrual status amounted to $28,741,799 and $20,828,126 as of December 31,
2009 and 2008, respectively.
Changes in the allowance for estimated losses on loans/leases for the years ended December 31,
2009, 2008, and 2007 are presented as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Balance, beginning
|
$ | 17,809,170 | $ | 11,315,253 | $ | 10,612,082 | ||||||
|
Provisions charged to expense
|
16,975,517 | 9,221,670 | 2,335,518 | |||||||||
|
Loans/leases charged off
|
(14,007,019 | ) | (3,684,889 | ) | (2,224,093 | ) | ||||||
|
Recoveries on loans/leases previously charged off
|
1,727,066 | 957,136 | 591,746 | |||||||||
|
|
||||||||||||
|
Balance, ending
|
$ | 22,504,734 | $ | 17,809,170 | $ | 11,315,253 | ||||||
|
|
||||||||||||
64
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Loans/Leases Receivable (Continued)
Loans/leases considered to be impaired as of December 31, 2009, 2008 and 2007 are as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Impaired loans/leases for which an
allowance has been provided
|
$ | 21,874,214 | $ | 15,768,281 | $ | 5,058,107 | ||||||
|
|
||||||||||||
|
Allowance provided for impaired loans/leases, included
in the allowance for estimated losses on loans/leases
|
$ | 5,549,444 | $ | 5,291,743 | $ | 1,507,674 | ||||||
|
|
||||||||||||
|
Impaired loans/leases for which no
allowance has been provided
|
$ | 4,052,593 | $ | 2,517,574 | $ | 164,330 | ||||||
|
|
||||||||||||
Impaired loans/leases for which no allowance has been provided have adequate collateral, based
on management’s current estimates.
As explained in Note 1, a loan/lease is considered impaired, when based on current information and
events, it is probable that the Company will be unable to collect all amounts due from the
borrower/lessee in accordance with the contractual terms of the loan/lease. Impaired loans/leases
include nonperforming commercial loans/leases but also include loans modified in troubled debt
restructurings where concessions have been granted to borrowers experiencing financial
difficulties. These concessions could include a reduction in the interest rate on the loan,
payment extensions, forgiveness of principal, forbearance or other actions intended to maximize
collection.
Included in impaired loans are troubled debt restructurings totaling $1,201,330 at December 31,
2009. There were no troubled debt restructurings at December 31, 2008 and 2007.
The following summarizes additional information regarding impaired loans/leases:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Average recorded investment in impaired loans/leases
for the years ended
|
$ | 24,185,391 | $ | 9,110,972 | $ | 5,821,901 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest income on impaired loans/leases recognized
for the years ended
|
$ | 124,499 | $ | 11,230 | $ | 215,754 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest income on impaired loans/leases recognized
for cash payments received for the years ended
|
$ | 124,499 | $ | 11,230 | $ | 215,754 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Loans past due 90 days or more and still accruing
interest as of December 31,
|
$ | 88,563 | $ | 221,749 | $ | 499,546 | ||||||
|
|
||||||||||||
There were no direct financing leases which were past due 90 days or more and still accruing
interest as of December 31, 2009.
65
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Loans are made in the normal course of business to directors, executive officers, and their related
interests. The terms of these loans, including interest rates and collateral, are similar to those
prevailing for comparable transactions with other persons. An analysis of the changes in the
aggregate committed amount of loans greater than or equal to $60,000 during the years ended
December 31, 2009, 2008, and 2007, was as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Balance, beginning
|
$ | 26,400,842 | $ | 21,327,609 | $ | 18,404,968 | ||||||
|
Net (decrease) increase due to change in related parties
|
(47,727 | ) | (3,798,611 | ) | 7,517,875 | |||||||
|
Advances
|
5,451,123 | 20,948,422 | 5,118,811 | |||||||||
|
Repayments
|
(6,271,816 | ) | (12,076,578 | ) | (9,714,045 | ) | ||||||
|
|
||||||||||||
|
Balance, ending
|
$ | 25,532,422 | $ | 26,400,842 | $ | 21,327,609 | ||||||
|
|
||||||||||||
The Company’s loan portfolio includes a geographic concentration in the Midwest.
Additionally, the loan portfolio includes a concentration of loans in certain industries as of
December 31, 2009 as follows:
| Industry Name | Balance | |||
|
|
||||
|
Lessors of Non-Residential Buildings & Dwellings
|
$ | 184,501,663 | ||
|
Lessors of Residential Buildings & Dwellings
|
60,344,245 | |||
|
Land Subdivision
|
45,226,759 | |||
The following summarizes the components of premises and equipment as of December 31, 2009 and 2008:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Land
|
$ | 5,525,022 | $ | 5,525,022 | ||||
|
Buildings (useful lives 15 to 50 years)
|
26,384,243 | 25,127,523 | ||||||
|
Furniture and equipment (useful lives 3 to 10 years)
|
17,959,643 | 16,460,090 | ||||||
|
|
||||||||
|
|
49,868,908 | 47,112,635 | ||||||
|
Less accumulated depreciation
|
18,414,015 | 15,723,368 | ||||||
|
|
||||||||
|
|
$ | 31,454,893 | $ | 31,389,267 | ||||
|
|
||||||||
Certain facilities are leased under operating leases. Rental expense, including common area
maintenance, was $458,778, $510,308, and $451,324, for the years ended December 31, 2009, 2008, and
2007, respectively.
66
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Future minimum rental commitments, excluding common area maintenance, under noncancelable leases
are as follows as of December 31, 2009:
|
Year ending December 31:
|
||||
|
2010
|
$ | 381,129 | ||
|
2011
|
326,966 | |||
|
2012
|
327,811 | |||
|
2013
|
328,672 | |||
|
2014
|
306,921 | |||
|
Thereafter
|
673,791 | |||
|
|
||||
|
|
$ | 2,345,290 | ||
|
|
||||
The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was
$327,780,800 and $347,631,421 as of December 31, 2009 and 2008, respectively.
As of December 31, 2009, the scheduled maturities of certificates of deposit were as follows:
|
Year ending December 31:
|
||||
|
2010
|
$ | 360,284,108 | ||
|
2011
|
72,446,670 | |||
|
2012
|
12,802,858 | |||
|
2013
|
3,695,827 | |||
|
2014
|
3,897,868 | |||
|
|
||||
|
|
$ | 453,127,331 | ||
|
|
||||
Short-term borrowings as of December 31, 2009 and 2008 are summarized as follows:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Overnight repurchase agreements with customers
|
$ | 94,089,571 | $ | 68,106,950 | ||||
|
Federal funds purchased
|
56,810,000 | 33,350,000 | ||||||
|
|
||||||||
|
|
$ | 150,899,571 | $ | 101,456,950 | ||||
|
|
||||||||
67
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Information concerning overnight repurchase agreements with customers is summarized as follows as
of December 31, 2009 and 2008:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Average daily balance during the period
|
$ | 95,831,160 | $ | 74,463,649 | ||||
|
Average daily interest rate during the period
|
0.62 | % | 1.54 | % | ||||
|
Maximum month-end balance during the period
|
$ | 128,943,849 | $ | 86,536,776 | ||||
|
Weighted average rate as of end of period
|
0.67 | % | 1.35 | % | ||||
|
|
||||||||
|
Securities underlying the agreements as of end of period:
|
||||||||
|
Carrying value
|
$ | 158,514,084 | $ | 96,137,434 | ||||
|
Fair value
|
158,514,084 | 96,137,434 | ||||||
The securities underlying the agreements as of December 31, 2009 and 2008 were under the
Company’s control in safekeeping at third-party financial institutions.
Information concerning federal funds purchased is summarized as follows as of December 31, 2009 and
2008:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Average daily balance during the period
|
$ | 17,754,319 | $ | 82,909,624 | ||||
|
Average daily interest rate during the period
|
0.41 | % | 2.24 | % | ||||
|
Maximum month-end balance during the period
|
$ | 57,150,000 | $ | 144,940,000 | ||||
|
Weighted average rate as of end of period
|
0.35 | % | 2.41 | % | ||||
68
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The subsidiary banks are members of the Federal Home Loan Bank (FHLB) of Des Moines or Chicago. As
of December 31, 2009 and 2008, the subsidiary banks held $11,813,100 and $11,796,100, respectively,
of FHLB stock, which is included in other assets on the consolidated balance sheet. Maturity and
interest rate information on advances from FHLB as of December 31, 2009 and 2008 is as follows:
| December 31, 2009 | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Interest Rate | ||||||||
| Amount Due | at Year-End | |||||||
|
Maturity:
|
||||||||
|
Year ending December 31:
|
||||||||
|
2010
|
$ | 8,100,000 | 5.16 | % | ||||
|
2011
|
14,000,000 | 3.85 | ||||||
|
2012
|
49,750,000 | 4.43 | ||||||
|
2013
|
14,000,000 | 3.22 | ||||||
|
2014
|
1,500,000 | 2.83 | ||||||
|
Thereafter
|
128,500,000 | 4.11 | ||||||
|
|
||||||||
|
Total FHLB advances
|
$ | 215,850,000 | 4.14 | |||||
|
|
||||||||
Of the advances outstanding, $183,500,000 have options which allow the FHLB, at its
discretion, to terminate the advances and require the subsidiary banks to repay at predetermined
dates prior to the stated maturity date of the advances.
| December 31, 2008 | ||||||||
| Weighted | ||||||||
| Average | ||||||||
| Interest Rate | ||||||||
| Amount Due | at Year-End | |||||||
|
Maturity:
|
||||||||
|
Year ending December 31:
|
||||||||
|
2009
|
$ | 14,345,000 | 4.04 | % | ||||
|
2010
|
8,100,000 | 5.16 | ||||||
|
2011
|
9,000,000 | 5.08 | ||||||
|
2012
|
44,750,000 | 4.68 | ||||||
|
2013
|
14,000,000 | 2.72 | ||||||
|
Thereafter
|
128,500,000 | 4.11 | ||||||
|
|
||||||||
|
Total FHLB advances
|
$ | 218,695,000 | 4.24 | |||||
|
|
||||||||
Advances are collateralized by securities with a carrying value of $41,955,829 and $36,523,795
as of December 31, 2009 and 2008, respectively, and by loans pledged of $399,879,863 and
$399,511,033, respectively, in aggregate. On pledged loans, the FHLB applies varying collateral
maintenance levels from 125% to 333% based on the loan type.
69
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Other borrowings as of December 31, 2009 and 2008 are summarized as follows:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Wholesale repurchase agreements
|
$ | 135,000,000 | $ | 70,000,000 | ||||
|
364-day revolving note
|
5,000,000 | 5,000,000 | ||||||
|
Other
|
59,841 | 582,634 | ||||||
|
|
||||||||
|
|
$ | 140,059,841 | $ | 75,582,634 | ||||
|
|
||||||||
Maturity and interest rate information concerning wholesale repurchase agreements is
summarized as follows:
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Interest Rate | Interest Rate | |||||||||||||||
| Amount Due | at Year-End | Amount Due | at Year-End | |||||||||||||
|
Maturity:
|
||||||||||||||||
|
Year ending December 31:
|
||||||||||||||||
|
2011
|
$ | 5,000,000 | 3.40 | % | $ | 5,000,000 | 3.40 | % | ||||||||
|
2012
|
40,000,000 | 4.47 | 40,000,000 | 4.47 | ||||||||||||
|
Thereafter
|
90,000,000 | 3.76 | 25,000,000 | 3.54 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 135,000,000 | 3.96 | $ | 70,000,000 | 4.06 | ||||||||||
|
|
||||||||||||||||
Each wholesale repurchase agreement has a one-time put option, at the discretion of the
counterparty, to terminate the agreement and require the subsidiary bank to repay at predetermined
dates prior to the stated maturity date of the agreement.
As of December 31, 2009 and 2008, embedded within $65,000,000 and $30,000,000, respectively, of the
wholesale repurchase agreements are interest rate cap options with varying terms. The interest
rate cap options are effected when the 3-month LIBOR rate increases to certain levels. If that
situation occurs, the rate paid will be decreased by the difference between the 3-month LIBOR rate
and the particular cap level. In no case will the rate paid fall below 0.00%.
At December 31, 2008, the Company had a single $25,000,000 unsecured revolving credit note which
matures every 364 days. At December 31, 2008, the note carried a balance outstanding of
$5,000,000. Interest was payable monthly at the effective Federal Funds rate plus 1.25% per annum,
as defined by the credit agreement. As of December 31, 2008, the interest rate on the note was
1.34%. The note renewed on April 3, 2009, and the amount of credit was reduced from $25,000,000
down to $20,000,000 and is now secured with a new maturity date of April 2, 2010. At December 31,
2009, the note carried a balance outstanding of $5,000,000. Interest is payable monthly at the
effective LIBOR rate plus 2.50% per annum, as defined in the credit agreement. As of December 31,
2009, the interest rate on the note was 2.74%.
70
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The current revolving note agreement contains certain covenants that place restrictions on
additional debt and stipulate minimum capital and various operating ratios. As of December 31,
2009, the Company was in violation of one of the operating covenants. The Company has received a
formal waiver of the covenant violation. The Company fully expects to renew the note upon maturity
in April 2010, including modification of the covenant for future periods. The Company anticipates
it will be in compliance with the revised covenants. The Company has the full ability to borrow on
the revolving credit note.
Unused lines of credit of the subsidiary banks as of December 31, 2009 and 2008 are summarized as
follows:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Secured
|
$ | 26,640,499 | $ | 27,695,251 | ||||
|
Unsecured
|
108,500,000 | 141,500,000 | ||||||
|
|
||||||||
|
|
$ | 135,140,499 | $ | 169,195,251 | ||||
|
|
||||||||
The Company pledges the eligible portion of its municipal securities portfolio and select
commercial real estate loans to the Federal Reserve Bank of Chicago for borrowing at the Discount
Window.
Junior subordinated debentures are summarized as of December 31, 2009 and 2008 as follows:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Note Payable to Trust II
|
$ | 12,372,000 | $ | 12,372,000 | ||||
|
Note Payable to Trust III
|
8,248,000 | 8,248,000 | ||||||
|
Note Payable to Trust IV
|
5,155,000 | 5,155,000 | ||||||
|
Note Payable to Trust V
|
10,310,000 | 10,310,000 | ||||||
|
|
||||||||
|
|
$ | 36,085,000 | $ | 36,085,000 | ||||
|
|
||||||||
A schedule of the Company’s trust preferred offerings outstanding as of December 31, 2009 and
2008, is as follows:
| Interest | Interest | |||||||||||||||
| Rate as | Rate as | |||||||||||||||
| of | of | |||||||||||||||
| Name | Date Issued | Amount Issued | Interest Rate | 12/31/09 | 12/31/08 | |||||||||||
|
|
||||||||||||||||
|
QCR Holdings Statutory Trust II
|
February 2004 | $ | 12,372,000 | 6.93%* | 6.93 | % | 6.93 | % | ||||||||
|
QCR Holdings Statutory Trust III
|
February 2004 | 8,248,000 | 2.85% over 3-month LIBOR | 3.10 | % | 6.61 | % | |||||||||
|
|
||||||||||||||||
|
QCR Holdings Statutory Trust IV
|
May 2005 | 5,155,000 | 1.80% over 3-month LIBOR | 2.08 | % | 6.62 | % | |||||||||
|
QCR Holdings Statutory Trust V
|
February 2006 | 10,310,000 | 6.62%** | 6.62 | % | 6.62 | % | |||||||||
|
|
||||||||||||||||
| * |
Rate is fixed until March 31, 2011, then becomes variable based on 3-month LIBOR plus
2.85%, reset quarterly.
|
|
| ** |
Rate is fixed until April 7, 2011, then becomes variable based on 3-month LIBOR plus 1.55%, reset
quarterly.
|
71
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Securities issued by Trust II mature in thirty years, but are callable at par anytime after seven
years from issuance. Securities issued by Trust III, Trust IV, and Trust V mature in thirty years,
but are callable at par anytime after five years from issuance.
Series B Non-Cumulative Perpetual Preferred stock
: The 268 shares of Series B
Non-Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”) have a stated dividend rate
of 8.00%. Dividends are not accrued and are payable only if declared and no dividends may be
declared on the Company’s common stock unless and until dividends have been declared on the
outstanding shares of Series B Preferred Stock. The Company has the right at any time after the
first anniversary of the issuance of the shares of Series B Preferred Stock, subject to all
required regulatory approvals, to redeem all, but not less than all, of the shares then
outstanding. Any such redemption shall be made by the Company upon at least 30 days’ prior written
notice. The shares can be redeemed for an amount per share in cash which is equal to: (i) the sum
of (A) $50,000; plus (B) a premium in the amount of $4,000 multiplied by a fraction the numerator
of which is the total number of calendar days the shares being redeemed have been outstanding and
the denominator of which is 365; but (ii) less the aggregate amount of any dividends that have been
paid on the shares. The Series B Preferred Stock was not registered under the Securities Act of
1933 (the “Act”) and was issued pursuant to an exemption from registration under Regulation D of
the rules promulgated under the Act.
Series C Non-Cumulative Perpetual Preferred stock
: The 300 shares of Series C
Non-Cumulative Perpetual Preferred Stock (“Series C Preferred Stock”) have a stated dividend rate
of 9.50%. Dividends are not accrued and are payable only if declared and no dividends may be
declared on the Company’s common stock unless and until dividends have been declared on the
outstanding shares of Series C Preferred Stock. The Company has the right at any time after the
first anniversary of the issuance of the shares of Series C Preferred Stock, subject to all
required regulatory approvals, to redeem all, but not less than all, of the shares then
outstanding. Any such redemption shall be made by the Company upon at least 30 days’ prior written
notice. The shares shall be redeemed for an amount per share in cash which is equal to: (i) the
sum of (A) $25,000; plus (B) a premium in the amount of $2,375 multiplied by a fraction the
numerator of which is the total number of calendar days the shares being redeemed have been
outstanding and the denominator of which is 365; but (ii) less the aggregate amount of any
dividends that have been paid on the shares. The Series C Preferred Stock was not registered under
the Act and was issued pursuant to an exemption from registration under Regulation D of the rules
promulgated under the Act.
Series D Cumulative Perpetual Preferred Stock and Common Stock Warrant
: On February 13,
2009, the Company issued 38,237 shares of Series D Cumulative Perpetual Preferred Stock (“Series D
Preferred Stock”) to the U.S. Department of the Treasury (“Treasury”) for an aggregate purchase
price of $38,237,000. The sale of Series D Preferred Stock was a result of the Company’s
participation in Treasury’s voluntary Capital Purchase Program (“CPP”). This sale also included
the issuance of a warrant (“Warrant”) that allows Treasury to purchase up to 521,888 shares of
common stock at an exercise price of $10.99.
The Series D Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of
5% per annum for the first five years, and 9% per annum thereafter. The Series D Preferred Stock
may be redeemed by the Company at any time, provided that the Company redeems at least 25 percent
of the aggregate issue price of the Series D Preferred Stock. Any redemption of the Series D
Preferred Stock will be at the per share liquidation amount of $1,000 per share, plus any accrued
and unpaid dividends.
72
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Prior to the third anniversary of Treasury’s purchase of the Series D Preferred Stock, unless the
Series D Preferred Stock has been redeemed or Treasury has transferred all of the Series D
Preferred Stock to one or more third parties, the consent of Treasury will be required for the
Company to: (i) increase the dividend paid on its Common Stock; or (ii) repurchase its Common Stock
or other equity or capital securities, other than in connection with benefit plans consistent with
past practice. The Series D Preferred Stock will be non-voting except for class voting rights on
matters that would adversely affect the rights of the holders of the Series D Preferred Stock.
The Warrant has a ten-year term and is immediately exercisable upon its issuance, with an exercise
price, subject to anti-dilution adjustments, equal to $10.99 per share of the Common Stock.
The Series D Preferred Stock and the Warrant were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Act. Upon the request of Treasury at any time, the
Company has agreed to promptly enter into a deposit arrangement pursuant to which the Series D
Preferred Stock may be deposited and depositary shares representing fractional shares of Series D
Preferred Stock, may be issued. The Company has agreed to register the Warrant and the shares of
Common Stock underlying the Warrant. Additionally, the Company has also agreed to register the
shares of Series D Preferred Stock upon the written request of Treasury.
Treasury has the ability to unilaterally amend the CPP documents at any time to comply with changes
in the law, and as a result, the terms of the CPP could change.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into
law, which contains provisions that significantly impact CPP recipients both retroactively and
prospectively. Restrictions on repayment, including the Tier 1 qualified capital raise
requirement, have been removed allowing institutions to repay the CPP funds, in whole or in part,
upon consultation and approval from the Company’s primary federal banking regulator. If the
Treasury is repaid, it will liquidate the warrant it holds at the fair market value. ARRA has also
imposed more strict compensation limitations and expands the number of executives covered based
upon the amount of CPP funds received. These provisions will apply to existing and future CPP
recipients for periods the CPP capital is outstanding.
The proceeds received from the Treasury were allocated to the Series D Preferred Stock and the
Warrant based on relative fair value. The fair value of the Series D Preferred Stock was
determined through a discounted future cash flows model using a discount rate of 12%. The fair
value of the Warrant was calculated using the Black-Scholes option pricing model, which includes
assumptions regarding the Company’s dividend yield, stock price volatility, and the risk-free
interest rate. The relative fair value of the Series D Preferred Stock and the Warrant on February
13, 2009, was $35.8 million and $2.4 million, respectively.
The Company calculated a discount on the Series D Preferred Stock in the amount of $2.4 million,
which is being amortized over a 5 year period. The effective cost on the Series D Preferred Stock,
including the accretion of the discount, is approximately 6.23%. In determining net income (loss)
attributable to the Company’s common stockholders, the periodic accretion and the cash dividend on
the preferred stock are subtracted from net income (loss) attributable to the Company.
73
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Federal and state income tax expense from continuing operations was comprised of the following
components for the years ended December 31, 2009, 2008, and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Current
|
$ | 604,233 | $ | 3,552,436 | $ | 2,421,028 | ||||||
|
Deferred
|
(356,893 | ) | (1,816,719 | ) | 472,393 | |||||||
|
|
||||||||||||
|
|
$ | 247,340 | $ | 1,735,717 | $ | 2,893,421 | ||||||
|
|
||||||||||||
A reconciliation of the expected federal income tax expense to the income tax expense included
in the consolidated statements of operations was as follows for the years ended December 31, 2009,
2008, and 2007:
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| Pretax | Pretax | Pretax | ||||||||||||||||||||||
| Amount | Income | Amount | Income | Amount | Income | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Computed “expected” tax expense
|
$ | 803,660 | 35.0 | % | $ | 2,449,573 | 35.0 | % | $ | 3,423,524 | 35.0 | % | ||||||||||||
|
Effect of graduated tax rates interest
|
(22,962 | ) | (1.0 | ) | (69,988 | ) | (1.0 | ) | (97,815 | ) | (1.0 | ) | ||||||||||||
|
Tax exempt income, net
|
(589,224 | ) | (25.7 | ) | (583,414 | ) | (8.4 | ) | (469,557 | ) | (4.8 | ) | ||||||||||||
|
Bank-owned life insurance
|
(421,618 | ) | (18.4 | ) | (344,724 | ) | (4.9 | ) | (286,618 | ) | (2.9 | ) | ||||||||||||
|
State income taxes, net of federal benefit,
current year
|
229,531 | 10.0 | 315,475 | 4.5 | 359,374 | 3.7 | ||||||||||||||||||
|
Change in unrecognized tax benefits
|
290,454 | 12.7 | 144,293 | 2.1 | 228,009 | 2.3 | ||||||||||||||||||
|
Noncontrolling interests
|
(94,154 | ) | (4.1 | ) | (98,068 | ) | (1.4 | ) | (131,849 | ) | (1.3 | ) | ||||||||||||
|
Other
|
51,653 | 2.3 | (77,430 | ) | (1.1 | ) | (131,647 | ) | (1.3 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 247,340 | 10.8 | % | $ | 1,735,717 | 24.8 | % | $ | 2,893,421 | 29.7 | % | ||||||||||||
|
|
||||||||||||||||||||||||
Changes in the unrecognized tax benefits included in liabilities is as follows for the years
ended December 31, 2009 and 2008:
| 2009 | 2008 | |||||||
|
|
||||||||
|
Balance, beginning
|
$ | 1,053,951 | $ | 817,972 | ||||
|
Impact of tax positions taken during current year
|
403,550 | 314,590 | ||||||
|
Gross decrease related to tax positions of prior years
|
(9,700 | ) | — | |||||
|
Gross increase related to tax positions of prior years
|
75,272 | 102,602 | ||||||
|
Reduction as a result of a lapse of the applicable statute of limitations
|
(302,592 | ) | (181,213 | ) | ||||
|
|
||||||||
|
Balance, ending
|
$ | 1,220,481 | $ | 1,053,951 | ||||
|
|
||||||||
Included in the unrecognized tax benefits liability at
December 31, 2009 are potential benefits of approximately $1,100,000 that, if recognized, would affect the effective tax rate.
74
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The liability
for unrecognized tax benefits includes accrued interest for tax positions, which either do not meet
the more-likely-than-not recognition threshold or where the tax benefit is measured at an amount
less than the tax benefit claimed or expected to be claimed on an income tax return. At December
31, 2009 and 2008, accrued interest on uncertain tax positions was approximately $217,000 and
$227,000, respectively. Estimated interest related to the underpayment of income taxes is
classified as a component of income tax expense in the statements of operations and totaled $(10,000)
and $88,000 for the twelve months ended December 31, 2009 and 2008, respectively.
The Company’s federal income tax returns are open and subject to examination from the 2006 tax
return year and forward. Various state franchise and income tax returns are generally open from the
2005 and later tax return years based on individual state statute of limitations.
The net deferred tax assets included with other assets on the consolidated balance sheets consisted
of the following as of December 31, 2009 and 2008:
| 2009 | 2008 | |||||||
|
Deferred tax assets:
|
||||||||
|
Compensation
|
$ | 3,618,967 | $ | 2,890,639 | ||||
|
Loan/lease losses
|
7,584,167 | 6,042,711 | ||||||
|
Deferred loan origination fees, net
|
136,134 | 49,803 | ||||||
|
Other
|
173,401 | 122,342 | ||||||
|
|
||||||||
|
|
11,512,669 | 9,105,495 | ||||||
|
|
||||||||
|
Deferred tax liabilities:
|
||||||||
|
Net unrealized gains on securities available for sale
|
82,410 | 1,824,867 | ||||||
|
Premises and equipment
|
5,601,881 | 3,707,863 | ||||||
|
Investment accretion
|
42,939 | 43,960 | ||||||
|
Other
|
374,159 | 216,875 | ||||||
|
|
||||||||
|
|
6,101,389 | 5,793,565 | ||||||
|
|
||||||||
|
Net deferred tax asset
|
$ | 5,411,280 | $ | 3,311,930 | ||||
|
|
||||||||
The change in deferred income taxes was reflected in the consolidated financial statements as
follows for the years
ended December 31, 2009, 2008, and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
Provision for income taxes
|
$ | (356,893 | ) | $ | (1,816,719 | ) | $ | 472,393 | ||||
|
Statement of stockholders’ equity-
accumulated other comprehensive income,
unrealized gains (losses) on securities
available for sale, net
|
(1,742,457 | ) | 84,221 | 1,735,995 | ||||||||
|
|
||||||||||||
|
|
$ | (2,099,350 | ) | $ | (1,732,498 | ) | $ | 2,208,388 | ||||
|
|
||||||||||||
75
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The Company has a profit sharing plan which includes a provision designed to qualify under Section
401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions.
All employees are eligible to participate in the plan. The Company matches 100% of the first 3% of
employee contributions, and 50% of the next 3% of employee contributions, up to a maximum amount of
4.5% of an employee’s compensation. Additionally, at its discretion, the Company may make
additional contributions to the plan which are allocated to the accounts of participants in the
plan based on relative compensation. Company contributions for the years ended December 31, 2009,
2008, and 2007 were as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Matching contribution
|
$ | 958,902 | $ | 965,009 | $ | 719,529 | ||||||
|
Discretionary contribution
|
22,212 | 77,000 | 101,900 | |||||||||
|
|
||||||||||||
|
|
$ | 981,114 | $ | 1,042,009 | $ | 821,429 | ||||||
|
|
||||||||||||
The Company has entered into nonqualified supplemental executive retirement plans (SERPs) with
certain executive officers. The SERPs allow certain executives to accumulate retirement benefits
beyond those provided by the qualified plans. During the years ended December 31, 2009, 2008, and
2007, the Company expensed $340,608, $874,240, and $594,794, respectively, related to these plans.
As of December 31, 2009 and 2008, the liability related to the SERPs was $2,516,694 and $2,293,086,
respectively. Payments in the amount of $117,000 and $19,500 were made in 2009 and 2008,
respectively.
The Company has entered into deferred compensation agreements with certain executive officers.
Under the provisions of the agreements the officers may defer compensation and the Company matches
the deferral up to certain maximums. The Company’s matching contribution varies by officer and is
a maximum of between $10,000 and $20,000 annually. Interest on the deferred amounts is earned at
The Wall Street Journal
’s prime rate subject to a minimum of 6% and a maximum of 12% with
such limits differing by officer. The Company has also entered into deferred compensation
agreements with certain management officers. Under the provisions of the agreements the officers
may defer compensation and the Company matches the deferral up to certain maximums. The Company’s
matching contribution differs by officer and is a maximum between 4% and 10% of officer’s
compensation. Interest on the deferred amounts is earned at
The Wall Street Journal
’s
prime rate plus one percentage point, and has a minimum of 4% and shall not exceed 8%. Upon
retirement, the officer will receive the deferral balance in 180 equal monthly installments. As of
December 31, 2009 and 2008 the liability related to the agreements totals $2,734,989 and
$2,931,741, respectively.
Changes in the deferred compensation agreements included in liabilities is as follows for the years
ended December 31, 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Balance, beginning
|
$ | 2,931,741 | $ | 2,088,665 | $ | 1,454,436 | ||||||
|
Company expense
|
474,431 | 496,043 | 411,615 | |||||||||
|
Employee deferrals
|
355,887 | 350,746 | 226,327 | |||||||||
|
Cash payments made
|
(1,027,070 | ) | (3,713 | ) | (3,713 | ) | ||||||
|
|
||||||||||||
|
Balance, ending
|
$ | 2,734,989 | $ | 2,931,741 | $ | 2,088,665 | ||||||
|
|
||||||||||||
76
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Stock-based compensation expense was reflected in the consolidated financial statements as follows
for the years ended December 31, 2009, 2008, and 2007.
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Stock option and incentive plans
|
$ | 562,063 | $ | 426,765 | $ | 295,763 | ||||||
|
Stock purchase plan
|
47,650 | 48,355 | 48,033 | |||||||||
|
Stock appreciation rights
|
(96,750 | ) | (176,199 | ) | (322,448 | ) | ||||||
|
|
||||||||||||
|
|
$ | 512,963 | $ | 298,921 | $ | 21,348 | ||||||
|
|
||||||||||||
Stock option and incentive plans:
The Company’s Board of Directors and its stockholders adopted in June 1993 the QCR Holdings, Inc.
Stock Option Plan (Stock Option Plan). Up to 225,000 shares of common stock may be issued to
employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive
stock options or nonqualified stock options granted under the Stock Option Plan. All of the
options have been granted under this plan, and on June 30, 2003, the plan expired. The Company’s
Board of Directors adopted in November 1996 the QCR Holdings, Inc. 1997 Stock Incentive Plan (1997
Stock Incentive Plan). Up to 225,000 shares of common stock may be issued to employees and
directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock
options and restricted stock granted under the 1997 Stock Incentive Plan. As of December 31, 2006,
there are no remaining options available for grant under this plan. The Company’s Board of
Directors adopted in January 2004, and the stockholders approved in May 2004, the QCR Holdings,
Inc. 2004 Stock Incentive Plan (2004 Stock Incentive Plan). Up to 225,000 shares of common stock
may be issued to employees and directors of the Company and its subsidiaries pursuant to the
exercise of nonqualified stock options and restricted stock granted under the 2004 Stock Incentive
Plan. As of December 31, 2009, there are no remaining options available for grant under this plan.
The Company’s Board of Directors adopted in January 2008, and the stockholders approved in May
2008, the QCR Holdings, Inc. 2008 Equity Incentive Plan (2008 Equity Incentive Plan). Up to
250,000 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 2008 Equity Incentive Plan. As of December 31, 2009, there are 115,858 remaining options
available for grant under this plan. The Stock Option Plan, the 1997 Stock Incentive Plan, and the
2004 Stock Incentive Plan (stock option plans) are administered by the Compensation Committee
appointed by the Board of Directors (Committee).
The number and exercise price of options granted under the stock option plans is determined by the
Committee at the time the option is granted. In no event can the exercise price be less than the
value of the common stock at the date of the grant for incentive stock options. All options have a
10-year life and will vest and become exercisable from 1-to-5 years after the date of the grant.
Only nonqualified stock options have been issued to date.
In the case of nonqualified stock options, the stock option plans provide for the granting of “Tax
Benefit Rights” to certain participants at the same time as these participants are awarded
nonqualified options. Each Tax Benefit Right entitles a participant to a cash payment, which is
expensed by the Company, equal to the excess of the fair market value of a share of common stock on
the exercise date over the exercise price of the related option multiplied by the difference
between the rate of tax on ordinary income over the rate of tax on capital gains (federal and
state).
77
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 15. Stock-Based Compensation (Continued)
A summary of the stock option plans as of December 31, 2009, 2008, and 2007 and changes during the
years then ended is presented below:
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Outstanding, beginning
|
408,465 | $ | 15.38 | 332,077 | $ | 15.25 | 281,594 | $ | 14.43 | |||||||||||||||
|
Granted
|
75,740 | 9.21 | 100,245 | 15.59 | 74,650 | 16.67 | ||||||||||||||||||
|
Exercised
|
— | — | (7,305 | ) | 14.93 | (19,069 | ) | 16.57 | ||||||||||||||||
|
Forfeited
|
(9,789 | ) | 13.24 | (16,552 | ) | 15.38 | (5,098 | ) | 13.98 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Outstanding, ending
|
474,416 | 14.44 | 408,465 | 15.38 | 332,077 | 15.25 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Exercisable, ending
|
285,293 | 212,463 | 186,939 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Weighted average fair
value per option of
options granted
during the period
|
$ | 2.71 | $ | 5.05 | $ | 5.80 | ||||||||||||||||||
A further summary of options outstanding as of December 31, 2009 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 | |||||||||||||||
|
|
||||||||||||||||||||
|
$6.90
|
12,870 | 1.50 | $ | 6.90 | 12,870 | $ | 6.90 | |||||||||||||
|
$7.00 to $7.13
|
33,650 | 1.26 | 7.01 | 33,650 | 7.01 | |||||||||||||||
|
$7.45 to $8.89
|
23,850 | 3.23 | 8.54 | 16,350 | 8.54 | |||||||||||||||
|
$9.30 to $11.64
|
98,076 | 6.84 | 10.35 | 30,186 | 10.35 | |||||||||||||||
|
$13.25 to $16.85
|
158,665 | 7.70 | 15.80 | 62,641 | 15.19 | |||||||||||||||
|
$17.00 to $18.60
|
50,420 | 5.75 | 18.06 | 43,841 | 18.25 | |||||||||||||||
|
$18.67 to $20.90
|
67,885 | 5.17 | 19.48 | 61,495 | 19.51 | |||||||||||||||
|
$21.00 to $22.00
|
29,000 | 5.17 | 21.28 | 24,260 | 21.28 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
474,416 | 285,293 | ||||||||||||||||||
|
|
||||||||||||||||||||
78
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Stock purchase plan:
The Company’s Board of Directors and its stockholders adopted in October 2002 the QCR Holdings,
Inc. Employee Stock Purchase Plan (the “Purchase Plan”). As of January 1, 2009, there were 59,139
shares of common stock available for issuance under the Purchase Plan. For each six-month offering
period, the Board of Directors will determine how many of the total number of available shares will
be offered. The purchase price is the lesser of 90% of the fair market value at the date of the
grant or the investment date. The investment date, as established by the Board of Directors of the
Company, is the date common stock is purchased after the end of each calendar quarter during an
offering period. The maximum dollar amount any one participant can elect to contribute in an
offering period is $7,500. Additionally, the maximum percentage that any one participant can elect
to contribute is 8% of his or her compensation for the years ended December 31, 2009 and 2008.
During the year ended December 31, 2009, 29,024 shares were granted and 28,575 purchased. Shares
granted during the year ended December 31, 2009 had a weighted average fair value of $1.64 per
share.
Stock appreciation rights:
The 1997 Stock Incentive Plan and 2004 Stock Incentive Plan allow the granting of stock
appreciation rights (SARs). SARs are rights entitling the grantee to receive cash equal to the
fair market value of the appreciation in the market value of a stated number of shares from the
date of grant. Like options, the number and exercise price of SARs granted is determined by the
Committee. The SARs vest 20% per year, and the term of the SARs may not exceed 10 years from the
date of the grant. As of December 31, 2009, 2008, and 2007 there were 52,800, 57,600, and 86,325
SARs, respectively, outstanding and exercisable. As of December 31, 2009 and 2008 the liability
related to the SARs totals $97,538 and $194,288, respectively. Payments made on SARs were $0,
$58,500, and $74,318 during the years ended December 31, 2009, 2008 and 2007, respectively.
A further summary of SARs is presented below:
| December 31, 2009 | Liability Recorded for SARs | |||||||||||||||||||
| Grant | Expiration | SARs | SARs | December 31, | ||||||||||||||||
| Date Price | Date | Outstanding | Exercisable | 2009 | 2008 | |||||||||||||||
|
|
||||||||||||||||||||
|
$6.90
|
6/29/11 | 28,350 | 28,350 | $ | 72,860 | $ | 126,442 | |||||||||||||
|
$7.00
|
4/10/11 | 9,000 | 9,000 | 20,970 | 35,820 | |||||||||||||||
|
$10.75
|
6/30/10 | 15,450 | 15,450 | 3,708 | 27,192 | |||||||||||||||
|
$11.83
|
6/30/09 | — | — | — | 4,496 | |||||||||||||||
|
$12.17
|
4/14/09 | — | — | — | 338 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
52,800 | 52,800 | $ | 97,538 | $ | 194,288 | ||||||||||||||
|
|
||||||||||||||||||||
79
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Company and subsidiary
banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the subsidiary banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and
of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2009 and 2008, that the Company and the subsidiary banks met all capital adequacy
requirements to which they are subject.
As of December 31, 2009, the most recent notification from the FDIC categorized the subsidiary
banks as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no
conditions or events since the notification that management believes have changed the subsidiary
banks’ categories. The Company and the subsidiary banks’ actual capital amounts and ratios as of
December 31, 2009 and 2008 are also presented in the table (dollars in thousands).
| To Be Well | ||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
As of December 31, 2009:
|
||||||||||||||||||||||||
|
Company:
|
||||||||||||||||||||||||
|
Total risk-based capital
|
$ | 174,696 | 12.52 | % | $ | 111,668 | > 8.0 | % | N/A | N/A | ||||||||||||||
|
Tier 1 risk-based capital
|
155,464 | 11.14 | % | 55,834 | > 4.0 | N/A | N/A | |||||||||||||||||
|
Leverage ratio
|
155,464 | 8.73 | % | 71,212 | > 4.0 | N/A | N/A | |||||||||||||||||
|
Quad City Bank & Trust:
|
||||||||||||||||||||||||
|
Total risk-based capital
|
$ | 94,957 | 12.26 | % | $ | 61,973 | > 8.0 | % | $ | 77,466 | > 10.00 | % | ||||||||||||
|
Tier 1 risk-based capital
|
85,250 | 11.00 | % | 30,987 | > 4.0 | 46,480 | > 6.00 | % | ||||||||||||||||
|
Leverage ratio
|
85,250 | 8.55 | % | 39,891 | > 4.0 | 49,864 | > 5.00 | % | ||||||||||||||||
|
Cedar Rapids Bank & Trust:
|
||||||||||||||||||||||||
|
Total risk-based capital
|
$ | 53,179 | 13.14 | % | $ | 32,386 | > 8.0 | % | $ | 40,483 | > 10.00 | % | ||||||||||||
|
Tier 1 risk-based capital
|
48,092 | 11.88 | % | 16,193 | > 4.0 | 24,290 | > 6.00 | % | ||||||||||||||||
|
Leverage ratio
|
48,092 | 8.93 | % | 21,552 | > 4.0 | 26,940 | > 5.00 | % | ||||||||||||||||
|
Rockford Bank & Trust:
|
||||||||||||||||||||||||
|
Total risk-based capital
|
$ | 30,402 | 13.92 | % | $ | 17,470 | > 8.0 | % | $ | 21,838 | > 10.00 | % | ||||||||||||
|
Tier 1 risk-based capital
|
27,660 | 12.67 | % | 8,735 | > 4.0 | 13,103 | > 6.00 | % | ||||||||||||||||
|
Leverage ratio
|
27,660 | 10.56 | % | 10,475 | > 4.0 | 13,094 | > 5.00 | % | ||||||||||||||||
80
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
| To Be Well | ||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
As of December 31, 2008:
|
||||||||||||||||||||||||
|
Company:
|
||||||||||||||||||||||||
|
Total risk-based capital
|
$ | 138,008 | 10.39 | % | $ | 106,283 | > 8.0 | % | N/A | N/A | ||||||||||||||
|
Tier 1 risk-based capital
|
111,121 | 8.36 | % | 53,141 | > 4.0 | % | N/A | N/A | ||||||||||||||||
|
Leverage ratio
|
111,121 | 6.67 | % | 66,610 | > 4.0 | % | N/A | N/A | ||||||||||||||||
|
Quad City Bank & Trust:
|
||||||||||||||||||||||||
|
Total risk-based capital
|
$ | 79,438 | 10.72 | % | $ | 59,273 | > 8.0 | % | $ | 74,091 | > 10.00 | % | ||||||||||||
|
Tier 1 risk-based capital
|
70,313 | 9.49 | % | 29,636 | > 4.0 | % | 44,455 | > 6.00 | % | |||||||||||||||
|
Leverage ratio
|
70,313 | 7.88 | % | 35,695 | > 4.0 | % | 44,618 | > 5.00 | % | |||||||||||||||
|
Cedar Rapids Bank & Trust:
|
||||||||||||||||||||||||
|
Total risk-based capital
|
$ | 40,575 | 10.52 | % | $ | 30,854 | > 8.0 | % | $ | 38,567 | > 10.00 | % | ||||||||||||
|
Tier 1 risk-based capital
|
35,752 | 9.27 | % | 15,427 | > 4.0 | % | 23,140 | > 6.00 | % | |||||||||||||||
|
Leverage ratio
|
35,752 | 7.85 | % | 18,212 | > 4.0 | % | 22,765 | > 5.00 | % | |||||||||||||||
|
Rockford Bank & Trust:
|
||||||||||||||||||||||||
|
Total risk-based capital
|
$ | 21,483 | 10.63 | % | $ | 16,162 | > 8.0 | % | $ | 20,202 | > 10.00 | % | ||||||||||||
|
Tier 1 risk-based capital
|
18,943 | 9.38 | % | 8,081 | > 4.0 | % | 12,121 | > 6.00 | % | |||||||||||||||
|
Leverage ratio
|
18,943 | 8.65 | % | 8,755 | > 4.0 | % | 10,944 | > 5.00 | % | |||||||||||||||
The Company’s ability to pay dividends to its shareholders may be affected by both general
corporate law considerations and policies of the Federal Reserve applicable to bank holding
companies.
The payment of dividends by any financial institution or its holding company is affected by the
requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and
regulations, and a financial institution generally is prohibited from paying any dividends if,
following payment thereof, the institution would be undercapitalized. Notwithstanding the
availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any
dividends by the Banks if the Federal Reserve determines such payment would constitute an unsafe or
unsound practice.
The Company also has certain contractual restrictions on its ability to pay dividends. The Company
has issued junior subordinated debentures in four private placements. Under the terms of the
debentures, the Company may be prohibited, under certain circumstances, from paying dividends on
shares of its capital stock. Additionally, the Company has issued shares of non-cumulative
perpetual preferred stock and under the terms of this preferred stock, the Company may be
prohibited, under certain circumstances, from paying dividends on shares of its common stock. None
of these circumstances currently exist.
In addition, as a result of the Company’s issuance of the CPP Preferred Stock to Treasury on
February 13, 2009, the ability of the Company to declare or pay dividends on its common stock is
subject to restrictions, including the restriction on increasing dividends from the last
semi-annual cash dividend declared prior to October 14, 2008, which was $0.04 per share. This
restriction will terminate on the earlier of (a) the third anniversary of the date of issuance of
the Series D Preferred Stock and (b) the date on which the CPP Preferred Stock has been redeemed in
whole or Treasury has transferred all of the CPP Preferred Stock to one or more third parties.
Further, the ability of the Company to declare or pay dividends on its common stock will be subject
to restrictions in the event that the Company fails to declare and pay full dividends on the CPP
Preferred Stock.
81
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The following information was used in the computation of basic and diluted earnings per common
share for the years ended December 31, 2009, 2008, and 2007:
| 2009 | 2008 | 2007 | ||||||||||
|
Amounts attributable to QCR Holdings, Inc.:
|
||||||||||||
|
Income from continuing operations
|
1,771,908 | 4,974,627 | 6,500,285 | |||||||||
|
Income (loss) from discontinued operations
|
— | 1,734,231 | (722,808 | ) | ||||||||
|
|
||||||||||||
|
Net income
|
1,771,908 | 6,708,858 | 5,777,477 | |||||||||
|
|
||||||||||||
|
Less: preferred stock dividends and discount accretion
|
3,843,924 | 1,784,500 | 1,072,000 | |||||||||
|
|
||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc. common stockholders
|
$ | (2,072,016 | ) | $ | 4,924,358 | $ | 4,705,477 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||
|
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
|
(0.46 | ) | 0.69 | 1.19 | ||||||||
|
Income (loss) from discontinued operations attributable to QCR Holdings, Inc.
|
— | 0.38 | (0.16 | ) | ||||||||
|
|
||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | (0.46 | ) | $ | 1.07 | $ | 1.03 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||
|
Income (loss) from continuing operations attributable to QCR Holdings, Inc.
|
(0.46 | ) | 0.69 | 1.18 | ||||||||
|
Income (loss) from discontinued operations attributable to QCR Holdings, Inc.
|
— | 0.37 | (0.16 | ) | ||||||||
|
|
||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | (0.46 | ) | $ | 1.06 | $ | 1.02 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
4,540,792 | 4,617,057 | 4,581,919 | |||||||||
|
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan*
|
— | ** | 17,480 | 17,649 | ||||||||
|
|
||||||||||||
|
Weighted average common and common equivalent shares outstanding
|
4,540,792 | ** | 4,634,537 | 4,599,568 | ||||||||
| * |
Excludes anti-dilutive shares of 391,843, and 213,900 at December 31, 2008 and 2007,
respectively.
|
|
| ** |
In accordance with U.S. GAAP, the common equivalent shares are not considered in the calculation
of diluted earnings per share as the numerator is a net loss.
|
In the normal course of business, the subsidiary banks make various commitments and incur certain
contingent liabilities that are not presented in the accompanying consolidated financial
statements. The commitments and contingent liabilities include various guarantees, commitments to
extend credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary
banks upon extension of credit, is based upon management’s credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, marketable securities, inventory,
property, plant and equipment, and income-producing commercial properties.
82
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 18. Commitments and Contingencies (Continued)
Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee
the performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements and, generally, have terms of one year or less. The
credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The subsidiary banks hold collateral, as described above,
supporting those commitments if deemed necessary. In the event the customer does not perform in
accordance with the terms of the agreement with the third party, the subsidiary banks would be
required to fund the commitments. The maximum potential amount of future payments the subsidiary
banks could be required to make is represented by the contractual amount. If the commitment is
funded, the subsidiary banks would be entitled to seek recovery from the customer. At December 31,
2009 and 2008 no amounts have been recorded as liabilities for the subsidiary banks’ potential
obligations under these guarantees.
As of December 31, 2009 and 2008, commitments to extend credit aggregated $476,519,000 and
$494,845,000, respectively. As of December 31, 2009 and 2008, standby letters of credit aggregated
$17,836,000 and $15,167,000, respectively. Management does not expect that all of these
commitments will be funded.
The Company has also executed contracts for the sale of mortgage loans in the secondary market in
the amount of $6,135,130 and $7,377,648 as of December 31, 2009 and 2008, respectively. These
amounts are included in loans held for sale at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold with varying recourse
provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by
the seller in situations such as, breach of representation, warranty, or covenant, untimely
document delivery, false or misleading statements, failure to obtain certain certificates or
insurance, unmarketability, etc. Certain loan sales agreements contain repurchase requirements
based on payment-related defects that are defined in terms of the number of days/months since the
purchase, the sequence number of the payment, and/or the number of days of payment delinquency.
Based on the specific terms stated in the agreements of investors purchasing residential mortgage
loans from the Company’s subsidiary banks, the Company had $71,379,478 and $44,475,340 of sold
residential mortgage loans with recourse provisions still in effect at December 31, 2009 and 2008,
respectively. The subsidiary banks did not repurchase any loans from secondary market investors
under the terms of loans sales agreements during the years ended December 31, 2009, and 2007. Quad
City Bank & Trust repurchased one loan from a secondary market investor under the terms of the loan
sale agreement during the year ended December 31, 2008. In the opinion of management, the risk of
recourse and the subsequent requirement of loan repurchase to the subsidiary banks is not
significant, and accordingly no liabilities have been established related to such.
Aside from cash on-hand and in-vault, the majority of the Company’s cash is maintained at upstream
correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal
funds sold exceeded federal insured limits by approximately $11,810,563 and $4,880,000 as of
December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, some of the Company’s
upstream correspondent banks are participants in the FDIC’s Temporary Liquidity Guarantee Program;
as a result, the cash maintained in non-interest bearing deposits at these insured institutions
were fully insured. In the opinion of management, no material risk of loss exists due to the
financial condition of the upstream correspondent banks.
In an arrangement with Goldman Sachs and Company (Goldman Sachs), certain of the Company’s
subsidiary banks offer a cash management program for select customers. Based on a predetermined
minimum balance, which must be maintained in the account, excess funds are automatically swept
daily to an institutional money market fund distributed by Goldman Sachs. At December 31, 2009 and
2008, the Company had $127,969,621 and $75,142,189, respectively of customer funds invested in this
cash management program.
83
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
During 2009, the Company had contingent liabilities relating to a commercial lending relationship
totaling $2,492,731. Resolution of the contingency occurred in 2009 and the contingent liabilities
were reversed. As a result, the Company recognized interest income of $1,272,966 for cash interest
payments previously received and reserved. Additionally, the Company reduced its allowance for
estimated losses on loans/leases by $1,000,000. Lastly, the Company recognized non-interest income
of $219,765 for reimbursement of various loan-related costs that were previously expensed and reserved.
| Year Ended December 31, 2009 | ||||||||||||||||
| March | June | September | December | |||||||||||||
| 2009 | 2009 | 2009 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Total interest income
|
$ | 20,770,111 | $ | 21,036,003 | $ | 22,453,878 | $ | 21,048,085 | ||||||||
|
Total interest expense
|
9,026,086 | 9,016,793 | 8,701,139 | 8,205,148 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
11,744,025 | 12,019,210 | 13,752,739 | 12,842,937 | ||||||||||||
|
Provision for loan/lease losses
|
4,358,543 | 4,875,745 | 3,526,892 | 4,214,337 | ||||||||||||
|
Noninterest income
|
3,654,770 | 3,688,426 | 4,235,792 | 4,064,446 | ||||||||||||
|
Noninterest expense
|
11,098,144 | 12,422,562 | 12,273,301 | 10,936,650 | ||||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations before taxes
|
(57,892 | ) | (1,590,671 | ) | 2,188,338 | 1,756,396 | ||||||||||
|
Federal and state income tax expense (benefit)
|
(293,682 | ) | (831,159 | ) | 563,399 | 808,782 | ||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
|
235,790 | (759,512 | ) | 1,624,939 | 947,614 | |||||||||||
|
Income (loss) from discontinued operations, net of taxes
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Net income (loss)
|
$ | 235,790 | $ | (759,512 | ) | $ | 1,624,939 | $ | 947,614 | |||||||
|
|
||||||||||||||||
|
Less net income (loss) attributable to noncontrolling
interests
|
151,446 | 60,932 | 35,919 | 28,626 | ||||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | 84,344 | $ | (820,444 | ) | $ | 1,589,020 | $ | 918,988 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||
|
Income (loss) from continuing operations attributable
to QCR Holdings, Inc.
|
(0.14 | ) | (0.42 | ) | 0.12 | (0.02 | ) | |||||||||
|
Income (loss) from discontinued operations attributable
to QCR Holdings, Inc.
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | (0.14 | ) | $ | (0.42 | ) | $ | 0.12 | $ | (0.02 | ) | |||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||
|
Income (loss) from continuing operations attributable
to QCR Holdings, Inc.
|
(0.14 | ) | (0.42 | ) | 0.12 | (0.02 | ) | |||||||||
|
Income (loss) from discontinued operations attributable
to QCR Holdings, Inc.
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | (0.14 | ) | $ | (0.42 | ) | $ | 0.12 | $ | (0.02 | ) | |||||
|
|
||||||||||||||||
84
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
| Year Ended December 31, 2008 | ||||||||||||||||
| March | June | September | December | |||||||||||||
| 2008 | 2008 | 2008 | 2008 | |||||||||||||
|
|
||||||||||||||||
|
Total interest income
|
$ | 21,057,375 | $ | 20,805,147 | $ | 21,347,914 | $ | 21,441,410 | ||||||||
|
Total interest expense
|
11,124,682 | 9,808,829 | 9,800,026 | 9,790,399 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
9,932,693 | 10,996,318 | 11,547,888 | 11,651,011 | ||||||||||||
|
Provision for loan/lease losses
|
984,240 | 1,355,343 | 2,154,061 | 4,728,026 | ||||||||||||
|
Noninterest income
|
3,617,958 | 3,849,399 | 3,504,363 | 3,454,509 | ||||||||||||
|
Noninterest expense
|
10,068,636 | 10,487,588 | 10,576,283 | 11,201,182 | ||||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations before taxes
|
2,497,775 | 3,002,786 | 2,321,907 | (823,688 | ) | |||||||||||
|
Federal and state income tax expense (benefit)
|
668,022 | 873,178 | 613,372 | (418,855 | ) | |||||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
|
1,829,753 | 2,129,608 | 1,708,535 | (404,833 | ) | |||||||||||
|
Income (loss) from discontinued operations, net of taxes
|
(1,002,917 | ) | (228,884 | ) | 2,690,333 | 275,699 | ||||||||||
|
|
||||||||||||||||
|
Net income (loss)
|
$ | 826,836 | $ | 1,900,724 | $ | 4,398,868 | $ | (129,134 | ) | |||||||
|
|
||||||||||||||||
|
Less net income (loss) attributable to noncontrolling
interests
|
140,392 | 128,435 | 93,386 | (73,777 | ) | |||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | 686,444 | $ | 1,772,289 | $ | 4,305,482 | $ | (55,357 | ) | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||
|
Income (loss) from continuing operations attributable
to QCR Holdings, Inc.
|
0.27 | 0.34 | 0.25 | (0.17 | ) | |||||||||||
|
Income (loss) from discontinued operations attributable
to QCR Holdings, Inc.
|
(0.22 | ) | (0.05 | ) | 0.58 | 0.06 | ||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | 0.05 | $ | 0.29 | $ | 0.83 | $ | (0.11 | ) | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||
|
Income (loss) from continuing operations attributable
to QCR Holdings, Inc.
|
0.27 | 0.34 | 0.25 | (0.17 | ) | |||||||||||
|
Income (loss) from discontinued operations attributable
to QCR Holdings, Inc.
|
(0.22 | ) | (0.05 | ) | 0.58 | 0.06 | ||||||||||
|
|
||||||||||||||||
|
Net income (loss) attributable to QCR Holdings, Inc.
|
$ | 0.05 | $ | 0.29 | $ | 0.83 | $ | (0.11 | ) | |||||||
|
|
||||||||||||||||
85
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The following is condensed financial information of QCR Holdings, Inc. (parent company only):
Condensed Balance Sheets
December 31, 2009 and 2008
December 31, 2009 and 2008
| 2009 | 2008 | |||||||
|
|
||||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 2,903,876 | $ | 1,485,858 | ||||
|
Interest-bearing deposits at financial institutions
|
181,009 | 179,061 | ||||||
|
Securities available for sale, at fair value
|
1,197,127 | 773,347 | ||||||
|
Investment in bank subsidiaries
|
163,065,573 | 130,718,800 | ||||||
|
Investment in nonbank subsidiaries
|
2,232,130 | 2,559,344 | ||||||
|
Other assets
|
2,499,664 | 2,510,193 | ||||||
|
|
||||||||
|
Total assets
|
$ | 172,079,379 | $ | 138,226,603 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Other borrowings
|
$ | 5,000,000 | $ | 5,000,000 | ||||
|
Junior subordinated debentures
|
36,085,000 | 36,085,000 | ||||||
|
Other liabilities
|
7,099,133 | 6,504,730 | ||||||
|
|
||||||||
|
Total liabilities
|
48,184,133 | 47,589,730 | ||||||
|
|
||||||||
|
|
||||||||
|
Stockholders’ Equity:
|
||||||||
|
Preferred stock
|
38,805 | 568 | ||||||
|
Common stock
|
4,674,536 | 4,630,883 | ||||||
|
Additional paid-in capital
|
82,194,330 | 43,090,268 | ||||||
|
Retained earnings
|
38,458,477 | 40,893,304 | ||||||
|
Accumulated other comprehensive income
|
135,608 | 3,628,360 | ||||||
|
Treasury stock
|
(1,606,510 | ) | (1,606,510 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
123,895,246 | 90,636,873 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 172,079,379 | $ | 138,226,603 | ||||
|
|
||||||||
86
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 20. Parent Company Only Financial Statements (Continued)
Condensed Statements of Income
Years Ended December 31, 2009, 2008, and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Total interest income
|
$ | 34,285 | $ | 151,742 | $ | 218,795 | ||||||
|
Securities gains, net
|
— | 199,500 | — | |||||||||
|
Other-than-temporary impairment losses on securities
|
(206,369 | ) | — | — | ||||||||
|
Equity in net income of bank subsidiaries related to continuing operations
|
6,921,939 | 9,323,385 | 9,892,911 | |||||||||
|
Equity in net income (loss) of nonbank subsidiaries related to continuing operations
|
(282,712 | ) | 175,972 | 2,606 | ||||||||
|
Equity in net income (loss) of subsidiaries related to discontinued operations
|
— | 1,734,231 | (722,808 | ) | ||||||||
|
Other
|
254,375 | 2,038,767 | 465,330 | |||||||||
|
|
||||||||||||
|
Total income
|
6,721,518 | 13,623,597 | 9,856,834 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest expense
|
2,303,020 | 2,703,617 | 3,347,664 | |||||||||
|
Salaries and employee benefits related to continuing operations
|
3,572,419 | 3,527,004 | 1,417,738 | |||||||||
|
Salaries and employee benefits related to discontinued operations*
|
— | 1,280,449 | — | |||||||||
|
Professional and data processing fees related to continuing operations
|
1,098,487 | 1,113,615 | 677,874 | |||||||||
|
Professional and data processing fees related to discontinued operations
|
— | 224,887 | — | |||||||||
|
Other
|
504,750 | 505,608 | 433,934 | |||||||||
|
|
||||||||||||
|
Total expenses
|
7,478,676 | 9,355,180 | 5,877,210 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income before income tax benefit
|
(757,158 | ) | 4,268,417 | 3,979,624 | ||||||||
|
|
||||||||||||
|
Income tax benefit
|
2,529,066 | 2,440,441 | 1,797,853 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 1,771,908 | $ | 6,708,858 | $ | 5,777,477 | ||||||
|
|
||||||||||||
| * |
Consisted entirely of severance payments related to the sale of First Wisconsin Bank & Trust.
|
87
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
Years Ended December 31, 2009, 2008, and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income
|
$ | 1,771,908 | $ | 6,708,858 | $ | 5,777,477 | ||||||
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||
|
Distributions in excess of (less than) earnings of:
|
||||||||||||
|
Bank subsidiaries
|
1,103,061 | 1,673,041 | 2,094,503 | |||||||||
|
Nonbank subsidiaries
|
558,254 | (62,744 | ) | 69,656 | ||||||||
|
Depreciation
|
724 | 2,753 | 2,633 | |||||||||
|
Gain on sale of other assets
|
— | — | (435,791 | ) | ||||||||
|
Gain on sale of First Wisconsin Bank & Trust
|
— | (494,664 | ) | — | ||||||||
|
Securities gains, net
|
— | (199,500 | ) | — | ||||||||
|
Other-than-temporary impairment losses on securities
|
206,369 | — | — | |||||||||
|
Stock-based compensation expense
|
609,713 | 475,120 | 343,796 | |||||||||
|
(Increase) decrease in accrued interest receivable
|
(319,186 | ) | 35,787 | 142,974 | ||||||||
|
(Increase) decrease in other assets
|
(318,419 | ) | 1,601,300 | (3,314,476 | ) | |||||||
|
Increase in other liabilities
|
358,824 | 2,523,615 | 912,670 | |||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
3,971,248 | 12,263,566 | 5,593,442 | |||||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Net increase in interest-bearing deposits at
financial institutions
|
(1,948 | ) | (8,916 | ) | (11,226 | ) | ||||||
|
Purchase of securities available for sale
|
(221,365 | ) | (16,939 | ) | (24,857 | ) | ||||||
|
Proceeds from sale of securities
|
— | 285,000 | — | |||||||||
|
Proceeds from sale of other assets
|
— | — | 500,000 | |||||||||
|
Proceeds from sale of First Wisconsin Bank & Trust, net
|
— | 13,324,553 | — | |||||||||
|
Capital infusion, bank subsidiaries
|
(36,935,000 | ) | (20,500,000 | ) | (15,750,000 | ) | ||||||
|
Purchase of premises and equipment
|
— | (971 | ) | (1,200 | ) | |||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(37,158,313 | ) | (6,917,273 | ) | (15,287,283 | ) | ||||||
|
|
||||||||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Net increase (decrease) in other borrowings
|
— | (2,000,000 | ) | 3,500,000 | ||||||||
|
Tax benefit of nonqualified stock options exercised
|
— | 1,611 | 22,370 | |||||||||
|
Payment of cash dividends on common and preferred stock
|
(3,595,221 | ) | (1,974,870 | ) | (1,334,012 | ) | ||||||
|
Proceeds from issuance of Series D Cumulative Perpetual Preferred
Stock and common stock warrant, net
|
38,052,823 | — | — | |||||||||
|
Proceeds from issuance of Series C Cumulative Perpetual Preferred
Stock, net
|
— | — | 7,273,579 | |||||||||
|
Proceeds from issuance of common stock, net
|
226,441 | 329,302 | 421,533 | |||||||||
|
Purchase of noncontrolling interests
|
(78,960 | ) | — | — | ||||||||
|
Purchase of treasury stock
|
— | (1,606,510 | ) | — | ||||||||
|
|
||||||||||||
|
Net cash provided by (used in) financing activities
|
34,605,083 | (5,250,467 | ) | 9,883,470 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net increase in cash and due from banks
|
1,418,018 | 95,826 | 189,629 | |||||||||
|
|
||||||||||||
|
Cash and due from banks:
|
||||||||||||
|
Beginning
|
1,485,858 | 1,390,032 | 1,200,403 | |||||||||
|
|
||||||||||||
|
Ending
|
$ | 2,903,876 | $ | 1,485,858 | $ | 1,390,032 | ||||||
|
|
||||||||||||
88
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The measurement of fair value under U.S. GAAP uses a hierarchy intended to maximize the use of
observable inputs and this hierarchy includes three levels and is based upon the valuation
techniques used to measure assets and liabilities. The three levels are as follows:
| • |
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in markets;
|
||
| • |
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets
and liabilities in active markets and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial
instrument; and
|
||
| • |
Level 3 – Inputs to the valuation methodology are unobservable and significant to the
fair value measurement
|
Assets measured at fair value on a recurring basis comprise the following at December 31, 2009 and
2008:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Quoted Prices | Significant | |||||||||||||||
| in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
|
||||||||||||||||
|
December 31, 2009:
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. govt. sponsored agency securities
|
$ | 345,024,448 | $ | — | $ | 345,024,448 | $ | — | ||||||||
|
Residential mortgage-backed securities
|
496,307 | — | 496,307 | — | ||||||||||||
|
Municipal securities
|
22,849,792 | — | 22,849,792 | — | ||||||||||||
|
Trust preferred securities
|
99,200 | — | 99,200 | — | ||||||||||||
|
Other securities
|
1,700,712 | 169,939 | 1,530,773 | — | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 370,170,459 | $ | 169,939 | $ | 370,000,520 | $ | — | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2008:
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. Treasury securities
|
$ | 4,389,545 | $ | — | $ | 4,389,545 | $ | — | ||||||||
|
U.S. govt. sponsored agency securities
|
226,243,160 | — | 226,243,160 | — | ||||||||||||
|
Residential mortgage-backed securities
|
807,139 | — | 807,139 | — | ||||||||||||
|
Municipal securities
|
23,348,225 | — | 23,348,225 | — | ||||||||||||
|
Trust preferred securities
|
165,000 | — | 165,000 | — | ||||||||||||
|
Other securities
|
773,346 | 200,796 | 572,550 | — | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 255,726,415 | $ | 200,796 | $ | 255,525,619 | $ | — | ||||||||
|
|
||||||||||||||||
A small portion of the securities available for sale portfolio consists of common stocks
issued by various unrelated bank holding companies and mutual funds. The fair values used by the
Company are obtained from an independent pricing service, which represent quoted market prices for
the identical securities (Level 1 inputs).
89
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Note 21. Fair Value (Continued)
The large majority of the securities available for sale portfolio consist of U.S. government
sponsored agency securities whereby the Company obtains fair values from an independent pricing
service. The fair values are determined by pricing models that consider observable market data,
such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers
and live trading systems (Level 2 inputs).
Certain assets are measured at fair value on a non-recurring basis; that is, the assets are not
measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment).
Assets measured at fair value on a non-recurring basis comprise the following at December 31, 2009
and 2008:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Quoted Prices | Significant | |||||||||||||||
| in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
December 31, 2009:
|
||||||||||||||||
|
Impaired loans/leases
|
$ | 17,630,752 | $ | — | $ | — | $ | 17,630,752 | ||||||||
|
Other real estate owned
|
10,029,281 | — | — | 10,029,281 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 27,660,032 | $ | — | $ | — | $ | 27,660,032 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2008:
|
||||||||||||||||
|
Impaired loans/leases
|
$ | 11,314,661 | $ | — | $ | — | $ | 11,314,661 | ||||||||
|
Other real estate owned
|
4,165,077 | — | — | 4,165,077 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 15,479,738 | $ | — | $ | — | $ | 15,479,738 | ||||||||
|
|
||||||||||||||||
Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as
impaired, at the lower of cost or fair value and are classified as a Level 3 in the fair value
hierarchy. Fair value is measured based on the value of the collateral securing these
loans/leases. Collateral may be real estate and/or business assets including equipment, inventory
and/or accounts receivable and is determined based on appraisals by qualified licensed appraisers
hired by the Company. Appraised and reported values may be discounted based on management’s
historical knowledge, changes in market conditions from the time of valuation, and/or management’s
expertise and knowledge of the client and client’s business. Other real estate owned in the table
above consists of property acquired through foreclosures and settlements of loans. Property
acquired is carried at the lower of the principal amount of loans outstanding, or the estimated
fair value of the property, less disposal costs, and is classified as a Level 3 in the fair value
hierarchy.
90
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
The following table presents the carrying values and estimated fair values of financial assets and
liabilities carried on the Company’s consolidated balance sheets, including those financial assets
and liabilities that are not measured and reported at fair value on a recurring basis or
non-recurring basis:
| 2009 | 2008 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| Value | Fair Value | Value | Fair Value | |||||||||||||
|
Cash and due from banks
|
$ | 35,878,046 | $ | 35,878,046 | $ | 33,464,074 | $ | 33,464,074 | ||||||||
|
Federal funds sold
|
6,598,333 | 6,598,333 | 20,695,898 | 20,695,898 | ||||||||||||
|
Interest-bearing deposits at financial institutions
|
29,329,413 | 29,329,413 | 2,113,904 | 2,113,904 | ||||||||||||
|
Investment securities:
|
||||||||||||||||
|
Held to maturity
|
350,000 | 350,000 | 350,000 | 350,000 | ||||||||||||
|
Available for sale
|
370,170,459 | 370,170,459 | 255,726,415 | 255,726,415 | ||||||||||||
|
Loans/leases receivable, net
|
1,221,814,832 | 1,222,885,000 | 1,196,880,462 | 1,189,382,000 | ||||||||||||
|
Accrued interest receivable
|
7,565,513 | 7,565,513 | 7,835,835 | 7,835,835 | ||||||||||||
|
Deposits
|
1,089,322,726 | 1,094,430,000 | 1,058,958,598 | 1,067,480,000 | ||||||||||||
|
Short-term borrowings
|
150,899,571 | 150,899,571 | 101,456,950 | 101,456,950 | ||||||||||||
|
Federal Home Loan Bank advances
|
215,850,000 | 229,927,000 | 218,695,000 | 235,309,000 | ||||||||||||
|
Other borrowings
|
140,059,841 | 145,135,000 | 75,582,634 | 78,472,000 | ||||||||||||
|
Accrued interest payable
|
2,951,419 | 2,951,419 | 4,539,122 | 4,539,122 | ||||||||||||
The methodologies for estimating the fair value of financial assets and liabilities that are
measured at fair value on a recurring or non-recurring basis are discussed above. For certain
financial assets and liabilities, carrying value approximates fair value due to the nature of the
financial instrument. These instruments include: cash and due from banks, federal funds sold,
interest-bearing deposits at financial institutions, accrued interest receivable and payable,
demand and other non-maturity deposits, and short-term borrowings. The Company used the following
methods and assumptions in estimating the fair value of the following instruments:
Loans/leases receivable
: The fair values for variable rate loans equal their carrying
values. The fair values for all other types of loans/leases are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans/leases with similar terms to
borrowers with similar credit quality. The fair value of loans held for sale is based on quoted
market prices of similar loans sold in the secondary market.
Deposits
: The fair values disclosed for demand deposits equal their carrying amounts,
which represent the amount payable on demand. Fair values for time deposits are estimated using a
discounted cash flow calculation that applies interest rates currently being offered on time
deposits to a schedule of aggregate expected monthly maturities on time deposits.
Federal Home Loan Bank advances
: The fair value of these instruments is estimated using
discounted cash flow analyses, based on the Company’s current incremental borrowing rates for
similar types of borrowing arrangements.
Other borrowings
: The fair value for the wholesale repurchase agreements is estimated
using rates currently available for debt with similar terms and remaining maturities. The fair
value for variable rate other borrowings is equal to its carrying value.
Junior subordinated debentures
: It is not practicable to estimate the fair value of the
Company’s junior subordinated debentures as instruments with similar terms are not readily
available in the market place.
Commitments to extend credit
: The fair value of these commitments is not material.
91
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Selected financial and descriptive information is required to be disclosed for reportable operating
segments, applying a ”management perspective” as the basis for identifying reportable segments.
The management perspective is determined by the view that management takes of the segments within
the Company when making operating decisions, allocating resources, and measuring performance. The
segments of QCR Holdings, Inc. have been defined by the structure of the Company’s internal
organization, focusing on the financial information that the Company’s operating decision-makers
routinely use to make decisions about operating matters.
The Company’s primary segment, Commercial Banking, is geographically divided by markets into the
secondary segments which are the three subsidiary banks wholly-owned by the Company: Quad City
Bank & Trust, Cedar Rapids Bank & Trust, and Rockford Bank & Trust. Each of these secondary
segments offer similar products and services, but are managed separately due to different pricing,
product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and
deposit services.
First Wisconsin Bank & Trust is accounted for as discontinued bank operations and has been properly
excluded where appropriate. First Wisconsin Bank & Trust’s assets held for sale at December 31,
2007 are reported in the All Other segment.
The Company’s Credit Card Processing segment represents credit card processing for cardholders of
the Company’s three subsidiary banks and agent banks.
As previously noted, the Company sold its merchant credit card acquiring business in 2008 and has
accounted for it as discontinued operations. The related financial information has been properly
excluded.
The Company’s Trust Management segment represents the trust and asset management services offered
at the Company’s three subsidiary banks in aggregate. This segment generates income primarily from
fees charged based on assets under administration for corporate and personal trusts and for
custodial services. No assets of the subsidiary banks have been allocated to the Trust Management
segment.
The Company’s All Other segment includes the operations of all other consolidated subsidiaries
and/or defined operating segments that fall below the segment reporting thresholds. This segment
includes the corporate operations of the parent and the real estate holding operations of Velie
Plantation Holding Company.
92
Table of Contents
QCR Holdings, Inc.
and Subsidiaries
and Subsidiaries
Notes to Consolidated Financial Statements
Selected financial information on the Company’s business segments, with all intercompany accounts
and transactions eliminated, is presented as follows for the years ended December 31, 2009, 2008,
and 2007:
| Commercial Banking | ||||||||||||||||||||||||||||||||
| Quad City | Cedar Rapids | Rockford | Credit Card | Trust | Intercompany | Consolidated | ||||||||||||||||||||||||||
| Bank & Trust | Bank & Trust | Bank & Trust | Processing | Management | All other | Eliminations | Total | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Twelve Months Ended December 31, 2009
|
||||||||||||||||||||||||||||||||
|
Total revenue
|
$ | 55,231,801 | $ | 29,104,664 | $ | 13,728,899 | $ | 344,850 | $ | 2,883,482 | $ | 43,155 | $ | (385,340 | ) | $ | 100,951,511 | |||||||||||||||
|
Net interest income
|
31,120,897 | 15,258,341 | 6,403,407 | 132,573 | — | (2,949,869 | ) | 393,562 | 50,358,911 | |||||||||||||||||||||||
|
Income from continuing operations
attributable to QCR Holdings, Inc.
|
6,236,772 | 2,307,323 | (2,218,988 | ) | (386,655 | ) | 596,833 | (4,633,185 | ) | (130,192 | ) | 1,771,908 | ||||||||||||||||||||
|
Total assets
|
975,774,394 | 542,739,913 | 265,791,702 | — | — | 11,656,970 | (16,316,872 | ) | 1,779,646,107 | |||||||||||||||||||||||
|
Provision for loan/lease losses
|
8,023,988 | 4,750,000 | 3,987,000 | 214,529 | — | — | — | 16,975,517 | ||||||||||||||||||||||||
|
Goodwill
|
3,222,688 | — | — | — | — | — | — | 3,222,688 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Twelve Months Ended December 31, 2008
|
||||||||||||||||||||||||||||||||
|
Total revenue
|
$ | 59,490,093 | $ | 27,342,969 | $ | 12,002,908 | $ | 987,769 | $ | 3,333,812 | $ | 2,558,859 | $ | (6,638,335 | ) | $ | 99,078,075 | |||||||||||||||
|
Net interest income
|
29,192,468 | 12,665,853 | 4,943,287 | 464,426 | — | (4,370,682 | ) | 1,232,558 | 44,127,910 | |||||||||||||||||||||||
|
Income from continuing operations
attributable to QCR Holdings, Inc.
|
7,484,411 | 3,045,421 | (1,606,051 | ) | 45,090 | 738,296 | (4,255,358 | ) | (477,182 | ) | 4,974,627 | |||||||||||||||||||||
|
Total assets
|
908,594,141 | 468,306,140 | 228,014,920 | 927,894 | — | 9,995,192 | (10,209,273 | ) | 1,605,629,014 | |||||||||||||||||||||||
|
Provision for loan/lease losses
|
4,078,844 | 1,869,645 | 3,044,000 | 229,181 | — | — | — | 9,221,670 | ||||||||||||||||||||||||
|
Goodwill
|
3,222,688 | — | — | — | — | — | — | 3,222,688 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Twelve Months Ended December 31, 2007
|
||||||||||||||||||||||||||||||||
|
Total revenue
|
$ | 58,138,479 | $ | 25,112,511 | $ | 8,434,430 | $ | 746,725 | $ | 3,672,501 | $ | 793,072 | $ | (907,770 | ) | $ | 95,989,948 | |||||||||||||||
|
Net interest income
|
25,234,230 | 9,627,613 | 2,930,001 | 484,812 | — | (5,246,024 | ) | 1,320,959 | 34,351,591 | |||||||||||||||||||||||
|
Income from continuing operations
attributable to QCR Holdings, Inc.
|
7,485,756 | 2,359,902 | (849,961 | ) | (127,180 | ) | 1,040,967 | (2,993,790 | ) | (415,409 | ) | 6,500,285 | ||||||||||||||||||||
|
Total assets
|
860,707,797 | 383,953,801 | 157,816,671 | 1,069,831 | — | 82,620,688 | (9,604,446 | ) | 1,476,564,342 | |||||||||||||||||||||||
|
Provision for loan/lease losses
|
485,081 | 818,401 | 727,956 | 304,080 | — | — | — | 2,335,518 | ||||||||||||||||||||||||
|
Goodwill
|
3,222,688 | — | — | — | — | — | — | 3,222,688 | ||||||||||||||||||||||||
93
Table of Contents
| Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
None.
| Item 9A. |
Controls and Procedures
|
Evaluation of disclosure controls and procedures.
An evaluation was performed under the
supervision and with the participation of the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the
Exchange Act) as of December 31, 2009. Based on that evaluation, the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s
disclosure controls and procedures were effective to ensure that information required to be
disclosed in the reports filed and submitted under the Exchange Act was recorded, processed,
summarized and reported as and when required.
Management’s Report on Internal Control over Financial Reporting.
The Company’s management is
responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial
reporting includes controls and procedures designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that: (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions of the Company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the
possibility of human error and the circumvention of overriding controls. Accordingly, even
effective internal control can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the effectiveness of internal
control may vary over time.
The Company’s management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009. Management’s assessment is based on the criteria
established in the
Internal Control — Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission and was designed to provide reasonable assurance that the
Company maintained effective internal control over financial reporting as of December 31, 2009.
Based on this assessment, management believes that the Company maintained effective internal
control over financial reporting as of December 31, 2009.
McGladrey & Pullen, LLP, the Company’s independent registered public accounting firm, has issued an
attestation report on the Company’s internal control over financial reporting as of December 31,
2009, which is included on the following page of this Form 10-K.
94
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
QCR Holdings, Inc.
QCR Holdings, Inc.
We have audited QCR Holdings, Inc. and subsidiaries’ internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). QCR
Holdings, Inc. and subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, QCR Holdings, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
95
Table of Contents
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31, 2009 and
2008, and the related consolidated statements of operations, changes in stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2009 of QCR Holdings, Inc.
and subsidiaries and our report dated March 5, 2010 expressed an unqualified opinion.
Davenport, Iowa
March 5, 2010
March 5, 2010
McGladrey & Pullen, LLP is a member firm of RSM International –
an affiliation of separate and independent legal entities.
an affiliation of separate and independent legal entities.
96
Table of Contents
Changes in Internal Control Over Financial Reporting.
During 2005, the Company underwent a
comprehensive effort to ensure compliance with the requirements under Section 404 of the
Sarbanes-Oxley Act of 2002. Continuing enhancements to the Company’s control environment were made
during 2009 as part of the Company’s ongoing
efforts to improve internal control over financial reporting. There have been no significant
changes to the Company’s
internal control over financial reporting during the period covered by this report that have
materially effected, or are reasonably likely to affect, the Company’s internal control over
financial reporting.
| Item 9B. |
Other Information
|
None.
| Item 10. |
Directors, Executive Officers and Corporate Governance
|
The information required by this item is set forth under the captions “Election of Directors,”
“Corporate Governance and the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Company’s 2010 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 Company’s 2010 Proxy Statement and is incorporated herein by reference.
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The information required by this item is set forth under the caption “Security Ownership of Certain
Beneficial Owners” in the Company’s 2010 Proxy Statement and is incorporated herein by reference,
or is presented below.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2009 for (i) all
compensation plans previously approved by the Company’s stockholders and (ii) all compensation
plans not previously approved by the Company’s stockholders:
| (a) |
the number of securities to be issued upon the exercise of outstanding options, warrants and rights;
|
||
| (b) |
the weighted-average exercise price of such outstanding options, warrants and rights; and
|
||
| (c) |
other than securities to be issued upon the exercise of such outstanding options, warrants
and rights, the number of securities remaining available for future issuance under the plans.
|
97
Table of Contents
EQUITY
COMPENSATION PLAN INFORMATION
| Number of securities | ||||||||||||
| Number of securities | Weighted-average | remaining available for | ||||||||||
| to be issued upon | exercise | future issuance under | ||||||||||
| exercise of | price of outstanding | equity compensation plans | ||||||||||
| outstanding options, | options, warrants and | (excluding securities | ||||||||||
| warrants and rights | rights | reflected in column(a)) | ||||||||||
| Plan category | (a) | (b) | (c) | |||||||||
|
|
||||||||||||
|
Equity compensation plans approved by stockholders
|
480,686 | $ | 14.35 | 143,953 | (1) | |||||||
|
|
||||||||||||
|
Equity compensation plans
not approved by stockholders
|
— | — | — | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
480,686 | $ | 14.35 | 143,953 | (1) | |||||||
|
|
||||||||||||
| (1) |
Includes 28,115 shares available under the QCR Holdings, Inc. Employee Stock Purchase
Plan.
|
| Item 13. |
Certain Relationships and Related Transactions, and Director Independence
|
The information required by this item is set forth under the captions “Security Ownership of
Certain Beneficial Owners,” “Corporate Governance and the Board of Directors,” and “Transactions
with Management and Directors” in the Company’s 2010 Proxy Statement and is incorporated herein by
reference.
| Item 14. |
Principal Accountant Fees and Services
|
The information required by this item is set forth under the caption “Independent Registered Public
Accounting Firm” in the Company’s 2010 Proxy statement and is incorporated herein by reference.
| Item 15. |
Exhibits and Financial Statement Schedules
|
| (a) |
1. Financial Statements
|
These documents are listed in the Index to Consolidated Financial Statements under Item 8.
| (a) |
2. Financial Statement Schedules
|
Financial statement schedules are omitted, as they are not required or are not
applicable, or the required information is shown in the consolidated financial statements and
the accompanying notes thereto.
98
Table of Contents
| (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
by reference to Exhibit 3.1 of the
Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2008).
|
|||
|
|
||||
| 3.2 |
Bylaws of QCR Holdings, Inc.
(incorporated herein by reference to
Exhibit 3.1 of the Registrant’s Form 8-K
dated December 20, 2007).
|
|||
|
|
||||
| 4.1 |
Warrant to Purchase Common Stock
(incorporated herein by reference to
Exhibit 4.2 of Registrant’s Form 8-K
dated February 13, 2009).
|
|||
|
|
||||
| 10.1 |
Employment Agreement between QCR
Holdings, Inc., Quad City Bank and Trust
Company and Douglas M. Hultquist dated
January 1, 2004 (incorporated herein by
reference to Exhibit 10.2 of Registrant’s
Annual Report on Form 10-K for the year
ended December 31, 2003).
|
|||
|
|
||||
| 10.2 |
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).
|
|||
|
|
||||
| 10.3 |
Employment Agreement between Cedar Rapids
Bank and Trust Company and Larry J.
Helling dated January 1, 2004
(incorporated herein by reference to
Exhibit 10.6 of Registrant’s Annual
Report on Form 10-K for the year ended
December 31, 2003).
|
|||
|
|
||||
| 10.4 |
Employment Agreement between QCR
Holdings, Inc. and Todd A. Gipple dated
January 1, 2004 (incorporated herein by
reference to Exhibit 10.11 of
Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2003).
|
|||
|
|
||||
| 10.5 |
QCR Holdings, Inc. Employee Stock
Purchase Plan (incorporated herein by
reference to Exhibit 10.1 of Registrant’s
Form S-8, file No. 333-101356 dated
November 20, 2002).
|
|||
|
|
||||
| 10.6 |
Dividend Reinvestment Plan of QCR
Holdings, Inc. (incorporated herein by
reference to Exhibit 99.1 of Registrant’s
Form S-3D, File No. 333-102699 dated
January 24, 2003).
|
|||
|
|
||||
| 10.7 |
Indenture by and between QCR Holdings,
Inc. / QCR Holdings Statutory Trust II
and U.S. Bank National Association, as
debenture and institutional trustee,
dated February 18, 2004 (incorporated
herein by reference to Exhibit 10.1 of
Registrant’s Quarterly Report on Form 10Q
for the quarter ended March 31, 2004).
|
|||
|
|
||||
| 10.8 |
Indenture by and between QCR Holdings,
Inc. / QCR Holdings Statutory Trust III
and U.S. Bank National Association, as
debenture and institutional trustee,
dated February 18, 2004 (incorporated
herein by reference to Exhibit 10.2 of
Registrant’s Quarterly Report on Form 10Q
for the quarter ended March 31, 2004).
|
|||
|
|
||||
| 10.9 |
Lease Agreement between Quad City Bank
and Trust Company and 127 North Wyman
Development, L.L.C. dated November 3,
2004 (incorporated herein by reference to
Exhibit 10.1 of Registrant’s Quarterly
Report on Form 10-Q for the period ended
September 30, 2004).
|
|||
99
Table of Contents
| Exhibit Number | Exhibit Description | |||
|
|
||||
| 10.10 |
2004 Stock Incentive Plan of QCR Holdings, Inc.
(incorporated herein by reference to Exhibit B of
Registrant’s Form Pre 14A, filed March 5, 2004, File No.
000-22208).
|
|||
|
|
||||
| 10.11 |
QCR Holdings, Inc. 2008 Equity Incentive Plan
(incorporated herein by reference to Appendix A to QCR
Holdings, Inc.’s Definitive Proxy Statement on Schedule
14A dated March 25, 2008).
|
|||
|
|
||||
| 10.12 |
Indenture by and between QCR Holdings, Inc./QCR Holdings
Statutory Trust IV and Wells Fargo Bank, National
Association, as debenture and institutional trustee,
dated May 4, 2005 (incorporated herein by reference to
Exhibit 10.1 of Registrant’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005).
|
|||
|
|
||||
| 10.13 |
Second Amended and Restated Operating Agreement between
Quad City Bank and Trust Company and John Engelbrecht
dated August 26, 2005 (incorporated herein by reference
to Exhibit 10.2 of Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005).
|
|||
|
|
||||
| 10.14 |
Indenture by and between QCR Holdings, Inc./QCR Holdings
Statutory Trust V and Wells Fargo Bank, National
Association, as debenture and institutional trustee,
dated February 24, 2006 (incorporated herein by reference
to Exhibit 10.27 of the Registrant’s Annual Report on
form 10-K for the year ended December 31, 2005).
|
|||
|
|
||||
| 10.15 |
Employment Agreement by and between QCR Holdings, Inc.,
Quad City Bank and Trust Company and Michael A. Bauer, as
amended and restated December 14, 2006 (incorporated
herein by reference to Exhibit 10.31 of the Registrant’s
Annual Report on form 10-K for the year ended
December 31, 2006).
|
|||
|
|
||||
| 10.16 |
Letter Agreement, dated February 13, 2009, by and between
QCR Holdings, Inc., and the United States Department of
the Treasury, which includes the Securities Purchase
Agreement — Standard Terms attached as Exhibit A thereto,
with respect to the issuance and sale of Fixed Rate
Cumulative Perpetual Preferred Stock, Series D, and the
Warrant to Purchase Common Stock (incorporated herein by
reference to Exhibit 10.1 of Registrant’s Form 8-K dated
February 13, 2009).
|
|||
|
|
||||
| 10.17 |
Form of Waiver, executed by each of the Company’s senior
executive officers (incorporated herein by reference to
Exhibit 10.2 of Registrant’s Form 8-K dated February 13,
2009).
|
|||
|
|
||||
| 10.18 |
Form of Omnibus Amendment, executed by the Company and
each of the Company’s senior executive officers
(incorporated herein by reference to Exhibit 10.3 of
Registrant’s Form 8-K dated February 13, 2009).
|
|||
|
|
||||
| 10.19 |
First Amendment to the Employment Agreement among QCR
Holdings, Inc., Quad City Bank and Trust Company and
Douglas M. Hultquist dated December 27, 2008
(incorporated by reference to Exhibit 10.19 of the
Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2008).
|
|||
|
|
||||
| 10.20 |
First Amendment to the Employment Agreement between Cedar
Rapids Bank and Trust Company and Larry J. Helling dated
December 30, 2008 (incorporated by reference to
Exhibit 10.20 of the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2008).
|
|||
100
Table of Contents
| Exhibit Number | Exhibit Description | |||
|
|
||||
| 10.21 |
First Amendment to the Employment Agreement between QCR Holdings,
Inc. and Todd A. Gipple dated December 30, 2008 (incorporated by
reference to Exhibit 10.21 of the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2008).
|
|||
|
|
||||
| 10.22 |
Executive Deferred Compensation Plan of QCR Holdings, Inc.
(incorporated by reference to Exhibit 10.22 of the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2008).
|
|||
|
|
||||
| 10.23 |
Executive Deferred Compensation Plan Participation Agreement among
QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M.
Hultquist dated October 24, 2008 (incorporated by reference to
Exhibit 10.23 of the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2008).
|
|||
|
|
||||
| 10.24 |
Executive Deferred Compensation Plan Participation Agreement between
Cedar Rapids Bank and Trust Company and Larry J. Helling dated
October 24, 2008 (incorporated by reference to Exhibit 10.24 of the
Registrant’s Annual Report on Form 10-K for the year ended December
31, 2008).
|
|||
|
|
||||
| 10.25 |
Executive Deferred Compensation Plan Participation Agreement between
QCR Holdings, Inc. and Todd A. Gipple dated October 24, 2008
(incorporated by reference to Exhibit 10.25 of the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2008).
|
|||
|
|
||||
| 10.26 |
Executive Deferred Compensation Plan Participation Agreement between
Quad City Bank and Trust Company and Michael A. Bauer dated
December 31, 2008 (incorporated by reference to Exhibit 10.26 of the
Registrant’s Annual Report on Form 10-K for the year ended December
31, 2008).
|
|||
|
|
||||
| 10.27 |
Amended and Restated Non-Qualified Supplemental Executive Retirement
Plan of QCR Holdings, Inc. (incorporated by reference to
Exhibit 10.27 of the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2008).
|
|||
|
|
||||
| 10.28 |
Non-Qualified Supplemental Executive Retirement Plan Joinder
Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company
and Douglas M. Hultquist dated December 31, 2008 (incorporated by
reference to Exhibit 10.28 of the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2008).
|
|||
|
|
||||
| 10.29 |
Non-Qualified Supplemental Executive Retirement Plan Joinder
Agreement between Cedar Rapids Bank and Trust Company and Larry J.
Helling dated December 31, 2008 (incorporated by reference to
Exhibit 10.29 of the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2008).
|
|||
|
|
||||
| 10.30 |
Non-Qualified Supplemental Executive Retirement Plan Joinder
Agreement between QCR Holdings, Inc. and Todd A. Gipple dated
December 31, 2008 (incorporated by reference to Exhibit 10.30 of the
Registrant’s Annual Report on Form 10-K for the year ended December
31, 2008).
|
|||
|
|
||||
| 10.31 |
Non-Qualified Supplemental Executive Retirement Plan Joinder
Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company
and Michael A. Bauer dated December 31, 2008 (incorporated by
reference to Exhibit 10.31 of the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2008).
|
|||
|
|
||||
| 10.32 |
2005 Deferred Income Plan of QCR Holdings, as amended and restated
on October 23, 2008 (incorporated by reference to Exhibit 10.32 of
the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2008).
|
|||
101
Table of Contents
| Exhibit Number | Exhibit Description | |||
|
|
||||
| 21.1 |
Subsidiaries of QCR Holdings, Inc. (exhibit is being filed herewith).
|
|||
|
|
||||
| 23.1 |
Consent of Independent Registered Public Accounting Firm — McGladrey
& Pullen, LLP (exhibit is being filed herewith).
|
|||
|
|
||||
| 31.1 |
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a) (exhibit is being filed herewith).
|
|||
|
|
||||
| 31.2 |
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a) (exhibit is being filed herewith).
|
|||
|
|
||||
| 32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).
|
|||
|
|
||||
| 32.2 |
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).
|
|||
|
|
||||
| 99.1 |
Certification of Chief Executive Officer pursuant to Section 111(b)
of the Emergency Economic Stabilization Act of 2008 (exhibit is
being filed herewith).
|
|||
|
|
||||
| 99.2 |
Certification of Chief Financial Officer pursuant to Section 111(b)
of the Emergency Economic Stabilization Act of 2008 (exhibit is
being filed herewith).
|
|||
102
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| QCR HOLDINGS, INC. | ||||
| Dated: March 5, 2010 | By: | /s/ Douglas M. Hultquist | ||
| Douglas M. Hultquist | ||||
| President and Chief Executive Officer | ||||
| Dated: March 5, 2010 | By: | /s/ Todd A. Gipple | ||
| Todd A. Gipple | ||||
|
Executive Vice President, Chief
Operating Officer,
and Chief Financial Officer |
||||
103
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant in the capacities and on the dates
indicated.
| Signature | Title | Date | ||
|
|
||||
|
/s/ James J. Brownson
|
Chairman of the Board of Directors | March 5, 2010 | ||
|
|
||||
|
/s/ Douglas M. Hultquist
|
President, Chief Executive Officer and Director | March 5, 2010 | ||
|
|
||||
|
/s/ Todd A. Gipple
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ Larry J. Helling
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ Mark C. Kilmer
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ John K. Lawson
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ Charles M. Peters
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ Ronald G. Peterson
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ John A. Rife
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ Donna J. Sorensen, J.D.
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ John D. Whitcher
|
Director | March 5, 2010 | ||
|
|
||||
|
/s/ Marie Z. Ziegler
|
Director | March 5, 2010 |
104
Table of Contents
APPENDIX A
SUPERVISION AND REGULATION
General
Financial institutions, their holding companies and their affiliates are extensively regulated
under federal and state law. As a result, the growth and earnings performance of the Company may
be affected not only by management decisions and general economic conditions, but also by the
requirements of federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Iowa Superintendent of Banking (the “Iowa Superintendent”),
the State of Illinois Department of Financial and Professional Regulation (the “Illinois DFPR”),
the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal
Deposit Insurance Corporation (the “FDIC”). Furthermore, taxation laws administered by the
Internal Revenue Service and state taxing authorities and securities laws administered by the
Securities and Exchange Commission (the “SEC”) and state securities authorities have an impact on
the business of the Company. The effect of these statutes, regulations and regulatory policies may
be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions
regulate, among other things, the scope of business, the kinds and amounts of investments, reserve
requirements, capital levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the respective operations
of the Company and its subsidiaries and is intended primarily for the protection of the
FDIC-insured deposits and depositors of the Banks, rather than shareholders. In addition to this
generally applicable regulatory framework, turmoil in the credit markets in recent years has
prompted the enactment of unprecedented legislation that has allowed the United States Department
of the Treasury (“Treasury”) to make equity capital available to qualifying financial institutions
to help restore confidence and stability in the U.S. financial markets, which imposes additional
requirements on institutions in which the U.S. Treasury invests.
The following is a summary of the material elements of the regulatory framework that currently
applies to the Company and its subsidiaries. It does not describe all of the statutes, regulations
and regulatory policies that apply, nor does it restate all of the requirements of those that are
described. Additionally, in response to the global financial crisis that began in 2007, various
legislative and regulatory proposals have been issued addressing, among other things, the
restructuring of the federal bank regulatory system, more stringent regulation of consumer products
such as mortgages and credit cards, and safe and sound compensation practices. At this time, the
Company is unable to determine whether any of these proposals will be adopted as proposed. As
such, the following is qualified in its entirety by reference to applicable law. Any change in
statutes, regulations or regulatory policies may have a material effect on the business of the
Company and its subsidiaries.
Table of Contents
The Company
General.
The Company, as the sole shareholder of the Banks (as defined below), is a bank
holding company. As a bank holding company, the Company is registered with, and is subject to
regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the
“BHCA”). In accordance with Federal Reserve policy, the Company is expected to act as a source of
financial strength to the Banks and to commit resources to support the Banks in circumstances where
the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with the Federal Reserve
periodic reports of the Company’s operations and such additional information regarding the Company
and its subsidiaries as the Federal Reserve may require.
Acquisitions, Activities and Change in Control.
The primary purpose of a bank holding company
is to control and manage banks. The BHCA generally requires the prior approval of the Federal
Reserve for any merger involving a bank holding company or any acquisition by a bank holding
company of another bank or bank holding company. Subject to certain conditions (including deposit
concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company
to acquire banks located in any state of the United States. In approving interstate acquisitions,
the Federal Reserve is required to give effect to applicable state law limitations on the aggregate
amount of deposits that may be held by the acquiring bank holding company and its insured
depository institution affiliates in the state in which the target bank is located (provided that
those limits do not discriminate against out-of-state depository institutions or their holding
companies) and state laws that require that the target bank have been in existence for a minimum
period of time (not to exceed five years) before being acquired by an out-of-state bank holding
company.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank and from engaging in
any business other than that of banking, managing and controlling banks or furnishing services to
banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own shares of companies
engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking
as to be a proper incident thereto.” This authority would permit the Company to engage in a
variety of banking-related businesses, including the ownership and operation of a thrift, or any
entity engaged in 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.
Table of Contents
Additionally, bank holding companies that meet certain eligibility requirements prescribed by
the BHCA and elect to operate as financial holding companies may engage in, or own shares in
companies engaged in, a wider range of nonbanking activities, including securities and insurance
underwriting and sales, merchant banking and any other activity that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such financial activity
and does not pose a substantial risk to the safety or soundness of depository institutions or the
financial system generally. As of the date of this filing, the Company has not applied for
approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured
depository institution or its holding company without prior notice to the appropriate federal bank
regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the
outstanding voting securities of a bank or bank holding company, but may arise under certain
circumstances between 10% and 24.99% ownership.
Capital Requirements.
Bank holding companies are required to maintain minimum levels of
capital in accordance with Federal Reserve capital adequacy guidelines. If capital levels fall
below the minimum required levels, a bank holding company, among other things, may be denied
approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve’s capital guidelines establish the following minimum regulatory capital
requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of
total assets weighted according to risk; and (ii) a leverage requirement expressed as a percentage
of total assets. The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of
4%. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes
of these capital standards, Tier 1 capital consists primarily of permanent stockholders’ equity
less intangible assets (other than certain loan servicing rights and purchased credit card
relationships). Total capital consists primarily of Tier 1 capital plus Tier 2 capital, which
consists of other non-permanent capital items such as certain other debt and equity instruments
that do not qualify as Tier 1 capital and a portion of the Company’s allowance for loan and lease
losses.
The risk-based and leverage standards described above are minimum requirements. Higher capital
levels will be required if warranted by the particular circumstances or risk profiles of individual
banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that
additional capital may be required to take adequate account of, among other things, interest rate
risk, or the risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or anticipating significant
growth would be expected to maintain capital ratios, including tangible capital positions (
i.e.
,
Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31,
2009, the Company had regulatory capital in excess of the Federal Reserve’s minimum requirements.
Table of Contents
Emergency Economic Stabilization Act of 2008.
Events in the U.S. and global financial markets
over the past several years, including the deterioration of the worldwide credit markets, have
created significant challenges for financial institutions throughout the country. In response to
this crisis affecting the U.S. banking system and financial markets, on October 3, 2008, the U.S.
Congress passed, and the President signed into law, the Emergency Economic Stabilization Act of
2008 (the “EESA”). The EESA authorized the Secretary of the Treasury to implement various
temporary emergency programs designed to strengthen the capital positions of financial institutions
and stimulate the availability of credit within the U.S. financial system. Financial institutions
participating in certain of the programs established under the EESA are required to adopt
Treasury’s standards for executive compensation and corporate governance.
The TARP Capital Purchase Program.
On October 14, 2008, Treasury announced that it would
provide Tier 1 capital (in the form of perpetual preferred stock) to eligible financial
institutions. This program, known as the TARP Capital Purchase Program (the “CPP”), allocated $250
billion from the $700 billion authorized by the EESA to Treasury for the purchase of senior
preferred shares from qualifying financial institutions (the “CPP Preferred Stock”). Under the
program, eligible institutions were able to sell equity interests to the Treasury in amounts equal
to between 1% and 3% of the institution’s risk-weighted assets. The CPP Preferred Stock is
non-voting and pays dividends at the rate of 5% per annum for the first five years and thereafter
at a rate of 9% per annum. In conjunction with the purchase of the CPP Preferred Stock, Treasury
received warrants to purchase common stock from the participating public institutions with an
aggregate market price equal to 15% of the preferred stock investment. Participating financial
institutions are required to adopt Treasury’s standards for executive compensation and corporate
governance for the period during which Treasury holds equity issued under the CPP.
Pursuant to the CPP, on February 13, 2009, the Company entered into a Letter Agreement with
Treasury, pursuant to which the Company issued (i) 38,237 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series D and (ii) a warrant to purchase 521,888 shares of the
Company’s common stock for an aggregate purchase price of $38.237 million in cash. The Company’s
federal regulators, the Treasury and the Treasury’s Office of the Inspector General maintain
significant oversight over the Company as a participating institution, to evaluate how it is using
the capital provided and to ensure that it strengthens its efforts to help its borrowers avoid
foreclosure, which is one of the core aspects of the EESA.
Table of Contents
Dividend Payments.
The Company’s ability to pay dividends to its shareholders may be affected
by both general corporate law considerations and policies of the Federal Reserve applicable to bank
holding companies
.
As a Delaware corporation, the Company is subject to the limitations of the
Delaware General Corporation Law (the “DGCL”), which allow the Company to pay dividends only out of
its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the
Company has no such surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Additionally, policies of the Federal Reserve caution
that a bank holding company should not pay cash dividends unless its net income available to common
shareholders over the past year has been sufficient to fully fund the dividends and the prospective
rate of earnings retention appears consistent with its capital needs, asset quality, and overall
financial condition. The Federal Reserve also possesses enforcement powers over bank holding
companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or
unsound practices or violations of applicable statutes and regulations. Among these powers is the
ability to proscribe the payment of dividends by banks and bank holding companies. Further, with
respect to the Company’s participation in the CPP, the terms of the CPP Preferred Stock provide
that no dividends on any common or preferred stock that ranks equal to or junior to the CPP
Preferred Stock may be paid unless and until all accrued and unpaid dividends for all past dividend
periods on the CPP Preferred Stock have been fully paid.
Federal Securities Regulation.
The Company’s common stock is registered with the SEC under
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the SEC under the Exchange Act.
The Banks
Quad City Bank and Trust Company (“Quad City Bank & Trust”) and Cedar Rapids Bank and Trust
Company (“Cedar Rapids Bank & Trust”) are chartered under Iowa law (collectively, the “Iowa Banks”)
and Rockford Bank and Trust Company (“Rockford Bank & Trust”) is chartered under Illinois law
(collectively, the “Banks”). The deposit accounts of the Banks are insured by the FDIC’s Deposit
Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations. The
Banks are also members of the Federal Reserve System (“member banks”).
As Iowa-chartered, FDIC-insured member banks, the Iowa Banks are subject to the examination,
supervision, reporting and enforcement requirements of the Iowa Superintendent, as the chartering
authority for Iowa banks. As an Illinois-chartered, FDIC-insured member bank, Rockford Bank &
Trust is subject to the examination, supervision, reporting and enforcement requirements of the
Illinois DFPR, as the chartering authority for Illinois banks. The Banks are also subject to the
examination, reporting and enforcement requirements of the Federal Reserve, as the primary federal
regulator of member banks. In addition, the FDIC, as administrator of the DIF, has regulatory
authority over the Banks.
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Deposit Insurance.
As FDIC-insured institutions, the Banks are required to pay deposit
insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system
whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk
classification. An institution’s risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators. Under the regulations of
the FDIC, as presently in effect, insurance assessments range from 0.07% to 0.78% of total
deposits, depending on an institution’s risk classification, its levels of unsecured debt and
secured liabilities, and, in certain cases, its level of brokered deposits.
Furthermore, as a result of the increased volume of bank failures in 2008 and 2009, on May 22,
2009, the FDIC approved a final rule imposing a special assessment on all depository institutions
whose deposits are insured by the FDIC. This one-time special assessment was imposed on
institutions in the second quarter, and was collected on September 30, 2009. Pursuant to the final
rule, the FDIC imposed on the Banks special assessments in the collective amount of $794 thousand,
which was due and payable on September 30, 2009.
On November 12, 2009, the FDIC adopted a final rule that required insured depository
institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for
the fourth quarter of 2009 and for all of 2010, 2011, and 2012. On December 30, 2009, the Banks
collectively paid the FDIC $8.8 million in prepaid assessments. The FDIC determined each
institution’s prepaid assessment based on the institution’s: (i) actual September 30, 2009
assessment base, increased quarterly by a 5 percent annual growth rate through the fourth quarter
of 2012; and (ii) total base assessment rate in effect on September 30, 2009, increased by an
annualized 3 basis points beginning in 2011. The FDIC will begin to offset prepaid assessments on
March 30, 2010, representing payment of the regular quarterly risk-based deposit insurance
assessment for the fourth quarter of 2009. Any prepaid assessment not exhausted after collection
of the amount due on June 30, 2013, will be returned to the institution.
FDIC Temporary Liquidity Guarantee Program
. In conjunction with Treasury’s actions to address
the credit and liquidity crisis in financial markets, on October 14, 2008, the FDIC announced the
Temporary Liquidity Guarantee Program. One component of the Temporary Liquidity Guarantee Program
is the Transaction Account Guarantee Program, which temporarily provides participating institutions
with unlimited deposit insurance coverage for non-interest bearing and certain low-interest bearing
transaction accounts maintained at FDIC insured institutions. All institutions that did not opt
out of the Transaction Account Guarantee Program were subject to a 10 basis point per annum
assessment on amounts in excess of $250,000 in covered transaction accounts through December 31,
2009. On August 26, 2009, the FDIC extended the Transaction Account Guarantee Program for an
additional six months through June 30, 2010. Beginning January 1, 2010, the assessment levels
increased to 15 basis points, 20 basis points or 25 basis points per annum, based on the risk
category to which an institution is assigned for purposes of the risk-based premium system. The
Banks did not opt out of the six-month extension of the Transaction Account Guarantee Program. As
a result, the Banks, like every other FDIC-insured depository institution in the United States that
did not opt out of the Transaction Account Guarantee Program, are incurring fees on amounts in
excess of $250,000 in covered transaction accounts.
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FICO Assessments.
The Financing Corporation (“FICO”) is a mixed-ownership governmental
corporation chartered by the former Federal Home Loan Bank Board pursuant to the Federal Savings
and Loan Insurance Corporation Recapitalization Act of 1987 to function as a financing vehicle for
the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued
30-year non-callable bonds of approximately $8.2 billion that mature by 2019. Since 1996, federal
legislation has required that all FDIC-insured depository institutions pay assessments to cover
interest payments on FICO’s outstanding obligations. These FICO assessments are in addition to
amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2009, the
FICO assessment rate was approximately 0.01% of deposits.
Supervisory Assessments.
Each of the Banks is required to pay supervisory assessments to its
respective state banking regulator to fund the operations of that agency. The amount of the
assessment payable by each Bank is calculated on the basis of that Bank’s total assets. During the
year ended December 31, 2009, the Iowa Banks paid supervisory assessments to the Iowa
Superintendent totaling $146 thousand and Rockford Bank & Trust paid supervisory assessments to the
Illinois DFPR totaling $32 thousand.
Capital Requirements.
Banks are generally required to maintain capital levels in excess of
other businesses. The Federal Reserve has established the following minimum capital standards for
state-chartered insured member banks, such as the Banks: (i) a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a
minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum
ratio of Tier 1 capital to total risk-weighted assets of 4%. In general, the components of Tier 1
capital and total capital are the same as those for bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher capital levels will
be required if warranted by the particular circumstances or risk profiles of individual
institutions. For example, Federal Reserve regulations provide that additional capital may be
required to take adequate account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading activities.
Further, federal law and regulations provide various incentives for financial institutions to
maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a
financial institution that is “well-capitalized” may qualify for exemptions from prior notice or
application requirements otherwise applicable to certain types of activities and may qualify for
expedited processing of other required notices or applications. Additionally, one of the criteria
that determines a bank holding company’s eligibility to operate as a financial holding company is a
requirement that all of its financial institution subsidiaries be “well-capitalized.” Under the
regulations of the Federal Reserve, in order to be “well-capitalized” a financial institution must
maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier
1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total
assets of 5% or greater.
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Federal law also provides the federal banking regulators with broad power to take prompt
corrective action to resolve the problems of undercapitalized institutions. The extent of the
regulators’ powers depends on whether the institution in question is “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case
as defined by regulation. Depending upon the capital category to which an institution is assigned,
the regulators’ corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institution’s asset growth and restricting its activities;
(iii) requiring the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates;
(v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election
of directors of the institution; (vii) requiring that senior executive officers or directors be
dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of
principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the
institution.
As of December 31, 2009: (i) none of the Banks was subject to a directive from the Federal
Reserve to increase its capital to an amount in excess of the minimum regulatory capital
requirements; (ii) each of the Banks exceeded its minimum regulatory capital requirements under
Federal Reserve capital adequacy guidelines; and (iii) each of the Banks was “well-capitalized,” as
defined by Federal Reserve regulations.
Liability of Commonly Controlled Institutions.
Under federal law, institutions insured by the
FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with the default of commonly controlled FDIC-insured depository institutions or any
assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in
danger of default. Because the Company controls each of the Banks, the Banks are commonly
controlled for purposes of these provisions of federal law.
Dividend Payments.
The primary source of funds for the Company is dividends from the Banks.
In general, the Banks may only pay dividends either out of their historical net income after any
required transfers to surplus or reserves have been made or out of their retained earnings. The
Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state
member banks, such as the Banks. Without prior Federal Reserve approval, a state member bank may
not pay dividends in any calendar year that, in the aggregate, exceed the bank’s calendar
year-to-date net income plus the bank’s retained net income for the two preceding calendar years.
The payment of dividends by any financial institution is affected by the requirement to
maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a
financial institution generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described above, each of the Banks exceeded
its minimum capital requirements under applicable guidelines as of December 31, 2009.
Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit
the payment of any dividends by the Banks if the Federal Reserve determines such payment would
constitute an unsafe or unsound practice.
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Insider Transactions.
The Banks are subject to certain restrictions imposed by federal law on
extensions of credit to the Company and its subsidiaries, on investments in the stock or other
securities of the Company and its subsidiaries and the acceptance of the stock or other securities
of the Company or its subsidiaries as collateral for loans made by the Banks. Certain limitations
and reporting requirements are also placed on extensions of credit by the Banks to their respective
directors and officers, to directors and officers of the Company and its subsidiaries, to principal
shareholders of the Company and to “related interests” of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the terms upon which any person
who is a director or officer of the Company or any of its subsidiaries or a principal shareholder
of the Company may obtain credit from banks with which the Banks maintain correspondent
relationships.
Safety and Soundness Standards.
The federal banking agencies have adopted guidelines that
establish operational and managerial standards to promote the safety and soundness of federally
insured depository institutions. The guidelines set forth standards for internal controls,
information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to achieve those
goals. If an institution fails to comply with any of the standards set forth in the guidelines,
the institution’s primary federal regulator may require the institution to submit a plan for
achieving and maintaining compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has been accepted by its
primary federal regulator, the regulator is required to issue an order directing the institution to
cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator
may restrict the institution’s rate of growth, require the institution to increase its capital,
restrict the rates the institution pays on deposits or require the institution to take any action
the regulator deems appropriate under the circumstances. Noncompliance with the standards
established by the safety and soundness guidelines may also constitute grounds for other
enforcement action by the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority.
The Iowa Banks have the authority under Iowa law to establish branches
anywhere in the State of Iowa, subject to receipt of all required regulatory approvals. In 1997,
the Company formed a de novo Illinois bank that was merged into Quad City Bank & Trust, resulting
in the Quad City Bank & Trust establishing a branch office in Illinois. Under Illinois law, Quad
City Bank & Trust may continue to establish offices in Illinois to the same extent permitted for an
Illinois bank (subject to certain conditions, including certain regulatory notice requirements).
Similarly, Rockford Bank & Trust has the authority under Illinois law to establish branches
anywhere in the State of Illinois, subject to receipt of all required regulatory approvals.
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Federal law permits state and national banks to merge with banks in other states subject to:
(i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law
limitations requiring the merging bank to have been in existence for a minimum period of time (not
to exceed five years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is permitted only in those states the laws of which expressly
authorize such expansion.
State Bank Investments and Activities.
Each of the Banks generally is permitted to make
investments and engage in activities directly or through subsidiaries as authorized by the laws of
the state under which it is chartered. However, under federal law and FDIC regulations,
FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining
equity investments of a type, or in an amount, that are not permissible for a national bank.
Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that is not permitted for
a national bank unless the bank meets, and continues to meet, its minimum regulatory capital
requirements and the FDIC determines the activity would not pose a significant risk to the deposit
insurance fund of which the bank is a member. These restrictions have not had, and are not
currently expected to have, a material impact on the operations of the Banks.
Federal Reserve System.
Federal Reserve regulations, as presently in effect, require
depository institutions to maintain reserves against their transaction accounts (primarily NOW and
regular checking accounts), as follows: for transaction accounts aggregating $55.2 million or less,
the reserve requirement is 3% of total transaction accounts; and for transaction accounts
aggregating in excess of $55.2 million, the reserve requirement is $1.335 million plus 10% of the
aggregate amount of total transaction accounts in excess of $55.2 million. The first $10.7 million
of otherwise reservable balances are exempted from the reserve requirements. These reserve
requirements are subject to annual adjustment by the Federal Reserve. We believe that the Banks
will continue to maintain compliance with the foregoing requirements.
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Appendix B
GUIDE 3 INFORMATION
The following tables and schedules show selected comparative financial information required by the
Securities and Exchange Commission Securities Act Guide 3, regarding the business of QCR Holdings,
Inc. (the “Company”) for the periods shown.
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
The information requested is disclosed in Management’s Discussion and Analysis section of the the
Company’s Form 10-K for the fiscal year ended December 31, 2009
C. Analysis of Changes of Interest Income/Interest Expense
The information requested is disclosed in Management’s Discussion and Analysis section of the the
Company’s Form 10-K for the fiscal year ended December 31, 2009
B-1
Table of Contents
II. Investment Portfolio
A. Investment Securities
The following tables present the amortized cost and fair value of investment securities as of
December 31, 2009, 2008, and 2007
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | (Losses) | Value | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
Securities held to maturity:
|
||||||||||||||||
|
Other bonds
|
$ | 350 | $ | — | $ | — | $ | 350 | ||||||||
|
|
||||||||||||||||
|
Totals
|
$ | 350 | $ | — | $ | — | $ | 350 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. gov’t.sponsored agency securities
|
$ | 345,623 | $ | 1,525 | $ | (2,124 | ) | $ | 345,024 | |||||||
|
Residential mortgage-backed securities
|
481 | 15 | — | 496 | ||||||||||||
|
Municipal securities
|
22,006 | 923 | (79 | ) | 22,850 | |||||||||||
|
Trust preferred securities
|
200 | — | (101 | ) | 99 | |||||||||||
|
Other securities
|
1,642 | 67 | (8 | ) | 1,701 | |||||||||||
|
|
||||||||||||||||
|
Totals
|
$ | 369,952 | $ | 2,530 | $ | (2,312 | ) | $ | 370,170 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2008
|
||||||||||||||||
|
|
||||||||||||||||
|
Securities held to maturity:
|
||||||||||||||||
|
Other bonds
|
$ | 350 | $ | — | $ | — | $ | 350 | ||||||||
|
|
||||||||||||||||
|
Totals
|
$ | 350 | $ | — | $ | — | $ | 350 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. Treasury securities
|
$ | 4,318 | $ | 71 | $ | — | $ | 4,389 | ||||||||
|
U.S. gov’t.sponsored agency securities
|
220,560 | 5,773 | (90 | ) | 226,243 | |||||||||||
|
Residential mortgage-backed securities
|
803 | 6 | (1 | ) | 808 | |||||||||||
|
Municipal securities
|
23,259 | 308 | (219 | ) | 23,348 | |||||||||||
|
Trust preferred securities
|
200 | — | (35 | ) | 165 | |||||||||||
|
Other securities
|
1,133 | 18 | (378 | ) | 773 | |||||||||||
|
|
||||||||||||||||
|
Totals
|
$ | 250,273 | $ | 6,176 | $ | (723 | ) | $ | 255,726 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2007
|
||||||||||||||||
|
|
||||||||||||||||
|
Securities held to maturity:
|
||||||||||||||||
|
Other bonds
|
$ | 350 | $ | — | $ | — | $ | 350 | ||||||||
|
|
||||||||||||||||
|
Totals
|
$ | 350 | $ | — | $ | — | $ | 350 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. Treasury securities
|
$ | 3,304 | $ | 59 | $ | — | $ | 3,363 | ||||||||
|
U.S. gov’t.sponsored agency securities
|
182,680 | 3,718 | (28 | ) | 186,370 | |||||||||||
|
Residential mortgage-backed securities
|
1,600 | 6 | (8 | ) | 1,598 | |||||||||||
|
Municipal securities
|
25,119 | 490 | (39 | ) | 25,570 | |||||||||||
|
Corporate securities
|
1,865 | 12 | — | 1,877 | ||||||||||||
|
Trust preferred securities
|
200 | — | — | 200 | ||||||||||||
|
Other securities
|
1,201 | 64 | (36 | ) | 1,229 | |||||||||||
|
|
||||||||||||||||
|
Totals
|
$ | 215,969 | $ | 4,349 | $ | (111 | ) | $ | 220,207 | |||||||
|
|
||||||||||||||||
| NOTE: |
Stock of the Federal Home Loan Bank and
Federal Reserve Bank are not included in the above.
The Company reports these investments with Other Assets on the consolidated balance sheets.
Following is the carrying value as of December 31, 2009, 2008,
and 2007:
|
| As of December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (dollars in thousands) | ||||||||||||
|
|
||||||||||||
|
Federal Home Loan Bank
|
$ | 11,813 | $ | 11,796 | $ | 9,562 | ||||||
|
Federal Reserve Bank
|
3,397 | 2,264 | 1,986 | |||||||||
|
|
||||||||||||
|
Totals
|
$ | 15,210 | $ | 14,060 | $ | 11,548 | ||||||
|
|
||||||||||||
B-2
Table of Contents
B. Investment Securities, Maturities, and Yields
The following table presents the maturity of securities held on December 31, 2009 and the weighted
average stated coupon rates by range of maturity:
| Weighted | ||||||||
| Amortized | Average | |||||||
| Cost | Yield | |||||||
| (dollars in thousands) | ||||||||
|
|
||||||||
|
U.S. gov’t.sponsored agency securities:
|
||||||||
|
Within 1 year
|
$ | 14,975 | 3.22 | % | ||||
|
After 1 but within 5 years
|
148,832 | 2.93 | % | |||||
|
After 5 but within 10 years
|
114,775 | 4.49 | % | |||||
|
After 10 years
|
67,041 | 5.46 | % | |||||
|
|
||||||||
|
|
||||||||
|
Total
|
$ | 345,623 | 3.95 | % | ||||
|
|
||||||||
|
|
||||||||
|
Residential mortgage-backed securities:
|
||||||||
|
Within 1 year
|
$ | 371 | 4.50 | % | ||||
|
After 1 but within 5 years
|
110 | 6.00 | % | |||||
|
|
||||||||
|
|
||||||||
|
Total
|
$ | 481 | 4.84 | % | ||||
|
|
||||||||
|
|
||||||||
|
Municipal securities:
|
||||||||
|
Within 1 year
|
$ | 624 | 5.28 | % | ||||
|
After 1 but within 5 years
|
7,449 | 4.62 | % | |||||
|
After 5 but within 10 years
|
6,199 | 3.90 | % | |||||
|
After 10 years
|
7,734 | 4.61 | % | |||||
|
|
||||||||
|
|
||||||||
|
Total
|
$ | 22,006 | 4.43 | % | ||||
|
|
||||||||
|
|
||||||||
|
Trust preferred securities:
|
||||||||
|
After 10 years
|
$ | 200 | 7.80 | % | ||||
|
|
||||||||
|
|
||||||||
|
Other bonds:
|
||||||||
|
Within 1 year
|
$ | 50 | 4.70 | % | ||||
|
After 1 but within 5 years
|
250 | 5.63 | % | |||||
|
After 5 but within 10 years
|
50 | 5.43 | % | |||||
|
|
||||||||
|
|
||||||||
|
Total
|
$ | 350 | 5.47 | % | ||||
|
|
||||||||
|
|
||||||||
|
Other securities with no maturity or stated face rate
|
$ | 1,642 | ||||||
|
|
||||||||
| NOTE: | Yields above are computed on a tax equivalent basis. |
C. As of December 31, 2009, there were no securities with aggregate book value and market value
purchased from a single issuer (as defined by Sction 2(4) of the Securities Act of 1933) that
exceeded 10% of stockholders’ equity.
B-3
Table of Contents
III. Loan/Lease Portfolio
A. Types of Loans/Leases
The information requested is disclosed in Management’s Discussion and Analysis section of the the Company’s Form 10-K
for the fiscal year ended December 31, 2009
B. Maturities and Sensitivities of Loans/Leases to Changes in Interest Rates
The information requested is disclosed in Management’s Discussion and Analysis section of the the Company’s Form 10-K
for the fiscal year ended December 31, 2009
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans/Leases
The information requested is disclosed in Management’s Discussion and Analysis section of the the Company’s Form 10-K
for the fiscal year ended December 31, 2009
2. Potential Problem Loans/Leases.
To management’s best knowledge, there are no such significant loans/leases that have not been disclosed in the table
presented in the Management’s Discussion and Analysis section of the Company’s Form 10-K for the fiscal year ended
December 31, 2009.
3. Foreign Outstandings. None.
4. Loan/Lease Concentrations.
As of December 31, 2009, there was a single concentration of loans/leases exceeding 10% of total loans/leases, which is not
otherwise disclosed in Item III. A. That concentration is Lessors of Non-Residential Buildings & Dwellings at 14.8%.
D. Other Interest-Bearing Assets
As of December 31, 2009, there are no interest-bearing assets required to be disclosed in this Appendix
IV. Summary of Loan/Lease Loss Experience
A. Analysis of the Allowance for Estimated Losses on Loans/Leases
The information requested is disclosed in Management’s Discussion and Analysis section of the the Company’s Form 10-K
for the fiscal year ended December 31, 2009
B. Allocation of the Allowance for Estimated Losses on Loans/Leases
The information requested is disclosed in Management’s Discussion and Analysis section of the the Company’s Form 10-K
for the fiscal year ended December 31, 2009
B-4
Table of Contents
V. Deposits.
The average amount of and average rate paid for the categories of deposits for the years ended December 31, 2009, 2008,
and 2007 are included in the consolidated average balance sheets and can be found in the Management’s Discussion
and Analysis section of the Company’s Form 10-K for the fiscal year ended December 31, 2009.
The Company has no deposits by foreign depositors in domestic offices as of December 31, 2009.
Included in interest bearing deposits at December 31, 2009, were certificates of deposit totaling $327,780,800 that were
$100,000 or greater. Maturities of these certificates were as follows:
| December 31, | ||||
| 2009 | ||||
| (Dollars in Thousands) | ||||
|
One to three months
|
$ | 154,950 | ||
|
Three to six months
|
62,088 | |||
|
Six to twelve months
|
53,112 | |||
|
Over twelve months
|
57,631 | |||
|
|
||||
|
|
||||
|
Total certificates of
deposit greater than $100,000
|
$ | 327,781 | ||
|
|
||||
VI. Return on Equity and Assets.
The following tables present the return on assets and equity and the equity to assets ratio of the Company:
| Years ended | ||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
|
Average total assets
|
$ | 1,724,647 | $ | 1,552,748 | $ | 1,351,482 | ||||||
|
Average equity
|
123,814 | 89,803 | 76,576 | |||||||||
|
Net income attributable to QCR Holdings, Inc.
|
1,772 | 6,709 | 5,777 | |||||||||
|
Return on average assets
|
0.10 | % | 0.43 | % | 0.43 | % | ||||||
|
Return on average common equity
|
-2.84 | % | 7.07 | % | 7.40 | % | ||||||
|
Return on average total equity
|
1.43 | % | 7.47 | % | 7.55 | % | ||||||
|
Dividend payout ratio
|
-17.39 | % | 7.48 | % | 7.77 | % | ||||||
|
Average equity to average assets ratio
|
7.18 | % | 5.78 | % | 5.66 | % | ||||||
B-5
Table of Contents
VII. Short Term Borrowings.
The following tables present the information requested on short-term borrowings of the Company:
Short-term borrowings as of December 31, 2009, 2008, and 2007 are summarized as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Overnight repurchase agreements with customers
|
$ | 94,089,571 | $ | 68,106,950 | $ | 80,264,021 | ||||||
|
Federal funds purchased
|
56,810,000 | 33,350,000 | 89,940,000 | |||||||||
|
|
||||||||||||
|
|
$ | 150,899,571 | $ | 101,456,950 | $ | 170,204,021 | ||||||
|
|
||||||||||||
Information concerning overnight repurchase agreements with customers is summarized as
follows:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Average daily balance during the period
|
$ | 95,831,160 | $ | 74,463,649 | $ | 73,832,762 | ||||||
|
Average daily interest rate during the period
|
0.62 | % | 1.54 | % | 3.21 | % | ||||||
|
Maximum month-end balance during the period
|
$ | 128,943,849 | $ | 86,536,776 | $ | 85,831,232 | ||||||
|
Weighted average rate as of end of period
|
0.67 | % | 1.35 | % | 2.51 | % | ||||||
|
Securities underlying the agreements as of end of period:
|
||||||||||||
|
Carrying value
|
$ | 158,514,084 | $ | 96,137,434 | $ | 99,567,226 | ||||||
|
Fair value
|
158,514,084 | 96,137,434 | 99,567,226 | |||||||||
Information concerning federal funds purchased is summarized as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
|
||||||||||||
|
Average daily balance during the period
|
$ | 17,754,319 | $ | 82,909,624 | $ | 65,507,198 | ||||||
|
Average daily interest rate during the period
|
0.41 | % | 2.24 | % | 6.03 | % | ||||||
|
Maximum month-end balance during the period
|
$ | 57,150,000 | $ | 144,940,000 | $ | 93,100,000 | ||||||
|
Weighted average rate as of end of period
|
0.35 | % | 2.41 | % | 5.20 | % | ||||||
B-6
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. [reserved]Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial StatementsNote 1. Nature Of Business and Significant Accounting PoliciesNote 1. Nature Of Business and Significant Accounting Policies (continued)Note 2. Discontinued OperationsNote 2. Discontinued Operations (continued)Note 3. Comprehensive Income (loss)Note 4. Investment SecuritiesNote 4. Investment Securities (continued)Note 5. Loans/leases ReceivableNote 5. Loans/leases Receivable (continued)Note 6. Premises and EquipmentNote 6. Premises and Equipment (continued)Note 7. DepositsNote 8. Short-term BorrowingsNote 8. Short-term Borrowings (continued)Note 9. Federal Home Loan Bank AdvancesNote 10. Other Borrowings and Unused Lines Of CreditNote 10. Other Borrowings and Unused Lines Of Credit (continued)Note 11. Junior Subordinated DebenturesNote 11. Junior Subordinated Debentures (continued)Note 12. Preferred StockNote 12. Preferred Stock (continued)Note 13. Federal and State Income TaxesNote 13. Federal and State Income Taxes (continued)Note 14. Employee Benefit PlansNote 15. Stock-based CompensationNote 15. Stock-based Compensation (continued)Note 16. Regulatory Capital Requirements and Restrictions on DividendsNote 16. Regulatory Capital Requirements and Restrictions on Dividends (continued)Note 17. Earnings Per Common ShareNote 18. Commitments and ContingenciesNote 18. Commitments and Contingencies (continued)Note 19. Quarterly Results Of Operations (unaudited)Note 19. Quarterly Results Of Operations (unaudited) (continued)Note 20. Parent Company Only Financial StatementsNote 20. Parent Company Only Financial Statements (continued)Note 21. Fair ValueNote 21. Fair Value (continued)Note 22. Business Segment InformationNote 22. Business Segment Information (continued)Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules