U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------- to ------------------------
Commission file number 0-22208
QCR HOLDINGS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 42-1397595
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer ID Number)
of incorporation or organization)
3551 7th Street, Suite 204, Moline, Illinois 61265
--------------------------------------------------
(Address of principal executive offices)
(309) 736-3580
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: As of November 1, 2002, the
Registrant had outstanding 2,753,687 shares of common stock, $1.00 par value per
share.
1
QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets,
September 30, 2002 and June 30, 2002 3
Consolidated Statements of Income,
For the Three Months Ended September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows,
For the Three Months Ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Item 3 Quantitative and Qualitative Disclosures 17
About Market Risk
Item 4 Controls and Procedures 17-18
Part II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security
Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19-20
Signatures 20-22
2
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2002 and June 30, 2002
September 30, June 30,
2002 2002
------------------------------
ASSETS
Cash and due from banks ........................................................ $ 34,948,741 $ 26,207,676
Federal funds sold ............................................................. 8,155,000 760,000
Certificates of deposit at financial institutions .............................. 6,678,213 7,272,213
Securities held to maturity, at amortized cost ................................. 425,386 425,440
Securities available for sale, at fair value ................................... 79,736,833 75,805,678
------------------------------
80,162,219 76,231,118
------------------------------
Loans receivable held for sale ................................................. 24,777,612 8,498,345
Loans receivable held for investment ........................................... 405,445,450 382,095,469
Less: Allowance for estimated losses on loans .................................. (6,481,881) (6,111,454)
------------------------------
423,741,181 384,482,360
------------------------------
Premises and equipment, net .................................................... 9,152,192 9,206,761
Accrued interest receivable .................................................... 3,352,520 3,125,992
Other assets ................................................................... 2,648,678 11,542,375
------------------------------
Total assets ........................................................... $ 568,838,744 $ 518,828,495
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ......................................................... $ 73,658,528 $ 65,384,902
Interest-bearing ............................................................ 331,777,310 310,932,407
------------------------------
Total deposits ............................................................ 405,435,838 376,317,309
------------------------------
Short-term borrowings .......................................................... 41,896,638 34,628,709
Federal Home Loan Bank advances ................................................ 64,553,155 52,414,323
Other borrowings ............................................................... 5,000,000 5,000,000
Company obligated manditorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures ................... 12,000,000 12,000,000
Other liabilities .............................................................. 5,477,028 5,890,551
------------------------------
Total liabilities ...................................................... 534,362,659 486,250,892
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; shares authorized 5,000,000;
September 2002 - shares issued 2,809,818 and outstanding
2,749,672; June 2002 - 2,809,593 and 2,749,447 respectively ................. 2,809,818 2,809,593
Additional paid-in capital ..................................................... 16,686,067 16,684,605
Retained earnings .............................................................. 13,813,507 12,654,202
Accumulated other comprehensive income ......................................... 2,021,229 1,283,739
------------------------------
35,330,621 33,432,139
Less cost of 60,146 common shares acquired for the treasury .................... (854,536) (854,536)
------------------------------
Total stockholders' equity ............................................. 34,476,085 32,577,603
------------------------------
Total liabilities and stockholders' equity ............................. $ 568,838,744 $ 518,828,495
==============================
See Notes to Consolidated Financial Statements
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30
2002 2001
-------------------------
Interest income:
Interest and fees on loans .................................. $ 6,639,470 $ 5,789,552
Interest and dividends on securities:
Taxable ............................................... 869,808 733,680
Nontaxable ............................................ 116,974 104,545
Interest on certificates of deposit at financial institutions 109,785 164,573
Interest on federal funds sold .............................. 30,393 78,392
Other interest .............................................. 109,227 79,302
-------------------------
Total interest income .................................. 7,875,657 6,950,044
-------------------------
Interest expense:
Interest on deposits ....................................... 2,068,967 2,569,682
Interest on company obligated manditorily
redeemable preferred securities ....................... 283,376 283,377
Interest on short-term borrowings .......................... 784,714 652,127
Interest on other borrowings ............................... 51,704 15,034
-------------------------
Total interest expense ................................. 3,188,761 3,520,220
-------------------------
Net interest income .................................... 4,686,896 3,429,824
Provision for loan losses ....................................... 636,800 408,490
-------------------------
Net interest income after provision for loan losses .... 4,050,096 3,021,334
-------------------------
Noninterest income:
Merchant credit card fees, net of processing costs .......... 687,900 519,625
Trust department fees ....................................... 513,705 476,718
Deposit service fees ........................................ 284,206 237,752
Gains on sales of loans, net ................................ 713,052 461,762
Securities losses, net ...................................... 0 (670)
Other ....................................................... 270,211 152,467
-------------------------
Total noninterest income ............................... 2,469,074 1,847,654
-------------------------
Noninterest expenses:
Salaries and employee benefits .............................. 2,866,528 2,290,436
Professional and data processing fees ....................... 395,569 372,517
Advertising and marketing ................................... 139,727 112,464
Occupancy and equipment expense ............................. 702,400 529,523
Stationery and supplies ..................................... 117,000 105,289
Postage and telephone ....................................... 144,677 108,532
Other ....................................................... 405,505 407,025
-------------------------
Total noninterest expenses ............................. 4,771,406 3,925,786
-------------------------
Income before income taxes ............................. 1,747,764 943,202
Federal and state income taxes ................................... 588,459 294,965
-------------------------
Net income ............................................. $ 1,159,305 $ 648,237
=========================
Earnings per common share:
Basic .................................................. $ 0.42 $ 0.26
Diluted ................................................ $ 0.41 $ 0.26
Weighted average common shares outstanding ............. 2,749,562 2,454,757
Weighted average common and common equivalent .......... 2,814,186 2,501,165
shares outstanding
Comprehensive income ............................................. $ 1,896,795 $ 1,310,029
See Notes to Consolidated Financial Statements
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30
2002 2001
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................... $ 1,159,305 $ 648,237
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation ................................................... 248,051 211,916
Provision for loan losses ...................................... 636,800 408,490
Amortization of offering costs on subordinated debentures ...... 7,376 7,376
Amortization of premiums on securities, net .................... 70,255 30,082
Securities losses, net ......................................... 0 670
Loans originated for sale ...................................... (58,957,339) (35,065,340)
Proceeds on sales of loans ..................................... 43,391,124 33,337,336
Net gains on sales of loans .................................... (713,052) (461,762)
Increase in accrued interest receivable ........................ (226,528) (345,304)
Decrease (increase) in other assets ............................ 8,473,803 (295,497)
(Decrease) increase in other liabilities ....................... (413,523) 520
---------------------------
Net cash used in operating activities ....................... $ (6,323,728) $(1,523,276)
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold ............................... (7,395,000) (255,000)
Net decrease in certificates of deposits at financial institutions 594,000 794,011
Purchase of securities available for sale ........................ (6,822,988) (6,307,160)
Proceeds from calls and maturities of securities ................. 3,560,000 2,750,000
Proceeds from paydowns on securities ............................. 440,605 405,862
Proceeds from sales of securities available for sale ............. 0 101,285
Increase in cash value of life insurance contracts ............... (28,965) (25,791)
Net loans originated and held for investment ..................... (23,616,354) (20,238,971)
Purchase of premises and equipment, net .......................... (193,482) (493,858)
---------------------------
Net cash used in investing activities ....................... $(33,462,184) $(23,269,622)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts ................................. 29,118,529 13,388,466
Net increase (decrease) in short-term borrowings ................. 7,267,929 (2,359,197)
Proceeds from Federal Home Loan Bank advances .................... 14,700,000 4,000,000
Payments on Federal Home Loan Bank advances ...................... (2,561,168) (1,582,369)
Net increase in other borrowings ................................. 0 5,000,000
Proceeds from issuance of common stock, net ...................... 1,687 4,988,622
---------------------------
Net cash provided by financing activities ................... $ 48,526,977 $23,435,522
---------------------------
Net increase (decrease) in cash and due from banks .......... 8,741,065 (1,357,376)
Cash and due from banks, beginning ......................................... 26,207,676 20,217,219
---------------------------
Cash and due from banks, ending ............................................ $ 34,948,741 $18,859,843
===========================
Supplemental disclosure of cash flow information, cash payments for:
Interest ......................................................... $ 3,526,352 $ 3,975,415
===========================
Income/franchise taxes ........................................... $ 755,925 $ 150,040
===========================
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income,
unrealized gains on securities available for sale, net ........... $ 737,490 $ 661,792
===========================
See Notes to Consolidated Financial Statements
5
Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include information or footnotes necessary for a
fair presentation of financial position, results of operations and changes in
financial condition in conformity with accounting principles generally accepted
in the United States of America. However, all adjustments that are, in the
opinion of management, necessary for a fair presentation have been included. Any
differences appearing between numbers presented in financial statements and
management's discussion and analysis are due to rounding. Results for the period
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the six-month transition period ending December 31, 2002.
Since the Company's formation in February 1993, its fiscal year end has been
June 30th. On August 21, 2002, the Company's Board of Directors approved a
change in the fiscal year end to December 31st. The Company will file a Form
10-K with the Securities and Exchange Commission for the transition period July
1, 2002 through December 31, 2002.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of QCR
Holdings, Inc. (the "Company"), a Delaware corporation, and its wholly owned
subsidiaries, Quad City Bank and Trust Company ("Quad City Bank & Trust"), Cedar
Rapids Bank and Trust Company ("Cedar Rapids Bank & Trust"), Quad City Bancard,
Inc. ("Bancard"), Allied Merchant Services, Inc. ("Allied"), QCR Capital Trust I
("Capital Trust"), and Quad City Liquidation Corporation ("QCLC"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. In addition to these six wholly owned subsidiaries, the Company
has an aggregate investment of $241 thousand in four associated companies, Nobel
Electronic Transfer, LLC, Nobel Real Estate Investors, LLC, Velie Plantation
Holding Company, and Clarity Merchant Services, Inc. Effective November 1, 2001,
the Company changed its name from Quad City Holdings, Inc. to QCR Holdings,
Inc., and its Nasdaq SmallCap trading symbol to "QCRH".
NOTE 3 - EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a
basic and diluted basis.
Three months ended
September 30,
-----------------------
2002 2001
-----------------------
Net income, basic and diluted
earnings ..................................... $1,159,305 $ 648,237
=======================
Weighted average common shares outstanding ......... 2,749,562 2,454,757
Weighted average common shares issuable upon
exercise of stock options ........................ 64,624 46,408
-----------------------
Weighted average common and
common equivalent shares
outstanding .................................. 2,814,186 2,501,165
=======================
6
NOTE 4 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is presented
as follows for the three month periods ended September 30, 2002 and 2001,
respectively.
2002 2001
------------------------------
Revenue:
Commercial banking .................... $ 8,972,373 $ 7,713,339
Merchant credit card processing ....... 731,098 566,072
Trust management ...................... 513,705 476,718
All other ............................. 127,555 41,569
------------------------------
Total revenue .................... $ 10,344,731 $ 8,797,698
==============================
Net income (loss):
Commercial banking .................... $ 1,123,693 $ 638,842
Merchant credit card processing ....... 208,024 93,456
Trust management ...................... 99,497 85,734
All other ............................. (271,909) (169,795)
------------------------------
Total net income ................. $ 1,159,305 $ 648,237
==============================
NOTE 5 - RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued Statement 143, "Accounting
for Asset Retirement Obligations" and Statement 144, " Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Statement 144 supersedes FASB Statement
121 and the accounting and reporting provisions of APB Opinion No. 30. Statement
144 establishes a single accounting model for long-lived assets to be disposed
of by sale at the lower of its carrying amount or its fair value less costs to
sell and to cease depreciation/amortization. For the Company, the provisions of
Statement 143 and 144 were effective July 1, 2002. Implementation of the
Statements had no material impact on the Company's financial statements.
The Financial Accounting Standards Board has issued Statement 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement rescinds FASB Statements No. 4 and 64,
relative to debt extinguishments and provides that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will
distinguish transactions that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the criteria for
classification as an extraordinary item. The Statement amends FASB Statement No.
13, "Accounting for Leases" to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Finally, the Statement rescinds FASB Statement No.
44, "Accounting for Intangible Assets of Motor Carriers" and amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of the Statement relative to accounting for leases were effective for
transactions occurring after May 15, 2002. Implementation of these provisions of
the Statement had no impact on the Company's consolidated financial statements.
For the Company, the provisions of the Statement relative to accounting for debt
extinguishment were effective July 1, 2002. Implementation of these provisions
of the Statement had no material impact on the Company's consolidated financial
statements.
The Financial Accounting Standards Board has issued Statement 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability and Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The Statement provides that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. For the Company, the provisions of
the Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. Implementation of the Statement is not expected to have
a material impact on the Company's consolidated financial statements.
7
The Financial Accounting Standards Board has issued Statement 147, "Acquisitions
of Certain Financial Institutions - an amendment of FASB Statements No. 72 and
144 and FASB Interpretation No. 9. Except for transactions between two or more
mutual enterprises, this Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets." In addition, the Statement amends FASB Statement No. 144 to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions that Statement 144
requires for other long-lived assets that are held and used. For the Company,
the provisions of the Statement are effective October 1, 2002. Implementation is
not expected to have a material impact on the Company's consolidated financial
statements.
NOTE 6 - SUBSEQUENT EVENTS
On October 22, 2002, the Company announced Bancard's sale of its ISO-related
merchant credit card operations to iPayment, Inc. for the price of $3.5 million.
After contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a gain of approximately $1.2 million,
or $0.44 per share, which will be realized during the quarter ended December 31,
2002. Also included in the sale were all of the merchant credit card processing
relationships owned by Allied. Bancard will continue to provide credit card
processing for its local merchants and cardholders of the subsidiary banks and
agent banks. It is anticipated that the Company's termination of ISO-related
merchant credit card processing will reduce Bancard's future earnings. However,
the Company believes that Bancard can be profitable with its narrowed business
focus of continuing to provide credit card processing for its local merchants
and agent banks and for cardholders of the Company's subsidiary banks.
On October 23, 2002, the Company announced that the board of directors had
declared the Company's first cash dividend of $0.05 per share payable on January
3, 2003, to stockholders of record on December 16, 2002. Going forward, it is
the Company's intention to consider the payment of dividends on a semi-annual
basis. The Company anticipates an ongoing need to retain much of its operating
income to help provide the capital for continued growth, but believes that
operating results have reached a level that can sustain dividends to
stockholders as well.
8
Part I
Item 2
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QCR Holdings, Inc. (the "Company") is the parent company of Quad City Bank &
Trust, Cedar Rapids Bank & Trust, and Quad City Bancard, Inc. Effective November
1, 2001, the Company changed its name to QCR Holdings, Inc. from Quad City
Holdings, Inc.
Quad City Bank & Trust is an Iowa-chartered commercial bank that is a member of
the Federal Reserve System with depository accounts insured to the maximum
amount permitted by law by the Federal Deposit Insurance Corporation. Quad City
Bank & Trust commenced operations in January 1994 and provides full-service
commercial and consumer banking, and trust and asset management services to the
Quad City area and adjacent communities through its four offices that are
located in Bettendorf and Davenport, Iowa and Moline, Illinois.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member
of the Federal Reserve System with depository accounts insured to the maximum
amount permitted by law by the Federal Deposit Insurance Corporation. The
Company commenced operations in Cedar Rapids in June 2001 operating as a branch
of Quad City Bank & Trust. The Cedar Rapids branch operation began functioning
under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank
& Trust provides full-service commercial and consumer banking service to Cedar
Rapids and adjacent communities through its office located in the GreatAmerica
Building in downtown Cedar Rapids, Iowa.
Quad City Bancard, Inc. ("Bancard") provides merchant credit card processing
services. Bancard has contracted with independent sales organizations ("ISOs")
that market credit card services to merchants throughout the country. In March
1999, Bancard formed its own subsidiary ISO, Allied Merchant Services, Inc.
("Allied"), for the purpose of generating additional credit card processing
business. At September 30, 2002, approximately 26,300 merchants were processing
transactions with Bancard. On October 22, 2002 the Company announced that
Bancard completed the sale of its ISO-related merchant credit card operations.
For more information with respect to the transaction, refer to Note 6.
Since the Company's formation in February 1993, its fiscal year end has been
June 30th. On August 21, 2002, the Company's Board of Directors approved a
change in the fiscal year end to December 31st. The Company will file a Form
10-K with the Securities and Exchange Commission for the transition period July
1, 2002 through December 31, 2002.
CRITICAL ACCOUNTING POLICY
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision for loan losses in
the statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis which discusses the allowance for loan
losses in the section entitled "Financial Condition". Although management
believes the levels of the allowance as of both September 30, 2002 and June 30,
2002 were adequate to absorb losses inherent in the loan portfolio, a decline in
local economic conditions, or other factors, could result in increasing losses
that cannot be reasonably predicted at this time.
9
FINANCIAL CONDITION
Total assets of the Company increased by $50.0 million, or 10%, to $568.8
million at September 30, 2002 from $518.8 million at June 30, 2002. The growth
resulted primarily from increases in the loan portfolio and cash and due from
banks funded by deposits received from customers and by proceeds received from
Federal Home Loan Bank advances and short-term borrowings.
Cash and due from banks increased by $8.7 million, or 33%, to $34.9 million at
September 30, 2002 from $26.2 million at June 30, 2002. The increase was
primarily due to the receipt on the final day of the period of $9.1 million of
funds from Visa/Mastercard for subsequent distribution to credit card merchants
who processed transactions with Bancard. Cash and due from banks represented
both cash maintained at its subsidiary banks, as well as funds that the Company
and its banks had deposited in other banks in the form of demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. At September 30,
2002, the subsidiary banks had $8.2 million invested in such funds. This amount
increased by $7.4 million from $760 thousand at June 30, 2002. This increase was
the result of additional liquidity at Quad City Bank & Trust at September 30,
2002 when compared to June 30, 2002.
Certificates of deposit at financial institutions decreased by $594 thousand, or
8%, to $6.7 million at September 30, 2002 from $7.3 million at June 30, 2002.
During the quarter ended September 30, 2002, the certificate of deposit
portfolio had six maturities totaling $594 thousand and no purchases.
Securities increased by $4.0 million, or 5%, to $80.2 million at September 30,
2002 from $76.2 million at June 30, 2002. The increase was the result of a
number of transactions in the securities portfolio. Paydowns of $441 thousand
were received on mortgage-backed securities, and the amortization of premiums,
net of the accretion of discounts, was $70 thousand. Maturities and calls of
securities occurred in the amount of $3.5 million. These portfolio decreases
were offset by the purchase of an additional $6.8 million of securities,
classified as available for sale and a $1.2 million increase in the fair value
of securities, classified as available for sale.
Total loans receivable increased by $39.6 million, or 10%, to $430.2 million at
September 30, 2002 from $390.6 million at June 30, 2002. The increase was the
result of the origination or purchase of $138.2 million of commercial business,
consumer and real estate loans, less loan charge-offs, net of recoveries, of
$266 thousand, and loan repayments or sales of loans of $98.3 million. During
the three months ended September 30, 2002, Quad City Bank & Trust contributed
$104.5 million, or 76%, and Cedar Rapids Bank & Trust contributed $33.7 million,
or 24%, of the Company's loan originations or purchases. Cedar Rapids Bank &
Trust participated $4.8 million, or 14%, of their originations during the
quarter to Quad City Bank & Trust. The mix of loan types within the Company's
portfolio remained relatively unchanged from June 30, 2002, reflecting 76%
commercial, 14% real estate and 10% consumer loans. 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.
The allowance for estimated losses on loans was $6.5 million at September 30,
2002 compared to $6.1 million at June 30, 2002, an increase of $370 thousand, or
6%. The adequacy of the allowance for estimated losses on loans was determined
based on factors that included the overall composition of the loan portfolio,
types of loans, past loss experience, loan delinquencies, potential substandard
and doubtful credits, economic conditions, and other factors that, in
management's judgement, deserved evaluation. To ensure that an adequate
allowance was maintained, provisions were made based on a number of factors,
including the increase in loans and a detailed analysis of the loan portfolio.
The loan portfolio was reviewed and analyzed monthly utilizing the percentage
allocation method. In addition, specific reviews were completed on all credits
risk-rated less than "fair quality" and carrying aggregate exposure in excess of
$250 thousand. The adequacy of the allowance for estimated losses on loans was
monitored by the loan review staff, and reported to management and the board of
directors. Although management believes that the allowance for estimated losses
on loans at September 30, 2002 was at a level adequate to absorb losses on
existing loans, there can be no assurance that such losses will not exceed the
estimated amounts or that the Company will not be required to make additional
provisions for loan losses in the future.
10
Asset quality is a priority for the Company and its subsidiaries. The ability to
grow profitably is in part dependent upon the ability to maintain that quality.
Along with other financial institutions, management shares a concern for the
outlook of the economy during the remainder of calendar 2002 and into 2003. A
slowdown in economic activity beginning in 2001 severely impacted several major
industries as well as the economy as a whole. Even though there are numerous
indications of emerging strength, it is not certain that this strength is
sustainable. In addition, consumer confidence may still be negatively impacted
by the recent substantial decline in equity prices. These events could still
adversely affect cash flows for both commercial and individual borrowers, as a
result of which, the Company could experience increases in problem assets,
delinquencies and losses on loans, and require further increases in the
provision for loan losses.
Net charge-offs for the three months ended September 30 were $266 thousand in
2002 and $27 thousand in 2001. One measure of the adequacy of the allowance for
estimated losses on loans is the ratio of the allowance to the held for
investment loan portfolio. The allowance for estimated losses on loans as a
percentage of held for investment loans was 1.59% at both September 30, 2002 and
June 30, 2002.
At September 30, 2002, total nonperforming assets were $4.8 million compared to
$2.3 million at June 30, 2002. The $2.5 million increase was the result of a
$2.6 million increase in nonaccrual loans, partially offset by a decrease of
$164 thousand in accruing loans past due 90 days or more. All of the Company's
nonperforming assets are located in the loan portfolio at Quad City Bank &
Trust. The loans in the Cedar Rapids Bank & Trust loan portfolio have been
originated fairly recently, and none of the loans have been categorized as
nonperforming assets. As the loan portfolio at Cedar Rapids Bank & Trust
matures, it is likely that there will be nonperforming loans or charge-offs
associated with the portfolio.
Nonaccrual loans were $4.2 million at September 30, 2002 compared to $1.6
million at June 30, 2002, an increase of $2.6 million. The increase in
nonaccrual loans was comprised of an increase in commercial loans of $2.6
million, slightly offset by decreases in real estate loans of $9 thousand and
consumer loans of $18 thousand. The net increase in nonaccrual commercial loans
was primarily due to the transfer to nonaccrual status of one commercial lending
relationship at Quad City Bank & Trust with an aggregate outstanding balance of
$2.4 million. Management is working closely with this customer in an attempt to
remedy the situation. In general, nonaccrual loans consisted primarily of loans
that were well collateralized and were not expected to result in material
losses, and represented approximately one percent of the Company's held for
investment loan portfolio at September 30, 2002.
From June 30, 2002 to September 30, 2002, accruing loans past due 90 days or
more decreased from $708 thousand to $544 thousand. The $164 thousand net
decrease was due primarily to the transfer to nonaccrual status of a single loan
at Quad City Bank & Trust with an outstanding balance of $133 thousand.
Premises and equipment showed a decrease of $55 thousand, or less than 1%, to
remain at $9.2 million at September 30, 2002, which was consistent with June 30,
2002. During the three-month period there were purchases of additional
furniture, fixtures and equipment and leasehold improvements of $193 thousand
entirely offset by depreciation expense of $248 thousand.
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $227 thousand, or 7%, to $3.3 million at September 30,
2002 from $3.1 million at June 30, 2002. The increase was primarily due to
greater average outstanding balances in interest-bearing assets.
Other assets decreased by $8.9 million, or 77%, to $2.6 million at September 30,
2002 from $11.5 million at June 30, 2002. The decrease was primarily due to the
receipt on the final day of the period of $9.1 million of funds from
Visa/Mastercard for subsequent distribution to credit card merchants who
processed transactions with Bancard. Other assets included Federal Reserve Bank
and Federal Home Loan Bank stock, the cash surrender value of life insurance
contracts, prepaid Visa/Mastercard processing charges, accrued trust department
fees, other miscellaneous receivables, and various prepaid expenses.
Deposits increased by $29.1 million, or 8%, to $405.4 million at September 30,
2002 from $376.3 million at June 30, 2002. The increase resulted from a $16.5
million net increase in non-interest bearing, NOW, money market and savings
accounts and a $12.6 million net increase in interest-bearing certificates of
deposit. Management believes that much of the increase resulted from customers'
reactions to the continued uncertainty in the equity markets.
11
Short-term borrowings increased $7.3 million, or 21%, from $34.6 million at June
30, 2002 to $41.9 million at September 30, 2002. The subsidiary banks offer
short-term repurchase agreements to some of their major customers. Also, on
occasion, the subsidiary banks purchase Federal funds for short-term funding
needs from the Federal Reserve Bank, or from some of their correspondent banks.
As of September 30, 2002 and June 30, 2002, short-term borrowings were comprised
of $30.2 million and $29.1 million of customer repurchase agreements,
respectively, along with Federal funds purchased of $11.7 million and $5.5
million, respectively.
Federal Home Loan Bank advances increased by $12.1 million, or 23%, to
$64.5 million at September 30, 2002 from $52.4 million at June 30, 2002. As a
result of their memberships in the FHLB of Des Moines, the subsidiary banks have
the ability to borrow funds for short or long-term purposes under a variety of
programs. FHLB advances are utilized for loan matching as a hedge against the
possibility of rising interest rates, and when these advances provide a less
costly or more readily available source of funds than customer deposits.
Other borrowings were $5.0 million at both June 30, 2002, and September
30, 2002. In September 2001, the Company drew a $5.0 million advance on a line
of credit at its primary correspondent bank as partial funding for the initial
capitalization of Cedar Rapids Bank & Trust.
In June 1999, the Company issued 1,200,000 shares of trust preferred securities
through a newly formed subsidiary, QCR Capital Trust I. On the Company's balance
sheet these securities are included with liabilities and are presented as
"company obligated manditorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures", and were $12.0 million at both
September 30, 2002 and June 30, 2002.
Other liabilities were $5.5 million at September 30, 2002 down $414 thousand, or
7%, from $5.9 million at June 30, 2002. Other liabilities were comprised of
unpaid amounts for various products and services, and accrued but unpaid
interest on deposits. At September 30, 2002, the most significant component of
other liabilities was $1.5 million of interest payable.
Common stock at September 30, 2002 was $2.8 million, which was unchanged from
June 30, 2002. A slight increase of $225 was the result of proceeds received
from the exercise of stock options.
Additional paid-in capital totaled $16.7 million at both September 30, 2002 and
June 30, 2002. A slight increase of $1 thousand resulted primarily from proceeds
received in excess of the $1.00 per share par value for the 225 shares of common
stock issued as the result of the exercise of stock options.
Retained earnings increased by $1,159,000, or 9%, to $13,813,000 at September
30, 2002 from $12,654,000 at June 30, 2002. The increase reflected net income
for the three-month period. On October 23, 2002, the Company announced that the
board of directors had declared a cash dividend of $0.05 per share, or
approximately $138 thousand, payable on January 3, 2003, to stockholders of
record on December 16, 2002.
Unrealized gains on securities available for sale, net of related income taxes,
totaled $2.0 million at September 30, 2002 as compared to $1.3 million at June
30, 2002. The increase in gains of $737 thousand was attributable to the
increase during the period in fair value of the securities identified as
available for sale.
In April 2000, the Company announced that the board of directors approved a
stock repurchase program enabling the Company to repurchase approximately 60,000
shares of its common stock. This stock repurchase program was completed in the
fall of 2000 and at both September 30, 2002 and June 30, 2002 the Company held
60,146 shares at a total cost of $855 thousand. The weighted average cost of the
shares was $14.21.
12
RESULTS OF OPERATIONS
OVERVIEW
Net income for the quarter ended September 30, 2002 was $1.2 million as compared
to net income of $648 thousand for the same period in 2001, an increase of $511
thousand or 79%. Basic earnings per share for the quarter ended September 30,
2002 increased to $0.42 from $0.26 for the same quarter one year ago. For the
quarter ended September 30, 2002, net interest income improved by 37% while
noninterest income improved by 34%, for a combined improvement of $1.9 million
when compared to the same period in 2001. Quad City Bank & Trust generated much
of the improvement in the Company's net interest margin, as well as a large
increase in the gains on sales of residential real estate loans during the
period. Offsetting the improvements in revenue for the Company were increases in
noninterest expense of $846 thousand and the provision for loan losses of $228
thousand. During the three-month period ended September 30, 2002, the climb in
noninterest expense was primarily due to an increase in salaries and benefits
expense of $576 thousand. After-tax losses at Cedar Rapids Bank & Trust were
$172 thousand for the three months ended September 30, 2002, which were less
than anticipated, and Cedar Rapids Bank and Trust's growth was more rapid than
expected. Management remains confident that the decision to enter the Cedar
Rapids market will provide significant long-term benefits to the Company.
The Company's operating results are derived largely from net interest income.
Net interest income is the difference between interest income, principally from
loans and investment securities, and interest expense, principally on borrowings
and customer deposits. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
The Company realized a 0.91% increase in the net interest spread improving from
2.92% at September 30, 2001 to 3.83% at September 30, 2002. The average yield on
interest-earning assets decreased 1.07% for the quarter ended September 30, 2002
when compared to the same quarter ended September 30, 2001. At the same time,
the average cost of interest-bearing liabilities declined 1.98%. The widening of
the net interest spread created an improvement in the Company's net interest
margin. For the three months ended September 30, 2002, the net interest margin
was 3.75% compared to 3.64% for the same period in 2001. Management has
aggressively managed the Company's cost of funds during the dramatic drop in
short-term interest rates in 2001 and the continuation of a low interest rate
environment through 2002, and continues to closely monitor and manage net
interest margin. On November 6, 2002 the Federal Reserve announced that it had
cut its short term rate by 50 basis points.
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Interest income increased by $926 thousand to $7.9 million for the three-month
period ended September 30, 2002 when compared to $6.9 million for the quarter
ended September 30, 2001. The increase of 13% in interest income was
attributable to greater average, outstanding balances in interest earning
assets, principally with respect to loans receivable, partially offset by
reduced interest rates. The Company's average yield on interest-earning assets
decreased 1.07% for the three months ended September 30, 2002 when compared to
the three months ended September 30, 2001.
Interest expense decreased by $331 thousand from $3.5 million for the
three-month period ended September 30, 2001 to $3.2 million for the three-month
period ended September 30, 2002. The 9% decrease in interest expense was caused
by significant reductions in interest rates, partially offset by greater
average, outstanding balances in interest-bearing liabilities, principally with
respect to customers' deposits in subsidiary banks, Federal Home Loan Bank
advances and short-term borrowings. The Company's average cost of
interest-bearing liabilities declined 1.98% for the three months ended September
30, 2002 when compared to the three months ended September 30, 2001.
13
At both September 30, 2002 and June 30, 2002, the Company had an allowance for
estimated losses on loans of approximately 1.59% of held for investment loans.
The provision for loan losses increased by $229 thousand from $408 thousand for
the three-month period ended September 30, 2001 to $637 thousand for the
three-month period ended September 30, 2002. During the quarter in calendar
2002, management made monthly provisions for loan losses based upon a number of
factors, including principally the increase in loans and a detailed analysis of
the loan portfolio. The $370 thousand net increase in the allowance for loan
losses was attributed 99%, or $366 thousand, to growth in the loan portfolio,
and 1%, or $4 thousand, to downgrades within the portfolio. For the three months
ended September 30, 2002, commercial loan charge-offs totaled $244 thousand,
which was primarily a single, fully reserved loan, and recoveries totaled less
than $1 thousand. Consumer loan charge-offs and recoveries totaled $43 thousand
and $20 thousand, respectively, during the quarter. Residential real estate
loans had no charge-offs or recoveries for the three months ended September 30,
2002.
Noninterest income of $2.4 million for the three-month period ended September
30, 2002 was a $621 thousand, or 34%, increase from $1.8 million for the
three-month period ended September 30, 2001. Noninterest income during each of
the quarters in comparison consisted primarily of income from the merchant
credit card operation, the trust department, depository service fees, gains on
the sale of residential real estate mortgage loans, and other miscellaneous
fees. The quarter ended September 30, 2002, when compared to the same quarter in
2001, posted a $168 thousand increase in fees earned by the merchant credit card
operations of Bancard. This 33% improvement in merchant credit card fees was the
result of increased processing volumes from Bancard's ISO (Independent Sales
Organization) relationships. Gains on the sale of residential real estate
mortgage loans, net, increased $251 thousand from the quarter ended September
30, 2001 to the same quarter in fiscal 2002. The activity within this area of
the subsidiary banks was stimulated by interest rates lower than those seen
during the same period last year. Additional increases in noninterest income
consisted of a $37 thousand increase in trust department fees, a $46 thousand
increase in deposit service fees, and a $118 thousand increase in other
noninterest income. Other noninterest income in each quarter consisted primarily
of investment advisory and management fees, fees collected from correspondent
banks, item processing fees, and income from associated companies.
Merchant credit card fees, for the three months ended September 30, 2002,
increased by 32% reflecting substantial growth in processing volumes. Bancard's
dollar volume of transactions processed during the quarter ended September 30,
2002 was $466 million compared to $288 million for the same period in 2001 for
an increase of $178 million or 62%. On October 22, 2002, the Company announced
Bancard's sale of its ISO-related merchant credit card operations to iPayment,
Inc.for the price of $3.5 million. After contractual compensation and severance
payments, transaction expenses, and income taxes, the transaction resulted in a
gain of approximately $1.2 million, or $0.44 per share, which will be realized
during the quarter ended December 31, 2002. Also included in the sale were all
of the merchant credit card processing relationships owned by Allied. Bancard
will continue to provide credit card processing for its local merchants and
cardholders of the subsidiary banks and agent banks. It is anticipated that the
Company's termination of ISO-related merchant credit card processing will reduce
Bancard's future earnings. However, the Company believes that Bancard can be
profitable with its narrowed business focus of continuing to provide credit card
processing for its local merchants and agent banks and for cardholders of the
company's subsidiary banks.
For the quarter ended September 30, 2002, trust department fees increased $37
thousand, or 8%, to $514 thousand from $477 thousand for the same quarter in
2001. The increase was primarily due to the continued development of existing
trust relationships and the addition of new trust customers, partially offset by
the reduced market values of securities held in trust accounts and the resulting
impact in the realization of trust fees.
Deposit service fees increased $46 thousand, or 20%, to $284 thousand from $238
thousand for the three-month periods ended September 30, 2002 and September 30,
2001, respectively. This increase was primarily a result of the growth in
deposit accounts of $89.9 million, or 28%, since September 30, 2001. Service
charges and NSF (non-sufficient funds) charges related to demand deposit
accounts were the main components of deposit service fees.
Gains on sales of loans, net, were $713 thousand for the three months ended
September 30, 2002, which reflected an increase of 54%, or $251 thousand, from
$462 thousand for the three months ended September 30, 2001. The increase
resulted from larger numbers of home refinances and/or home purchases, and the
subsequent sale of the majority of these loans into the secondary market. The
decline in interest rates during the past twelve months stimulated the activity
within this area of the subsidiary banks.
14
For the quarter ended September 30, 2002, other noninterest income increased
$118 thousand, or 77%, to $270 thousand from $152 thousand for the same quarter
in 2001. The increase was primarily due to a gain realized by Nobel Electronic
Transfer, LLC, one of the four associated companies in which the Company holds
an interest
The primary components of noninterest expenses were mainly salaries and
benefits, occupancy and equipment expenses, and professional and data processing
fees, for both quarters. Noninterest expenses for the three months ended
September 30, 2002 were $4.8 million as compared to $3.9 million for the same
period in 2001, for an increase of $846 thousand or 22%.
The following table sets forth the various categories of noninterest expenses
for the three months ended September 30, 2002 and 2001.
Noninterest Expenses
Three months ended
September 30,
--------------------------------
2002 2001 % change
--------------------------------
Salaries and employee benefits .............. $2,866,528 $2,290,436 25.2%
Professional and data processing fees ....... 395,569 372,517 6.2%
Advertising and marketing ................... 139,727 112,464 24.2%
Occupancy and equipment expense ............. 702,400 529,523 32.7%
Stationery and supplies ..................... 117,000 105,289 11.1%
Postage and telephone ....................... 144,677 108,532 33.3%
Other ....................................... 405,505 407,025 (0.4)%
--------------------------------
Total noninterest expenses .... $4,771,406 3,925,786 21.5%
================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For the quarter ended September 30, 2002, total
salaries and benefits increased to $2.9 million or $576 thousand over the
previous year's quarter total of $2.3 million. The increase was primarily due to
the addition of employees at the subsidiary banks, in combination with increased
incentive compensation to real estate officers proportionate to the increased
volumes of gains on sales of loans. Occupancy and equipment expense increased
$173 thousand or 33% for the quarter. The increase was predominately due to the
addition of Cedar Rapids Bank & Trust's permanent full service banking facility
in September 2001and the resulting increased levels of rent, utilities,
depreciation, maintenance, and other occupancy expenses. Postage and telephone
increased $36 thousand from $109 thousand for the three months ended September
30, 2001 to $145 thousand for the same period in 2002. The increase was
primarily due to the addition of Cedar Rapids Bank & Trust, which contributed
$21 thousand of the growth. For the quarter ended September 30, 2002,
advertising and marketing increased to $140 thousand, or $28 thousand over the
previous year's quarter total of $112 thousand, with the addition of Cedar
Rapids Bank & Trust accounting for $18 thousand of the increase. Professional
and data processing fees increased from $373 thousand for the three months ended
September 30, 2001 to $396 thousand for the same three-month period in 2002. The
$23 thousand increase was predominately due to increases in data processing and
auditing fees at the subsidiary banks, substantially offset by a decrease in
legal fees resulting from the settlement of legal proceedings at Bancard in
February 2002.
The provision for income taxes was $588 thousand for the three-month period
ended September 30, 2002 compared to $295 thousand for the three-month period
ended September 30, 2001 for an increase of $293 thousand or 100%. The increase
was the result of an increase in income before income taxes of $805 thousand or
85% for the 2002 quarter when compared to the 2001 quarter, in combination with
an increase in the Company's effective tax rate.
15
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customers' credit needs. The liquidity of the
Company primarily depends upon cash flows from operating, investing, and
financing activities. Net cash used in operating activities, consisting
primarily of loan originations for subsequent sale in the secondary market, was
$6.3 million for the three months ended September 30, 2002 compared to $1.5
million net cash used for the same period in 2001. Net cash used in investing
activities, consisting principally of loan originations to be held for
investment, was $33.5 million for the three months ended September 30, 2002 and
$23.3 million for the three months ended September 30, 2001. Net cash provided
by financing activities, consisting primarily of deposit growth, proceeds from
Federal Home Loan Bank (FHLB) advances, and net proceeds from short-term
borrowings for the three months ended September 30, 2002 was $48.5 million and
for the same period in 2001 was $23.4 million.
The Company has a variety of sources of short-term liquidity available to it,
including federal funds purchased from correspondent banks, sales of securities
available for sale, FHLB advances, lines of credit and loan participations or
sales. At September 30, 2002, the subsidiary banks had seven unused lines of
credit totaling $38.0 million of which $4.0 million was secured and $34.0
million was unsecured. At June 30, 2002, the subsidiary banks had seven unused
lines of credit totaling $36.0 million of which $4.0 million was secured and
$32.0 million was unsecured. At both September 30, 2002 and June 30, 2002, the
Company also had a secured line of credit for $10.0 million, of which $5.0
million had been used as partial funding for the capitalization of Cedar Rapids
Bank & Trust.
On October 23, 2002, the Company announced that the board of directors had
declared the Company's first cash dividend of $0.05 per share payable on January
3, 2003, to stockholders of record on December 16, 2002. Going forward it is the
Company's intention to consider the payment of dividends on a semi-annual basis.
The Company anticipates an ongoing need to retain much of its operating income
to help provide the capital for continued rapid growth, however believes that
operating results have reached a level that can sustain dividends to
stockholders as well.
16
Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company realizes income principally from the spread between the interest
earned on loans, investments and other interest-earning assets and the interest
paid on deposits and borrowings. Loan volumes and yields, as well as the volume
of and rates on investments, deposits and borrowings, are affected by market
interest rates. Additionally, because of the terms and conditions of many of the
loan and deposit accounts, a change in interest rates could also affect the
projected maturities in the loan portfolio and/or the deposit base, which could
alter the Company's sensitivity to future changes in interest rates.
Accordingly, management considers interest rate risk to be a significant market
risk.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within policy limits approved by the board of directors, while
taking into consideration, among other factors, the Company's overall credit,
operating income, operating cost, and capital profile. The subsidiary banks'
ALM/Investment Committees, which includes senior management representatives and
members of the board of directors, monitor and manage interest rate risk to
maintain an acceptable level of change to net interest income as a result of
changes in interest rates.
One method used to quantify interest rate risk is the net portfolio value
analysis. This analysis calculates the difference between the present value of
liabilities and the present value of expected cash flows from assets and
off-balance sheet contracts. The most recent net portfolio value analysis, as of
June 30, 2002, projected that net portfolio value would decrease by
approximately 7.73% if interest rates would rise 200 basis points over the next
year. It projected an increase in net portfolio value of approximately 1.28% if
interest rates would drop 200 basis points. Both simulations are within the
board-established policy limits of a 10% decline in value.
Part I
Item 4
CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses. There were no
significant deficiencies or material weaknesses identified in the evaluation and
therefore, no corrective actions were taken.
SPECIAL NOTE CONCERNING 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," "plan," "intend,"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
17
o The economic impact of the terrorist attacks that occurred on September
11th, as well as any future threats and attacks, and the response of the
United States to any such threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
18
Part II
QCR HOLDINGS, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 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 2 Changes in Securities and Use of Proceeds - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders - None
The annual meeting of stockholders was held at The Lodge (formerly Jumer's
Castle Lodge) located at 900 spruce Hills Drive, Bettendorf, Iowa on Wednesday,
October 23, 2002 at 10:00 a.m. At the meeting, Article XII of the certificate of
incorporation was amended to change the number of directors from three to nine
to three to twelve. The certificate of incorporation was also amended to permit
the board of directors to consider non-stockholder factors when considering a
change in control proposal. At the meeting, stockholders approved the adoption
of the QCR Holdings, Inc. Employee Stock Purchase Plan. Also at the meeting,
Patrick S. Baird was elected and John K. Lawson and Ronald G. Peterson were
re-elected to serve as Class III directors, with terms expiring in 2005.
Continuing as Class I directors, with terms expiring in 2003, are Michael A.
Bauer, James J. Brownson, and Henry Royer. Continuing as Class II directors,
with terms expiring in 2004, are Larry J. Helling, Douglas M. Hultquist, and
John W. Schricker.
At the time of the annual meeting, there were 2,809,818 issued shares and
2,749,672 outstanding shares of common stock. Either in person or by proxy,
there were 2,323,455 common shares represented at the meeting, constituting
approximately 84% of the outstanding shares. The voting was as follows:
Votes Votes Broker Votes
For Against Abstained Non-votes
---------------------------------------------
Amendment of Article XII ....... 2,212,189 86,085 25,181 0
Amendment regarding
consideration of
non-stockholder interests . 1,399,850 122,782 24,055 776,768
Approval of the QCR
Holdings, Inc. Employee
Stock Purchase Plan ....... 2,175,885 120,387 27,183 0
Votes Votes
For Withheld
-----------------------------
Patrick S. Baird ....................... 2,304,476 18,979
John K. Lawson ......................... 2,311,776 11,679
Ronald G. Peterson ..................... 2,304,776 18,679
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
3(ii) Bylaws of QCR Holdings, Inc. dated August 21 , 2002.
3(iii) Certificate of Amendment of QCR Holdings, Inc.
Certificate of Incorporation dated October 24, 2002.
10.1 First Amendment of Lease, dated October, 2001 between 3001
L.L.C., an Iowa limited liability company ("Landlord"),
and Cedar Rapids Bank and Trust Company f.k.a. Quad City
Bank and Trust Company ("Tenant").
19
10.2 Purchase and Sale Agreement, dated October, 2002 between
Quad City Bancard, Inc., a Delaware corporation, Allied
Merchant Services, Inc., an Illinois corporation
(collectively referred to as "Seller"), and iPayment,
Inc., a Delaware corporation, and Quad City Acquisition
Corp., a Delaware corporation, a wholly owned subsidiary
of iPayment ("Purchaser").
99.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (exhibit is
being filed herewith).
99.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (exhibit is
being filed herewith).
99.3 Shareholder letter dated November 2002 discussing earnings
for the quarter ended September 30, 2002 and related
financial information.
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 5, 2002 under Item 5,
which reported the Company's fourth quarter financial information
in the form of a press release.
A report on Form 8-K was filed on August 27, 2002 under Item 5,
which issued information, in the form a press release, regarding
the Company's decision to change its fiscal year end from June
30th to December 31st and its plans to file a From 10-K for the
transition period July 1, 2002 to December 31, 2002.
A report on Form 8-K was filed on October 22, 2002 under Item 5,
which issued information, in the form a press release, announcing
the sale of a portion of the Company's merchant credit card
business to iPayment, Inc. and the resulting gain.
A report on Form 8-K was filed on October 23, 2002 under Item 5,
which reported the Company's declaration of a dividend payable
January 3, 2003 and its earnings for the quarter ended September
30, 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QCR HOLDINGS, INC.
(Registrant)
Date November 12, 2002 /s/ Michael A. Bauer
----------------- ---------------------------------
Michael A. Bauer, Chairman
Date November 12, 2002 /s/ Douglas M. Hultquist
----------------- ---------------------------------
Douglas M. Hultquist, President
Chief Executive Officer
Date November 12, 2002 /s/ Todd A. Gipple
----------------- -------------------
Todd A. Gipple, Executive
Vice President
Chief Financial Officer
20
SECTION 302 CERTIFICATION
I, Douglas M. Hultquist, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
There were no significant deficiencies or material weaknesses identified in
the evaluation and therefore, no corrective actions were taken.
Date: November 12, 2002
/s/ Douglas M. Hultquist
- -------------------------------
Douglas M. Hultquist
Chief Executive Officer
21
SECTION 302 CERTIFICATION
I, Todd A. Gipple, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
There were no significant deficiencies or material weaknesses identified in
the evaluation and therefore, no corrective actions were taken.
Date: November 12, 2002
/s/ Todd A. Gipple
- --------------------------
Todd A. Gipple
Chief Financial Officer
22