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 March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22208
QCR HOLDINGS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 42-1397595
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer ID Number)
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 May 1, 2003, the
Registrant had outstanding 2,775,576 shares of common stock, $1.00 par value per
share.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]
1
QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets,
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income,
For the Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows,
For the Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-9
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-19
Item 3 Quantitative and Qualitative Disclosures 20
About Market Risk
Item 4 Controls and Procedures 20-21
Part II OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
Signatures 23-25
2
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2003 and December 31, 2002
March 31, December 31,
2003 2002
------------------------------
ASSETS
Cash and due from banks ........................................................ $ 29,253,606 $ 24,906,003
Federal funds sold ............................................................. 12,685,000 14,395,000
Interest-bearing deposits at financial institutions ............................ 14,009,735 14,568,142
Securities held to maturity, at amortized cost ................................. 425,278 425,332
Securities available for sale, at fair value ................................... 87,442,298 81,228,749
------------------------------
87,867,576 81,654,081
------------------------------
Loans receivable held for sale ................................................. 20,661,446 23,691,004
Loans receivable held for investment ........................................... 451,477,346 426,044,732
Less: Allowance for estimated losses on loans .................................. (7,440,700) (6,878,953)
------------------------------
464,698,092 442,856,783
------------------------------
Premises and equipment, net .................................................... 9,016,042 9,224,542
Accrued interest receivable .................................................... 3,348,686 3,221,246
Other assets ................................................................... 2,137,959 13,774,559
------------------------------
Total assets ........................................................... $ 623,016,696 $ 604,600,356
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ......................................................... $ 89,972,184 $ 89,675,609
Interest-bearing ............................................................ 357,582,704 345,072,014
------------------------------
Total deposits ............................................................ 447,554,888 434,747,623
------------------------------
Short-term borrowings .......................................................... 35,384,810 32,862,446
Federal Home Loan Bank advances ................................................ 77,444,012 74,988,320
Other borrowings ............................................................... 7,000,000 5,000,000
Company obligated manditorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures ................... 12,000,000 12,000,000
Other liabilities .............................................................. 6,102,264 8,415,365
------------------------------
Total liabilities ...................................................... 585,485,974 568,013,754
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; shares authorized 5,000,000; ....................... 2,833,358 2,823,061
March 2003 - shares issued 2,833,358 and outstanding 2,773,212 December 2002
- 2,823,061 and 2,762,915 respectively
Additional paid-in capital ..................................................... 16,792,866 16,761,423
Retained earnings .............................................................. 16,539,548 15,712,600
Accumulated other comprehensive income ......................................... 2,219,486 2,144,054
------------------------------
38,385,258 37,441,138
Less cost of 60,146 common shares acquired for the treasury .................... (854,536) (854,536)
------------------------------
Total stockholders' equity ............................................. 37,530,722 36,586,602
------------------------------
Total liabilities and stockholders' equity ............................. $ 623,016,696 $ 604,600,356
==============================
See Notes to Consolidated Financial Statements
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31
2003 2002
-------------------------------------
Interest and dividend income:
Loans, including fees .................................. $6,809,229 $5,842,513
Securities:
Taxable .......................................... 806,169 818,673
Nontaxable ....................................... 120,257 107,022
Interest-bearing deposits at financial institutions .... 123,062 210,158
Federal funds sold ..................................... 47,350 103,619
-----------------------
Total interest and dividend income ................ 7,906,067 7,081,985
-----------------------
Interest expense:
Deposits .............................................. 1,869,065 2,103,234
Short-term borrowings ................................. 87,308 120,251
Federal Home Loan Bank advances ....................... 766,247 556,910
Other borrowings ...................................... 51,960 66,114
Company obligated manditorily redeemable
preferred securities ............................. 283,376 283,376
-----------------------
Total interest expense ............................ 3,057,956 3,129,885
-----------------------
Net interest income ............................... 4,848,111 3,952,100
Provision for loan losses .................................. 1,330,427 497,500
-----------------------
Net interest income after provision for loan losses 3,517,684 3,454,600
----------------------
Noninterest income:
Merchant credit card fees, net of processing costs ..... 337,493 414,260
Trust department fees .................................. 561,142 593,758
Deposit service fees ................................... 330,848 255,435
Gains on sales of loans, net ........................... 955,409 418,095
Other .................................................. 303,931 147,125
-----------------------
Total noninterest income .......................... 2,488,823 1,828,673
-----------------------
Noninterest expenses:
Salaries and employee benefits ......................... 2,884,792 2,538,376
Professional and data processing fees .................. 429,070 326,536
Advertising and marketing .............................. 148,756 148,287
Occupancy and equipment expense ........................ 651,697 605,659
Stationery and supplies ................................ 110,277 125,271
Postage and telephone .................................. 153,565 126,673
Other .................................................. 405,686 524,385
-----------------------
Total noninterest expenses ........................ 4,783,843 4,395,187
-----------------------
Income before income taxes ........................ 1,222,664 888,086
Federal and state income taxes .............................. 395,716 274,003
-----------------------
Net income ........................................ $ 826,948 $ 614,083
=======================
Earnings per common share:
Basic ............................................. $ 0.30 $ 0.22
Diluted ........................................... $ 0.29 $ 0.22
Weighted average common shares outstanding ........ 2,767,013 2,743,668
Weighted average common and common equivalent ..... 2,827,727 2,804,909
shares outstanding
Comprehensive income ........................................ $ 902,380 $ 431,184
See Notes to Consolidated Financial Statements
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31
2003 2002
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 826,948 $ 614,083
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ..................................................... 260,564 239,463
Provision for loan losses ........................................ 1,330,427 497,500
Amortization of offering costs on subordinated debentures ........ 7,376 7,376
Amortization of premiums on securities, net ...................... 113,510 40,993
Loans originated for sale ........................................ (62,183,071) (29,717,764)
Proceeds on sales of loans ....................................... 66,168,038 37,526,773
Net gains on sales of loans ...................................... (955,409) (418,095)
Net losses on sales of premises and equipment .................... 40,299 0
Tax benefit of nonqualified stock options exercised .............. 97,538 0
Increase in accrued interest receivable .......................... (127,440) (103,856)
(Increase) decrease in other assets .............................. 11,608,294 (4,874,257)
Increase (decrease) in other liabilities ......................... (2,174,955) 109,727
---------------------------
Net cash provided by operating activities ..................... $ 15,012,119 $ 3,921,943
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold ................................. 1,710,000 340,000
Net (increase) decrease in interest-bearing deposits at
financial institutions ........................................... 558,407 (5,658,111)
Activity in available-for-sale securities:
Purchases ...................................................... (11,597,571) (9,133,140)
Calls and maturities ........................................... 4,000,000 1,500,000
Paydowns ....................................................... 1,391,185 476,149
Activity in life insurance contracts:
Purchases ..................................................... 0 (401,087)
(Increase) decrease in cash value ............................. (24,257) 178,182
Net loans originated and held for investment ....................... (26,201,294) (24,578,211)
Purchase of premises and equipment ................................. (314,430) (121,131)
Proceeds from sales of premises and equipment ...................... 222,067 0
----------------------------
Net cash used in investing activities ......................... $(30,255,893) $(37,397,349)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts ................................... 12,807,265 20,114,798
Net increase in short-term borrowings .............................. 2,522,364 4,844,322
Activity in Federal Home Loan Bank advances:
Advances ...................................................... 3,900,000 7,500,000
Payments ...................................................... (1,444,308) (173,411)
Net increase in other borrowings ................................... 2,000,000 0
Payment of cash dividend ........................................... (138,146) 0
Proceeds from issuance of common stock, net ........................ (55,798) (6,501)
---------------------------
Net cash provided by financing activities ..................... $ 19,591,377 $ 32,279,208
---------------------------
Net increase (decrease) in cash and due from banks ............ 4,347,603 (1,196,198)
Cash and due from banks, beginning ........................................... 24,906,003 19,691,318
---------------------------
Cash and due from banks, ending .............................................. $ 29,253,606 $ 18,495,120
===========================
Supplemental disclosure of cash flow information, cash payments for:
Interest ........................................................... $ 3,449,277 $ 3,061,257
===========================
Income/franchise taxes ............................................. $ 1,624,553 $ 357,160
===========================
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income,
unrealized gains (losses) on securities available for sale, net .... $ 75,432 $ (182,899)
===========================
See Notes to Consolidated Financial Statements
5
Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
Certain amounts in the prior period financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform with the
current period presentation.
From the Company's formation in February 1993 through June 30, 2002, its fiscal
year end had been June 30th. In 2002, the Company changed its fiscal year end to
December 31st. The Company filed a Form 10-K with the Securities and Exchange
Commission for the transition period July 1, 2002 through December 31, 2002.
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 $325
thousand in four associated companies, Nobel Electronic Transfer, LLC, Nobel
Real Estate Investors, LLC, Velie Plantation Holding Company, and Clarity
Merchant Services, Inc.
Stock-based compensation plans: The Company accounts for its stock-based
employee compensation plans under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Three Months
Ended Ended
March 31, March 31,
2003 2002
-----------------------------
Net income, as reported ...................... $ 826,948 $ 614,083
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects ......... (26,197) (22,469)
-----------------------------
Net income ........................... $ 800,751 $ 591,614
=============================
Earnings per share:
Basic:
As reported .............................. $ 0.30 $ 0.22
Pro formsa ............................... 0.29 0.22
Diluted:
As reported .............................. 0.29 0.22
Pro forma ................................ 0.28 0.21
6
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions for grants during the three months
ended March 31, 2003 and 2002: dividend rate of 0.59% for the three months ended
March 31, 2003 and 0% for the three months ended March 31, 2002; expected price
volatility of 23.87% to 24.54%; risk-free interest rate based upon current rates
at the date of grant (4.33% to 5.62% for stock options and 1.16% to 1.29% for
employee stock purchase plan); and expected lives of 10 years for stock options
and 3 months to 6 months for employee stock purchase plan.
NOTE 2 - EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a
basic and diluted basis.
Three months ended
March 31,
---------------------------
2003 2002
---------------------------
Net income, basic and diluted
earnings ............................... $ 826,948 $ 614,083
===========================
Weighted average common shares
outstanding ................................ 2,767,013 2,743,668
Weighted average common shares
issuable upon exercise of stock
options .................................... 60,714 61,241
---------------------------
Weighted average common and
common equivalent shares
outstanding ............................ 2,827,727 2,804,909
===========================
NOTE 3 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is presented
as follows for the three-month periods ended March 31, 2003 and 2002,
respectively.
2003 2002
---------------------------------
Revenue:
Commercial banking ................ $ 9,354,948 $ 7,824,928
Credit card processing ............ 381,510 453,618
Trust management .................. 561,142 593,758
All other ......................... 97,290 38,354
---------------------------------
Total revenue ................ $ 10,394,890 $ 8,910,658
=================================
Net income (loss):
Commercial banking ................ $ 879,706 $ 805,439
Credit card processing ............ 157,707 (45,493)
Trust management .................. 128,652 173,492
All other ......................... (339,117) (319,355)
---------------------------------
Total net income ............. $ 826,948 $ 614,083
=================================
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Banks make various commitments and incur
certain contingent liabilities that are not presented in the accompanying
consolidated financial statements. The commitments and contingent liabilities
include various guarantees, commitments to extend credit, and standby letters of
credit.
7
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Banks upon extension of credit, is based upon
management's credit evaluation of the 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 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 March 31, 2003 and December 31, 2002 no
amounts have been recorded as liabilities for the Banks' potential obligations
under these guarantees.
As of March 31, 2003 and December 31, 2002, commitments to extend credit
aggregated $154,693,000 and $165,163,000, respectively. As of March 31, 2003 and
December 31, 2002, standby letters of credit aggregated $5,416,000 and
$4,914,000, respectively. Management does not expect that all of these
commitments will be funded.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $20,661,446 and $23,691,004, at March 31, 2003
and December 31, 2002, respectively. These amounts are included in loans held
for sale at the respective balance sheet dates.
Bancard is subject to the risk of chargebacks from cardholders and the merchant
being incapable of refunding the amount charged back. Management attempts to
mitigate such risk by regular monitoring of merchant activity and in appropriate
cases, holding cash reserves deposited by the merchant.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed up by a performance bond in the amount of $1,000,000. As of March 31,
2003 and December 31, 2002 there were no significant pending liabilities.
A significant portion of residential mortgage loans sold to investors in the
secondary market are sold with recourse. Specifically, certain loan sales
agreements provide that if the borrower becomes delinquent a number of payments
or a number of days, within six months to one year of the sale, the Banks must
repurchase the loan from the subject investor. The Banks did not repurchase any
loans from secondary market investors under the terms of these loan sales
agreements during the three and six months ended March 31, 2003 and December 31,
2002, respectively. In the opinion of management, the risk of recourse to the
Banks is not significant and, accordingly, no liability has been established
related to such.
NOTE 5 - RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued Statement 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
No. 123. This Statement amends Statement No. 123 to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation were
effective January 1, 2003 and implementation had no impact on the Company's
consolidated financial statements. The amended interim disclosure requirements
are effective for the Company for the quarter ending March 31, 2003 and have
been adopted in the consolidated financial statements.
8
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Implementation of the Statement is not expected
to have a material impact on the financial statements.
The Financial Accounting Standards Board has issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation were applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Implementation
of these provisions of the Interpretation had no impact on the Company's
consolidated financial statements. The disclosure requirements of the
Interpretation were effective for financial statements of interim or annual
periods ending after December 15, 2002, and were adopted in the consolidated
financial statements for December 31, 2002 and these interim financial
statements for the period ending March 31, 2003.
The Financial Accounting Standards Board has issued Interpretation No. 46,
"Consolidation of Variable Purpose Entities" - an interpretation of ARB No. 51.
This Interpretation requires the consolidation of certain special purposes
entities (SPE's) by a company if it is determined to be the primary beneficiary
of the SPE's operating activities. The adoption of this Interpretation in
January 2003 did not have an impact on the consolidated financial statements.
9
MANAGEMENT'S 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.
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 and cardholder credit card
processing services. On October 22, 2002, the Company announced Bancard's sale
of its independent sales organization (ISO) related merchant credit card
operations to iPayment, Inc. At March 31, 2003, Bancard continued to temporarily
process transactions for iPayment, Inc., and approximately 30,000 merchants.
When iPayment, Inc. discontinues processing with Bancard later in calendar 2003,
it is expected that processing volumes will decrease significantly. Bancard
will, however, continue to provide credit card processing for its local
merchants and agent banks and for cardholders of the Company's subsidiary banks.
In 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), to generate merchant
credit card processing business. Bancard owns 100% of Allied. As a result of
Bancard's sale of its ISO related merchant credit card operations to iPayment,
Inc. in October 2002, Allied ceased its operations as an ISO. Included in the
sale to iPayment, Inc., were all of the merchant credit card processing
relationships owned by Allied.
From the Company's formation in February 1993 through June 30, 2002, its fiscal
year end had been June 30th. In 2002, the Company changed its fiscal year end to
December 31st. The Company filed 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 March 31, 2003 and December 31,
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.
10
FINANCIAL CONDITION
Total assets of the Company increased by $18.4 million, or 3%, to $623.0 million
at March 31, 2003 from $604.6 million at December 31, 2002. The growth resulted
primarily from increases in the loan and securities portfolios funded by
deposits received from customers.
Cash and due from banks increased by $4.4 million, or 17%, to $29.3 million at
March 31, 2003 from $24.9 million at December 31, 2002. The increase was
primarily due to the receipt on the final day of the period of $11.5 million of
funds from Visa/Mastercard. 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 non-interest bearing demand
deposits.
Federal funds sold are inter-bank funds with daily liquidity. At March 31, 2003,
the subsidiary banks had $12.7 million invested in such funds. This amount
decreased by $1.7 million, or 12%, from $14.4 million at December 31, 2002. This
decrease was the result of a reduced liquidity position at Cedar Rapids Bank &
Trust at March 31, 2003 when compared to December 31, 2002.
Interest-bearing deposits at financial institutions decreased by $558 thousand,
or 4%, to $14.0 million at March 31, 2003 from $14.6 million at December 31,
2002. Included in interest-bearing deposits at financial institutions are demand
accounts, money market accounts, and certificates of deposit. The decrease was
primarily the result of maturities of certificates of deposit totaling $1.2
million, which were partially offset by increases in money market accounts of
$707 thousand.
Securities increased by $6.2 million, or 8%, to $87.9 million at March 31, 2003
from $81.7 million at December 31, 2002. The increase was the result of a number
of transactions in the securities portfolio. Paydowns of $1.4 million were
received on mortgage-backed securities, and the amortization of premiums, net of
the accretion of discounts, was $114 thousand. Maturities and calls of
securities occurred in the amount of $4.0 million. These portfolio decreases
were offset by the purchase of an additional $11.6 million of securities,
classified as available for sale and a $121 thousand increase in the fair value
of securities, classified as available for sale.
Total loans receivable increased by $22.4 million, or 5%, to $472.1 million at
March 31, 2003 from $449.7 million at December 31, 2002. The increase was the
result of the origination or purchase of $156.0 million of commercial business,
consumer and real estate loans, less loan charge-offs, net of recoveries, of
$769 thousand, and loan repayments or sales of loans of $132.8 million. During
the three months ended March 31, 2003, Quad City Bank & Trust contributed $120.6
million, or 74%, and Cedar Rapids Bank & Trust contributed $40.2 million, or
26%, of the Company's loan originations or purchases. Cedar Rapids Bank & Trust
participated $4.8 million, or 9%, of their originations during the quarter to
Quad City Bank & Trust. The mix of loan types within the Company's portfolio at
March 31, 2003 reflected 80% commercial, 11% real estate and 9% 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 $7.4 million at March 31, 2003
compared to $6.9 million at December 31, 2002, an increase of $562 thousand, or
8%. 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
March 31, 2003 was at a level adequate to absorb probable 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.
11
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 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 indications of emerging strength,
it is not certain that this strength is sustainable. In addition, consumer
confidence may still be negatively impacted by the substantial decline in equity
prices experienced over the last several months. 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 March 31 were $769 thousand in 2003
and $32 thousand in 2002. 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 1.65% at March 31, 2003 and 1.61 %
at December 31, 2002.
At March 31 2003, total nonperforming assets were $5.6 million compared to $5.0
million at December 31, 2002. The $584 thousand increase was the result of a
$132 thousand increase in nonaccrual loans in combination with an increase of
$452 thousand in accruing loans past due 90 days or more. All of the
nonperforming assets were located in the loan portfolio at Quad City Bank &
Trust. The loans in the Cedar Rapids Bank & Trust loan portfolio have been
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 $4.7 million at March 31, 2003 compared to $4.6 million at
December 31, 2002, an increase of $132 thousand. The increase in nonaccrual
loans was comprised of increases in both commercial loans of $277 thousand and
consumer loans of $25 thousand, partially offset by a decrease in real estate
loans of $170 thousand. Three large commercial lending relationships at Quad
City Bank & Trust, with an aggregate outstanding balance of $3.5 million,
comprised 73% of the nonaccrual loans at March 31, 2003. Management is working
closely with these customers in an attempt to remedy their individual
situations. Like many other financial institutions, some of the Company's
customers are experiencing difficulty in the lagging economy, which could lead
to further increases in nonperforming assets and the need for an increased
allowance for loan losses. Given the continued soft economy, management is
closely monitoring the Company's loan portfolio and the need for increased
provisions for possible loan losses. Nonaccrual loans represented approximately
one percent of the Company's held for investment loan portfolio at March 31,
2003.
From December 31, 2002 to March 31, 2003, accruing loans past due 90 days or
more increased from $431 thousand to $883 thousand. The $452 thousand net
increase was primarily due to seasonal and /or temporary setbacks experienced by
a few commercial customers at Quad City Bank & Trust. Payments were received on
a number of these loans just subsequent to quarter end, and the balance of loans
in this category had been reduced to less than $300 thousand by mid-April 2003.
Premises and equipment showed a decrease of $209 thousand, or 2%, to decline to
$9.0 million at March 31, 2003 from $9.2 million at December 31, 2002. During
the three-month period there were purchases of additional furniture, fixtures
and equipment and leasehold improvements of $314 thousand, which were entirely
offset by the combination of a property sale of $262 thousand and depreciation
expense of $261 thousand. The property sale resulted in a net loss of $40
thousand.
Accrued interest receivable on loans, securities and interest-bearing deposits
with financial institutions increased by $127 thousand, or 4%, to $3.3 million
at March 31, 2003 from $3.2 million at December 31, 2002. The increase was
primarily due to greater average outstanding balances in interest-bearing
assets.
Other assets decreased by $11.7 million, or 84%, to $2.1 million at March 31,
2003 from $13.8 million at December 31, 2002. The decrease was primarily due to
the receipt, on the final day of the period, of $11.5 million of funds from
Visa/Mastercard. 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.
12
Deposits increased by $12.8 million, or 3%, to $447.5 million at March 31, 2003
from $434.7 million at December 31, 2002. The increase resulted from a $19.4
million net increase in non-interest bearing, NOW, money market and savings
accounts partially offset by a $6.6 million net decrease in interest-bearing
certificates of deposit. Interest-bearing demand and money market accounts for
commercial customers at the subsidiary banks accounted for essentially all of
the increase in deposits for the period.
Short-term borrowings increased $2.5 million, or 8%, from $32.9 million at
December 31, 2002 to $35.4 million at March 31, 2003. 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 both March 31, 2003 and December 31, 2002, short-term borrowings were
comprised entirely of customer repurchase agreements.
Federal Home Loan Bank advances increased by $2.4 million, or 3%, to $77.4
million at March 31, 2003 from $75.0 million at December 31, 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 increased to $7.0 million at March 31, 2003 for an increase of
$2.0 million or, 40%, from December 31, 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 February 2003, the Company drew an additional $2.0 million advance as
funding to maintain the required level of regulatory capital at 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
March 31, 2003 and December 31, 2002.
Other liabilities were $6.1 million at March 31, 2003 down $2.3 million, or 27%,
from $8.4 million at December 31, 2002. Other liabilities were comprised of
unpaid amounts for various products and services, and accrued but unpaid
interest on deposits. At March 31, 2003, the most significant component of other
liabilities was $1.4 million of interest payable.
Common stock at March 31, 2003 was $2.8 million, which was unchanged from
December 31, 2002. A slight increase of $10 thousand was the result of proceeds
received from the exercise of stock options.
Additional paid-in capital totaled $16.8 million at both March 31, 2003 and
December 31, 2002. A slight increase of $31 thousand resulted primarily from
proceeds received in excess of the $1.00 per share par value for the 10,297
shares of common stock issued as the result of the exercise of stock options.
Retained earnings increased by $827 thousand, or 5%, to $16.5 million at March
31, 2003 from $15.7 million at December 31, 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, which was paid 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 $2.2 million at March 31, 2003 as compared to $2.1 million at December
31, 2002. The increase in gains of $75 thousand was attributable to increases
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 March 31, 2003 and December 31, 2002 the Company held
60,146 shares at a total cost of $855 thousand. The weighted average cost of the
shares was $14.21.
13
RESULTS OF OPERATIONS
OVERVIEW
Net income for the quarter ended March 31, 2003 was $827 thousand as compared to
net income of $614 thousand for the same period in 2002, an increase of $213
thousand or 35%. Basic earnings per share for the quarter ended March 31, 2003
increased to $0.30 from $0.22 for the same quarter one year ago. For the quarter
ended March 31, 2003, net interest income improved by 23% while noninterest
income improved by 36%, for a combined improvement of $1.6 million when compared
to the same period in 2002. Quad City Bank & Trust generated much of the
improvement in the Company's net interest income, 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 $389 thousand and the provision for loan losses of $833
thousand. During the three-month period ended March 31, 2003, the climb in
noninterest expense was primarily due to an increase in salaries and benefits
expense of $346 thousand. After-tax losses at Cedar Rapids Bank & Trust were $54
thousand for the three months ended March 31, 2003, as compared to after-tax
losses of $268 thousand for the same quarter in 2002. Losses at the new bank
charter decreased at a pace anticipated by management, however Cedar Rapids Bank
and Trust's growth was more rapid than expected, as total assets surpassed $100
million in February 2003. Management remains confident that the decision to
enter the Cedar Rapids market will provide significant long-term benefits to the
Company.
14
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
For Three Months Ended March 31,
-------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost
-------------------------------------------------------------------------
ASSETS Interest earnings assets:
Federal funds sold .................................. $ 19,118 $ 47 0.98% $ 14,973 $ 104 2.78%
Interest-bearing deposits at
financial institutions ........................... 13,820 123 3.56% 14,173 210 5.93%
Investment securities (1) ........................... 81,473 988 4.85% 65,586 981 5.98%
Gross loans receivable (2) .......................... 451,251 6,809 6.04% 342,974 5,842 6.81%
-------------------------------------------------------------------------
Total interest earning assets .................... 565,662 7,967 5.63% 437,705 7,137 6.52%
Noninterest-earning assets:
Cash and due from banks ............................. $ 26,063 $ 19,307
Premises and equipment .............................. 9,050 9,298
Less allowance for estimated losses on loans ........ (7,186) (5,030)
Other ............................................... 14,259 19,354
--------- ----------
Total assets ..................................... $ 607,848 $ 480,634
========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY Interest-bearing liabilities:
Interest-bearing demand deposits .................... $ 141,034 365 1.04% $ 108,314 425 1.57%
Savings deposits .................................... 11,977 17 0.57% 9,007 29 1.29%
Time deposits ....................................... 193,312 1,488 3.08% 171,672 1,650 3.84%
Short-term borrowings ............................... 38,119 87 0.91% 27,023 120 1.78%
Federal Home Loan Bank advances ..................... 76,104 766 4.03% 42,765 557 5.21%
COMR ................................................ 12,000 283 9.43% 12,000 283 9.43%
Other borrowings .................................... 6,000 52 3.47% 5,000 66 5.28%
-------------------------------------------------------------------------
Total interest-bearing
liabilities .................................. 478,546 3,058 2.56% 375,780 3,130 3.33%
Noninterest-bearing demand .......................... 86,112 62,505
Other noninterest-bearing
liabilities ...................................... 6,090 11,593
Total liabilities ................................... 570,748 449,877
Stockholders' equity ................................ 37,100 30,757
--------- ----------
Total liabilities and
stockholders' equity ......................... $ 607,848 $ 480,634
========= ==========
Net interest income ................................. $ 4,909 $ 4,007
========= =========
Net interest spread ................................. 3.07% 3.19%
===== =====
Net interest margin ................................. 3.47% 3.66%
===== =====
Ratio of average interest earning
assets to average interest-
bearing liabilities .............................. 118.20% 116.48%
========== =========
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate for each period
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
15
Analysis of Changes of Interest Income/Interest Expense
For the three months ended March 31, 2003
Inc./(Dec.) Components
from of Change (1)
From ------------------
Prior
Period Rate Volume
-----------------------------
2003 vs. 2002
-----------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ................................ $ (57) $ (201) $ 144
Interest-bearing deposits at financial institutions (87) (82) (5)
Investment securities (2) ......................... 7 (831) 838
Gross loans receivable (3) ........................ 967 (3,661) 4,628
-----------------------------
Total change in interest income ......... $ 830 $(4,775) $ 5,605
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................. $ (60) $ (576) $ 516
Savings deposits .................................. (12) (56) 44
Time deposits ..................................... (162) (1,118) 956
Short-term borrowings ............................. (33) (231) 198
Federal Home Loan Bank advances ................... 209 (737) 946
COMR .............................................. -- -- --
Other borrowings .................................. (14) (76) 62
-----------------------------
Total change in interest expense ........ $ (72) $(2,794) $ 2,722
-----------------------------
Total change in net interest income ............... 902 $(1,981) 2,883
=============================
(1) The column "increase/decrease from prior period" 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 for each period
presented.
(3) Loan fees are not material and are included in interest income from loans
receivable.
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 0.12% decrease in the net interest spread declining from
3.19% for the quarter ended March 31, 2002 to 3.07% for the quarter ended March
31, 2003. The average yield on interest-earning assets decreased 0.89% for the
quarter ended March 31, 2003 when compared to the same quarter ended March 31,
2002. At the same time, the average cost of interest-bearing liabilities
declined 0.77%. The narrowing of the net interest spread resulted in
deterioration of the Company's net interest margin. For the three months ended
March 31, 2003, the net interest margin was 3.47% compared to 3.66% for the same
period in 2002. Management 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 throughout 2002 and into 2003,
and continues to closely monitor and manage net interest margin.
16
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Interest income increased by $824 thousand to $7.9 million for the three-month
period ended March 31, 2003 when compared to $7.1 million for the quarter ended
March 31, 2002. The increase of 12% 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 0.89% for the
three months ended March 31, 2003 when compared to the three months ended March
31, 2002.
Interest expense decreased by $72 thousand from $3.1 million for the three-month
period ended March 31, 2002 to $3.0 million for the three-month period ended
March 31, 2003. The 2% decrease in interest expense was caused by significant
reductions in interest rates, almost entirely 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 0.77% for the three months ended March 31, 2003 when
compared to the three months ended March 31, 2002.
At March 31, 2003 and December 31, 2002, the Company had an allowance for
estimated losses on loans approximately at 1.65% and 1.61 %, respectively, of
held for investment loans. The provision for loan losses increased by $833
thousand from $497 thousand for the three-month period ended March 31, 2002 to
$1.3 million for the three-month period ended March 31, 2003. During the first
quarter of 2003, 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. During the first quarter of 2003, the $1.3
million provision to the allowance for loan losses was attributed 27%, or $353
thousand, to net growth in the loan portfolio, and 73%, or $977 thousand, to
downgrades and write-offs within the portfolio. For the three months ended March
31, 2003, commercial loan charge-offs totaled $758 thousand, which resulted
entirely from a single customer relationship at Quad City Bank & Trust, and
there were no commercial recoveries. The write-off of this relationship
accounted for 57% of the provision for loans losses during the first quarter of
2003 and was in addition to a $1.2 million charge-off, which occurred during the
quarter ended December 31, 2002. The additional losses are a result of
environmental issues associated with the collateral for the loan, which were
identified during the first quarter of 2003. The Company believes that these
environmental issues have negatively impacted the value and salability of the
business and has determined that it is appropriate to take a conservative
approach and write-down the loan balance to reflect no value in the real estate
and equipment collateral. Quad City Bank & Trust will proceed with efforts to
liquidate all other collateral, and is pursuing a sale of the real estate and
equipment, as well as all available legal remedies against the borrower.
Consumer loan charge-offs and recoveries totaled $92 thousand and $81 thousand,
respectively, during the quarter. Residential real estate loans had no
charge-offs or recoveries for the three months ended March 31, 2003.
Noninterest income of $2.5 million for the three-month period ended March 31,
2003 was a $660 thousand, or 36%, increase from $1.8 million for the three-month
period ended March 31, 2002. Noninterest income during each of the quarters in
comparison consisted primarily of income from the merchant credit card
operation, fees from the trust department, depository service fees, gains on the
sale of residential real estate mortgage loans, and other miscellaneous fees.
The quarter ended March 31, 2003, when compared to the same quarter in 2002,
posted a $77 thousand decrease in fees earned by the merchant credit card
operations of Bancard. This 19% decline in merchant credit card fees was a
result of the sale of independent sales organization (ISO) related merchant
credit card activity to iPayment, Inc. in October 2002. Gains on the sale of
residential real estate mortgage loans, net, increased $537 thousand from the
quarter ended March 31, 2002 to the same quarter in calendar 2003. The activity
within this area of the subsidiary banks was stimulated by interest rates
consistent with or lower than those seen during the same period last year.
Additional variations in noninterest income consisted of a $33 thousand decrease
in trust department fees, a $75 thousand increase in deposit service fees, and a
$157 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, ATM fees, and
income from associated companies.
17
Merchant credit card fees, for the three months ended March 31, 2003 decreased
by 19% reflecting the initial effects of the sale of the independent sales
organization (ISO) related merchant credit card activity to iPayment, Inc. On
October 22, 2002, the Company announced Bancard's sale of its ISO-related
merchant credit card operations to iPayment, Inc. for $3.5 million. After
contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a gain of $1.3 million, or $0.47 per
share, which was realized during the quarter ended December 31, 2002. Also
included in the sale were all of the merchant credit card processing
relationships owned by Allied. Bancard continues to provide credit card
processing for its local merchants and cardholders of the subsidiary banks and
agent banks. During the three-month period ended March 31, 2003, Bancard also
temporarily continued to process ISO related transactions for iPayment, Inc. for
a fixed monthly fee rather than a percentage of transaction volumes. The Company
anticipates that this ISO processing will be transferred to another provider in
the second quarter of 2003. As previously anticipated, the Company's sale of the
ISO-related merchant credit card processing has reduced Bancard's monthly
earnings. The Company continues to believe that Bancard will remain profitable
with its narrowed business focus of continuing to provide credit card processing
for its local merchants and agent banks and for cardholders of the Company's
subsidiary banks. At that time, the Company anticipates that merchant credit
card fees, net of processing costs, will be in a range of $50 thousand to $90
thousand a month from the Company's local merchant, cardholder, and agent bank
portfolios. As a result, Quad City Bancard's net income will likely be
approximately break even for a period after the iPayment processing is moved to
another provider.
For the quarter ended March 31, 2003, trust department fees decreased $33
thousand, or 5%, to $561 thousand from $594 thousand for the same quarter in
2002. Although there was continued development of existing trust relationships
and the addition of new trust customers during the quarter, the impact of such
was entirely 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 $76 thousand, or 30%, to $331 thousand from $255
thousand for the three-month periods ended March 31, 2003 and March 31, 2002,
respectively. This increase was primarily a result of the growth in deposit
accounts of $83.6 million, or 23%, since March 31, 2002. Service charges and NSF
(non-sufficient funds) charges related to demand deposit accounts were the main
components of deposit service fees.
Gains on sales of loans, net, were $955 thousand for the three months ended
March 31, 2003, which reflected an increase of 129%, or $537 thousand, from $418
thousand for the three months ended March 31, 2002. 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. Depressed interest
rates, which have existed for the last several months, continued to stimulate
the activity within this area of the subsidiary banks throughout the first
quarter of 2003. While mortgage rates remain at historically low levels,
management does not anticipate that the level of gains on sales of loans, net
will continue throughout the year.
For the quarter ended March 31, 2003, other noninterest income increased $157
thousand, or 107%, to $304 thousand from $147 thousand for the same quarter in
2002. The increase was primarily due to a combination of increased earnings
realized by Nobel Electronic Transfer, LLC, one of the four associated companies
in which the Company holds an interest, and to improved fees generated from the
usage of Visa check cards by customers of the subsidiary banks.
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 March
31, 2003 were $4.8 million as compared to $4.4 million for the same period in
2002, for an increase of $389 thousand or 9%.
The following table sets forth the various categories of noninterest expenses
for the three months ended March 31, 2003 and 2002.
Noninterest Expenses
Three months ended
March 31,
-----------------------
2003 2002 % Change
--------------------------------
Salaries and employee benefits .............. $2,884,792 $2,538,376 13.7%
Professional and data processing fees ....... 429,070 326,536 31.4%
Advertising and marketing ................... 148,756 148,287 0.3%
Occupancy and equipment expense ............. 651,697 605,659 7.6%
Stationery and supplies ..................... 110,277 125,271 (12.0)%
Postage and telephone ....................... 153,565 126,673 21.2%
Other ....................................... 405,686 524,385 (22.6)%
-----------------------
Total noninterest expenses .... $4,783,843 4,395,187 8.8%
=======================
18
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For the quarter ended March 31, 2003, total
salaries and benefits increased to $2.9 million or $346 thousand over the
previous year's quarter total of $2.5 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. Professional and data processing fees
increased from $327 thousand for the three months ended March 31, 2002 to $429
thousand for the same three-month period in 2003. The $102 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 at Bancard as
a result of the conclusion of legal settlement proceedings in February 2002.
Occupancy and equipment expense increased $46 thousand or 8% from quarter to
quarter. The increase was predominately due to increased levels of rent,
utilities, depreciation, maintenance, and other occupancy expenses associated
with the Company's facilities. Postage and telephone increased $27 thousand from
$127 thousand for the three months ended March 31, 2002 to $154 thousand for the
same period in 2003. The increase was proportionate to the increased business
activity throughout the Company. Other noninterest expense declined $119
thousand, or 23%, for the three months ended March 31, 2003 when compared to the
like period in 2002. The decrease was primarily due to the elimination of
Bancard's monthly provision for merchant credit card losses as a result of the
sale of ISO related merchant credit card activity to iPayment, Inc. in October
2002.
The provision for income taxes was $396 thousand for the three-month period
ended March 31, 2003 compared to $274 thousand for the three-month period ended
March 31, 2002 for an increase of $122 thousand or 44%. The increase was the
result of an increase in income before income taxes of $335 thousand or 38% for
the 2003 quarter when compared to the 2002 quarter, in combination with a slight
increase in the Company's effective tax rate.
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 provided by operating activities, consisting
primarily of proceeds on sales of loans, was $15.0 million for the three months
ended March 31, 2003 compared to $3.9 million net cash provided in the same
period in 2002. Net cash used in investing activities, consisting principally of
loan originations to be held for investment, was $30.3 million for the three
months ended March 31, 2003 and $37.4 million for the three months ended March
31, 2002. Net cash provided by financing activities, consisting primarily of
deposit growth, for the three months ended March 31, 2003 was $19.6 million and
for the same period in 2002 was $32.3 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 March 31, 2003, the subsidiary banks had eight unused lines of credit
totaling $43.0 million of which $4.0 million was secured and $39.0 million was
unsecured. At December 31, 2002, the subsidiary banks had seven unused lines of
credit totaling $38.0 million of which $4.0 million was secured and $34.0
million was unsecured. At both March 31, 2003 and December 31, 2002, the Company
also had a secured line of credit at its primary correspondent bank for $10.0
million. At December 31, 2002, $5.0 million had been drawn and used as partial
funding for the capitalization of Cedar Rapids Bank & Trust, and in February
2003 an additional $2.0 million was drawn as funding to maintain the required
level of capital at Cedar Rapids Bank & Trust.
The Company paid its first cash dividend of $0.05 per share 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. At the annual meeting of stockholders on May 7, 2003, the
Company announced the declaration of a $0.05 per share cash dividend payable on
July 3, 2003, to stockholders of record on June 16, 2003.
19
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
December 31, 2002, projected that net portfolio value would decrease by
approximately 5.40% if interest rates would rise 200 basis points over the next
year. It projected an increase in net portfolio value of approximately 4.61% 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
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "bode," "predict,"
"suggest," "appear," "plan," "intend," "estimate," "may," "will," "would,"
"could," "should" or other similar expressions. Additionally, all statements in
this document, including forward-looking statements, speak only as of the date
they are made, and the Company undertakes no obligation to update any statement
in light of new information or future events.
20
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
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.
21
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
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
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).
(b) Reports on Form 8-K
A report on Form 8-K was filed on February 10, 2003 under Item 5,
which reported the Company's financial information, including
earnings for both the quarter and six-month transition period
ended December 31, 2002, in the form of a press release.
A report on Form 8-K was filed on May 1, 2003 under Item 12,
which reported the Company's financial information, including
earnings for the quarter ended March 31, 2003, in the form of a
press release.
A report on Form 8-K was filed on May 8, 2003 under Item 12,
which reported the Company's announcement of the declaration of a
cash dividend and the results of the Annual Stockholders Meeting
that was held May 7, 2003 in the form of a press release.
22
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 May 14, 2003 /s/ Michael A. Bauer
--------------------------
Michael A. Bauer, Chairman
Date May 14, 2003 /s/ Douglas M. Hultquist
--------------------------
Douglas M. Hultquist,
President
Chief Executive Officer
Date May 14, 2003 /s/ Todd A. Gipple
--------------------------
Todd A. Gipple, Executive
Vice President
Chief Financial Officer
23
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 officers 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 officers 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 officers 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.
Date: May 14, 2003
/s/ Douglas M. Hultquist
-----------------------
Douglas M. Hultquist
Chief Executive Officer
24
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 officers 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 officers 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 officers 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.
Date: May 14, 2003
/s/ Todd A. Gipple
----------------------
Todd A. Gipple
Chief Financial Officer
25