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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, 2005
[ ] 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 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]
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, 2005, the
Registrant had outstanding 4,513,355 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,
March 31, 2005 and December 31, 2004 3
Consolidated Statements of Income,
For the Three Months Ended March 31, 2005 and 2004 4
Consolidated Statements of Cash Flows,
For the Three Months Ended March 31, 2005 and 2004 5
Notes to Consolidated Financial Statements 6-11
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-25
Item 3 Quantitative and Qualitative Disclosures 25
About Market Risk
Item 4 Controls and Procedures 26
Part II OTHER INFORMATION
Item 1 Legal Proceedings 27
Item 2 Unregistered Sales of Issuer Securities and Use
of Proceeds 27
Item 3 Defaults Upon Senior Securities 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Other Information 27
Item 6 Exhibits 28
Signatures 38-39
2
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2005 and December 31, 2004
March 31, December 31,
2005 2004
------------------------------
ASSETS
Cash and due from banks ................................... $ 26,002,365 $ 21,372,342
Federal funds sold ........................................ 7,995,000 2,890,000
Interest-bearing deposits at financial institutions ....... 2,144,789 3,857,563
Securities held to maturity, at amortized cost ............ 100,000 100,000
Securities available for sale, at fair value .............. 153,641,486 149,460,886
------------------------------
153,741,486 149,560,886
------------------------------
Loans receivable held for sale ............................ 4,151,955 3,498,809
Loans receivable held for investment ...................... 648,484,554 644,852,018
Less: Allowance for estimated losses on loans ............. (8,840,593) (9,261,991)
------------------------------
643,795,916 639,088,836
------------------------------
Premises and equipment, net ............................... 21,233,934 18,100,590
Accrued interest receivable ............................... 4,383,674 4,072,762
Bank-owned life insurance ................................. 16,703,559 15,935,000
Other assets .............................................. 15,861,197 15,205,568
------------------------------
Total assets ...................................... $ 891,861,920 $ 870,083,547
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing .................................... $ 102,772,615 $ 109,361,817
Interest-bearing ....................................... 485,474,965 478,653,866
------------------------------
Total deposits ....................................... 588,247,580 588,015,683
------------------------------
Short-term borrowings ..................................... 119,914,076 104,771,178
Federal Home Loan Bank advances ........................... 91,967,631 92,021,877
Other borrowings .......................................... 11,000,000 6,000,000
Junior subordinated debentures ............................ 20,620,000 20,620,000
Other liabilities ......................................... 8,543,933 7,881,009
------------------------------
Total liabilities ................................. 840,293,220 819,309,747
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; shares authorized 10,000,000 . 4,509,883 4,496,730
March 2005 - 4,509,883 shares issued and outstanding,
December 2004 - 4,496,730 shares issued and outstanding,
Additional paid-in capital ................................ 20,491,238 20,329,033
Retained earnings ......................................... 26,602,417 25,278,666
Accumulated other comprehensive income (loss) ............. (34,838) 669,371
------------------------------
Total stockholders' equity ........................ 51,568,700 50,773,800
------------------------------
Total liabilities and stockholders' equity ........ $ 891,861,920 $ 870,083,547
==============================
See Notes to Consolidated Financial Statements
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31
2005 2004
-------------------------
Interest and dividend income:
Loans, including fees .......................................... $ 9,320,244 $ 7,468,485
Securities:
Taxable ...................................................... 1,165,022 991,405
Nontaxable ................................................... 136,243 142,812
Interest-bearing deposits at financial institutions ............ 40,887 71,515
Federal funds sold ............................................. 17,593 4,590
-------------------------
Total interest and dividend income ....................... 10,679,989 8,678,807
-------------------------
Interest expense:
Deposits ....................................................... 2,445,159 1,503,181
Short-term borrowings .......................................... 466,119 142,250
Federal Home Loan Bank advances ................................ 849,609 800,135
Other borrowings ............................................... 101,285 35,878
Junior subordinated debentures ................................. 329,478 421,425
-------------------------
Total interest expense ................................... 4,191,650 2,902,869
-------------------------
Net interest income ...................................... 6,488,339 5,775,938
Provision for loan losses ........................................ 301,206 856,841
-------------------------
Net interest income after provision for loan losses .... 6,187,133 4,919,097
-------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ............. 418,959 539,198
Trust department fees .......................................... 735,143 680,804
Deposit service fees ........................................... 381,266 409,344
Gains on sales of loans, net ................................... 259,836 261,418
Earnings on cash surrender value of life insurance ............. 178,727 95,216
Investment advisory and management fees ........................ 140,179 125,675
Other .......................................................... 604,510 252,627
-------------------------
Total noninterest income ................................. 2,718,620 2,364,282
-------------------------
Noninterest expenses:
Salaries and employee benefits ................................. 3,896,367 3,151,801
Professional and data processing fees .......................... 612,796 465,276
Advertising and marketing ...................................... 260,179 213,792
Occupancy and equipment expense ................................ 975,953 730,990
Stationery and supplies ........................................ 147,778 136,945
Postage and telephone .......................................... 196,315 166,280
Bank service charges ........................................... 118,473 137,842
Insurance ...................................................... 153,155 106,040
Loss on redemption of junior subordinated debentures ........... 747,490
Other .......................................................... 593,834 238,178
-------------------------
Total noninterest expenses ............................... 6,954,850 6,094,634
-------------------------
Income before income taxes ............................... 1,950,903 1,188,745
Federal and state income taxes ................................... 627,153 352,828
-------------------------
Net income ............................................... $ 1,323,750 $ 835,917
=========================
Earnings per common share:
Basic .......................................................... $ 0.29 $ 0.20
Diluted ........................................................ $ 0.29 $ 0.19
Weighted average common shares outstanding ..................... 4,503,312 4,214,475
Weighted average common and common equivalent .................. 4,611,299 4,338,620
shares outstanding
Cash dividends declared per common share ......................... $ 0.00 $ 0.00
=========================
Comprehensive income ............................................. $ 619,541 $ 1,022,604
=========================
See Notes to Consolidated Financial Statements
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31
2005 2004
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 1,323,750 $ 835,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................................... 426,759 329,183
Provision for loan losses ....................................... 301,206 856,841
Amortization of offering costs on subordinated debentures ....... 3,579 7,196
Loss on redemption of junior subordinated debentures ............ 0 747,490
Amortization of premiums on securities, net ..................... 173,621 310,661
Loans originated for sale ....................................... (18,144,695) (20,203,620)
Proceeds on sales of loans ...................................... 17,751,385 19,799,430
Net gains on sales of loans ..................................... (259,836) (261,418)
Tax benefit of nonqualified stock options exercised ............. 52,828 83,301
Increase in accrued interest receivable ......................... (310,912) (157,703)
Increase in other assets ........................................ (242,045) (2,650,990)
Increase (decrease) in other liabilities ........................ 842,790 (355,762)
----------------------------
Net cash provided by (used in) operating activities ......... $ 1,918,430 $ (659,474)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold ..................... $ (5,105,000) $ 410,000
Net decrease in interest-bearing deposits at financial institutions 1,712,774 1,173,835
Activity in securities portfolio:
Purchases ....................................................... (15,987,703) (16,913,019)
Calls and maturities ............................................ 10,235,000 13,950,000
Paydowns ........................................................ 277,110 360,673
Activity in bank-owned life insurance:
Purchases ....................................................... (589,812) (11,950,717)
Increase in cash value .......................................... (178,747) (89,639)
Net loans originated and held for investment ...................... (4,355,140) (38,551,733)
Purchase of premises and equipment ................................ (3,560,103) (1,250,899)
Proceeds from sales of premises and equipment ..................... 0 4,382
----------------------------
Net cash used in investing activities ....................... $(17,551,621) $(52,857,117)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts .................................. $ 231,897 $ 581,586
Net increase in short-term borrowings ............................. 15,142,898 34,063,897
Activity in Federal Home Loan Bank advances:
Advances ........................................................ -- 18,000,000
Payments ........................................................ (54,246) (6,051,657)
Net increase (decrease) in other borrowings ....................... 5,000,000 (10,000,000)
Proceeds from issuance of junior subordinated debentures .......... -- 20,620,000
Payment of cash dividends ......................................... (179,866) (167,838)
Proceeds from issuance of common stock, net ....................... 122,531 25,458
----------------------------
Net cash provided by financing activities ................... $ 20,263,214 $ 57,071,446
----------------------------
Net increase in cash and due from banks ..................... $ 4,630,023 $ 3,554,855
Cash and due from banks, beginning .................................. 21,372,342 24,427,573
----------------------------
Cash and due from banks, ending ..................................... $ 26,002,365 $ 27,982,428
============================
Supplemental disclosure of cash flow information,
cash payments for:
Interest .......................................................... $ 3,823,467 $ 3,778,526
============================
Income/franchise taxes ............................................ $ 29,851 $ 44,635
============================
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income,
unrealized gains (losses) on securities available for sale, net . $ (704,209) $ 186,687
============================
See Notes to Consolidated Financial Statements
5
Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
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, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005.
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.
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"), Rockford Bank and Trust Company ("Rockford Bank & Trust"), Quad
City Bancard, Inc. ("Bancard"), and Quad City Liquidation Corporation ("QCLC").
All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company also wholly owns QCR Holdings Statutory Trust II
("Trust II"), QCR Holdings Statutory Trust III ("Trust III"), and QCR Holdings
Statutory Trust IV ("Trust IV"). (See also Note 7 regarding Trust IV.) These
three entities were established by the Company for the sole purpose of issuing
trust preferred securities. As required by a ruling of the Securities and
Exchange Commission in December 2003, the Company's equity investments in these
entities are not consolidated, but are included in other assets on the
consolidated balance sheet for $620 thousand in aggregate at March 31, 2005. In
addition to these eight wholly owned subsidiaries, the Company has an aggregate
investment of $308 thousand in three associated companies, Nobel Electronic
Transfer, LLC, Nobel Real Estate Investors, LLC, and Velie Plantation Holding
Company. The Company owns 20% equity positions in each of these associated
companies.
6
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 Ended March 31,
----------------------------
2005 2004
---------------------------
Net income, as reported ....................... $1,323,750 $ 835,917
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects ........... (44,244) (33,699)
--------------------------
Net income ............................. $1,279,506 $ 802,218
==========================
Earnings per share:
Basic:
As reported ................................ $ 0.29 $ 0.20
Pro forma .................................. $ 0.28 $ 0.19
Diluted:
As reported ................................ $ 0.29 $ 0.19
Pro forma .................................. $ 0.28 $ 0.19
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, 2005 and 2004: dividend rate of 0.36% to 0.43%; expected price
volatility of 24.25% to 24.81%; risk-free interest rate based upon current rates
at the date of grants (4.10% to 4.57% for stock options and 0.95% to 2.47% for
the employee stock purchase plan); and expected lives of 10 years for stock
options and 3 months to 6 months for the 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,
---------------------------
2005 2004
---------------------------
Net income, basic and diluted
Earnings ................................... $1,323,750 $ 835,917
===========================
Weighted average common shares
Outstanding ................................ 4,503,312 4,214,475
Weighted average common shares
issuable upon exercise of stock
options and under the
employee stock purchase plan ............... 107,987 124,145
---------------------------
Weighted average common and
common equivalent shares
outstanding ................................ 4,611,299 4,338,620
===========================
7
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, 2005 and 2004,
respectively.
Three months ended
March 31,
---------------------------------
2005 2004
---------------------------------
Revenue:
Commercial banking:
Quad City Bank & Trust ............. $ 8,602,346 $ 7,621,755
Cedar Rapids Bank & Trust .......... 3,258,266 2,027,790
Rockford Bank & Trust .............. 56,987 0
Credit card processing .............. 472,980 584,679
Trust management .................... 735,143 680,804
All other ........................... 272,887 128,061
--------------------------------
Total revenue .................. $ 13,398,609 $ 11,043,089
================================
Net income (loss):
Commercial banking:
Quad City Bank & Trust ............. $ 1,363,014 $ 1,127,201
Cedar Rapids Bank & Trust .......... 377,699 142,418
Rockford Bank & Trust .............. (378,724) 0
Credit card processing ............... 117,556 244,864
Trust management ..................... 198,188 199,475
All other ............................ (353,983) (878,041)
--------------------------------
Total net income ............... $ 1,323,750 $ 835,917
================================
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company's subsidiary banks make various
commitments and incur certain contingent liabilities that are not presented in
the accompanying consolidated financial statements. The commitments and
contingent liabilities include various guarantees, commitments to extend credit,
and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the banks upon extension of credit, is based
upon management's credit evaluation of the counter-party. Collateral held varies
but may include accounts receivable, marketable securities, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The subsidiary banks hold collateral, as described
above, supporting those commitments if deemed necessary. In the event the
customer does not perform in accordance with the terms of the agreement with the
third party, the 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, 2005 and
December 31, 2004, no amounts were recorded as liabilities for the banks'
potential obligations under these guarantees.
As of March 31, 2005 and December 31, 2004, commitments to extend credit
aggregated were $259.7 million and $257.6 million, respectively. As of March 31,
2005 and December 31, 2004, standby, commercial and similar letters of credit
aggregated were $12.2 million and $12.7 million, respectively. Management does
not expect that all of these commitments will be funded.
8
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amounts of $4.2 million and $3.5 million, at March 31,
2005 and December 31, 2004, respectively. These amounts are included in loans
held for sale at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold
with varying recourse provisions. Essentially, all loan sales agreements require
the repurchase of a mortgage loan by the seller in situations such as breach of
representation, warranty, or covenant, untimely document delivery, false or
misleading statements, failure to obtain certain certificates or insurance,
unmarketability, etc. Certain loan sales agreements also contain repurchase
requirements based on payment-related defects that are defined in terms of the
number of days/months since the purchase, the sequence number of the payment,
and/or the number of days of payment delinquency. Based on the specific terms
stated in the agreements of investors purchasing residential mortgage loans from
the Company's subsidiary banks, the Company had $32.4 million and $35.6 million
of sold residential mortgage loans with recourse provisions still in effect at
March 31, 2005 and December 31, 2004, respectively. The subsidiary banks did not
repurchase any loans from secondary market investors under the terms of loans
sales agreements during the quarter ended March 31, 2005 or the year ended
December 31, 2004. In the opinion of management, the risk of recourse to the
subsidiary banks is not significant, and accordingly no liabilities have been
established related to such.
During 2004, Quad City Bank & Trust joined the Federal Home Loan Bank's (FHLB)
Mortgage Partnership Finance (MPF) Program, which offers a "risk-sharing"
alternative to selling residential mortgage loans to investors in the secondary
market. Lenders funding mortgages through the MPF Program manage the credit risk
of the loans they originate. The loans are subsequently funded by the FHLB and
held within their portfolio, thereby managing the liquidity, interest rate, and
prepayment risks of the loans. Lenders participating in the MPF Program receive
monthly credit enhancement fees for managing the credit risk of the loans they
originate. Any credit losses incurred on those loans will be absorbed first by
private mortgage insurance, second by an allowance established by the FHLB, and
third by withholding monthly credit enhancements due to the participating
lender. At March 31, 2005, Quad City Bank & Trust had funded $13.0 million of
mortgages through the FHLB's MPF Program with an attached credit exposure of
$258 thousand. At December 31, 2004, Quad City Bank & Trust had funded $11.7
million of mortgages through the FHLB's MPF Program with an attached credit
exposure of $240 thousand. In conjunction with its participation in this
program, Quad City Bank & Trust had an allowance for credit losses on these
off-balance sheet exposures of $45 thousand and $11 thousand at March 31, 2005
and December 31, 2004, respectively.
Bancard is subject to the risk of cardholder chargebacks and its merchants 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. In August of 2004 Bancard began
making monthly provisions to an allowance for chargeback losses in an amount
equal to 5 basis points of the month's dollar volume of merchant credit card
activity. Management will continually monitor merchant credit card activity and
Bancard's level of the allowance for chargeback losses. At March 31, 2005 and
December 31, 2004, Bancard had a merchant chargeback reserve of $103 thousand
and $164 thousand, respectively.
The Company also has a limited guarantee to MasterCard International,
Incorporated, which is backed by a $750 thousand letter of credit from The
Northern Trust Company. As of March 31, 2005 and December 31, 2004, there were
no significant pending liabilities.
9
NOTE 5 - JUNIOR SUBORDINATED DEBENTURES
In June 1999, the Company issued 1,200,000 shares of 9.2% cumulative trust
preferred securities through a newly formed subsidiary, Trust I, which used the
proceeds from the sale of the trust preferred securities to purchase junior
subordinated debentures of the Company. These securities were $12.0 million at
December 31, 2003. In February 2004, the Company issued, in a private
transaction, $12.0 million of fixed/floating rate capital securities and $8.0
million of floating rate capital securities through two newly formed
subsidiaries, Trust II and Trust III, respectively. The securities issued by
Trust II and Trust III mature in thirty years. The fixed/floating rate capital
securities are callable at par after seven years, and the floating rate capital
securities are callable at par after five years. The fixed/floating rate capital
securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly, and the floating rate capital securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the rate currently set at 5.94%.
Trust II and Trust III used the proceeds from the sale of the trust preferred
securities, along with the funds from their equity, to purchase junior
subordinated debentures of the Company in the amounts of $12.4 million and $8.2
million, respectively. In February 2004, the Federal Reserve provided
confirmation to the Company for their treatment of these new issuances as Tier 1
capital for regulatory capital purposes, subject to current established
limitations. These securities were $20.0 million in aggregate at March 31, 2005.
On June 30, 2004, the Company redeemed the $12.0 million of 9.2% cumulative
trust preferred securities issued by Trust I in 1999. During 2004, the Company
recognized a loss of $747 thousand on the redemption of these trust preferred
securities at their earliest call date, which resulted from the one-time
write-off of unamortized costs related to the original issuance of the
securities in 1999.
See also Note 7 regarding Trust IV and the related increase in junior
subordinated debentures subsequent to March 31, 2005.
NOTE 6 - RECENT ACCOUNTING DEVELOPMENTS
On September 30, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") Issue No. 03-1-1
delaying the effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments",
which provides guidance for determining the meaning of "other-than-temporarily
impaired" and its application to certain debt and equity securities within the
scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", and investments accounted for under the cost method. The guidance
requires that investments which have declined in value due to credit concerns or
solely due to changes in interest rates must be recorded as
other-than-temporarily impaired unless the Company can assert and demonstrate
its intention to hold the security for a period of time sufficient to allow for
a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. The delay of the effective date of EITF 03-1 will be superceded
concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP
Issue 03-1-a is intended to provide implementation guidance with respect to all
securities analyzed for impairment under paragraphs 10-20 of EITF 03-1.
Management continues to closely monitor and evaluate how the provisions of EITF
03-1 and proposed FSP Issue 03-1-a will affect the Company.
In December 2004, FASB published Statement No. 123 (revised 2004), Share-Based
Payment ("FAS 123(R)") FAS 123(R) requires that the compensation cost relating
to share-based payment transactions, including grants of employee stock options
and shares under employee stock purchase plans, be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement. The
Statement was originally effective at the beginning of the Company's third
quarter in 2005, however, in April 2005 the adoption of a new rule, by the
Securities and Exchange Commission, changed the dates for compliance with this
standard. The Company will now be required to implement Statement No. 123(R)
beginning January 1, 2006.
As of the effective date, the Company will have the option of applying the
Statement using a modified prospective application or a modified retrospective
application. Under the prospective method compensation cost would be recognized
for (1) all awards granted after the required effective date and for awards
modified, cancelled, or repurchased after that date and (2) the portion of prior
awards for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated for pro forma disclosures under
SFAS 123. Under the retrospective application method compensation cost would be
recognized as in (1) above and (2) for prior periods would be restated
consistent with the pro forma disclosures required for those periods by SFAS
123. The Company has not yet made a decision on which method of application it
will elect.
10
The impact of this Statement on the Company after the effective date and beyond
will depend upon various factors, among them being the future compensation
strategy. The SFAS 123 pro forma compensation costs presented in the footnotes
to the financial statements have been calculated using a Black-Scholes
option-pricing model and may not be indicative of amounts, which should be
expected in future periods.
NOTE 7 - SUBSEQUENT EVENT
On May 5, 2005, the Company announced the issuance of $5.0 million of floating
rate capital securities (the "Trust Preferred Securities") of QCR Holdings
Statutory Trust IV. The securities represent the undivided beneficial interest
in Trust IV, which was established by the Company for the sole purpose of
issuing the Trust Preferred Securities. The Trust Preferred Securities were sold
in a private transaction exempt from registration under the Securities Act of
1933, as amended (the "Act") and have not been registered under the Act.
The securities issued by Trust IV mature in thirty years, but are callable at
par after five years. The Trust Preferred Securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the initial rate set at 5.02%.
Interest is payable quarterly. Trust IV used the $5.0 million of proceeds from
the sale of the Trust Preferred Securities, in combination with $155 thousand of
proceeds from its own equity, to purchase $5.2 million of junior subordinated
debentures of the Company. The Company will treat these new issuances as Tier 1
capital for regulatory capital purposes, subject to current established
limitations. The Company incurred no issuance costs, as a result of the
transaction. The Company intends to use its net proceeds for general corporate
purposes, including the possible paydown of its other borrowings.
11
Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QCR Holdings, Inc. is the parent company of Quad City Bank & Trust, Cedar Rapids
Bank & Trust, Rockford Bank & Trust, and Quad City Bancard, Inc.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are Iowa-chartered
commercial banks, and Rockford Bank & Trust is an Illinois-chartered commercial
bank. All are members 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 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 five offices
that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. Cedar
Rapids Bank & Trust commenced operations in 2001 and 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. In early summer of 2005, Cedar Rapids Bank & Trust is scheduled to
open its first branch location in northern Cedar Rapids, and in mid 2005 it
plans to relocate its headquarters to a new facility in downtown Cedar Rapids.
Rockford Bank & Trust commenced operations in January 2005 and provides
full-service commercial and consumer banking service to Rockford and adjacent
communities through its office located in downtown Rockford.
Bancard provides merchant and cardholder credit card processing services. In
October 2002, the Company sold Bancard's independent sales organization (ISO)
related merchant credit card operations to iPayment, Inc. Until September 24,
2003, Bancard continued to temporarily process transactions for iPayment, Inc.,
and approximately 32,500 merchants. Since iPayment, Inc. discontinued processing
with Bancard, processing volumes have decreased significantly. Bancard provides
credit card processing for its local merchants and agent banks and for
cardholders of the Company's subsidiary banks.
12
OVERVIEW
Net income for the first three months of 2005 was $1.3 million as compared to
net income of $836 thousand for the same period in 2004, an increase of $488
thousand, or 58%. Basic and diluted earnings per share for the first three
months of 2005 were each $0.29 compared to $0.20 basic and $0.19 diluted
earnings per share for the first quarter of 2004. For the three months ended
March 31, 2005, total revenue experienced an improvement of $2.4 million when
compared to the same period in 2004. Contributing to this 21% improvement in
revenue for the Company were increases in net interest income of $712 thousand,
or 12%, and in noninterest income of $355 thousand, or 15%. Also, positively
impacting earnings was a decline in the provision for loan losses of $556
thousand, or 65%. The first three months of 2005 reflected an increase in
noninterest expense of 14%, when compared to the same period in 2004. The
increase in noninterest expense was predominately due to a combination of
expense incurred on other real estate owned and operating expense related to the
start-up of the Company's third bank charter in Rockford, Illinois. After-tax
income at Quad City Bank & Trust and Cedar Rapids Bank & Trust showed
improvement of $224 thousand and $212 thousand, respectively, for the first
quarter of 2005, as compared to the same period in 2004. Cedar Rapids Bank &
Trust also experienced significant asset growth, as total assets grew to $238.4
million at March 31, 2005 from $171.0 million at March 31, 2004.
Earnings for the first quarter of 2004 were impacted by the write-off of $747
thousand of unamortized issuance costs associated with the redemption of $12.0
million of trust preferred securities originally issued in 1999. The write-off
of these costs, combined with the additional interest costs of supporting both
the original and new securities issued in February 2004, resulted in an
after-tax reduction to net income during the first quarter of 2004 of $558
thousand, or $0.13 in diluted earnings per share. Excluding the one-time
write-off of these unamortized issuance costs and the additional interest costs
of the new securities, net income for the three months ended March 31, 2004
would have been $1.4 million. Although excluding the impact of this event is a
non-GAAP measure, we believe that it is important to provide such information
due to the non-recurring nature of this expense and to more accurately compare
the results of the periods presented. Management believes that the refinancing
strategy will continue to provide significant long-term benefits to the Company
as the new fixed rate securities were issued at a rate of 6.93% for the first
seven years and the floating rate securities currently carry a rate of 5.94%, as
compared to a rate of 9.2% on the 1999 fixed rate securities
On May 5, 2005, the Company announced the issuance of $5.0 million of floating
rate capital securities of QCR Holdings Statutory Trust IV. The securities
represent the undivided beneficial interest in Trust IV, which was established
by the Company for the sole purpose of issuing the Trust Preferred Securities.
The securities issued by Trust IV mature in thirty years, but are callable at
par after five years. The Trust Preferred Securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the initial rate set at 5.02%.
Interest is payable quarterly. Trust IV used the $5.0 million of proceeds from
the sale of the Trust Preferred Securities, in combination with $155 thousand of
proceeds from its own equity, to purchase $5.2 million of junior subordinated
debentures of the Company. The Company will treat these new issuances as Tier 1
capital for regulatory capital purposes, subject to current established
limitations. The Company incurred no issuance costs, as a result of the
transaction. The Company intends to use its net proceeds for general corporate
purposes, including the possible paydown of its other borrowings.
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.
13
The Company realized a 0.11% decrease in its net interest spread, declining from
3.10% for the three months ended March 31, 2004 to 2.99% for the three months
ended March 31, 2005. The average yield on interest-earning assets increased
0.18% for the three months ended March 31, 2005 when compared to the same period
ended March 31, 2004. At the same time, the average cost of interest-bearing
liabilities increased 0.29%. The narrowing of the net interest spread resulted
in a 0.19% reduction in the Company's net interest margin percentage. For the
three months ended March 31 2005, the net interest margin was 3.26% compared to
3.45% for the same period in 2004. The net interest margin of 3.26% for the
first quarter of 2005 was a decline from that experienced in the fourth quarter
of 2004, when the quarterly net interest margin was 3.32%. Management continues
to closely monitor and manage net interest margin. From a profitability
standpoint, an important challenge for the subsidiary banks is the maintenance
of their net interest margins. Management continually addresses this issue with
the use of alternative funding sources and pricing strategies.
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
For the three months ended March 31,
------------------------------------------------------------------------
2005 2004
--------------------------------- -----------------------------------
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 .................................... $ 3,411 $ 18 2.11% $ 4,368 $ 5 0.46%
Interest-bearing deposits at
financial institutions .............................. 5,531 41 2.97% 10,956 71 2.59%
Investment securities (1) ............................. 149,004 1,371 3.68% 125,819 1,208 3.84%
Gross loans receivable (2) ............................ 647,923 9,320 5.75% 536,763 7,468 5.57%
--------------------- ----------------------
Total interest earning assets ................. 805,869 10,750 5.34% 677,906 8,752 5.16%
Noninterest-earning assets:
Cash and due from banks ............................... $ 28,453 $ 29,625
Premises and equipment ................................ 19,594 12,477
Less allowance for estimated losses on loans .......... (9,423) (8,972)
Other ................................................. 34,096 26,161
-------- --------
Total assets .................................. $878,589 $737,197
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ...................... $171,275 436 1.02% $172,094 322 0.75%
Savings deposits ...................................... 16,264 13 0.32% 14,571 12 0.33%
Time deposits ......................................... 298,719 1,996 2.67% 202,297 1,169 2.31%
Short-term borrowings ................................. 105,923 466 1.76% 63,883 142 0.89%
Federal Home Loan Bank advances ....................... 92,003 850 3.70% 83,553 800 3.83%
Junior subordinated debentures ........................ 20,620 330 6.40% 22,310 422 7.57%
Other borrowings ...................................... 9,750 101 4.14% 5,000 36 2.88%
--------------------- ----------------------
Total interest-bearing
liabilities ................................... 714,554 4,192 2.35% 563,708 2,903 2.06%
Noninterest-bearing demand ............................ 106,985 120,858
Other noninterest-bearing
liabilities ......................................... 5,889 10,989
Total liabilities ..................................... 827,428 695,555
Stockholders' equity .................................. 51,161 41,642
--------- --------
Total liabilities and
stockholders' equity .......................... $ 878,589 $737,197
========= ========
Net interest income ................................... $ 6,558 $ 5,849
======= =======
Net interest spread ................................... 2.99% 3.10%
====== ======
Net interest margin ................................... 3.26% 3.45%
====== ======
Ratio of average interest earning
assets to average interest-
bearing liabilities ................................. 112.78% 120.26%
========= ========
14
(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.
Analysis of Changes of Interest Income/Interest Expense
For the three months ended March 31, 2005
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Period Rate Volume
-----------------------------------
2004 vs. 2005
-----------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ................................ $ 13 $ 20 $ (7)
Interest-bearing deposits at financial institutions (30) 57 (87)
Investment securities (2) ......................... 163 (298) 461
Gross loans receivable (3) ........................ 1,852 260 1,592
---------------------------------
Total change in interest income ......... $ 1,998 $ 39 $ 1,959
---------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................. $ 114 $ 124 $ (10)
Savings deposits .................................. 1 (2) 3
Time deposits ..................................... 827 204 623
Short-term borrowings ............................. 324 194 130
Federal Home Loan Bank advances ................... 50 (154) 204
Junior subordinated debentures .................... (92) (62) (30)
Other borrowings .................................. 65 20 45
---------------------------------
Total change in interest expense ........ $ 1,289 $ 324 $ 965
---------------------------------
Total change in net interest income ............... $ 709 $ (285) $ 994
=================================
(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.
15
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. 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, 2005 and December 31, 2004 were adequate to absorb losses inherent in
the loan portfolio, a decline in local economic conditions, or other factors,
could result in increasing losses that cannot be reasonably predicted at this
time.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Interest income increased by $2.0 million to $10.7 million for the three-month
period ended March 31, 2005 when compared to $8.7 million for the quarter ended
March 31, 2004. The increase of 23% in interest income was attributable to
greater average, outstanding balances in interest earning assets, principally
with respect to loans receivable, slightly enhanced by an improved aggregate
asset yield. The Company's average yield on interest earning assets increased
0.18% for the three months ended March 31, 2005 when compared to the three
months ended March 31, 2004.
Interest expense increased by $1.3 million from $2.9 million for the three-month
period ended March 31, 2004, to $4.2 million for the three-month period ended
March 31, 2005. The 44% increase in interest expense was the result of a
combination of greater average, outstanding balances in interest bearing
liabilities, principally with respect to customers' time deposits in subsidiary
banks, partially enhanced by aggregate increased interest rates, principally
with respect to customers' time deposits in subsidiary banks and short term
borrowings. The Company's average cost of interest bearing liabilities was 2.35%
for the three months ended March 31, 2005, which was an increase of 0.29% when
compared to the three months ended March 31, 2004.
At March 31, 2005 and December 31, 2004, the Company had an allowance for
estimated losses on loans of 1.35% and 1.43%, respectively. The provision for
loan losses decreased by $556 thousand from $857 thousand for the three-month
period ended March 31, 2004 to $301 thousand for the three-month period ended
March 31, 2005. During the first quarter of 2005, management made monthly
provisions for loan losses based upon a number of factors, including the
increase in loans and a detailed analysis of the loan portfolio. During the
first quarter of 2005, $58 thousand of the provision to the allowance for loan
losses, or 19%, was attributed to net growth in the loan portfolio and $243
thousand, or 81%, was attributed to downgrades within the portfolio during the
quarter. For the three months ended March 31, 2005, there were commercial loan
charge-offs of $751 thousand, and there were commercial recoveries of $102
thousand. The charge-off a single, nonperforming loan at Quad City Bank & Trust
for $726 thousand accounted for 87% of the gross commercial charge-offs.
Consumer loan charge-offs and recoveries totaled $87 thousand and $13 thousand,
respectively, during the quarter. Credit card loans accounted for 85% of the
first quarter consumer net charge-offs. Residential real estate loans had no
charge-offs or recoveries for the three months ended March 31, 2005.
16
Noninterest income of $2.7 million for the three-month period ended March 31,
2005 was a $354 thousand, or 15%, increase from $2.4 million for the three-month
period ended March 31 2004. 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 income.
The quarter ended March 31 2005, when compared to the same quarter in 2004,
posted a $120 thousand decrease in fees earned by the merchant credit card
operations of Bancard. Trust department fees improved $54 thousand from the
first quarter of 2004 to the first quarter of 2005. Deposit service fees were
down $28 thousand from quarter to quarter. Gains on the sale of residential real
estate mortgage loans, net, held steady at $260 thousand for the quarter ended
March 31, 2005 when compared to the same quarter in 2004. Additional variations
in noninterest income consisted of an $84 thousand increase in earnings on cash
surrender value of life insurance, a $14 thousand increase in investment
advisory and management fees, and a $352 thousand increase in other noninterest
income. Other noninterest income in each quarter consisted primarily of income
from associated companies, earnings on other assets, and Visa check card fees.
Merchant credit card fees, net of processing costs for the three months ended
March 31, 2005 decreased by 22% to $419 thousand from $539 thousand for the
first quarter of 2004. In October 2002, the Company sold Bancard's ISO related
merchant credit card operations to iPayment, Inc., and Bancard's core business
focus was shifted to processing for its agent banks, cardholders, and local
merchants. Through September 2003, Bancard continued to process ISO-related
transactions for iPayment, Inc. for a fixed monthly service fee, which increased
as the temporary processing period was extended. In September 2003, the transfer
of the ISO-related Visa/Mastercard processing activity to iPayment, Inc. was
completed and significantly reduced Bancard's exposure to risk of credit card
loss that the ISO activity carried with it. Bancard had established and carried
ISO-specific reserves, which provided coverage for this exposure. In March 2004,
the Company recognized a recovery of $144 thousand from a reduction in these
ISO-specific reserves. For the first quarter of 2004, Bancard's ISO-related
income was $196 thousand, and Bancard's core merchant credit card fees, net of
processing costs were $343 thousand. For the first quarter of 2005, Bancard's
core merchant credit card fees, net of processing costs were $419 thousand,
which was an improvement of $76 thousand, or 22%, when compared to the first
quarter of 2004. The increase from year to year was primarily the result of a
reduction of $73 thousand during the first quarter of 2005 to a specific
allocation in the allowance for chargeback losses.
For the quarter ended March 31, 2005, trust department fees increased $54
thousand, or 8%, to $735 thousand from $681 thousand for the same quarter in
2004. There was continued development of existing trust relationships and the
addition of new trust customers throughout the past twelve months, as well as an
improvement in market values of securities held in trust accounts, when compared
to one year ago. Each of these factors had a resulting impact on the calculation
and realization of trust fees.
Deposit service fees decreased $28 thousand, or 7%, to $381 thousand from $409
thousand for the three-month periods ended March 31, 2005 and March 31, 2004,
respectively. This decrease was primarily a result of the reduction in service
fees collected on the noninterest bearing demand deposit accounts at Quad City
Bank & Trust. The balance of consolidated noninterest bearing demand deposits at
March 31, 2005 was down $11.6 million from March 31, 2004. Service charges and
NSF (non-sufficient funds or overdraft) charges related to demand deposit
accounts were the main components of deposit service fees.
Gains on sales of loans, net, were $260 thousand for the three months ended
March 31, 2005, which remained stabile, when compared to $261 thousand for the
three months ended March 31, 2004. Loans originated for sale during the first
quarter of 2005 were $18.1 million and during the first quarter of 2004 were
$20.2 million. Proceeds on the sales of loans during the first quarters of 2005
and 2004 were $17.8 million and $19.8 million, respectively.
During the first quarter of 2005, earnings on the cash surrender value of life
insurance grew $84 thousand, or 88%, to $179 thousand from $95 thousand for the
first quarter of 2004. In February 2004, the Company made significant
investments in bank-owned life insurance (BOLI) on key executives at the two
existing subsidiary banks. Quad City Bank & Trust purchased $8.3 million of
BOLI, and Cedar Rapids Bank & Trust made a purchase of $3.6 million of BOLI.
Investment advisory and management fees increased $14 thousand from $126
thousand for the three months ended March 31, 2004 to $140 thousand for the
three months ended March 31, 2005. The 12% increase from year to year was due to
the increased volume of investment services provided by representatives of LPL
Financial Services at the subsidiary banks, primarily at Quad City Bank & Trust.
17
For the quarter ended March 31, 2005, other noninterest income increased $352
thousand, or 139%, to $605 thousand from $253 thousand for the same quarter in
2004. The increase was primarily due to income from associated companies. During
the first quarter of 2005, one of the Company's associated companies, Nobel
Electronic Transfer, LLC, completed a large, one-time sales transaction, which
contributed $219 thousand to other noninterest income. Income from associated
companies, earnings on other assets, Visa check card fees, and ATM fees were
primary contributors to other noninterest income during the first quarter of
2005.
Noninterest expenses for the three months ended March 31, 2005, were $7.0
million and for the three months ended March 31, 2004, were $6.1 million. For
the first quarter of 2005, noninterest expenses for the new charter at Rockford
Bank and Trust were $577 thousand. The significant components of noninterest
expenses were salaries and benefits, occupancy and equipment expenses, and
professional and data processing fees, for both quarters. During the first
quarter of 2004, there was also a significant loss on the redemption of junior
subordinated debentures.
The following table sets forth the various categories of noninterest expenses
for the three months ended March 31, 2005 and 2004.
Noninterest Expenses
Three months ended
March 31,
-------------------------
2005 2004 % change
--------------------------------------
Salaries and employee benefits ..................... $ 3,896,367 $ 3,151,801
23.6%
Professional and data processing fees .............. 612,796 465,276 31.7%
Advertising and marketing .......................... 260,179 213,792 21.7%
Occupancy and equipment expense .................... 975,953 730,990 33.5%
Stationery and supplies ............................ 147,778 136,945 7.9%
Postage and telephone .............................. 196,315 166,280 18.1%
Bank service charges ............................... 118,473 137,842 (14.1)%
Insurance .......................................... 153,155 106,040 44.4%
Loss on redemption of junior subordinated debentures 0 747,490 (100.0)%
0
Other .............................................. 593,834 238,178 149.3%
-------------------------
Total noninterest expenses ................. $ 6,954,850 6,094,634 14.1%
=========================
The quarter ended March 31, 2004 reflected a $747 thousand loss on the
anticipated redemption of trust preferred securities at their earliest call date
of June 30, 2004. For the quarter ended March 31, 2005, total salaries and
benefits increased to $3.9 million, which was up $745 thousand from the previous
year's quarter total of $3.2 million. The increase of 24% was primarily due to
the Company's increase in compensation and benefits related to an increase in
employees from 222 full time equivalents (FTEs) to 257 from year-to-year. The
staffing of Rockford Bank and Trust created eleven FTEs and 44% of the increase
in total salaries and benefits. Other noninterest expense increased $356
thousand to $594 thousand for the first quarter of 2005 from $238 thousand for
the first quarter of 2004. The increase was primarily a result of $141 thousand
of expense incurred on other real estate owned, in combination with increased
provisions for credit losses on off-balance sheet exposures. Occupancy and
equipment expense increased $245 thousand, or 34%, from quarter to quarter. The
increase was a proportionate reflection of the Company's investment in new
facilities at the subsidiary banks, in combination with the related costs for
additional furniture, fixtures and equipment. Professional and data processing
fees experienced a 32% increase from $465 thousand for the first quarter of 2004
to $613 thousand for the comparable quarter in 2005. The $148 thousand increase
was primarily the result of legal and other professional fees related to the
organization of Rockford Bank & Trust and legal fees incurred at Quad City Bank
& Trust in foreclosure proceedings with a significant commercial loan customer.
For the quarter ended March 31, 2005, insurance expense increased to $153
thousand, which was up $47 thousand from the previous year's quarter total of
$106 thousand. The increase of 44% was primarily due to the Company's $8.3
million increased investment in premises and equipment, net, from March 31, 2004
to March 31, 2005.
18
The provision for income taxes was $627 thousand for the three-month period
ended March 31, 2005 compared to $353 thousand for the three-month period ended
March 31, 2004 for an increase of $274 thousand, or 78%. The increase was the
result of an increase in income before income taxes of $762 thousand, or 64%,
for the 2005 quarter when compared to the 2004 quarter. Primarily due to a
decrease in the proportionate share of tax-exempt income to total income from
year to year, the Company experienced an increase in the effective tax rate from
29.7% for the first quarter of 2004 to 32.2% for the first quarter of 2005.
FINANCIAL CONDITION
Total assets of the Company increased by $21.8 million, or 3%, to $891.9 million
at March 31, 2005 from $870.1 million at December 31, 2004. The growth resulted
primarily from increases in Federal funds sold, the loan portfolio and in cash
and due from banks, funded by short-term borrowings, interest-bearing deposits
and other borrowings.
Cash and due from banks increased by $4.6 million, or 22%, to $26.0 million at
March 31, 2005 from $21.4 million at December 31, 2004. 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, 2005,
the subsidiary banks had $8.0 million invested in such funds. This amount
increased by $5.1 million, or 177%, from $2.9 million at December 31, 2004. The
increase was primarily a result of an increased demand for Federal funds by Quad
City Bank & Trust's downstream correspondent banks.
Interest bearing deposits at financial institutions decreased by $1.8 million,
or 44%, to $2.1 million at March 31, 2005 from $3.9 million at December 31,
2004. Included in interest bearing deposits at financial institutions are demand
accounts, money market accounts, and certificates of deposit. The decrease was
the result of decreases in money market accounts of $1.5 million and maturities
of certificates of deposit totaling $71 thousand, in combination with a decrease
in demand account balances of $212 thousand.
Securities increased by $4.1 million, or 3%, to $153.7 million at March 31, 2005
from $149.6 million at December 31, 2004. The increase was the result of a
number of transactions in the securities portfolio. Paydowns of $277 thousand
were received on mortgage-backed securities, and the amortization of premiums,
net of the accretion of discounts, was $174 thousand. Maturities and calls of
securities occurred in the amount of $10.2 million, and the portfolio
experienced a decrease in the fair value of securities, classified as available
for sale, of $1.1 million. These portfolio decreases were offset by the purchase
of an additional $16.0 million of securities, classified as available for sale.
Total gross loans receivable increased slightly by $4.2 million, or 1%, to
$652.6 million at March 31, 2005 from $648.4 million at December 31, 2004. The
increase was the result of originations, renewals, additional disbursements or
purchases of $106.5 million of commercial business, consumer and real estate
loans, less loan charge-offs, net of recoveries, of $723 thousand, and loan
repayments or sales of loans of $101.5 million. During the three months ended
March 31, 2005, Quad City Bank & Trust contributed $67.6 million, or 64%, Cedar
Rapids Bank & Trust contributed $34.4 million, or 32%, and Rockford Bank & Trust
contributed $4.5 million, or 4%, of the Company's loan originations, renewals,
additional disbursements or purchases. Cedar Rapids Bank & Trust participated
$5.6 million, or 16%, of their originations during the period to Quad City Bank
& Trust. The mix of loan types within the Company's portfolio at March 31, 2005
reflected 81% commercial, 10% 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 $8.8 million at March 31, 2005
compared to $9.3 million at December 31, 2004, a decrease of $421 thousand, or
5%. 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, collateral positions, governmental guarantees 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 quarterly on all credits risk-rated less than "fair quality" and
monthly on all credits that were both risk-rated less than "fair quality" and
carried an aggregate exposure of $500 thousand or more. 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.
19
Although management believes that the allowance for estimated losses on loans at
March 31, 2005 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. Unpredictable future events could 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. Asset quality is a
priority for the Company and its subsidiaries. The ability to grow profitably is
in part dependent upon the ability to maintain that quality. The Company
continually focuses efforts at its subsidiary banks with the intention to
improve the overall quality of the Company's loan portfolio.
Net charge-offs for the three months ended March 31 were $723 thousand in 2005
and $24 thousand in 2004. One measure of the adequacy of the allowance for
estimated losses on loans is the ratio of the allowance to the gross loan
portfolio. The allowance for estimated losses on loans as a percentage of gross
loans was 1.35% at March 31, 2005 and 1.69% at March 31, 2004.
At March 31, 2005, total nonperforming assets were $9.2 million compared to
$10.7 million at December 31, 2004. The $1.5 million decrease was the result of
a $490 thousand decrease in nonaccrual loans in combination with a decrease of
$582 thousand in accruing loans past due 90 days or more, and a decrease of $351
thousand in other real estate owned.
Nonaccrual loans were $7.1 million at March 31, 2005 compared to $7.6 million at
December 31, 2004, a decrease of $490 thousand. The decrease in nonaccrual loans
was comprised of decreases in commercial loans of $293 thousand and real estate
loans of $480 thousand, and an increase in consumer loans of $283 thousand. Five
large commercial lending relationships at Quad City Bank & Trust, with an
aggregate outstanding balance of $6.1 million, comprised 85% of the nonaccrual
loans at March 31, 2005. The existence of either a strong collateral position, a
governmental guarantee, or an improved payment status on several of the
nonperformers significantly reduces the Company's exposure to loss. Quad City
Bank & Trust continues to work for resolutions with all of these customers.
Management is continually monitoring the Company's loan portfolio and the level
of allowance for loan losses. The allowance for loan losses to total loans was
1.35% at March 31, 2005. Management's efforts are ongoing to improve the overall
quality of the loan portfolio. Nonaccrual loans represented approximately one
percent of the Company's held for investment loan portfolio at March 31, 2005.
From December 31, 2004 to March 31, 2005, accruing loans past due 90 days or
more decreased from $1.1 million to $551 thousand. Two significant lending
relationships at Quad City Bank & Trust comprised $396 thousand, or 72%, of this
balance at March 31, 2005. By mid April, one of these relationships totaling
$175 thousand had brought its payment status current.
Premises and equipment increased by $3.1 million, or 17%, to $21.2 million at
March 31, 2005 from $18.1 million at December 31, 2004. During the three-month
period there were purchases of additional land, furniture, fixtures and
equipment and leasehold improvements of $3.6 million, which were partially
offset by depreciation expense of $427 thousand.
In September 2003, the Company announced plans for a fifth Quad City Bank &
Trust banking facility, to be located in west Davenport at Five Points. During
the first three months of 2005, the Company incurred final construction costs of
$961 thousand for this project. Total costs were approximately $3.4 million,
when the facility was completed and began operations in March 2005. In February
2004, Cedar Rapids Bank & Trust announced plans to build a facility in downtown
Cedar Rapids. The Bank's main office will be relocated to this site in mid 2005,
when completion of the project is anticipated. Costs for this facility during
the first three months of 2005 were $1.3 million, and costs to date are $4.0
million. Total costs for this facility are projected to be $6.9 million at
completion. Cedar Rapids Bank & Trust is also constructing a branch office
located on Council Street. The Company has incurred costs for this project of
$805 thousand during the first three months of 2005 and $1.5 million to date.
Total costs for this facility are projected to be $2.3 million at completion.
During the first three months of 2005, costs associated with the establishment
of the full-service banking facility in leased space in downtown Rockford, which
opened as the Company's third bank charter on January 3rd, were $273 thousand,
and total costs were $458 thousand.
Accrued interest receivable on loans, securities and interest-bearing deposits
with financial institutions increased by $311 thousand, or 8%, to $4.4 million
at March 31, 2005 from $4.1 million at December 31, 2004.
20
Bank-owned life insurance (BOLI) increased by $769 thousand from $15.9 million
at December 31, 2004 to $16.7 million at March 31, 2005. Banks may generally buy
BOLI as a financing or cost recovery vehicle for pre-and post-retirement
employee benefits. During 2004, the subsidiary banks purchased $8.0 million of
insurance to finance the expenses associated with the establishment of
supplemental retirement benefits plans for the executive officers. In addition,
the subsidiary banks purchased life insurance totaling $4.2 million on the lives
of a number of senior management personnel for the purpose of funding the
expenses of new deferred compensation arrangements for senior officers. Benefit
expense associated with both the supplemental retirement benefits and deferred
compensation arrangements was $44 thousand and $44 thousand, respectively, for
the three months ended March 31, 2005. These purchases in 2004, combined with
the previously purchased bank-owned life insurance, resulted in Quad City Bank &
Trust and Cedar Rapids Bank & Trust each holding investments in bank-owned life
insurance policies near the regulatory maximum of 25% of capital. The banks
monitor the risks associated with these holdings, including diversification,
lending-limit, concentration, interest rate risk, credit risk, and liquidity.
Earnings on BOLI totaled $179 thousand for the first quarter of 2005.
Other assets increased by $655 thousand, or 4%, to $15.9 million at March 31,
2005 from $15.2 million at December 31, 2004. Other assets included $6.8 million
of equity in Federal Reserve Bank and Federal Home Loan Bank stock, $3.1 million
of deferred tax assets, $1.6 million in other real estate owned (OREO), $928
thousand in investments in unconsolidated companies, $586 thousand of accrued
trust department fees, $413 thousand of unamortized prepaid trust preferred
securities offering expenses, $450 thousand of prepaid Visa/Mastercard
processing charges, other miscellaneous receivables, and various prepaid
expenses. During the second half of 2004, the Company accumulated OREO from four
credit relationships at the subsidiary banks, which totaled $1.9 million at
December 31, 2004. During the first quarter of 2005, one of these OREO
properties was sold for $301 thousand at a minimal gain and one of the property
values was written down $50 thousand.
Deposits increased slightly by $232 thousand, or less than 1%, to $588.2 million
at March 31, 2005 from $588.0 million at December 31, 2004. The modest increase
resulted from a $5.2 million net decrease in non-interest bearing, NOW, money
market and savings accounts offset by a $5.4 million net increase in
interest-bearing certificates of deposit. The subsidiary banks experienced a net
decrease in brokered certificates of deposit of $2.6 million during the first
quarter of 2005.
Short-term borrowings increased $15.1 million, or 14%, from $104.8 million at
December 31, 2004 to $119.9 million at March 31, 2005. 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 their correspondent banks. As a
result of the $21.8 million increase in assets during the first three months of
2005, primarily in the loan and securities portfolios, and the lack of growth in
deposits, the subsidiary banks utilized additional short-term borrowings.
Short-term borrowings were comprised of customer repurchase agreements of $56.9
million and $47.6 million at March 31, 2005 and December 31, 2004, respectively,
as well as federal funds purchased of $63.0 million at March 31, 2005 and $57.2
million at December 31, 2004.
Federal Home Loan Bank advances decreased by $54 thousand, or less than 1%, to
remain at $92.0 million at March 31, 2005 as at December 31, 2004. As a result
of their memberships in either the FHLB of Des Moines or Chicago, 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 $11.0 million at March 31, 2005 for an increase of $5.0
million from December 31, 2004. In June 2004, the Company drew an advance of
$7.0 million on a line of credit at an upstream correspondent bank as partial
funding for the early redemption of $12.0 million in trust preferred securities,
which had been issued in 1999. In December 2004, the Company made a payment to
reduce the balance by $1.0 million. In January 2005, the Company drew an
additional $5.0 million advance as partial funding for the initial
capitalization of Rockford Bank & Trust.
21
Junior subordinated debentures remained unchanged at $20.6 million at March 31,
2005 as at December 31, 2004. In June 1999, the Company issued $12.0 million of
trust preferred securities through a newly formed subsidiary, Trust I. The
Company redeemed these securities on June 30, 2004. In February 2004, the
Company formed two new subsidiaries and issued, in a private transaction, $12.0
million of fixed rate trust preferred securities and $8.0 million of floating
rate trust preferred securities of Trust II and Trust III, respectively. Trust
II and Trust III used the proceeds from the sale of the trust preferred
securities, along with the funds from their equity, to purchase junior
subordinated debentures of the Company in the amounts of $12.4 million and $8.2
million, respectively.
On May 5, 2005, the Company announced the issuance of $5.0 million of floating
rate capital securities of QCR Holdings Statutory Trust IV. The securities
represent the undivided beneficial interest in Trust IV, which was established
by the Company for the sole purpose of issuing the Trust Preferred Securities.
Trust IV used the $5.0 million of proceeds from the sale of the Trust Preferred
Securities, in combination with $155 thousand of proceeds from its own equity,
to purchase $5.2 million of junior subordinated debentures of the Company.
Other liabilities were $8.5 million at March 31, 2005, up $663 thousand, or 8%,
from $7.9 million at December 31, 2004. Other liabilities were comprised of
unpaid amounts for various products and services, and accrued but unpaid
interest on deposits. At March 31, 2005, the most significant components of
other liabilities were $3.5 million of accrued expenses, $1.7 million of
accounts payable, and $1.9 million of interest payable.
Common stock, at both March 31, 2005 and December 31, 2004, was $4.5 million.
The slight increase of $13 thousand was the result of stock issued from the net
exercise of stock options and stock purchased under the employee stock purchase
plan.
Additional paid-in capital totaled $20.5 million at March 31, 2005, up $162
thousand, or 1%, from $20.3 million at December 31, 2004. The increase resulted
from the proceeds received in excess of the $1.00 per share par value for the
13,153 shares of common stock issued as the result of the net exercise of stock
options and stock purchased under the employee stock purchase plan.
Retained earnings increased by $1.3 million, or 5%, to $26.6 million at March
31, 2005 from $20.3 million at December 31, 2004. The increase reflected net
income for the three-month period.
Unrealized gains on securities available for sale, net of related income taxes,
totaled a negative $35 thousand at March 31, 2005 as compared to $669 thousand
at December 31, 2004. The decrease in gains of $704 thousand was attributable to
decreases during the period in fair value of the securities identified as
available for sale, primarily due to a rise in interest rates.
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 $1.9 million for the three months
ended March 31, 2005 compared to $659 thousand net cash used in operating
activities for the same period in 2004. Net cash used in investing activities,
consisting principally of purchases of available for sale securities, was $17.6
million for the three months ended March 31, 2005 and $52.9 million, consisting
primarily of loan originations to be held for investment, for the three months
ended March 31, 2004. Net cash provided by financing activities, consisting
primarily of proceeds from short-term borrowings, for the three months ended
March 31, 2005 was $20.3 million, and for the same period in 2004 was $57.1
million.
22
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 both March 31, 2005 and December 31, 2004, the subsidiary banks had
fourteen lines of credit totaling $99.5 million, of which $13.0 million was
secured and $86.5 million was unsecured. At March 31, 2005, Quad City Bank &
Trust had drawn $31.0 million of their available balance of $83.0 million, and
Cedar Rapids Bank & Trust had drawn $4.0 million of their available balance of
$16.5 million. At December 31, 2004, Quad City Bank & Trust had drawn $21.1
million of their available balance of $83.0 million. As of both March 31, 2005
and December 31, 2004, the Company had two unsecured revolving credit notes
totaling $15.0 million in aggregate, replacing a single note of $15.0 million
previously held. The Company had a 364-day revolving note, which matures
December 29, 2005, for $10.0 million and had a balance outstanding of $6.0
million as of both March 31, 2005 and December 31, 2004. The Company also had a
3-year revolving note, which matures December 30, 2007, for $5.0 million and
carried no balance as of December 31, 2004. On January 3, 2005, the 3-year note
was fully drawn as partial funding for the capitalization of Rockford Bank &
Trust. For both notes, interest is payable monthly at the Federal Funds rate
plus 1% per annum, as defined in the credit agreements. As of December 31, 2004,
the interest rate on the 364-day note was 3.23%. At March 31, 2005, the interest
rate on both notes was 3.79%.
On February 18, 2004, the Company issued $12.0 million of fixed/floating rate
capital securities and $8.0 million of floating rate capital securities. The
securities represent undivided beneficial interests in Trust II and Trust III,
which were established by the Company for the purpose of issuing the trust
preferred securities. The securities issued by Trust II and Trust III mature in
thirty years. The fixed/floating rate capital securities are callable at par
after seven years, and the floating rate capital securities are callable at par
after five years. The fixed/floating rate capital securities have a fixed rate
of 6.93%, payable quarterly, for seven years, at which time they have a variable
rate based on the three-month LIBOR, reset quarterly, and the floating rate
capital securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the rate currently set at 5.94%. Trust II and Trust III used the
proceeds from the sale of the trust preferred securities, along with the funds
from their equity, to purchase junior subordinated debentures of the Company in
the amounts of $8.2 million and $12.4 million, respectively. The Company
incurred issuance costs of $429 thousand, which are being amortized over the
lives of the securities.
The Company used the net proceeds for general corporate purposes, which included
a net paydown of $3.0 million on the balance of the Company's unsecured
revolving credit note, an infusion of $3.0 million to Cedar Rapids Bank & Trust
for capital maintenance purposes, and an infusion of $1.0 million to Quad City
Bank & Trust for capital maintenance purposes. Management's primary use for the
balance of the proceeds was the redemption, in June 2004, of the $12.0 million
of 9.2% cumulative trust preferred securities issued by Trust I in 1999. Based
on this intended redemption, $747 thousand of unamortized issuance costs related
to the trust preferred securities of Trust I were expensed in March 2004.
On May 5, 2005, the Company announced the issuance of $5.0 million of floating
rate capital securities of QCR Holdings Statutory Trust IV. The securities
represent the undivided beneficial interest in Trust IV, which was established
by the Company for the sole purpose of issuing the Trust Preferred Securities.
The securities issued by Trust IV mature in thirty years, but are callable at
par after five years. The Trust Preferred Securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the initial rate set at 5.02%.
Interest is payable quarterly. Trust IV used the $5.0 million of proceeds from
the sale of the Trust Preferred Securities, in combination with $155 thousand of
proceeds from its own equity, to purchase $5.2 million of junior subordinated
debentures of the Company. The Company will treat these new issuances as Tier 1
capital for regulatory capital purposes, subject to current established
limitations. The Company incurred no issuance costs, as a result of the
transaction. The Company intends to use its net proceeds for general corporate
purposes, including the possible paydown of its other borrowings.
On April 28, 2005, the Company declared a cash dividend of $0.04 per share, or
$180 thousand, payable on July 6, 2005, to stockholders of record on June 15,
2005. 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, however it
believes that operating results have reached a level that can sustain dividends
to stockholders as well.
23
RECENT REGULATORY DEVELOPMENTS
Effective April 11, 2005, the Board of Governors of the Federal Reserve System
amended the risk-based capital standards for bank holding companies to allow the
continued inclusion of outstanding and prospective issuances of trust preferred
securities in the Tier 1 capital of bank holding companies, subject to stricter
standards. The new regulations limit the amount of trust preferred securities
(combined with all other restricted core capital elements) that a bank holding
company may include as Tier 1 capital to 25% of the sum of all core capital
elements, net of goodwill less any associated deferred tax liability. Amounts in
excess of the limits described above generally may be included in Tier 2
capital. The regulations also provide a transition period for bank holding
companies to conform their capital structures to the revised quantitative
limits. These limits will first become applicable to bank holding companies
beginning on March 31, 2009. At this time, due to the absence of goodwill on the
Company's balance sheet, management does not expect these new regulatory limits
to have a material impact on the Company's capital structure.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document contains, and future oral and written statements of the
Company and its management may contain, forward-looking statements, within the
meaning of such term in the Private Securities Litigation Reform Act of 1995,
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of the Company. Forward-looking
statements, which may be based upon beliefs, expectations and assumptions of the
Company's management and on information currently available to management, are
generally identifiable by the use of words such as "believe," "expect,"
"anticipate," "bode," "predict," "suggest," "project," "appear," "plan,"
"intend," "estimate," "may," "will," "would," "could," "should," "likely" or
other similar expressions. Additionally, all statements in this document,
including forward-looking statements, speak only as of the date they are made,
and the Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. 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.
24
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.
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 on many of the
investments and the loan and deposit accounts, a change in interest rates could
also affect the projected maturities in the securities and loan portfolios
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 a short-term earnings at risk
summary, which is a detailed and dynamic simulation model used to quantify the
estimated exposure of net interest income to sustained interest rate changes.
This simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all interest sensitive
assets and liabilities reflected on the Company's consolidated balance sheet.
This sensitivity analysis demonstrates net interest income exposure over a one
year horizon, assuming no balance sheet growth and a 200 basis point upward and
a 100 basis point downward shift in interest rates, where interest-bearing
assets and liabilities reprice at their earliest possible repricing date. The
model assumes a parallel and pro rata shift in interest rates over a
twelve-month period. Application of the simulation model analysis at December
31, 2004 demonstrated a 1.47% decrease in interest income with a 200 basis point
increase in interest rates, and a 1.20% decrease in interest income with a 100
basis point decrease in interest rates. Both simulations are within the
board-established policy limits of a 10% decline in value.
25
Part I
Item 4
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
March 31, 2005. Based on that evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
changes in the Company's disclosure controls or internal controls over financial
reporting during the quarter ended March 31, 2005, that have materially
affected, or are reasonably likely to materially affect the Company's disclosure
controls or internal controls over financial reporting.
26
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 Unregistered Sales of Equity 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
(a) Exhibits
10.1 Indenture by and between QCR Holdings, Inc./QCR Holdings
Statutory Trust IV and Wells Fargo Bank, National
Association, as debenture and institutional trustee, dated
May 4, 2005 (exhibit is being filed herewith).
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
27
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 11, 2005 /s/ Michael A. Bauer
----------------------------------
Michael A. Bauer, Chairman
Date May 11, 2005 /s/ Douglas M. Hultquist
----------------------------------
Douglas M. Hultquist, President
Chief Executive Officer
Date May 11, 2005 /s/ Todd A. Gipple
----------------------------------
Todd A. Gipple, Executive Vice
President, Chief Financial Officer
28