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 December 31, 2001
[ ] 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.
(f/k/a Quad City Holdings, Inc.)
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 42-1397595
- ------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer ID Number)
incorporation or organization)
3551 7th Street, Suite 204, Moline, Illinois 61265
--------------------------------------------------
(Address of principal executive offices)
(309) 736-3580
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: As of February 1,
2002, the Registrant had outstanding 2,742,436 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,
December 31, 2001 and June 30, 2001 3
Consolidated Statements of Income,
For the Three Months Ended December 31, 2001 and 2000 4
Consolidated Statements of Income,
For the Six Months Ended December 31, 2001 and 2000 5
Consolidated Statements of Cash Flows,
For the Six Months Ended December 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-19
Part II OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
2
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, 2001 and June 30, 2001
December 31, June 30,
2001 2001
------------------------------
ASSETS
Cash and due from banks ........................................................ $ 21,254,057 $ 20,217,219
Federal funds sold ............................................................. 10,560,000 7,775,000
Certificates of deposit at financial institutions .............................. 8,957,285 10,512,585
Securities held to maturity, at amortized cost ................................. 325,547 575,559
Securities available for sale, at fair value ................................... 65,795,383 56,134,521
------------------------------
66,120,930 56,710,080
------------------------------
Loans receivable held for sale ................................................. 13,470,496 5,823,820
Loans receivable held for investment ........................................... 329,528,984 282,040,946
Less: Allowance for estimated losses on loans .................................. (4,938,970) (4,248,182)
------------------------------
338,060,510 283,616,584
------------------------------
Premises and equipment, net .................................................... 9,352,429 8,660,698
Accrued interest receivable .................................................... 3,040,985 2,863,178
Other assets ................................................................... 5,338,946 10,592,590
------------------------------
Total assets ........................................................... $ 462,685,142 $ 400,947,934
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ......................................................... $ 60,602,589 $ 52,582,264
Interest-bearing ............................................................ 283,285,038 249,572,960
------------------------------
Total deposits ............................................................ 343,887,627 302,155,224
------------------------------
Short-term borrowings .......................................................... 26,418,365 28,342,542
Federal Home Loan Bank advances ................................................ 40,165,288 29,712,759
Other borrowings ............................................................... 5,000,000 0
Company obligated manditorily redeemable preferred securities of ............... 12,000,000 12,000,000
subsidiary trust holding solely subordinated debentures
Other liabilities .............................................................. 4,914,534 4,919,949
------------------------------
Total liabilities ...................................................... 432,385,814 377,130,474
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; shares authorized 5,000,000;
shares issued and outstanding December 2001 - 2,802,582 and 2,742,436; June
2001 - 2,325,566 and 2,265,420 respectively ................................. 2,802,582 2,325,566
Additional paid-in capital ..................................................... 16,658,238 12,148,759
Retained earnings .............................................................. 11,029,359 9,691,749
Accumulated other comprehensive income, unrealized gains on
securities available for sale, net ........................................... 663,685 505,922
------------------------------
31,153,864 24,671,996
Less cost of 60,146 common shares acquired for the treasury .................... (854,536) (854,536)
------------------------------
Total stockholders' equity ............................................. 30,299,328 23,817,460
------------------------------
Total liabilities and stockholders' equity ............................. $ 462,685,142 $ 400,947,934
==============================
See Notes to Consolidated Financial Statements
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended December 31
2001 2000
-------------------------
Interest income:
Interest and fees on loans .................................. $ 5,748,417 $ 5,898,649
Interest and dividends on securities:
Taxable ................................................... 745,161 771,376
Nontaxable ................................................ 104,281 64,420
Interest on certificates of deposit at financial institutions 150,609 182,675
Interest on federal funds sold .............................. 58,530 296,599
Other interest .............................................. 88,758 50,982
-------------------------
Total interest income ................................ 6,895,756 7,264,701
-------------------------
Interest expense:
Interest on deposits ....................................... 2,166,316 3,452,477
Interest on company obligated manditorily .................. 283,376 283,377
redeemable preferred securities
Interest on short-term borrowings .......................... 594,455 587,169
Interest on other borrowings ............................... 69,158 0
-------------------------
Total interest expense ................................. 3,113,305 4,323,023
-------------------------
Net interest income .................................... 3,782,451 2,941,678
Provision for loan losses .................................... 631,375 343,800
-------------------------
Net interest income after provision for loan losses .... 3,151,076 2,597,878
-------------------------
Noninterest income:
Merchant credit card fees, net of processing costs .......... 502,903 428,041
Trust department fees ....................................... 520,640 512,370
Deposit service fees ........................................ 225,797 169,052
Gains on sales of loans, net ................................ 770,861 170,539
Securities losses, net ...................................... 0 (22,855)
Other ....................................................... 172,385 158,349
-------------------------
Total noninterest income ............................... 2,192,586 1,415,496
-------------------------
Noninterest expenses:
Salaries and employee benefits .............................. 2,483,922 1,953,749
Professional and data processing fees ....................... 412,184 328,256
Advertising and marketing ................................... 174,179 152,921
Occupancy and equipment expense ............................. 608,062 498,413
Stationery and supplies ..................................... 130,477 98,238
Postage and telephone ....................................... 120,930 99,982
Other ....................................................... 389,374 334,612
-------------------------
Total noninterest expenses ............................. 4,319,128 3,466,171
-------------------------
Income before income taxes ............................. 1,024,534 547,203
Federal and state income taxes ................................ 335,161 203,258
-------------------------
Net income .......................................... $ 689,373 $ 343,945
=========================
Earnings per common share:
Basic ....................................................... $ 0.25 $ 0.15
Diluted ..................................................... $ 0.24 $ 0.15
Weighted average common shares outstanding .................. 2,801,180 2,267,659
Weighted average common and common equivalent
shares outstanding ........................................ 2,851,637 2,306,866
Comprehensive income .......................................... $ 185,344 $ 901,351
See Notes to Consolidated Financial Statements
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended December 31
2001 2000
----------------------------
Interest income:
Interest and fees on loans .................................. $ 11,537,969 $ 11,392,219
Interest and dividends on securities:
Taxable ................................................... 1,478,841 1,557,710
Nontaxable ................................................ 208,826 130,363
Interest on certificates of deposit at financial institutions 315,182 354,456
Interest on federal funds sold .............................. 136,922 706,340
Other interest .............................................. 168,060 101,652
----------------------------
Total interest income .................................. 13,845,800 14,242,740
----------------------------
Interest expense:
Interest on deposits ....................................... 4,735,998 6,738,019
Interest on company obligated manditorily .................. 566,753 567,788
redeemable preferred securities
Interest on short-term borrowings .......................... 1,246,582 1,136,391
Interest on other borrowings ............................... 84,192 0
----------------------------
Total interest expense ................................. 6,633,525 8,442,198
----------------------------
Net interest income .................................... 7,212,275 5,800,542
Provision for loan losses .................................... 1,039,865 519,875
----------------------------
Net interest income after provision for loan losses .... 6,172,410 5,280,667
----------------------------
Noninterest income:
Merchant credit card fees, net of processing costs .......... 1,022,528 800,483
Trust department fees ....................................... 997,358 1,017,287
Deposit service fees ........................................ 463,549 346,849
Gains on sales of loans, net ................................ 1,232,623 297,679
Securities losses, net ...................................... (670) (22,730)
Other ....................................................... 324,852 348,013
----------------------------
Total noninterest income ............................... 4,040,240 2,787,581
---------------------------
Noninterest expenses:
Salaries and employee benefits .............................. 4,774,358 3,735,561
Professional and data processing fees ....................... 784,701 592,259
Advertising and marketing ................................... 286,643 280,352
Occupancy and equipment expense ............................. 1,137,585 918,065
Stationery and supplies ..................................... 235,766 170,490
Postage and telephone ....................................... 229,462 193,968
Other ....................................................... 796,399 653,114
----------------------------
Total noninterest expenses ............................. 8,244,914 6,543,809
----------------------------
Income before income taxes ............................. 1,967,736 1,524,439
Federal and state income taxes ................................ 630,126 520,245
----------------------------
Net income ............................................. $ 1,337,610 $ 1,004,194
============================
Earnings per common share:
Basic ....................................................... $ 0.51 $ 0.44
Diluted ..................................................... $ 0.50 $ 0.43
Weighted average common shares outstanding .................. 2,627,969 2,271,460
Weighted average common and common equivalent
shares outstanding ........................................ 2,676,529 2,319,617
Comprehensive income .......................................... $ 1,495,373 $ 1,999,393
See Notes to Consolidated Financial Statements
5
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended December 31
2001 2000
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................. $ 1,337,610 $ 1,004,194
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ............................................................. 446,850 367,458
Provision for loan losses ................................................ 1,039,865 519,875
Amortization of offering costs on subordinated debentures ................ 14,753 15,788
Amortization of premiums on securities, net .............................. 64,448 27,240
Securities losses, net ................................................... 670 22,730
Loans originated for sale ................................................ (92,436,144) (26,910,723)
Proceeds on sales of loans ............................................... 86,022,091 26,702,926
Net gains on sales of loans .............................................. (1,232,623) (297,679)
Increase in accrued interest receivable .................................. (177,807) (478,144)
(Increase) decrease in other assets ...................................... 5,395,469 (1,309,759)
Increase (decrease) in other liabilities ................................. (5,415) 245,394
----------------------------
Net cash provided by (used in) operating activities ................... $ 469,767 $ (90,700)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold .............................. (2,785,000) 5,700,000
Net decrease in certificates of deposits at financial institutions ......... 1,555,300 1,274,378
Purchase of securities available for sale .................................. (15,141,928) (239,984)
Proceeds from calls and maturities of securities ........................... 4,895,000 2,000,000
Proceeds from paydowns on securities ....................................... 926,416 930,645
Proceeds from sales of securities available for sale ....................... 101,285 254,247
Increase in cash value of life insurance contracts ......................... (255,556) (43,920)
Net loans originated ....................................................... (47,837,115) (23,425,004)
Purchase of premises and equipment, net .................................... (1,138,581) (1,213,891)
----------------------------
Net cash used in investing activities ................................. $(59,680,179) $(14,763,529)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts ........................................... 41,732,403 19,354,925
Net increase (decrease) in short-term borrowings ........................... (1,924,177) 4,800,103
Proceeds from Federal Home Loan Bank advances .............................. 12,500,000 7,250,000
Payments on Federal Home Loan Bank advances ................................ (2,047,471) (9,301,694)
Net increase in other borrowings ........................................... 5,000,000 0
Purchase of treasury stock ................................................. 0 (255,056)
Proceeds from issuance of common stock, net ................................ 4,986,495 925
----------------------------
Net cash provided by financing activities ............................. $ 60,247,250 $ 21,849,203
----------------------------
Net increase in cash and due from banks ............................... 1,036,838 6,994,974
Cash and due from banks, beginning ........................................... 20,217,219 15,130,357
----------------------------
Cash and due from banks, ending .............................................. $ 21,254,057 $ 22,125,331
============================
Supplemental disclosure of cash flow information, cash payments for:
Interest ................................................................... $ 7,283,994 $ 7,852,504
============================
Income/franchise taxes ..................................................... $ 503,242 $ 700,106
============================
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, .......................... $ 157,763 $ 995,199
unrealized gains on securities available for sale, net
Due to broker for purchase of securities available for sale ................ $ 0 $ 2,766,069
============================
See Notes to Consolidated Financial Statements
6
Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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 periods ended December 31,
2001 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2002.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of QCR
Holdings, Inc. (the "Company"), a Delaware corporation, and its wholly owned
subsidiaries, Quad City Bank and Trust Company ("Quad City Bank & Trust"), Cedar
Rapids Bank and Trust Company ("Cedar Rapids Bank & Trust"), Quad City Bancard,
Inc. ("Bancard"), Allied Merchant Services, Inc. ("Allied"), Quad City Holdings
Capital Trust I ("Capital Trust"), and Quad City Liquidation Corporation
("QCLC"). All significant intercompany accounts and transactions have been
eliminated in consolidation. In addition to six wholly owned subsidiaries, the
Company has an aggregate investment of $276 thousand in five associated
companies, Nobel Electronic Transfer, LLC, Nobel Real Estate Investors, LLC,
Velie Plantation Holding Company, Illini Partners, LLC, and Clarity Merchant
Services, Inc. Effective November 1, 2001, the Company changed its name from
Quad City Holdings, Inc. to QCR Holdings, Inc., and its Nasdaq SmallCap trading
symbol to "QCRH".
NOTE 3 - EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a
basic and diluted basis.
Three months ended Six months ended
December 31, December 31,
-------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------
Net income, basic and diluted
earnings ........................ $ 689,373 $ 343,945 $1,337,610 $1,004,194
=================================================
Weighted average common shares
outstanding ..................... 2,801,180 2,267,659 2,627,969 2,271,460
Weighted average common shares
issuable upon exercise of stock
options and warrants ............ 50,457 39,207 48,560 48,157
-------------------------------------------------
Weighted average common and
common equivalent shares
outstanding ..................... 2,851,637 2,306,866 2,676,529 2,319,617
=================================================
7
NOTE 4 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is presented
as follows for the three months and six months ended December 31, 2001 and 2000,
respectively.
Three months ended Six months ended
December 31, December 31,
-----------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------------
Revenue:
Commercial banking ............ $ 7,983,119 $ 7,709,536 $ 15,696,458 $ 15,069,686
Merchant credit card processing 544,931 483,839 1,111,003 906,134
Trust management .............. 520,639 512,370 997,358 1,017,287
All other ..................... 39,653 (25,548) 81,221 37,214
------------------------------------------------------------
Total revenue ............ $ 9,088,342 $ 8,680,197 $ 17,886,040 $ 17,030,321
============================================================
Net income (loss):
Commercial banking ............ $ 774,550 $ 474,257 $ 1,413,393 $ 1,165,913
Merchant credit card processing 73,595 26,286 167,051 90,400
Trust management .............. 131,962 108,223 217,696 220,239
All other ..................... (290,734) (264,821) (460,530) (472,358)
------------------------------------------------------------
Total net income ......... $ 689,373 $ 343,945 $ 1,337,610 $ 1,004,194
============================================================
NOTE 5 - RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued Statement 143, "Accounting
for Asset Retirement Obligations" and Statement 144, " Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Statement 144 supersedes FASB Statement
121 and the accounting and reporting provisions of APB Opinion No. 30. Statement
144 establishes a single accounting model for long-lived assets to be disposed
of by sale at the lower of its carrying amount or its fair value less costs to
sell and to cease depreciation/amortization. For the Company, the provisions of
Statement 143 and 144 are effective July 1, 2002. Implementation of the
Statements is not expected to have a material impact on the Company's financial
statements.
8
Part I
Item 2
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QCR Holdings, Inc. (the "Company") is the parent company of Quad City Bank &
Trust, Cedar Rapids Bank & Trust, and Quad City Bancard, Inc. Effective November
1, 2001, the Company changed its name to QCR Holdings, Inc. from Quad City
Holdings, Inc.
Quad City Bank & Trust is an Iowa-chartered commercial bank that is a member of
the Federal Reserve System with depository accounts insured by the Federal
Deposit Insurance Corporation. Quad City Bank & Trust commenced operations in
January 1994 and provides full-service commercial and consumer banking, and
trust and asset management services to the Quad City area and adjacent
communities through its four offices that are located in Bettendorf and
Davenport, Iowa and Moline, Illinois.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member
of the Federal Reserve System with depository accounts insured by the Federal
Deposit Insurance Corporation. The Company commenced operations in Cedar Rapids
in June 2001 operating as a branch of Quad City Bank & Trust. The Cedar Rapids
branch operation began functioning under the Cedar Rapids Bank & Trust charter
in September 2001. Cedar Rapids Bank & Trust provides full-service commercial
and consumer banking service to Cedar Rapids and adjacent communities through
its office located in the GreatAmerica Building in downtown Cedar Rapids, Iowa.
Quad City Bancard, Inc. ("Bancard") provides merchant credit card processing
services. Bancard has contracted with independent sales organizations ("ISOs")
that market credit card services to merchants throughout the country. In March
1999, Bancard formed its own subsidiary ISO, Allied Merchant Services, Inc., for
the purpose of generating additional credit card processing business. At
December 31, 2001, approximately 18,000 merchants were processing transactions
with Bancard.
The Company has a fiscal year end of June 30.
FINANCIAL CONDITION
Total assets of the Company increased by $61.8 million or 15% to $462.7 million
at December 31, 2001 from $400.9 million at June 30, 2001. The growth resulted
primarily from increases in the loan and securities portfolios funded by
deposits received from customers and by proceeds received from a private
placement of Company common stock, Federal Home Loan Bank advances, and other
borrowings.
Cash and due from banks increased by $1.1 million or 5% to $21.3 million at
December 31, 2001 from $20.2 million at June 30, 2001. Cash and due from banks
represented both cash maintained at its subsidiary banks, as well as funds that
the Company and its banks had deposited in other banks in the form of demand
deposits.
Federal funds sold are inter-bank funds with daily liquidity. At December 31,
2001, the subsidiary banks had $10.6 million invested in such funds. This amount
increased by $2.8 million or 36% from $7.8 million at June 30, 2001.
Certificates of deposit at financial institutions decreased by $1.5 million or
15% to $9.0 million at December 31, 2001 from $10.5 million at June 30, 2001.
During the first six months of fiscal 2002, the certificate of deposit portfolio
had 18 maturities totaling $1.7 million and two purchases totaling $198
thousand.
Securities increased by $9.4 million or 17% to $66.1 million at December 31,
2001 from $56.7 million at June 30, 2001. The increase was the result of a
number of transactions in the securities portfolio. Paydowns of $926 thousand
were received on mortgage-backed securities, and the amortization of premiums,
net of the accretion of discounts, was $64 thousand. Maturities and calls of
securities occurred in the amount of $4.9 million, and sales of securities
totaled $101 thousand. These portfolio decreases were offset by the purchase of
an additional $15.1 million of securities and a $257 thousand increase in the
fair value of securities, classified as available for sale.
9
Total loans receivable increased by $55.1 million or 19% to $343.0 million at
December 31, 2001 from $287.9 million at June 30, 2001. The increase was the
result of the origination or purchase of $293.4 million of commercial business,
consumer and real estate loans, less loan charge-offs, net of recoveries, of
$349 thousand, and loan repayments or sales of loans of $237.9 million. During
the six months ended December 31, 2001, Quad City Bank & Trust contributed
$252.3 million, or 86%, and Cedar Rapids Bank & Trust contributed $41.1 million,
or 14%, of the Company's loan originations or purchases. The mix of loan types
within the Company's portfolio remained relatively unchanged from June 30, 2001,
reflecting 74% commercial, 14% real estate and 12% 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 $4.9 million at December 31,
2001 compared to $4.2 million at June 30, 2001, an increase of $691 thousand or
16%. The adequacy of the allowance for estimated losses on loans was determined
based on factors that included the overall composition of the loan portfolio,
types of loans, past loss experience, loan delinquencies, potential substandard
and doubtful credits, economic conditions, and other factors that, in
management's judgement, deserved evaluation. To ensure that an adequate
allowance was maintained, provisions were made based on the increase in loans
and a detailed analysis of the loan portfolio. The loan portfolio was reviewed
and analyzed monthly utilizing the percentage allocation method. In addition,
specific reviews were completed on all credits risk-rated less than "fair
quality" and carrying aggregate exposure in excess of $250 thousand. The
adequacy of the allowance for estimated losses on loans was monitored by the
loan review staff, and reported to management and the board of directors.
Although management believes that the allowance for estimated losses on loans at
December 31, 2001 was at a level adequate to absorb losses on existing loans,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional provisions for loan
losses in the future. Asset quality is a priority for the Company and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality. Along with other financial institutions,
management shares a concern for the possible continued softening of the economy
in the coming months. Should the economic climate continue to deteriorate,
borrowers may experience difficulty, and the level of non-performing loans,
charge-offs and delinquencies could rise and require further increases in the
provision.
Net charge-offs for the six months ended December 31, were $349 thousand in 2001
and $165 thousand in 2000. One measure of the adequacy of the allowance for
estimated losses on loans is the ratio of the allowance to the held for
investment loan portfolio. The allowance for estimated losses on loans as a
percentage of held for investment loans was 1.5% at both December 31, 2001 and
June 30, 2001.
At December 31, 2001, total nonperforming assets were $3.6 million compared to
$1.7 million at June 30, 2001. The $1.9 million increase was the result of a
$615 thousand increase in nonaccrual loans and an increase of $1.3 million in
accruing loans past due 90 days or more. Due to the fact that most of the loans
in the Cedar Rapids Bank & Trust loan portfolio have been made fairly recently,
none of the loans have been categorized as nonperforming assets. As the loan
portfolio at Cedar Rapids Bank & Trust matures, it is likely that there will be
nonperforming loans or charge-offs associated with the portfolio.
Nonaccrual loans were $1.8 million at December 31, 2001 compared to $1.2 million
at June 30, 2001, an increase of $615 thousand. The increase in nonaccrual loans
was comprised of increases in commercial loans of $857 thousand and consumer
loans of $42 thousand, partially offset by a decrease in real estate loans of
$284 thousand. The net increase in nonaccrual commercial loans was primarily due
to the addition of a single, fully collateralized loan at Quad City Bank & Trust
with an outstanding balance of $740 thousand. The net increase in nonaccrual
consumer loans was due to the addition of three loans at Quad City Bank & Trust.
In general, nonaccrual loans consisted primarily of loans that were well
collateralized and were not expected to result in material losses, and
represented less than one percent of the Company's held for investment loan
portfolio at December 31, 2001.
From June 30, 2001 to December 31, 2001, accruing loans past due 90 days or more
increased from $495 thousand to $1.8 million, respectively. The $1.3 million net
increase was primarily due to the addition of five loans at Quad City Bank &
Trust, with an aggregate outstanding balance of $754 thousand, which were not
anticipated to produce any material losses.
10
Premises and equipment showed an increase of $692 thousand or 8% to $9.3 million
at December 31, 2001 from $8.6 million at June 30, 2001. The increase resulted
from the purchase of additional furniture, fixtures and equipment and leasehold
improvements of $1.1 million during the period offset by depreciation expense of
$447 thousand. The opening of a permanent, main banking facility in Cedar Rapids
on September 28, 2001 accounted for $748 thousand, or 66%, of the premises and
equipment capital additions during the first six months of fiscal 2002.
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $178 thousand or 6% to $3.0 million at December 31, 2001
from $2.9 million at June 30, 2001. The increase was primarily due to greater
average outstanding balances in interest-bearing assets.
Other assets decreased by $5.3 million or 50% to $5.3 million at December 31,
2001 from $10.6 million at June 30, 2001. The decrease resulted from the receipt
on the final day of the period of $6.2 million of funds from Visa/Mastercard for
subsequent distribution to credit card merchants who processed transactions with
Bancard. The two largest components of other assets are a $2.4 million key
officer life insurance contract and a $1.7 million receivable due Bancard from a
terminated ISO. Bancard is vigorously pursuing the collection of this receivable
through legal avenues. Other assets also included accrued trust department fees,
other miscellaneous receivables, and various prepaid expenses.
Deposits increased by $41.8 million or 14% to $343.9 million at December 31,
2001 from $302.1 million at June 30, 2001. The increase resulted from a $26.3
million net increase in non-interest bearing, NOW, money market and other
savings accounts and a $15.5 million net increase in interest-bearing
certificates of deposit.
Short-term borrowings decreased $1.9 million or 7% from $28.3 million at June
30, 2001 to $26.4 million at December 31, 2001. The subsidiary banks offer
short-term repurchase agreements to some of their major customers. Also, on
occasion, the subsidiary banks purchase Federal funds for short-term funding
needs from the Federal Reserve Bank, or from some of their correspondent banks.
As of both December 31, 2001 and June 30, 2001, all short-term borrowings were
comprised of customer repurchase agreements.
Federal Home Loan Bank advances increased by $10.5 million, or 35%, to $40.2
million at December 31, 2001 from $29.7 million at June 30, 2001. As a result of
their memberships in the FHLB of Des Moines, the subsidiary banks have the
ability to borrow funds for short or long-term purposes under a variety of
programs. FHLB advances are utilized for loan matching as a hedge against the
possibility of rising interest rates, and when these advances provide a less
costly source of funds than customer deposits.
Other borrowings, which were zero at June 30, 2001, grew to $5.0 million at
December 31, 2001. The Company drew a $5.0 million advance on a line of credit
at its primary correspondent bank as partial funding for the capitalization of
Cedar Rapids Bank & Trust.
In June 1999, the Company issued 1,200,000 shares of trust preferred securities
through a newly formed subsidiary, Quad City Holdings Capital Trust I. On the
Company's balance sheet these securities are included with liabilities and are
presented as "company obligated manditorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures", and were $12.0 million
at both December 31, 2001 and June 30, 2001.
Other liabilities were $4.9 million at December 31, 2001 unchanged from June 30,
2001. Other liabilities was comprised of unpaid amounts for various products and
services, and accrued but unpaid interest on deposits. At December 31, 2001, the
most significant component of other liabilities was $1.7 million of interest
payable.
Common stock at December 31, 2001 increased by $477 thousand, or 21%, to $2.8
million from $2.3 million at June 30, 2001. The increase was primarily the
result of the Company's private placement of 475,424 additional shares of common
stock at $11.00 per share. The funds received as a result of this issuance were
largely from residents of the Cedar Rapids area and were used as partial funding
for the capitalization of Cedar Rapids Bank & Trust. During 2000 the Company
acquired 60,146 treasury shares at a total cost of $854 thousand.
Additional paid-in capital totaled $16.7 million at December 31, 2001 and $12.1
million at June 30, 2001. The increase of $4.6 million, or 37%, resulted
primarily from proceeds received in excess of the $1.00 per share par value, net
of issuance costs, for the 475,424 shares of common stock issued as the result
of the Company's private placement offering.
Retained earnings increased by $1.3 million, or 14%, to $11.0 million at
December 31, 2001 from $9.7 million at June 30, 2001. The increase reflected net
income for the six-month period.
11
Unrealized gains on securities available for sale, net of related income taxes,
totaled $664 thousand at December 31, 2001 as compared to $506 thousand at June
30, 2001. The increase in gains of $158 thousand was attributable to the
increase during the period in fair value of the securities identified as
available for sale, primarily the result of a decline in interest rates.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company realizes income principally from the spread between the interest
earned on loans, investments and other interest-earning assets and the interest
paid on deposits and borrowings. Loan volumes and yields, as well as the volume
of and rates on investments, deposits and borrowings, are affected by market
interest rates. Additionally, because of the terms and conditions of many of the
loan and deposit accounts, a change in interest rates could also affect the
projected maturities in the loan portfolio and/or the deposit base, which could
alter the Company's sensitivity to future changes in interest rates.
Accordingly, management considers interest rate risk to be a significant market
risk.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within policy limits approved by the board of directors, while
taking into consideration, among other factors, the Company's overall credit,
operating income, operating cost, and capital profile. The subsidiary banks'
ALM/Investment Committees, which includes senior management representatives and
members of the board of directors, monitors and manages interest rate risk to
maintain an acceptable level of change to net interest income as a result of
changes in interest rates.
One method used to quantify interest rate risk is the net portfolio value
analysis. This analysis calculates the difference between the present value of
liabilities and the present value of expected cash flows from assets and
off-balance sheet contracts. The most recent net portfolio value analysis, as of
September 30, 2001, projected that net portfolio value would decrease by
approximately 8.30% if interest rates would rise 200 basis points over the next
year. It projected an increase in net portfolio value of approximately 7.46% if
interest rates would drop 200 basis points. Both simulations are within
board-established policy limits.
RESULTS OF OPERATIONS
OVERVIEW
Net income for the second quarter ended December 31, 2001 was $689 thousand as
compared to net income of $344 thousand for the same period in 2000, an increase
of $345 thousand or 100%. Basic earnings per share for the second quarter of
fiscal 2002 increased to $0.25 from $0.15 in fiscal 2001. For the second quarter
ended December 31, 2001, net interest and noninterest income improved by 29% and
55%, respectively, for a combined increase of $1.6 million when compared to the
same period in 2000. Offsetting these revenue improvements for the Company was
an increase in noninterest expense of $853 thousand, or 25%.
Net income for the six-month period ended December 31, 2001 was $1.3 million as
compared to net income of $1.0 million for the same period in 2000, an increase
of $333 thousand or 33%. Basic earnings per share for the first six months of
fiscal 2002 increased to $0.51 from $0.44 in fiscal 2001. When compared to
fiscal 2001, the first six months of fiscal 2002 reflected significant growth in
both net interest income and noninterest income for the Company. For the six
month period ended December 31, 2001, net interest and noninterest income
improved by 24% and 45%, respectively, for a combined increase of $2.7 million
when compared to the same period in 2000. Quad City Bank & Trust generated much
of the improvement in net interest margin, as well as a large increase in the
gains on sales of residential real estate loans during the period. Offsetting
these revenue improvements for the Company was an increase in noninterest
expense of $1.7 million, or 26%. During the first six months of fiscal 2002,
pre-tax costs associated with the Company's operations of the Cedar Rapids Bank
& Trust subsidiary were approximately $1.1 million, and were the primary
contributors to the climb in noninterest expense. While the start-up expenses of
Cedar Rapids Bank & Trust negatively impacted earnings for the six months ended
December 31, 2001, management is confident that this strategic decision will
provide significant long-term benefits to the Company.
12
The Company's operating results are derived largely from net interest income.
Net interest income is the difference between interest income, principally from
loans and investment securities, and interest expense, principally on borrowings
and customer deposits. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
The Company's average yield on interest-earning assets decreased 1.44% for the
second quarter ended December 31, 2001 when compared to the second quarter ended
December 31, 2000. With the same comparison, the average cost of
interest-bearing liabilities declined 2.03% resulting in a 0.59% increase in the
net interest spread of 2.71% at December 31, 2000 to 3.30% at December 31, 2001.
The widening of the net interest spread created a significant improvement in the
Company's net interest margin. For the three months ended December 31, 2001, the
net interest margin was 3.76% compared to 3.36% for the same period in 2000.
The Company's average yield on interest-earning assets decreased 1.14% for the
six months ended December 31, 2001 when compared to the six months ended
December 31, 2000. With the same comparison, the average cost of
interest-bearing liabilities declined 1.66% resulting in a 0.52% increase in the
net interest spread of 2.72% at December 31, 2000 to 3.24% at December 31, 2001.
The widening of the net interest spread created a significant improvement in the
Company's net interest margin. For the six months ended December 31, 2001, the
net interest margin was 3.70% compared to 3.36% for the same period in 2000.
Management has aggressively managed the Company's cost of funds during the
dramatic drop in short-term interest rates since January 2001, and continues to
closely monitor and manage net interest margin.
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
Interest income decreased by $369 thousand to $6.9 million for the three-month
period ended December 31, 2001 when compared to $7.3 million for the quarter
ended December 31, 2000. The decrease of 5% in interest income was attributable
to reduced interest rates partially offset by greater average, outstanding
balances in interest earning assets, principally with respect to loans
receivable. The Company's average yield on interest-earning assets decreased
1.44% for the three months ended December 31, 2001 when compared to the three
months ended December 31, 2000.
Interest expense decreased by $1.2 million from $4.3 million for the three-month
period ended December 31, 2000 to $3.1 million for the three-month period ended
December 31, 2001. The 28% decrease in interest expense was caused by
significant reductions in interest rates, partially offset by greater average,
outstanding balances in interest-bearing liabilities, principally with respect
to customers' deposits in subsidiary banks, Federal Home Loan Bank advances and
other borrowings. The Company's average cost of interest-bearing liabilities
declined 2.03% for the three months ended December 31, 2001 when compared to the
three months ended December 31, 2000.
At both December 31, 2001 and June 30, 2001, the Company had an allowance for
estimated losses on loans of approximately 1.5% of held for investment loans.
The provision for loan losses increased by $287 thousand from $344 thousand for
the three-month period ended December 31, 2000 to $631 thousand for the
three-month period ended December 31, 2001. During the second quarter of fiscal
2002, management made monthly provisions for loan losses based upon the increase
in loans and a detailed analysis of the loan portfolio. The $287 thousand
increase was attributed 66% or $190 thousand to growth in the loan portfolio,
and 34% or $97 thousand to downgrades within the portfolio. For the three months
ended December 31, 2001, commercial loan charge-offs totaled $332 thousand,
which was a single fully reserved loan, and recoveries totaled $29 thousand.
Consumer loan charge-offs and recoveries totaled $54 thousand and $35 thousand,
respectively, during the quarter. Real estate loans had no charge-offs or
recoveries for the three months ended December 31, 2001.
13
Noninterest income of $2.2 million for the three-month period ended December 31,
2001 was a $777 thousand, or 55%, increase from $1.4 million for the three-month
period ended December 31, 2000. Noninterest income during each of the quarters
in comparison consisted primarily of income from the merchant credit card
operation, the trust department, depository service fees, gains on the sale of
residential real estate mortgage loans, and other miscellaneous fees. The second
quarter of fiscal 2002, when compared to the same quarter in fiscal 2001, posted
a $75 thousand increase in fees earned by the merchant credit card operation of
Bancard. This 17% improvement in merchant credit card fees was the result of
Bancard's ongoing effort to develop existing and build new ISO relationships as
a replacement for the termination in May 2000 of its largest ISO processing
contract. Gains on the sale of residential real estate mortgage loans, net,
increased $600 thousand from the second quarter of fiscal 2001 to the same
quarter in fiscal 2002. The activity within this area of the subsidiary banks
was stimulated by the environment of falling interest rates. Additional
increases in noninterest income consisted of a $9 thousand increase in trust
department fees, a $57 thousand increase in deposit service fees, and a $14
thousand increase in other noninterest income. Other noninterest income in each
quarter consisted primarily of investment advisory and management fees, rent
income and fees collected from correspondent banks.
In November 1999, Bancard's largest ISO notified Bancard that it intended to
terminate its processing relationship in May 2000 and start processing its own
transactions, as per a previous agreement. As anticipated, processing for this
ISO ceased in May 2000 eliminating approximately 64% of Bancard's average
monthly processing volume. Bancard has since created additional ISO
relationships and developed the relationships with existing ISOs in an effort to
rebuild processing volumes. Bancard's dollar volume of transactions processed
during the second quarter of fiscal 2002 was $281 million compared to $208
million for the same period in fiscal 2001 for an increase of $73 million or
35%. Bancard continues to work to restore processing volumes at or above the
levels existing prior to the termination of processing with the original ISO.
For the quarter ended December 31, 2001, trust department fees increased $9
thousand, or 2%, to $521 thousand from $512 thousand for the same quarter in
2000. The increase was primarily due to the continued development of existing
trust relationships and the addition of new trust customers, partially offset by
the decline experienced during the period in the value of stocks held in the
portfolio.
Deposit service fees increased $57 thousand, or 34%, to $226 thousand from $169
thousand for the three-month periods ended December 31, 2001 and December 31,
2000, respectively. This increase was primarily a result of the new deposit
accounts fee structure that was implemented beginning February 1, 2001. Service
charges and NSF (non-sufficient funds) charges related to demand deposit
accounts were the main components of deposit service fees.
Gains on sales of loans, net, were $771 thousand for the three months ended
December 31, 2001, which reflected an increase of 352%, or $600 thousand, from
$171 thousand for the three months ended December 31, 2000. The increase
resulted from larger numbers of both home refinances and home purchases, and the
subsequent sale of the majority of these loans into the secondary market. The
decline in interest rates since the beginning of calendar year 2001 dramatically
accelerated the activity within this area of the subsidiary banks.
For the quarter ended December 31, 2001, other noninterest income increased $14
thousand, or 9%, to $172 thousand from $158 thousand for the same quarter in
2000. The increase was primarily due to the improved profitability of two of the
associated companies in which the Company holds interest, partially offset by a
decrease in rental income. An expansion of the real estate and trust departments
at the Moline, Illinois facility eliminated space that had previously generated
rental income.
The primary components of noninterest expenses were primarily salaries and
benefits, occupancy and equipment expenses, and professional and data processing
fees, for both quarters. Noninterest expenses for the three months ended
December 31, 2001 were $4.3 million as compared to $3.5 million for the same
period in 2000, for an increase of $853 thousand or 25%.
14
The following table sets forth the various categories of noninterest expenses
for the three months ended December 31, 2001 and 2000.
Noninterest Expenses
Three months ended
December 31,
-----------------------
2001 2000 % change
----------------------------------
Salaries and employee benefits ........................ $2,483,922 $1,953,749 27.1%
Professional and data processing fees ................. 412,184 328,256 25.6%
Advertising and marketing ............................. 174,179 152,921 13.9%
Occupancy and equipment expense ....................... 608,062 498,413 22.0%
Stationery and supplies ............................... 130,477 98,238 32.8%
Postage and telephone ................................. 120,930 99,982 21.0%
Other ................................................. 389,374 334,612 16.4%
---------------------------------
Total noninterest expenses .................... $4,319,128 3,466,171 24.6%
=================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For the quarter ended December 31, 2001, total
salaries and benefits increased to $2.5 million or $530 thousand over the
previous year's quarter total of $2.0 million. The addition of employees to
staff the Cedar Rapids Bank & Trust operation accounted for $417 thousand, or
79%, of this increase. A slight increase from December 2000 to December 2001 in
the number of Quad City Bank & Trust employees, and increased incentive
compensation to real estate officers proportionate to the increased volumes of
gains on sales of loans comprised the balance of the change in salary and
benefits expense. Professional and data processing fees increased from $328
thousand for the three months ended December 31, 2000 to $412 thousand for the
same three-month period in 2001. The $84 thousand increase was predominately due
to legal fees resulting from the legal proceedings in process between Bancard
and PMT Services, Inc. Occupancy and equipment expense increased $110 thousand
or 22% for the quarter. The increase was predominately due to the additions of
Quad City Bank & Trust's fourth full service banking facility in late October
2000 and Cedar Rapids Bank & Trust's permanent full service banking facility in
September 2001, and the resulting increased levels of rent, utilities,
depreciation, maintenance, and other occupancy expenses. Stationary and supplies
increased $32 thousand from $98 thousand for the three months ended December 31,
2000 to $130 thousand for the same period in 2001. The addition of Cedar Rapids
Bank & Trust accounted for $30 thousand, or 93% of this increase. Other
noninterest expense increased $55 thousand or 16% for the quarter. The increase
was primarily the result of increased insurance expense, increased processing
and servicing charges incurred by the trust department, and increased expense
incurred by the subsidiary banks for miscellaneous lending expense and service
charges from upstream banks.
The provision for income taxes was $335 thousand for the three-month period
ended December 31, 2001 compared to $203 thousand for the three-month period
ended December 31, 2000 for an increase of $132 thousand or 65%. The increase
was the result of an increase in income before income taxes of $477 thousand or
87% for the fiscal 2002 quarter when compared to the fiscal 2001 quarter, in
combination with a reduction in the Company's effective tax rate.
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
Interest income decreased $397 thousand to $13.8 million for the six-month
period ended December 31, 2001 when compared to $14.2 million for the quarter
ended December 31, 2000. The decrease of 3% in interest income was attributable
to reduced interest rates partially offset by greater average, outstanding
balances in interest earning assets, principally with respect to loans
receivable. The Company's average yield on interest-earning assets decreased
1.14% for the six months ended December 31, 2001 when compared to the six months
ended December 31, 2000.
Interest expense decreased by $1.8 million from $8.4 million for the six-month
period ended December 31, 2000 to $6.6 million for the six-month period ended
December 31, 2001. The 21% decrease in interest expense was caused by
significant reductions in interest rates partially offset by greater average,
outstanding balances in interest-bearing liabilities, principally with respect
to customers' deposits in subsidiary banks, Federal Home Loan Bank advances and
other borrowings. The Company's average cost of interest-earning liabilities
declined 1.66% for the six months ended December 31, 2001 when compared to the
six months ended December 31, 2000.
15
At both December 31, 2001 and June 30, 2001, the Company had an allowance for
estimated losses on loans of approximately 1.5% of held for investment loans.
The provision for loan losses increased by $520 thousand from $0.5 million for
the six-month period ended December 31, 2000 to $1.0 million for the six-month
period ended December 31, 2001. During the first six months of fiscal 2002,
management made monthly provisions for loan losses based upon the increase in
loans and a detailed analysis of the loan portfolio. The $520 thousand increase
can be attributed 70% or $364 thousand to growth in the loan portfolio, and 30%
or $156 thousand to downgrades within the portfolio. During the six months ended
December 31, 2001, commercial loan charge-offs totaled $332 thousand, which was
a single fully reserved loan, and recoveries totaled $29 thousand. Consumer loan
charge-offs and recoveries totaled $95 thousand and $49 thousand, respectively,
during the period. Real estate loans had no charge-offs or recoveries for the
six months ended December 31, 2001.
Noninterest income of $4.0 million for the six-month period ended December 31,
2001 was a $1.2 million, or 45%, increase from $2.8 million for the six-month
period ended December 31, 2000. Noninterest income during each of the periods in
comparison consisted primarily of income from the merchant credit card
operation, the trust department, depository service fees, gains on the sale of
residential real estate mortgage loans, and other miscellaneous fees. The first
six months of fiscal 2002, when compared to the same period in fiscal 2001,
posted a $222 thousand increase in fees earned by the merchant credit card
operation of Bancard. This 28% improvement in merchant credit card fees was the
result of Bancard's ongoing effort to develop existing and build new ISO
relationships as a replacement for the termination in May 2000 of its largest
ISO processing contract. Gains on the sale of residential real estate mortgage
loans, net, increased $935 thousand from the first six months of fiscal 2001 to
the same period in fiscal 2002. The activity within this area of the subsidiary
banks was stimulated by the environment of falling interest rates. Additional
increases in noninterest income consisted of a $117 thousand increase in deposit
service fees. The various increases in noninterest income were partially offset
by a 2% decrease in fees earned by the trust department, and a 7% decrease in
other noninterest income. Other noninterest income in each quarter consisted
primarily of investment advisory and management fees, rent income and fees
collected from correspondent banks.
In November 1999, Bancard's largest ISO notified Bancard that it intended to
terminate its processing relationship in May 2000 and start processing its own
transactions, as per a previous agreement. As anticipated, processing for this
ISO ceased in May 2000 eliminating approximately 64% of Bancard's average
monthly processing volume. Bancard has since built additional ISO relationships
and developed the relationships with existing ISOs in an effort to rebuild
processing volumes. Bancard's dollar volume of transactions processed during the
first six months of fiscal 2002 was $568 million compared to $402 million for
the same period in fiscal 2001 for an increase of $166 million or 42 %. Bancard
continues to work to restore processing volumes at or above the levels existing
prior to the termination of processing with the original ISO.
For the six months ended December 31, 2001, trust department fees decreased $20
thousand, or 2%, to $997 thousand from $1.0 million for the same period in 2000.
The decrease was primarily a reflection of the economic instability and related
stock market volatility experienced during the period, partially offset by the
development of existing trust relationships and the addition of new trust
customers.
Deposit service fees increased $117 thousand, or 34%, to $464 thousand from $347
thousand for the six-month periods ended December 31, 2001 and December 31,
2000, respectively. This increase was primarily a result of the new deposit
accounts fee structure that was implemented beginning February 1, 2001. Service
charges and NSF (non-sufficient funds) charges related to demand deposit
accounts were the main components of deposit service fees.
Gains on sales of loans, net, was $1.2 million for the six months ended December
31, 2001, which reflected an increase of 314%, or $935 thousand, from $298
thousand for the six months ended December 31, 2000. The increase resulted from
larger numbers of both home refinances and home purchases, and the subsequent
sale of the majority of these loans into the secondary market. The decline in
interest rates since the beginning of calendar year 2001 dramatically
accelerated the activity within this area of the subsidiary banks.
16
For the six months ended December 31, 2001, other noninterest income decreased
$23 thousand, or 7%, to $325 thousand from $348 thousand for the same period in
2000. The decrease was primarily due to a decrease in rental income, partially
offset by the improved profitability of two of the associated companies in which
the Company holds interest. An expansion of the real estate and trust
departments at the Moline, Illinois facility eliminated space that had
previously generated rental income.
The main components of noninterest expenses were primarily salaries and
benefits, occupancy and equipment expenses, and professional and data processing
fees, for both six-month periods. Noninterest expenses for the six months ended
December 31, 2001 were $8.2 million as compared to $6.5 million for the same
period in 2000, for an increase of $1.7 million or 26%.
The following table sets forth the various categories of noninterest expenses
for the six months ended December 31, 2001 and 2000.
Noninterest Expenses
Six months ended
December 31,
------------------------
2001 2000 % change
-----------------------------------
Salaries and employee benefits .......... $4,774,358 $3,735,561 27.8%
Professional and data processing fees ... 784,701 592,259 32.5%
Advertising and marketing ............... 286,643 280,352 2.2%
Occupancy and equipment expense ......... 1,137,585 918,065 23.9%
Stationery and supplies ................. 235,766 170,490 38.3%
Postage and telephone ................... 229,462 193,968 18.3%
Other ................................... 796,399 653,114 21.9%
-----------------------------------
Total noninterest expenses ...... $8,244,914 6,543,809 26.0%
===================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For the six months ended December 31, 2001, total
salaries and benefits increased to $4.8 million or $1.1 million over the
previous year's period total of $3.7 million. The addition of employees to staff
the Cedar Rapids Bank & Trust operation accounted for $751 thousand, or 72%, of
this increase. A slight increase from December 2000 to December 2001 in the
number of Quad City Bank & Trust employees, and increased incentive compensation
to real estate officers proportionate to the increased volumes of gains on sales
of loans comprised the balance of the change in salary and benefits expense.
Professional and data processing fees increased from $592 thousand for the six
months ended December 31, 2000 to $785 thousand for the same six-month period in
2001. The $193 thousand increase was predominately due to legal fees resulting
from the legal proceedings in process between Bancard and PMT Services, Inc.
Occupancy and equipment expense increased $220 thousand or 24% for the period.
The increase was predominately due to the additions of Quad City Bank & Trust's
fourth full service banking facility in late October 2000 and Cedar Rapids Bank
& Trust's permanent full service banking facility in September 2001, and the
resulting increased levels of rent, utilities, depreciation, maintenance, and
other occupancy expenses. Stationary and supplies increased $66 thousand from
$170 thousand for the six months ended December 31, 2000 to $236 thousand for
the same period in 2001. The addition of Cedar Rapids Bank & Trust accounted for
$41 thousand, or 63% of this increase. Other noninterest expense increased $143
thousand or 22% for the period. The increase was primarily the result of
increased insurance expense, increased processing and servicing charges incurred
by the trust department, and increased expense incurred by the subsidiary banks
for miscellaneous lending expense and service charges from upstream banks.
The provision for income taxes was $630 thousand for the six-month period ended
December 31, 2001 compared to $520 thousand for the six-month period ended
December 31, 2000 for an increase of $110 thousand or 21%. The increase was the
result of an increase in income before income taxes of $443 thousand or 29% for
the fiscal 2002 period when compared to the fiscal 2001 period, as well as a
reduction in the Company's effective tax rate.
17
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 the proceeds on sales of loans, was $470 thousand for the six
months ended December 31, 2001 compared to $91 thousand net cash used for the
same period in 2000. Net cash used in investing activities, consisting
principally of loan originations, was $59.7 million for the six months ended
December 31, 2001 and $14.8 million for the six months ended December 31, 2000.
Net cash provided by financing activities, consisting primarily of deposit
growth, proceeds from Federal Home Loan Bank (FHLB) advances, and net proceeds
from other borrowings for the six months ended December 31, 2001 was $60.2
million and for the same period in 2000 was $21.8 million.
The Company has a variety of sources of short-term liquidity available to it,
including federal funds purchased from correspondent banks, sales of securities
available for sale, FHLB advances, lines of credit and loan participations or
sales. At December 31, 2001, the subsidiary banks had seven unused lines of
credit totaling $36.0 million of which $4.0 million was secured and $32.0
million was unsecured. At June 30, 2001, the subsidiary banks had six unused
lines of credit totaling $31.0 million of which $8.0 million was secured and
$23.0 million was unsecured. At December 31, 2001, the Company also had a
secured line of credit for $10.0 million, of which $5.0 million had been used as
partial funding for the capitalization of Cedar Rapids Bank & Trust. At June 30,
2001, the Company had an unused line of credit for $3.0 million, which was
secured.
OTHER DEVELOPMENTS
In addition to the main office in Bettendorf, IA, Quad City Bank & Trust has two
full service banking locations in Davenport, IA, and a full-service banking
location in the Velie Plantation Mansion in Moline, IL. The Company also
maintains two locations that are utilized for various operational and
administrative functions. In March 1999, Quad City Bank & Trust acquired and
improved a 3,000 square foot office building adjacent to the Davenport facility
for utilization by its technology and credit administration departments.
Beginning May 1, 2000, the Company leased approximately 2,000 square feet on the
second floor of its facility in Moline. The space was renovated and serves as
the corporate headquarters of the Company.
Construction of Quad City Bank & Trust's fourth full service banking facility
was completed in October 2000 at 5515 Utica Ridge Road in Davenport. Quad City
Bank & Trust leases approximately 6,000 square feet on the first floor and 2,200
square feet in the lower level of the 24,000 square foot facility. The office
was opened for business on October 30, 2000.
The Company announced plans, in April 2001, to expand its banking operations to
the Cedar Rapids, Iowa market. Initially, from June until mid-September, the
Cedar Rapids operation functioned as a branch of Quad City Bank & Trust while
waiting for regulatory approvals for a new state bank charter. On September 14,
2001, the Cedar Rapids branch operation was converted into the new charter and
began operations as Cedar Rapids Bank and Trust Company. Cedar Rapids Bank &
Trust leases approximately 8,200 square feet in the GreatAmerica Building in
Cedar Rapids, which currently serves as its only office.
18
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words, "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. 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 affect on the
operations and future prospects of the Company and its subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area, our implementation of new technologies, our ability
to develop and maintain secure and reliable electronic systems, and accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. The Company does not assume any obligation to
update any forward-looking statement. Further information, concerning the
Company and its business including additional factors that could materially
affect the Company's financial results, is included in the Company's filings
with the Securities and Exchange Commission.
19
Part II
QCR HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Bancard is the holder of an account receivable in the approximate amount of
$1,700,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova
Corporation, which was acquired by U.S. Bancorp in July 2001. This receivable
arises pursuant to Bancard's provision of electronic credit card sales
authorization and settlement services to PMT pursuant to a written contract that
includes PMT's obligation to indemnify Bancard for credit card chargeback losses
arising from those services. PMT has failed to timely pay Bancard for monthly
invoices, including service charges and substantial chargeback losses, for the
period beginning May, 2000. Bancard is vigorously pursuing collection of this
receivable. On September 25, 2000, PMT filed a lawsuit in federal court in Los
Angeles, California, against Bancard and the Company. This lawsuit alleges
tortious acts and breaches of contract by Bancard, the Company, and others and
seeks recovery from Bancard and the Company of not less than $3,600,000 of
alleged actual damages, plus punitive damages. Bancard and the Company filed
lawsuits in federal and state courts in Davenport, Iowa against PMT. These
lawsuits sought a court order compelling PMT to participate in arbitration in
Bettendorf, Iowa, as provided for in the pertinent contract documents, and to
resolve the disputes between PMT, Bancard and the Company, including the unpaid
account receivable. The federal court in Iowa ruled that the arbitration issue
should be determined by the state court in Iowa. Subsequently, the Iowa District
Court of Scott County ruled that all claims, including the tort claims, must be
arbitrated in Iowa. Because of that ruling, the California lawsuit was
dismissed, and arbitration will take place in March 2002. Bancard and the
Company continue to believe that PMT's allegations are without merit and will
vigorously pursue the collection of the receivable and the defense of PMT's
claims.
Item 2 Changes in Securities and Use of Proceeds - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held at The Mark of the Quad Cities
located at 1201 River Drive, Moline, Illinois on October 24, 2001 at 10:00 a.m.
At the meeting, Article I of the certificate of incorporation was amended to
change the name of Quad City Holdings, Inc. to QCR Holdings, Inc. Also at the
meeting, Douglas M. Hultquist, John W. Schricker, and Larry J. Helling were
re-elected to serve as Class II directors, with terms expiring in 2004.
Continuing as Class III directors, with terms expiring in 2002, are Richard R.
Horst, John K. Lawson, and Ronald G. Peterson. Continuing as Class I directors,
with terms expiring in 2003, are Michael A. Bauer and James J. Brownson.
Part II
Item 4
Submission of Matters to a Vote of Security Holders-continued
At the time of the annual meeting, there were 2,800,990 issued shares and
2,740,844 outstanding shares of common stock. Either in person or by proxy,
there were 2,534,093 common shares represented at the meeting, constituting
approximately 92% of the outstanding shares. The voting was as follows:
Votes Votes Votes
For Against Abstained
-------------------------------------
Amendment of Article I 2,304,164 32,841 17,088
Votes Votes
For Withheld
------------------------
Douglas M. Hultquist 2,332,864 21,229
John W. Schricker 2,312,125 41,968
Larry J. Helling 2,330,686 23,407
Item 5 Other Information - None
20
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A report on Form 8-K was filed on November 1, 2001 under Item 5
which reported the Company's name change with the related ticker
symbol change and first quarter financial information in the
form of a press release.
21
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 February 1, 2002 /s/ Michael A. Bauer
-----------------------------------
Michael A. Bauer, Chairman
Date February 1, 2002 /s/ Douglas M. Hultquist
-----------------------------------
Douglas M. Hultquist, President
Chief Executive Officer
Date February 1, 2002 /s/ Todd A. Gipple
-----------------------------------
Todd A. Gipple, Executive
Vice President
Chief Financial Officer
22