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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22208
QCR HOLDINGS, INC.
------------------------------------------------------
(f/k/a Quad City Holdings, Inc.)
(Exact name of Registrant as specified in its charter)
Delaware 42-1397595
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer ID
or organization) Number)
3551 7th Street, Suite 204, Moline, Illinois 61265
--------------------------------------------------
(Address of principal executive offices)
(309) 736-3580
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: As of May 1, 2002,
the Registrant had outstanding 2,744,896 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, 2002 and June 30, 2001 3
Consolidated Statements of Income,
For the Three Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Income,
For the Nine Months Ended March 31, 2002 and 2001 5
Consolidated Statements of Cash Flows,
For the Nine Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 20
Part II OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
2
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2002 and June 30, 2001
March 31, June 30,
2002 2001
------------------------------
ASSETS
Cash and due from banks ........................................................ $ 25,222,970 $ 20,217,219
Federal funds sold ............................................................. 10,220,000 7,775,000
Certificates of deposit at financial institutions .............................. 9,450,285 10,512,585
Securities held to maturity, at amortized cost ................................. 325,494 575,559
Securities available for sale, at fair value ................................... 72,621,163 56,134,521
------------------------------
72,946,657 56,710,080
------------------------------
Loans receivable held for sale ................................................. 6,079,582 5,823,820
Loans receivable held for investment ........................................... 354,075,650 282,040,946
Less: Allowance for estimated losses on loans .................................. (5,404,925) (4,248,182)
------------------------------
354,750,307 283,616,584
------------------------------
Premises and equipment, net .................................................... 9,234,097 8,660,698
Accrued interest receivable .................................................... 3,144,841 2,863,178
Other assets ................................................................... 10,536,105 10,592,590
------------------------------
Total assets ........................................................... $ 495,505,262 $ 400,947,934
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ......................................................... $ 61,822,545 $ 52,582,264
Interest-bearing ............................................................ 302,179,881 249,572,960
------------------------------
Total deposits ............................................................ 364,002,426 302,155,224
------------------------------
Short-term borrowings .......................................................... 31,262,687 28,342,542
Federal Home Loan Bank advances ................................................ 47,491,877 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 .............................................................. 5,024,261 4,919,949
------------------------------
Total liabilities ...................................................... 464,781,251 377,130,474
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; shares authorized 5,000,000; shares issued and
outstanding March 2002 - 2,805,042 and 2,744,896; June 2001 - 2,325,566
and 2,265,420 respectively .................................................. 2,805,042 2,325,566
Additional paid-in capital ..................................................... 16,649,277 12,148,759
Retained earnings .............................................................. 11,643,442 9,691,749
Accumulated other comprehensive income, unrealized gains on
securities available for sale, net ........................................... 480,786 505,922
------------------------------
31,578,547 24,671,996
Less cost of 60,146 common shares acquired for the treasury .................... (854,536) (854,536)
------------------------------
Total stockholders' equity ............................................. 30,724,011 23,817,460
------------------------------
Total liabilities and stockholders' equity ............................. $ 495,505,262 $ 400,947,934
==============================
See Notes to Consolidated Financial Statements
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31
2002 2001
-----------------------
Interest income:
Interest and fees on loans .................................. $5,842,513 $5,781,051
Interest and dividends on securities:
Taxable ................................................... 818,673 776,055
Nontaxable ................................................ 107,022 74,455
Interest on certificates of deposit at financial institutions 133,556 176,577
Interest on federal funds sold .............................. 103,619 403,412
Other interest .............................................. 76,602 67,989
-----------------------
Total interest income ............................... 7,081,985 7,279,539
-----------------------
Interest expense:
Interest on deposits ........................................ 2,103,234 3,392,761
Interest on company obligated manditorily ................... 283,376 283,376
redeemable preferred securities
Interest on short-term borrowings ........................... 677,161 637,232
Interest on other borrowings ................................ 66,114 0
-----------------------
Total interest expense .............................. 3,129,885 4,313,369
-----------------------
Net interest income ................................. 3,952,100 2,966,170
Provision for loan losses .................................... 497,500 148,374
-----------------------
Net interest income after provision for loan losses . 3,454,600 2,817,796
-----------------------
Noninterest income:
Merchant credit card fees, net of processing costs .......... 414,260 401,946
Trust department fees ....................................... 593,758 566,017
Deposit service fees ........................................ 255,435 218,078
Gains on sales of loans, net ................................ 418,095 313,796
Other ....................................................... 147,125 132,224
-----------------------
Total noninterest income ............................ 1,828,673 1,632,061
-----------------------
Noninterest expenses:
Salaries and employee benefits .............................. 2,538,376 2,105,388
Professional and data processing fees ....................... 326,536 267,494
Advertising and marketing ................................... 148,287 113,078
Occupancy and equipment expense ............................. 605,659 488,593
Stationery and supplies ..................................... 125,271 82,959
Postage and telephone ....................................... 126,673 98,173
Other ....................................................... 524,385 315,781
-----------------------
Total noninterest expenses .......................... 4,395,187 3,471,466
-----------------------
Income before income taxes .......................... 888,086 978,391
Federal and state income taxes ................................ 274,003 355,520
-----------------------
Net income .......................................... $ 614,083 $ 622,871
=======================
Earnings per common share:
Basic ....................................................... $ 0.22 $ 0.28
Diluted ..................................................... $ 0.22 $ 0.27
Weighted average common shares outstanding .................. 2,743,668 2,265,420
Weighted average common and common equivalent ............... 2,804,909 2,311,112
shares outstanding
Comprehensive income .......................................... $ 431,184 $1,262,374
See Notes to Consolidated Financial Statements
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended March 31
2002 2001
----------------------------
Interest income:
Interest and fees on loans .................................. $ 17,380,482 $ 17,173,270
Interest and dividends on securities:
Taxable ................................................... 2,297,514 2,333,765
Nontaxable ................................................ 315,848 204,818
Interest on certificates of deposit at financial institutions 448,738 531,033
Interest on federal funds sold .............................. 240,541 1,109,752
Other interest .............................................. 244,662 169,641
----------------------------
Total interest income ............................... 20,927,785 21,522,279
----------------------------
Interest expense:
Interest on deposits ........................................ 6,839,232 10,130,780
Interest on company obligated manditorily ................... 850,129 851,164
redeemable preferred securities
Interest on short-term borrowings ........................... 1,923,743 1,773,623
Interest on other borrowings ................................ 150,306 0
----------------------------
Total interest expense .............................. 9,763,410 12,755,567
----------------------------
Net interest income ................................. 11,164,375 8,766,712
Provision for loan losses .................................... 1,537,365 668,249
----------------------------
Net interest income after provision for loan losses . 9,627,010 8,098,463
----------------------------
Noninterest income:
Merchant credit card fees, net of processing costs .......... 1,436,788 1,202,429
Trust department fees ....................................... 1,591,116 1,583,304
Deposit service fees ........................................ 718,984 564,927
Gains on sales of loans, net ................................ 1,650,718 611,475
Securities losses, net ...................................... (670) (22,730)
Other ....................................................... 471,977 480,237
---------------------------
Total noninterest income ............................ 5,868,913 4,419,642
----------------------------
Noninterest expenses:
Salaries and employee benefits .............................. 7,312,734 5,840,949
Professional and data processing fees ....................... 1,111,237 859,753
Advertising and marketing ................................... 434,930 393,430
Occupancy and equipment expense ............................. 1,743,244 1,406,658
Stationery and supplies ..................................... 361,037 253,449
Postage and telephone ....................................... 356,135 292,141
Other ....................................................... 1,320,784 968,895
----------------------------
Total noninterest expenses .......................... 12,640,101 10,015,275
----------------------------
Income before income taxes .......................... 2,855,822 2,502,830
Federal and state income taxes ................................ 904,129 875,765
----------------------------
Net income .......................................... $ 1,951,693 $ 1,627,065
============================
Earnings per common share:
Basic ....................................................... $ 0.73 $ 0.72
Diluted ..................................................... $ 0.72 $ 0.70
Weighted average common shares outstanding .................. 2,665,972 2,269,476
Weighted average common and common equivalent ............... 2,718,674 2,316,811
shares outstanding
Comprehensive income .......................................... $ 1,926,557 $ 3,261,767
See Notes to Consolidated Financial Statements
5
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended March 31
2002 2001
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................ $ 1,951,693 $ 1,627,065
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ............................................................ 686,313 567,043
Provision for loan losses ............................................... 1,537,365 668,249
Amortization of offering costs on subordinated debentures ............... 22,129 22,129
Amortization of premiums on securities, net ............................. 105,441 40,311
Securities losses, net .................................................. 670 22,730
Loans originated for sale ............................................... (122,153,908) (53,699,958)
Proceeds on sales of loans .............................................. 123,548,864 47,959,757
Net gains on sales of loans ............................................. (1,650,718) (611,475)
Increase in accrued interest receivable ................................. (281,663) (543,559)
(Increase) decrease in other assets ..................................... 521,211 (1,657,901)
Increase in other liabilities ........................................... 104,312 1,200,194
------------------------------
Net cash provided by (used in) operating activities ................. $ 4,391,709 $ (4,405,415)
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold ............................. (2,445,000) 270,000
Net decrease in certificates of deposits at financial institutions1,062,300 1,866,378
Purchase of securities available for sale ................................. (24,275,068) (5,110,785)
Proceeds from calls and maturities of securities .......................... 6,395,000 7,545,000
Proceeds from paydowns on securities ...................................... 1,402,565 1,156,226
Proceeds from sales of securities available for sale ...................... 101,285 254,247
Purchase of life insurance contracts ...................................... (401,087) 0
Increase in cash value of life insurance contracts ........................ (77,374) (65,880)
Net loans originated ...................................................... (72,415,326) (29,442,898)
Purchase of premises and equipment, net ................................... (1,259,712) (1,360,791)
------------------------------
Net cash used in investing activities ............................... $ (91,912,417) $ (24,888,503)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts .......................................... 61,847,202 20,997,296
Net increase in short-term borrowings ..................................... 2,920,145 7,015,751
Proceeds from Federal Home Loan Bank advances ............................. 20,000,000 16,250,000
Payments on Federal Home Loan Bank advances ............................... (2,220,882) (9,381,541)
Net increase in other borrowings .......................................... 5,000,000 0
Purchase of treasury stock ................................................ 0 (255,056)
Proceeds from issuance of common stock, net ............................... 4,979,994 925
------------------------------
Net cash provided by financing activities ........................... $ 92,526,459 $ 34,627,375
------------------------------
Net increase in cash and due from banks ............................. 5,005,751 5,333,457
Cash and due from banks, beginning .......................................... 20,217,219 15,130,357
------------------------------
Cash and due from banks, ending ............................................. $ 25,222,970 $ 20,463,814
==============================
Supplemental disclosure of cash flow information,
cash payments for:
Interest .................................................................. $ 10,345,251 $ 11,616,540
==============================
Income/franchise taxes .................................................... $ 860,402 $ 1,174,613
==============================
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income,
unrealized gains (losses) on securities available for sale, net ........... $ (25,136) $ 1,634,702
==============================
See Notes to Consolidated Financial Statements
6
Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include information or footnotes necessary for a
fair presentation of financial position, results of operations and changes in
financial condition in conformity with accounting principles generally accepted
in the United States of America. However, all adjustments that are, in the
opinion of management, necessary for a fair presentation have been included. Any
differences appearing between numbers presented in financial statements and
management's discussion and analysis are due to rounding. Results for the
periods ended March 31, 2002 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"), QCR Capital Trust I
("Capital Trust"), and Quad City Liquidation Corporation ("QCLC"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. In addition to six wholly owned subsidiaries, the Company has an
aggregate investment of $268 thousand in four associated companies, Nobel
Electronic Transfer, LLC, Nobel Real Estate Investors, LLC, Velie Plantation
Holding Company, and Clarity Merchant Services, Inc. Effective November 1, 2001,
the Company changed its name from Quad City Holdings, Inc. to QCR Holdings,
Inc., and its Nasdaq SmallCap trading symbol to "QCRH".
NOTE 3 - EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a
basic and diluted basis.
Three months ended Nine months ended
March 31, March 31,
----------------------- -----------------------
2002 2001 2002 2001
-------------------------------------------------
Net income, basic and diluted
earnings .................................. $ 614,083 $ 622,871 $1,951,693 $1,627,065
=================================================
Weighted average common shares outstanding .. 2,743,668 2,265,420 2,665,972 2,269,476
Weighted average common shares issuable
upon exercise of stock options ............ 61,241 45,692 52,702 47,335
-------------------------------------------------
Weighted average common and
common equivalent shares
outstanding ............................... 2,804,909 2,311,112 2,718,674 2,316,811
=================================================
7
NOTE 4 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is presented
as follows for the three month and six month periods ended March 31, 2002 and
2001, respectively.
Three months ended Nine months ended
March 31, March 31,
------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------
Revenue :
Commercial banking ............ $ 7,824,929 $ 7,823,729 $ 23,521,387 $ 22,893,415
Merchant credit card processing 453,618 463,347 1,564,621 1,369,481
Trust management .............. 593,759 566,017 1,591,116 1,583,304
All other ..................... 38,352 58,507 119,574 95,721
------------------------------------------------------------
Total revenue ......... $ 8,910,658 $ 8,911,600 $ 26,796,698 $ 25,941,921
============================================================
Net income (loss) :
Commercial banking ............ $ 805,440 $ 640,705 $ 2,218,832 $ 1,806,618
Merchant credit card processing (45,493) 48,854 121,558 139,254
Trust management .............. 173,492 146,777 391,188 367,016
All other ..................... (319,356) (213,465) (779,885) (685,823)
------------------------------------------------------------
Total net income ...... $ 614,083 $ 622,871 $ 1,951,693 $ 1,627,065
============================================================
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 1
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QCR Holdings, Inc. (the "Company") is the parent company of Quad City Bank &
Trust, Cedar Rapids Bank & Trust, and Quad City Bancard, Inc. Effective November
1, 2001, the Company changed its name to QCR Holdings, Inc. from Quad City
Holdings, Inc.
Quad City Bank & Trust is an Iowa-chartered commercial bank that is a member of
the Federal Reserve System with depository accounts insured to the maximum
amount permitted by law by the Federal Deposit Insurance Corporation. Quad City
Bank & Trust commenced operations in January 1994 and provides full-service
commercial and consumer banking, and trust and asset management services to the
Quad City area and adjacent communities through its four offices that are
located in Bettendorf and Davenport, Iowa and Moline, Illinois.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member
of the Federal Reserve System with depository accounts insured to the maximum
amount permitted by law by the Federal Deposit Insurance Corporation. The
Company commenced operations in Cedar Rapids in June 2001 operating as a branch
of Quad City Bank & Trust. The Cedar Rapids branch operation began functioning
under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank
& Trust provides full-service commercial and consumer banking service to Cedar
Rapids and adjacent communities through its office located in the GreatAmerica
Building in downtown Cedar Rapids, Iowa.
Quad City Bancard, Inc. ("Bancard") provides merchant credit card processing
services. Bancard has contracted with independent sales organizations ("ISOs")
that market credit card services to merchants throughout the country. In March
1999, Bancard formed its own subsidiary ISO, Allied Merchant Services, Inc., for
the purpose of generating additional credit card processing business. At March
31, 2002, approximately 20,400 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 $94.6 million or 24% to $495.5 million
at March 31, 2002 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 $5.0 million or 25% to $25.2 million at
March 31, 2002 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 March 31, 2002,
the subsidiary banks had $10.2 million invested in such funds. This amount
increased by $2.4 million or 31% from $7.8 million at June 30, 2001.
Certificates of deposit at financial institutions decreased by $1.0 million or
10% to $9.5 million at March 31, 2002 from $10.5 million at June 30, 2001.
During the first nine months of fiscal 2002, the certificate of deposit
portfolio had 28 maturities totaling $2.7 million and 17 purchases totaling $1.7
million.
Securities increased by $16.2 million or 29% to $72.9 million at March 31, 2002
from $56.7 million at June 30, 2001. The increase was the result of a number of
transactions in the securities portfolio. Paydowns of $1.4 million were received
on mortgage-backed securities, and the amortization of premiums, net of the
accretion of discounts, was $105 thousand. Maturities and calls of securities
occurred in the amount of $6.4 million, sales of securities totaled $101
thousand, and the Company experienced a $34 thousand decrease in the fair value
of securities, classified as available for sale. These portfolio decreases were
offset by the purchase of an additional $24.3 million of securities, classified
as available for sale.
9
Total loans receivable increased by $72.3 million or 25% to $360.2 million at
March 31, 2002 from $287.9 million at June 30, 2001. The increase was the result
of the origination or purchase of $430.4 million of commercial business,
consumer and real estate loans, less loan charge-offs, net of recoveries, of
$381 thousand, and loan repayments or sales of loans of $357.8 million. During
the nine months ended March 31, 2002, Quad City Bank & Trust contributed $362.3
million, or 84%, and Cedar Rapids Bank & Trust contributed $68.1 million, or
16%, 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 78% commercial, 11% real estate and 11% 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 $5.4 million at March 31, 2002
compared to $4.2 million at June 30, 2001, an increase of $1.2 million or 27%.
The adequacy of the allowance for estimated losses on loans was determined based
on factors that included the overall composition of the loan portfolio, types of
loans, past loss experience, loan delinquencies, potential substandard and
doubtful credits, economic conditions, and other factors that, in management's
judgement, deserved evaluation. To ensure that an adequate allowance was
maintained, provisions were made based on a number of factors, including the
increase in loans and a detailed analysis of the loan portfolio. The loan
portfolio was reviewed and analyzed monthly utilizing the percentage allocation
method. In addition, specific reviews were completed on all credits risk-rated
less than "fair quality" and carrying aggregate exposure in excess of $250
thousand. The adequacy of the allowance for estimated losses on loans was
monitored by the loan review staff, and reported to management and the board of
directors. Although management believes that the allowance for estimated losses
on loans at March 31, 2002 was at a level adequate to absorb losses on existing
loans, there can be no assurance that such losses will not exceed the estimated
amounts or that the Company will not be required to make additional provisions
for loan losses in the future. 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 nine months ended March 31, were $381 thousand in 2002
and $201 thousand in 2001. One measure of the adequacy of the allowance for
estimated losses on loans is the ratio of the allowance to the held for
investment loan portfolio. The allowance for estimated losses on loans as a
percentage of held for investment loans was 1.5% at both March 31, 2002 and June
30, 2001.
At March 31, 2002, total nonperforming assets were $2.4 million compared to $1.7
million at June 30, 2001. The $636 thousand increase was the result of a $377
thousand increase in nonaccrual loans and an increase of $259 thousand in
accruing loans past due 90 days or more. All of the Company's nonperforming
assets are located in the loan portfolio at Quad City Bank & Trust. The loans in
the Cedar Rapids Bank & Trust loan portfolio have been made fairly recently, and
none of the loans have been categorized as nonperforming assets. As the loan
portfolio at Cedar Rapids Bank & Trust matures, it is likely that there will be
nonperforming loans or charge-offs associated with the portfolio.
Nonaccrual loans were $1.6 million at March 31, 2002 compared to $1.2 million at
June 30, 2001, an increase of $377 thousand. The increase in nonaccrual loans
was comprised of an increase in commercial loans of $785 thousand, partially
offset by decreases in real estate loans of $396 thousand and consumer loans of
$12 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 $737 thousand. 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 March 31, 2002.
10
From June 30, 2001 to March 31, 2002, accruing loans past due 90 days or more
increased from $495 thousand to $754 thousand, respectively. The $259 thousand
net increase was primarily due to the addition of three loans at Quad City Bank
& Trust, with an aggregate outstanding balance of $344 thousand, which were not
anticipated to produce any material losses. These additions were partially
offset by a net decrease in accruing real estate loans past due 90 days or more.
Premises and equipment showed an increase of $573 thousand or 7% to $9.2 million
at March 31, 2002 from $8.6 million at June 30, 2001. The increase resulted from
the purchase of additional furniture, fixtures and equipment and leasehold
improvements of $1.3 million during the period offset by depreciation expense of
$686 thousand. The opening of a permanent, main banking facility in Cedar Rapids
on September 28, 2001 accounted for $773 thousand, or 61%, of the premises and
equipment capital additions during the first nine months of fiscal 2002.
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $282 thousand or 10% to $3.1 million at March 31, 2002
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 $56 thousand or less than 1% to $10.5 million at March
31, 2002 from $10.6 million at June 30, 2001. The three largest components of
other assets at March 31, 2002 were $2.8 million in Federal Reserve Bank and
Federal Home Loan Bank stock, $2.6 million in cash surrender value of life
insurance contracts and $2.0 million in prepaid Visa/Mastercard processing.
Other assets also included accrued trust department fees, other miscellaneous
receivables, and various prepaid expenses.
Deposits increased by $61.9 million or 20% to $364.0 million at March 31, 2002
from $302.1 million at June 30, 2001. The increase resulted from a $34.6 million
net increase in non-interest bearing, NOW, money market and other savings
accounts and a $27.3 million net increase in interest-bearing certificates of
deposit.
Short-term borrowings increased $3.0 million or 10% from $28.3 million at June
30, 2001 to $31.3 million at March 31, 2002. The subsidiary banks offer
short-term repurchase agreements to some of their major customers. Also, on
occasion, the subsidiary banks purchase Federal funds for short-term funding
needs from the Federal Reserve Bank, or from some of their correspondent banks.
As of both March 31, 2002 and June 30, 2001, short-term borrowings were
comprised entirely of customer repurchase agreements.
Federal Home Loan Bank advances increased by $17.8 million, or 60%, to $47.5
million at March 31, 2002 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
March 31, 2002. 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, QCR Capital Trust I. On the Company's balance
sheet these securities are included with liabilities and are presented as
"company obligated manditorily redeemable preferred securities of subsidiary
trust holding solely subordinated debentures", and were $12.0 million at both
March 31, 2002 and June 30, 2001.
Other liabilities were $5.0 million at March 31, 2002 up $104 thousand, or 2%,
from $4.9 million at June 30, 2001. Other liabilities was comprised of unpaid
amounts for various products and services, and accrued but unpaid interest on
deposits. At March 31, 2002, the most significant component of other liabilities
was $1.8 million of interest payable.
Common stock at March 31, 2002 increased by $479 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 fiscal 2001, the
Company acquired 18,650 treasury shares at a total cost of $255 thousand.
11
Additional paid-in capital totaled $16.6 million at March 31, 2002 and $12.1
million at June 30, 2001. The increase of $4.5 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 $1.9 million, or 20%, to $11.6 million at March
31, 2002 from $9.7 million at June 30, 2001. The increase reflected net income
for the nine-month period.
Unrealized gains on securities available for sale, net of related income taxes,
totaled $481 thousand at March 31, 2002 as compared to $506 thousand at June 30,
2001. The decrease in gains of $25 thousand was attributable to the decrease
during the period in fair value of the securities identified as available for
sale.
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
December 31, 2001, projected that net portfolio value would decrease by
approximately 8.03% if interest rates would rise 200 basis points over the next
year. It projected an increase in net portfolio value of approximately 7.51% if
interest rates would drop 200 basis points. Both simulations are within
board-established policy limits.
RESULTS OF OPERATIONS
OVERVIEW
Net income for the third quarter ended March 31, 2002 was $614 thousand as
compared to net income of $623 thousand for the same period in 2001, a decrease
of $9 thousand or 1%. Basic earnings per share for the third quarter of fiscal
2002 decreased to $0.22 from $0.28 in fiscal 2001. For the third quarter ended
March 31, 2002, net interest income improved by 33% while noninterest income
improved by 12%, for a combined improvement of $1.2 million when compared to the
same period in 2001. Offsetting the improvements in revenue for the Company were
increases in noninterest expense of $924 thousand and the provision for loan
losses of $349 thousand.
12
Net income for the nine-month period ended March 31, 2002 was $2.0 million as
compared to net income of $1.6 million for the same period in 2001, an increase
of $325 thousand or 20%. Basic earnings per share for the first nine months of
fiscal 2002 increased to $0.73 from $0.72 in fiscal 2001. When compared to
fiscal 2001, the first nine months of fiscal 2002 reflected significant growth
in both net interest income and noninterest income for the Company. For the nine
month period ended March 31, 2002, net interest and noninterest income improved
by 27% and 33%, respectively, for a combined increase of $3.8 million when
compared to the same period in 2001. 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 were increases in noninterest expense of
$2.6 million and the provision for loan losses of $869 thousand. During the
first nine months of fiscal 2002, pre-tax costs associated with the Company's
operation of the Cedar Rapids Bank & Trust subsidiary were approximately $1.7
million, and were the primary contributors to the climb in noninterest expense.
While the after-tax start-up losses at Cedar Rapids Bank & Trust, including the
pre-charter losses, were $900 thousand for the nine months ended March 31, 2002,
these losses were less than anticipated, and Cedar Rapids Bank and Trust's
growth was more rapid than expected. Management remains confident that the
decision to enter the Cedar Rapids market will provide significant long-term
benefits to the Company. Also impacting noninterest expense for both the quarter
and nine months ended March 31, 2002 were legal costs at the Company's
subsidiary, Quad City Bancard, related to its arbitration proceedings to collect
a large customer receivable and the subsequent settlement of the dispute in
February 2002. As a result of the settlement, an amount was paid by the customer
to Bancard, which resulted in the collection of the receivable, less an amount
that approximated the costs of continued arbitration. The effect of the
settlement was a reduction in third quarter after-tax earnings of approximately
$175,000, or $.06 per share. After careful consideration, management made the
determination that a settlement at that time was the most cost effective option
for the Company.
The Company's operating results are derived largely from net interest income.
Net interest income is the difference between interest income, principally from
loans and investment securities, and interest expense, principally on borrowings
and customer deposits. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
The Company's average yield on interest-earning assets decreased 1.50% for the
third quarter ended March 31, 2002 when compared to the third quarter ended
March 31, 2001. With the same comparison, the average cost of interest-bearing
liabilities declined 2.09% resulting in a 0.59% increase in the net interest
spread of 2.60% at March 31, 2001 to 3.19% at March 31, 2002. The widening of
the net interest spread created a significant improvement in the Company's net
interest margin. For the three months ended March 31, 2002, the net interest
margin was 3.66% compared to 3.29% for the same period in 2001.
The Company's average yield on interest-earning assets decreased 1.27% for the
nine months ended March 31, 2002 when compared to the nine months ended March
31, 2001. With the same comparison, the average cost of interest-bearing
liabilities declined 1.62% resulting in a 0.35% increase in the net interest
spread of 2.90% at March 31, 2001 to 3.25% at March 31, 2002. The widening of
the net interest spread created a significant improvement in the Company's net
interest margin. For the nine months ended March 31, 2002, the net interest
margin was 3.68% compared to 3.33% for the same period in 2001. Management has
aggressively managed the Company's cost of funds during the dramatic drop in
short-term interest rates since January 2001, and continues to closely monitor
and manage net interest margin.
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Interest income decreased by $198 thousand to $7.1 million for the three-month
period ended March 31, 2002 when compared to $7.3 million for the quarter ended
March 31, 2001. 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 1.50% for the three
months ended March 31, 2002 when compared to the three months ended March 31,
2001.
13
Interest expense decreased by $1.2 million from $4.3 million for the three-month
period ended March 31, 2001 to $3.1 million for the three-month period ended
March 31, 2002. The 27% 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
2.09% for the three months ended March 31, 2002 when compared to the three
months ended March 31, 2001.
At both March 31, 2002 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 $349 thousand from $148 thousand for
the three-month period ended March 31, 2001 to $497 thousand for the three-month
period ended March 31, 2002. During the third quarter of fiscal 2002, management
made monthly provisions for loan losses based upon a number of factors,
including principally the increase in loans and a detailed analysis of the loan
portfolio. The $349 thousand increase was attributed 80% or $278 thousand to
growth in the loan portfolio, and 20% or $71 thousand to downgrades within the
portfolio. For the three months ended March 31, 2002, commercial loan
charge-offs totaled $51 thousand, which was a single fully reserved loan, and
recoveries totaled $1 thousand. Consumer loan charge-offs and recoveries totaled
$32 thousand and $51 thousand, respectively, during the quarter. Real estate
loans had no charge-offs or recoveries for the three months ended March 31,
2002.
Noninterest income of $1.8 million for the three-month period ended March 31,
2002 was a $196 thousand, or 12%, increase from $1.6 million for the three-month
period ended March 31, 2001. Noninterest income during each of the quarters in
comparison consisted primarily of income from the merchant credit card
operation, the trust department, depository service fees, gains on the sale of
residential real estate mortgage loans, and other miscellaneous fees. The third
quarter of fiscal 2002, when compared to the same quarter in fiscal 2001, posted
a $12 thousand increase in fees earned by the merchant credit card operation of
Bancard. This 3% 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 $104 thousand from the third quarter of fiscal 2001 to the same
quarter in fiscal 2002. The activity within this area of the subsidiary banks
was stimulated by interest rates lower than those seen during the same period
last year. Additional increases in noninterest income consisted of a $28
thousand increase in trust department fees, a $37 thousand increase in deposit
service fees, and a $15 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. For the third quarter of fiscal 2000, just prior to
the termination, Bancard's processing volume was $290 million. Bancard has since
created additional ISO relationships and developed the relationships with
existing ISOs successfully rebuilding and expanding processing volumes.
Bancard's dollar volume of transactions processed during the third quarter of
fiscal 2002 was $301 million compared to $223 million for the same period in
fiscal 2001 for an increase of $78 million or 35%. Bancard's processing volumes
are now above the level existing prior to the termination of processing with the
original ISO. Merchant credit card fees for the three months ended March 31,
2002 included a $104 thousand charge related to the arbitration settlement with
Nova. Exclusive of the settlement, fees would have increased by 29%, which is
more reflective of the improvement in processing volumes.
For the quarter ended March 31, 2002, trust department fees increased $28
thousand, or 5%, to $594 thousand from $566 thousand for the same quarter in
2001. The increase was primarily due to the continued development of existing
trust relationships and the addition of new trust customers, partially offset by
the reduced market values of securities held in trust accounts and the resulting
impact in the calculation of trust fees.
Deposit service fees increased $37 thousand, or 17%, to $255 thousand from $218
thousand for the three-month periods ended March 31, 2002 and March 31, 2001,
respectively. This increase was primarily a result of the growth in deposit
accounts of $54.9 million, or 18%, since March 31, 2001. Service charges and NSF
(non-sufficient funds) charges related to demand deposit accounts were the main
components of deposit service fees.
14
Gains on sales of loans, net, were $418 thousand for the three months ended
March 31, 2002, which reflected an increase of 33%, or $104 thousand, from $314
thousand for the three months ended March 31, 2001. 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 during our fiscal year, which began July 1, 2001, stimulated the
activity within this area of the subsidiary banks.
For the quarter ended March 31, 2002, other noninterest income increased $15
thousand, or 11%, to $147 thousand from $132 thousand for the same quarter in
2001. The increase was primarily due to the improved profitability of two of the
associated companies in which the Company holds an interest, in combination with
an increase in item processing fees at Quad City Bank & Trust.
The primary components of noninterest expenses were mainly salaries and
benefits, occupancy and equipment expenses, and professional and data processing
fees, for both quarters. Noninterest expenses for the three months ended March
31, 2002 were $4.4 million as compared to $3.5 million for the same period in
2001, for an increase of $924 thousand or 27%.
The following table sets forth the various categories of noninterest expenses
for the three months ended March 31, 2002 and 2001.
Noninterest Expenses
Three months ended
March 31,
-----------------------
2002 2001 % change
---------------------------------
Salaries and employee benefits ............ $2,538,376 $2,105,388 20.6%
Professional and data processing fees ..... 326,536 267,494 22.1%
Advertising and marketing ................. 148,287 113,078 31.1%
Occupancy and equipment expense ........... 605,659 488,593 24.0%
Stationery and supplies ................... 125,271 82,959 51.0%
Postage and telephone ..................... 126,673 98,173 29.0%
Other ..................................... 524,385 315,781 66.1%
---------------------------------
Total noninterest expenses ........ $4,395,187 3,471,466 26.6%
=================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For the quarter ended March 31, 2002, total
salaries and benefits increased to $2.5 million or $433 thousand over the
previous year's quarter total of $2.1 million. The increase was primarily due to
the addition of employees for the Cedar Rapids Bank & Trust operation, which did
not open for business until June, 2001. Professional and data processing fees
increased from $267 thousand for the three months ended March 31, 2001 to $326
thousand for the same three-month period in 2002. The $59 thousand increase was
predominately due to increases in data processing and consulting fees at the
subsidiary banks, partially offset by a decrease in legal fees resulting from
the settlement of legal proceedings between Bancard and PMT Services, Inc. in
February 2002. Occupancy and equipment expense increased $117 thousand or 24%
for the quarter. The increase was predominately due to the addition of 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 $42
thousand from $83 thousand for the three months ended March 31, 2001 to $125
thousand for the same period in 2002. The addition of Cedar Rapids Bank & Trust
accounted for $28 thousand, or 67% of this increase. Other noninterest expense
increased $209 thousand or 66% for the quarter. The increase was primarily due
to a $170 thousand merchant credit card loss resulting from the settlement of an
arbitration dispute between Bancard and Nova Information Systems, Inc. A
settlement amount was paid to Bancard, which was the receivable due from Nova
less an amount that approximated the costs of continued arbitration. Also, the
increased noninterest expense in the third quarter of fiscal 2002 was the result
of increased expense incurred by the subsidiary banks for service charges from
their upstream banks and insurance.
The provision for income taxes was $274 thousand for the three-month period
ended March 31, 2002 compared to $356 thousand for the three-month period ended
March 31, 2001 for a decrease of $82 thousand or 23%. The decrease was the
result of a decrease in income before income taxes of $90 thousand or 9% for the
fiscal 2002 quarter when compared to the fiscal 2001 quarter, in combination
with a reduction in the Company's effective tax rate.
15
NINE MONTHS ENDED MARCH 31, 2002 AND 2001
Interest income decreased $594 thousand to $20.9 million for the nine-month
period ended March 31, 2002 when compared to $21.5 million for the nine months
ended March 31, 2001. 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 1.27% for the nine
months ended March 31, 2002 when compared to the nine months ended March 31,
2001.
Interest expense decreased by $3.0 million from $12.8 million for the nine-month
period ended March 31, 2001 to $9.8 million for the nine-month period ended
March 31, 2002. The 23% 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
1.62% for the nine months ended March 31, 2002 when compared to the nine months
ended March 31, 2001.
At both March 31, 2002 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 $869 thousand from $668 thousand for
the nine-month period ended March 31, 2001 to $1.5 million for the nine-month
period ended March 31, 2002. During the first nine months of fiscal 2002,
management made monthly provisions for loan losses based upon a number of
factors, principally the increase in loans and a detailed analysis of the loan
portfolio. The $869 thousand increase was attributed 74% or $642 thousand to
growth in the loan portfolio, and 26% or $227 thousand to downgrades within the
portfolio. During the nine months ended March 31, 2002, commercial loan
charge-offs totaled $383 thousand, which was comprised of two fully reserved
loans, and recoveries totaled $29 thousand. Consumer loan charge-offs and
recoveries totaled $127 thousand and $100 thousand, respectively, during the
period. Real estate loans had no charge-offs or recoveries for the nine months
ended March 31, 2002.
Noninterest income of $5.9 million for the nine-month period ended March 31,
2002 was a $1.5 million, or 33%, increase from $4.4 million for the nine-month
period ended March 31, 2001. 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
nine months of fiscal 2002, when compared to the same period in fiscal 2001,
posted a $234 thousand increase in fees earned by the merchant credit card
operation of Bancard. This 19% 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 $1.0 million from the first nine months of fiscal 2001 to
the same period in fiscal 2002. The activity within this area of the subsidiary
banks was stimulated by an environment of lower interest rates. Additional
increases in noninterest income consisted of a $154 thousand increase in deposit
service fees and an $8 thousand improvement in fees earned by the trust
department. Partially offsetting these revenue improvements was a 2% 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. For the nine months ended March 31, 2000, just prior
to termination, Bancard's processing volume was $773 million. Bancard has since
built additional ISO relationships and developed the relationships with existing
ISOs, successfully rebuilding and expanding processing volumes. Bancard's dollar
volume of transactions processed during the first nine months of fiscal 2002 was
$870 million compared to $624 million for the same period in fiscal 2001 for an
increase of $246 million or 39 %. Bancard's processing volumes are now above the
level existing prior to the termination of processing with the original ISO.
Merchant credit card fees for the nine months ended March 31, 2002 included a
$104 thousand charge related to the arbitration settlement with Nova. Exclusive
of the settlement, fees would have increased by 28%, which is more reflective of
the improvement in processing volumes.
16
For the nine months ended March 31, 2002, trust department fees increased $8
thousand, or less than 1%, to remain at $1.6 million as they were for the same
period in 2001. The nominal increase was primarily a reflection of the
development of existing trust relationships and the addition of new trust
customers, almost entirely offset by the reduced market value of securities held
in trust accounts and the resulting impact in the calculation of trust fees.
Deposit service fees increased $154 thousand, or 27%, to $719 thousand from $565
thousand for the nine-month periods ended March 31, 2002 and March 31, 2001,
respectively. This increase was primarily a result of both the new deposit
accounts fee structure that was implemented beginning February 1, 2001 and the
growth in deposit accounts of $54.9 million, or 18%, since March 31, 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 $1.6 million for the nine months ended March
31, 2002, which reflected an increase of 170%, or $1.0 million, from $611
thousand for the nine months ended March 31, 2001. 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 nine months ended March 31, 2002, other noninterest income decreased $8
thousand, or 2%, to $472 thousand from $480 thousand for the same period in
2001. The decrease was primarily due to decreases in rental income and
investment advisory and management fees, partially offset by the improved
profitability of two of the associated companies in which the Company holds an
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 nine-month periods. Noninterest expenses for the nine months
ended March 31, 2002 were $12.6 million as compared to $10.0 million for the
same period in 2001, for an increase of $2.6 million or 26%.
The following table sets forth the various categories of noninterest expenses
for the nine months ended March 31, 2002 and 2001.
Noninterest Expenses
Nine months ended
March 31,
------------------------
2002 2001 % change
---------------------------------
Salaries and employee benefits ............. $ 7,312,734 $ 5,840,949 25.2%
Professional and data processing fees ...... 1,111,237 859,753 29.3%
Advertising and marketing .................. 434,930 393,430 10.6%
Occupancy and equipment expense ............ 1,743,244 1,406,658 23.9%
Stationery and supplies .................... 361,037 253,449 42.5%
Postage and telephone ...................... 356,135 292,141 21.9%
Other ...................................... 1,320,784 968,895 36.3%
---------------------------------
Total noninterest expenses ......... $12,640,101 10,015,275 26.2%
=================================
17
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For the nine months ended March 31, 2002, total
salaries and benefits increased to $7.3 million or $1.5 million over the
previous year's nine-month total of $5.8 million. The addition of employees to
staff the Cedar Rapids Bank & Trust operation accounted for $1.2 million, or
83%, of this increase. A slight increase from March 2001 to March 2002 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 $860 thousand for the nine
months ended March 31, 2001 to $1.1 million for the same nine-month period in
2001. The $251 thousand increase was predominately due to legal fees resulting
from the legal proceedings between Bancard and Nova Information Services, Inc.
and the additional professional and data processing fees related to Cedar Rapids
Bank & Trust. Occupancy and equipment expense increased $337 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
$108 thousand from $253 thousand for the nine months ended March 31, 2001 to
$361 thousand for the same period in 2002. The addition of Cedar Rapids Bank &
Trust accounted for $69 thousand, or 64% of this increase. Other noninterest
expense increased $352 thousand or 36% for the period. Significantly
contributing to this increase was a $170 thousand merchant credit card loss
resulting from the settlement of an arbitration dispute between Bancard and Nova
Information Systems, Inc. A settlement amount was paid to Bancard, which was the
receivable due from Nova less an amount that approximated the costs of continued
arbitration. Also making contributions to the increase in noninterest expense
were increased insurance expense, and increased expense incurred by the
subsidiary banks for miscellaneous lending expense and service charges from
upstream banks.
The provision for income taxes was $904 thousand for the nine-month period ended
March 31, 2002 compared to $876 thousand for the nine-month period ended March
31, 2001 for an increase of $28 thousand or 3%. The increase was the result of
an increase in income before income taxes of $353 thousand or 14% for the fiscal
2002 period when compared to the fiscal 2001 period, partially offset by a
reduction in the Company's effective tax rate.
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customers' credit needs. The liquidity of the
Company primarily depends upon cash flows from operating, investing, and
financing activities. Net cash provided by operating activities, consisting
primarily of the proceeds on sales of loans, was $4.4 million for the nine
months ended March 31, 2002 compared to $4.4 million net cash used for the same
period in 2001. Net cash used in investing activities, consisting principally of
loan originations, was $91.9 million for the nine months ended March 31, 2002
and $24.9 million for the nine months ended March 31, 2001. 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 nine months ended March 31, 2002 was $92.5 million and for the same
period in 2001 was $34.6 million.
The Company has a variety of sources of short-term liquidity available to it,
including federal funds purchased from correspondent banks, sales of securities
available for sale, FHLB advances, lines of credit and loan participations or
sales. At March 31, 2002, the subsidiary banks had seven unused lines of credit
totaling $36.0 million of which $4.0 million was secured and $32.0 million was
unsecured. At 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 March 31, 2002, the Company also had a secured line of credit for
$10.0 million, of which $5.0 million had been used as partial funding for the
capitalization of Cedar Rapids Bank & Trust. 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. 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.
18
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.
RECENT REGULATORY DEVELOPMENTS
On October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other
provisions, the USA PATRIOT Act requires each financial institution: (i) to
establish an anti-money laundering program; (ii) to establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of,
foreign banks that do not have a physical presence in any country. The USA
PATRIOT Act also requires the Secretary of the Treasury to prescribe, by
regulations to be issued jointly with the federal banking regulators and certain
other agencies, minimum standards that financial institutions must follow to
verify the identity of customers, both foreign and domestic, when a customer
opens an account. In addition, the USA PATRIOT Act contains a provision
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations suspected of engaging in terrorist acts or money laundering
activities.
During the first quarter of 2002, the Financial Crimes Enforcement Network
(FinCEN), a bureau of the Department of the Treasury, issued proposed and
interim regulations as mandated by the USA PATRIOT Act that would: (i) prohibit
certain financial institutions from providing correspondent accounts to foreign
shell banks; (ii) require such financial institutions to take reasonable steps
to ensure that correspondent accounts provided to foreign banks are not being
used to indirectly provide banking services to foreign shell banks; (iii)
require certain financial institutions that provide correspondent accounts to
foreign banks to maintain records of the ownership of such foreign banks and
their agents in the United States; (iv) require the termination of correspondent
accounts of foreign banks that fail to turn over their account records in
response to a lawful request from the Secretary of the Treasury or the Attorney
General; and (v) encourage information sharing among financial institutions and
federal law enforcement agencies to identify, prevent, deter and report money
laundering and terrorist activity. To date, it has not been possible to predict
the impact the USA PATRIOT ACT and its implementing regulations may have on the
Company or the Banks in the future.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "plan," "intend,"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
19
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 the terrorist attacks that occurred on September
11th, as well as any future threats and attacks, and the response of the
United States to any such threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
20
Part II
QCR HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Bancard was 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
Information Systems, Inc. ("Nova"), which was acquired by U.S. Bancorp in July
2001. This receivable arose 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 failed to timely pay Bancard
for monthly invoices, including service charges and substantial chargeback
losses, for the period beginning May, 2000. On September 25, 2000, PMT filed a
lawsuit in federal court in Los Angeles, California, against Bancard and the
Company. This lawsuit alleged tortious acts and breaches of contract by Bancard,
the Company, and others and sought 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 be determined by the state court in Iowa. Subsequently,
the Iowa District Court of Scott County ruled that all claims, including the
tort claims, would be arbitrated in Iowa. Because of that ruling, the California
lawsuit was dismissed, and arbitration proceedings were to begin in March 2002.
On February 21, 2002, QCR Holdings announced settlement of its arbitration
dispute with Nova Information Systems, Inc. A settlement amount was paid by
PMT/Nova to Bancard, which resulted in the collection of the receivable due from
Nova, less an amount that approximated the costs of continued arbitration. The
effect of the settlement was a reduction in third quarter after-tax earnings of
approximately $175 thousand. While management continued to believe that Nova's
claims were without merit, a determination was made that a settlement at that
time was the most cost effective option for the Company.
Item 2 Changes in Securities and Use of Proceeds - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders - None
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Shareholder letter dated May 2002 discussing
earnings for the third quarter ended March 31,
2002 and related financial information.
10.1 Executive Deferred Compensation Agreement dated
January 2002 for Todd A. Gipple, Executive Vice President
and Chief Financial Officer of QCR Holdings, Inc.
10.2 Executive Deferred Compensation Agreement dated June 2001
for Larry J. Helling, President and Chief Executive
Officer of Cedar Rapids Bank and Trust Company.
(b) Reports on Form 8-K
A report on Form 8-K was filed on February 1, 2002 under
Item 5, which reported the Company's second quarter
financial information in the form of a press release.
A report on Form 8-K was filed on February 22, 2002 under
Item 5, which reviewed the Company's second quarter
financial information in the form of a stockholder letter
and issued information regarding the settlement of its
arbitration dispute with Nova Information Systems, Inc. in
the form of a press release.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QCR HOLDINGS, INC.
(Registrant)
Date May 14, 2002 /s/ Michael A. Bauer
--------------- -------------------------------------
Michael A. Bauer, Chairman
Date May 14, 2002 /s/ Douglas M. Hultquist
--------------- -------------------------------------
Douglas M. Hultquist, President
Chief Executive Officer
Date May 14, 2002 /s/ Todd A. Gipple
--------------- -------------------------------------
Todd A. Gipple, Executive Vice
President Chief Financial Officer
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