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 June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22208
QCR HOLDINGS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 42-1397595
- ------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer ID Number)
incorporation or organization)
3551 7th Street, Suite 204, Moline, Illinois 61265
--------------------------------------------------
(Address of principal executive offices)
(309) 736-3580
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: As of August 1, 2003, the
Registrant had outstanding 2,786,190 shares of common stock, $1.00 par value per
share.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]
1
QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets,
June 30, 2003 and December 31, 2002 2
Consolidated Statements of Income,
For the Three Months Ended June 30, 2003 and 2002 3
Consolidated Statements of Income,
For the Six Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows,
For the Six Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-12
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-32
Item 3 Quantitative and Qualitative Disclosures 33
About Market Risk
Item 4 Controls and Procedures 34-35
Part II OTHER INFORMATION
Item 1 Legal Proceedings 36
Item 2 Changes in Securities and Use of Proceeds 36
Item 3 Defaults Upon Senior Securities 36
Item 4 Submission of Matters to a Vote of Security Holders 36
Item 5 Other Information 36
Item 6 Exhibits and Reports on Form 8-K 37
Signatures 38-39
2
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2003 and December 31, 2002
June 30, December 31,
2003 2002
------------------------------
ASSETS
Cash and due from banks ........................................................ $ 31,989,972 $ 24,906,003
Federal funds sold ............................................................. 31,750,000 14,395,000
Interest-bearing deposits at financial institutions ............................ 12,086,926 14,568,142
Securities held to maturity, at amortized cost ................................. 400,225 425,332
Securities available for sale, at fair value ................................... 93,633,909 81,228,749
------------------------------
94,034,134 81,654,081
------------------------------
Loans receivable held for sale ................................................. 22,538,122 23,691,004
Loans receivable held for investment ........................................... 467,214,667 426,044,732
Less: Allowance for estimated losses on loans .................................. (7,907,969) (6,878,953)
------------------------------
481,844,820 442,856,783
------------------------------
Premises and equipment, net .................................................... 8,918,525 9,224,542
Accrued interest receivable .................................................... 3,207,338 3,221,246
Other assets ................................................................... 1,111,030 13,774,559
------------------------------
Total assets ........................................................... $ 664,942,745 $ 604,600,356
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ......................................................... $ 99,123,917 $ 89,675,609
Interest-bearing ............................................................ 383,927,125 345,072,014
------------------------------
Total deposits ............................................................ 483,051,042 434,747,623
------------------------------
Short-term borrowings .......................................................... 36,257,578 32,862,446
Federal Home Loan Bank advances ................................................ 79,294,895 74,988,320
Other borrowings ............................................................... 7,000,000 5,000,000
Company obligated manditorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures ................... 12,000,000 12,000,000
Other liabilities .............................................................. 7,796,181 8,415,365
------------------------------
Total liabilities ...................................................... 625,399,696 568,013,754
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; shares authorized 5,000,000; ....................... 2,839,352 2,823,061
June 2003 - shares issued 2,839,352 and outstanding 2,779,206 December 2002 -
2,823,061 and 2,762,915 respectively
Additional paid-in capital ..................................................... 16,868,754 16,761,423
Retained earnings .............................................................. 18,127,508 15,712,600
Accumulated other comprehensive income ......................................... 2,561,971 2,144,054
------------------------------
40,397,585 37,441,138
Less cost of 60,146 common shares acquired for the treasury .................... (854,536) (854,536)
------------------------------
Total stockholders' equity ............................................. 39,543,049 36,586,602
------------------------------
Total liabilities and stockholders' equity ............................. $ 664,942,745 $ 604,600,356
==============================
See Notes to Consolidated Financial Statements
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30
2003 2002
--------------------------
Interest and dividend income:
Loans, including fees .................................. $ 7,302,264 $ 6,337,840
Securities:
Taxable .......................................... 757,712 868,809
Nontaxable ....................................... 119,985 113,290
Interest-bearing deposits at financial institutions .... 111,856 254,698
Federal funds sold ..................................... 54,407 17,715
--------------------------
Total interest and dividend income ................ 8,346,224 7,592,352
--------------------------
Interest expense:
Deposits .............................................. 1,826,459 2,055,346
Short-term borrowings ................................. 101,556 122,268
Federal Home Loan Bank advances ....................... 957,189 594,644
Other borrowings ...................................... 58,555 51,109
Company obligated manditorily redeemable
preferred securities ............................. 283,377 283,377
--------------------------
Total interest expense ............................ 3,227,136 3,106,744
--------------------------
Net interest income ............................... 5,119,088 4,485,608
Provision for loan losses .................................. 358,000 727,600
--------------------------
Net interest income after provision for loan losses 4,761,088 3,758,008
--------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ..... 657,754 660,421
Trust department fees .................................. 580,579 570,561
Deposit service fees ................................... 362,923 275,646
Gains on sales of loans, net ........................... 1,214,011 340,719
Securities gains (losses), net ......................... (591) 7,103
Other .................................................. 434,062 191,296
--------------------------
Total noninterest income .......................... 3,248,738 2,045,746
--------------------------
Noninterest expenses:
Salaries and employee benefits ......................... 3,200,921 2,764,849
Professional and data processing fees .................. 530,436 299,533
Advertising and marketing .............................. 204,770 169,072
Occupancy and equipment expense ........................ 656,741 588,562
Stationery and supplies ................................ 114,443 115,121
Postage and telephone .................................. 164,557 129,918
Other .................................................. 527,711 315,272
--------------------------
Total noninterest expenses ........................ 5,399,579 4,382,327
--------------------------
Income before income taxes ........................ 2,610,247 1,421,427
Federal and state income taxes .............................. 883,347 410,667
--------------------------
Net income ........................................ $ 1,726,900 $ 1,010,760
==========================
Earnings per common share:
Basic ............................................. $ 0.62 $ 0.37
Diluted ........................................... $ 0.61 $ 0.36
Weighted average common shares outstanding ........ 2,777,252 2,746,289
Weighted average common and common equivalent ..... 2,843,706 2,814,909
shares outstanding
Comprehensive income ........................................ $ 2,069,385 $ 1,813,713
See Notes to Consolidated Financial Statements
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended June 30
2003 2002
----------------------------
Interest and dividend income:
Loans, including fees .................................. $ 14,111,493 $ 12,180,353
Securities:
Taxable .......................................... 1,563,881 1,687,482
Nontaxable ....................................... 240,242 220,312
Interest-bearing deposits at financial institutions .... 234,918 464,856
Federal funds sold ..................................... 101,757 121,334
----------------------------
Total interest and dividend income ................ 16,252,291 14,674,337
----------------------------
Interest expense:
Deposits .............................................. 3,695,524 4,158,580
Short-term borrowings ................................. 188,864 242,305
Federal Home Loan Bank advances ....................... 1,723,436 1,151,768
Other borrowings ...................................... 110,515 117,223
Company obligated manditorily redeemable
preferred securities ............................. 566,753 566,753
----------------------------
Total interest expense ............................ 6,285,092 6,236,629
----------------------------
Net interest income ............................... 9,967,199 8,437,708
Provision for loan losses .................................. 1,688,427 1,225,100
----------------------------
Net interest income after provision for loan losses 8,278,772 7,212,608
----------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ..... 995,247 1,074,681
Trust department fees .................................. 1,141,721 1,164,319
Deposit service fees ................................... 693,771 531,081
Gains on sales of loans, net ........................... 2,169,420 758,814
Securities gains (losses), net ......................... (591) 7,103
Other .................................................. 737,993 338,421
----------------------------
Total noninterest income .......................... 5,737,561 3,874,419
----------------------------
Noninterest expenses:
Salaries and employee benefits ......................... 6,085,713 5,303,225
Professional and data processing fees .................. 959,506 626,069
Advertising and marketing .............................. 353,526 317,359
Occupancy and equipment expense ........................ 1,308,438 1,194,221
Stationery and supplies ................................ 224,720 240,392
Postage and telephone .................................. 318,122 256,591
Other .................................................. 933,397 839,657
----------------------------
Total noninterest expenses ........................ 10,183,422 8,777,514
----------------------------
Income before income taxes ........................ 3,832,911 2,309,513
Federal and state income taxes .............................. 1,279,063 684,670
----------------------------
Net income ........................................ $ 2,553,848 $ 1,624,843
============================
Earnings per common share:
Basic ............................................. $ 0.92 $ 0.59
Diluted ........................................... $ 0.90 $ 0.58
Weighted average common shares outstanding ........ 2,772,133 2,744,986
Weighted average common and common equivalent ..... 2,835,717 2,809,917
shares outstanding
Comprehensive income ........................................ $ 2,971,765 $ 2,244,897
See Notes to Consolidated Financial Statements
5
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30
2003 2002
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................... $ 2,553,848 $ 1,624,843
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................... 527,914 476,897
Provision for loan losses ...................................... 1,688,427 1,225,100
Amortization of offering costs on subordinated debentures ...... 14,753 14,753
Amortization of premiums on securities, net .................... 287,770 98,194
Investment securities (gains)/losses, net ...................... 591 (7,103)
Loans originated for sale ...................................... (140,594,814)
Proceeds on sales of loans ..................................... 143,917,116 60,268,455
Net gains on sales of loans .................................... (2,169,420) (758,814)
Net losses on sales of premises and equipment .................. 40,299 0
Tax benefit of nonqualified stock options exercised ............ 113,489 60,332
(Increase) decrease in accrued interest receivable ............. 13,908 (85,007)
(Increase) decrease in other assets ............................ 12,538,885 (6,313,304)
Increase (decrease) in other liabilities ....................... (619,978) 976,017
-----------------------------
Net cash provided by operating activities .................. $ 18,312,788 $ 3,042,873
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold ................... (17,355,000) 9,800,000
Net (increase) decrease in interest-bearing deposits at
financial institutions ......................................... 2,481,216 (4,567,435)
Activity in securities portfolio:
Purchases ...................................................... (25,280,886) (14,892,995)
Calls and maturities ........................................... 10,750,000 4,807,500
Paydowns ....................................................... 2,530,330 862,626
Activity in life insurance contracts:
Purchases ...................................................... (66,312) (401,087)
(Increase) decrease in cash value ............................... (73,738) 139,668
Net loans originated and held for investment ..................... (41,829,346) (52,619,101)
Purchase of premises and equipment ............................... (484,675) (333,044)
Proceeds from sales of premises and equipment .................... 222,479 0
-----------------------------
Net cash used in investing activities ...................... $ (69,105,932) $ (57,203,868)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts ................................. 48,303,419 32,429,682
Net increase in short-term borrowings ............................ 3,395,132 8,210,344
Activity in Federal Home Loan Bank advances:
Advances ....................................................... 10,350,000 12,500,000
Payments ....................................................... (6,043,425) (250,965)
Net increase in other borrowings ................................. 2,000,000 0
Payment of cash dividend ......................................... (138,146) 0
Proceeds from issuance of common stock, net ...................... 10,133 (26,954)
-----------------------------
Net cash provided by financing activities .................. $ 57,877,113 $ 52,862,107
-----------------------------
Net increase (decrease) in cash and due from banks ......... 7,083,969 (1,298,888)
Cash and due from banks, beginning ................................. 24,906,003 19,691,318
-----------------------------
Cash and due from banks, ending .................................... $ 31,989,972 $ 18,392,430
=============================
Supplemental disclosure of cash flow information, cash payments for:
Interest ......................................................... $ 6,713,509 $ 6,121,867
=============================
Income/franchise taxes ........................................... $ 2,312,153 $ 860,050
=============================
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income,
unrealized gains on securities available for sale, net .......... $ 417,917 $ 620,054
See Notes to Consolidated Financial Statements
6
Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include information
or footnotes necessary for a fair presentation of financial position, results of
operations and changes in financial condition in conformity with accounting
principles generally accepted in the United States of America. However, all
adjustments that are, in the opinion of management, necessary for a fair
presentation have been included. Any differences appearing between numbers
presented in financial statements and management's discussion and analysis are
due to rounding. Results for the periods ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
Certain amounts in the prior period financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform with the
current period presentation.
From the Company's formation in February 1993 through June 30, 2002, its fiscal
year end had been June 30th. In 2002, the Company changed its fiscal year end to
December 31st. The Company filed a Form 10-K with the Securities and Exchange
Commission for the transition period July 1, 2002 through December 31, 2002.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of QCR Holdings, Inc. (the "Company"), a Delaware
corporation, and its wholly owned subsidiaries, Quad City Bank and Trust Company
("Quad City Bank & Trust"), Cedar Rapids Bank and Trust Company ("Cedar Rapids
Bank & Trust"), Quad City Bancard, Inc. ("Bancard"), Allied Merchant Services,
Inc. ("Allied"), QCR Capital Trust I ("Capital Trust"), and Quad City
Liquidation Corporation ("QCLC"). All significant intercompany accounts and
transactions have been eliminated in consolidation. In addition to these six
wholly owned subsidiaries, the Company has an aggregate investment of $298
thousand in four associated companies, Nobel Electronic Transfer, LLC, Nobel
Real Estate Investors, LLC, Velie Plantation Holding Company, and Clarity
Merchant Services, Inc.
Stock-based compensation plans: The Company accounts for its stock-based
employee compensation plans under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------
Net income, as reported ............... $1,726,900 $1,010,760 $2,553,848 $1,624,843
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects .. (25,416) (22,382) (51,613) (44,851)
----------------------------------------------------
Net income .................... $1,701,484 $ 988,378 $2,502,235 $1,579,992
====================================================
Earnings per share:
Basic:
As reported ....................... $ 0.62 $ 0.37 $ 0.92 $ 0.59
Pro forma ......................... 0.61 0.36 0.90 0.58
Diluted:
As reported ....................... 0.61 0.36 0.90 0.58
Pro forma ......................... 0.60 0.35 0.89 0.57
7
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions for grants during the six months
ended June 30, 2003 and 2002: dividend rate of 0.59% for the six months ended
June 30, 2003 and 0.0% for the six months ended June 30, 2002; expected price
volatility of 23.54% to 24.54%; risk-free interest rate based upon current rates
at the date of grants (3.68% to 5.68% for stock options and 1.16% to 1.29% for
the employee stock purchase plan); and expected lives of 10 years for stock
options and 3 months to 6 months for the employee stock purchase plan.
NOTE 2 - EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a
basic and diluted basis.
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------
2003 2002 2003 2002
-----------------------------------------------
Net income, basic and diluted
earnings ................... $1,726,900 $1,010,760 $2,553,848 $1,624,843
Weighted average common shares
outstanding ................ 2,777,252 2,746,289 2,772,133 2,744,986
Weighted average common shares
issuable upon exercise of
stock options and under the
employee stock purchase
plan ....................... 66,454 68,620 63,584 64,931
-----------------------------------------------
Weighted average common and
common equivalent shares
outstanding ................ 2,843,706 2,814,909 2,835,717 2,809,917
===============================================
NOTE 3 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is presented
as follows for both the three-month and six-month periods ended June 30, 2003
and 2002, respectively.
Three months ended Six months ended
June 30, June 30,
------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------
Revenue:
Commercial banking ... $ 10,250,725 $ 8,313,588 $ 19,605,673 $ 16,138,516
Credit card processing 698,852 699,246 1,080,362 1,152,864
Trust management ..... 580,578 570,561 1,141,721 1,164,320
All other ............ 64,807 54,703 162,096 93,056
------------------------------------------------------------
Total revenue .. $ 11,594,962 $ 9,638,098 $ 21,989,852 $ 18,548,756
============================================================
Net income (loss):
Commercial banking ... $ 1,660,457 $ 932,705 $ 2,540,163 $ 1,738,144
Credit card processing 334,005 221,994 491,712 176,501
Trust management ..... 129,027 149,754 257,679 323,246
All other ............ (396,589) (293,693) (735,706) (613,048)
------------------------------------------------------------
Total net income $ 1,726,900 $ 1,010,760 $ 2,553,848 $ 1,624,843
============================================================
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the company's subsidiary banks make various
commitments and incur certain contingent liabilities that are not presented in
the accompanying consolidated financial statements. The commitments and
contingent liabilities include various guarantees, commitments to extend credit,
and standby letters of credit.
8
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the banks upon extension of credit, is based
upon management's credit evaluation of the counter-party. Collateral held varies
but may include accounts receivable, marketable securities, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The banks hold collateral, as described above,
supporting those commitments if deemed necessary. In the event the customer does
not perform in accordance with the terms of the agreement with the third party,
the banks would be required to fund the commitments. The maximum potential
amount of future payments the banks could be required to make is represented by
the contractual amount. If the commitment is funded, the banks would be entitled
to seek recovery from the customer. At June 30, 2003 and December 31, 2002, no
amounts have been recorded as liabilities for the banks' potential obligations
under these guarantees.
As of June 30, 2003 and December 31, 2002, commitments to extend credit
aggregated $171.1 million and $165.2 million, respectively. As of June 30, 2003
and December 31, 2002, standby letters of credit aggregated $6.2 million and
$4.9 million, respectively. Management does not expect that all of these
commitments will be funded.
The Company has also executed contracts for the sale of mortgage loans in the
secondary market in the amount of $22.5 million and $23.7 million, at June 30,
2003 and December 31, 2002, respectively. These amounts are included in loans
held for sale at the respective balance sheet dates.
Bancard is subject to the risk of chargebacks from cardholders and the merchant
being incapable of refunding the amount charged back. Management attempts to
mitigate such risk by regular monitoring of merchant activity and in appropriate
cases, holding cash reserves deposited by the merchant.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed up by a performance bond in the amount of $1.0 million. As of June 30,
2003 and December 31, 2002, there were no significant pending liabilities.
A significant portion of residential mortgage loans sold to investors in the
secondary market are sold with recourse. Specifically, certain loan sales
agreements provide that if the borrower becomes delinquent a number of payments
or a number of days, within six months to one year of the sale, the banks must
repurchase the loan from the subject investor. The banks did not repurchase any
loans from secondary market investors under the terms of these loan sales
agreements during the six months ended June 30, 2003 and December 31, 2002,
respectively. In the opinion of management, the risk of recourse to the banks is
not significant and, accordingly, no liability has been established related to
such.
NOTE 5 - RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued Statement 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
No. 123. This Statement amends Statement No. 123 to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation are
effective for transitions after January 1, 2003. The Company did not make a
voluntary change to the fair value based method of accounting for stock-based
employee compensation during the six months ended June 30, 2003. The amended
interim disclosure requirements were effective for the Company for the quarter
ending March 31, 2003 and have been adopted in the consolidated financial
statements for the period ended June 30, 2003.
9
The Financial Accounting Standards Board has issued Statement 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. The Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. Implementation of the Statement is not expected
to have a material impact on the consolidated financial statements.
The Financial Accounting Standards Board has issued Statement 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and requires that certain freestanding financial instruments be
reported as liabilities in the balance sheet. Depending on the type of financial
instrument, it is required to be accounted for at either fair value or the
present value of future cash flows determined at each balance sheet date with
the change in that value reported as interest expense in the income statement.
Prior to the application of Statement No. 150, either those financial
instruments were not required to be recognized, or if recognized were reported
in the balance sheet as equity and changes in the value of those instruments
were normally not recognized in net income. For the Company, the Statement is
effective July 1, 2003 and the Company is currently analyzing the impact on
the consolidated financial statements.
10
Part I
Item 2
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
GENERAL
QCR Holdings, Inc. (the "Company") is the parent company of Quad City Bank &
Trust, Cedar Rapids Bank & Trust, and Quad City Bancard, Inc.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are Iowa-chartered
commercial banks that are members of the Federal Reserve System with depository
accounts insured to the maximum amount permitted by law by the Federal Deposit
Insurance Corporation. Quad City Bank & Trust commenced operations in 1994 and
provides full-service commercial and consumer banking, and trust and asset
management services to the Quad City area and adjacent communities through its
four offices that are located in Bettendorf and Davenport, Iowa and Moline,
Illinois. Cedar Rapids Bank & Trust commenced operations in 2001 and provides
full-service commercial and consumer banking service to Cedar Rapids and
adjacent communities through its office located in the GreatAmerica Building in
downtown Cedar Rapids, Iowa.
Quad City Bancard, Inc. ("Bancard") provides merchant and cardholder credit card
processing services. In October 2002, the Company sold Bancard's independent
sales organization (ISO) related merchant credit card operations to iPayment,
Inc. At June 30, 2003, Bancard continued to temporarily process transactions for
iPayment, Inc., and approximately 32,000 merchants. This arrangement is
anticipated to terminate later in 2003. When iPayment, Inc. discontinues
processing with Bancard, it is expected that processing volumes will decrease
significantly. Bancard will, however, continue to provide credit card processing
for its local merchants and agent banks and for cardholders of the Company's
subsidiary banks.
In 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), to generate merchant
credit card processing business. Bancard owns 100% of Allied. As a result of
Bancard's sale of its ISO related merchant credit card operations to iPayment,
Inc. in October 2002, Allied ceased its operations as an ISO. Included in the
sale to iPayment, Inc., were all of the merchant credit card processing
relationships owned by Allied.
From the Company's formation in 1993 through June 30, 2002, its fiscal year end
had been June 30th. In 2002, the Company changed its fiscal year end to December
31st. The Company filed a Form 10-K with the Securities and Exchange Commission
for the transition period July 1, 2002 through December 31, 2002.
CRITICAL ACCOUNTING POLICY
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision for loan losses in
the statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis, which discusses the allowance for loan
losses in the section entitled "Financial Condition." Although management
believes the levels of the allowance as of both June 30, 2003 and December 31,
2002 were adequate to absorb losses inherent in the loan portfolio, a decline in
local economic conditions, or other factors, could result in increasing losses
that cannot be reasonably predicted at this time.
11
FINANCIAL CONDITION
Total assets of the Company increased by $60.3 million, or 10%, to $664.9
million at June 30, 2003 from $604.6 million at December 31, 2002. The growth
resulted primarily from increases in the loan and securities portfolios funded
by deposits received from customers.
Cash and due from banks increased by $7.1 million, or 28%, to $32.0 million at
June 30, 2003 from $24.9 million at December 31, 2002. The increase was
primarily due to the final day of the period occurring on a Monday, and the
routine receipt at Quad City Bank of significant funds passing between
Visa/Mastercard and their merchants. On Monday, June 30, 2003 this amount was
$13.3 million. Cash and due from banks represented both cash maintained at its
subsidiary banks, as well as funds that the Company and its banks had deposited
in other banks in the form of non-interest bearing demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. At June 30, 2003,
the subsidiary banks had $31.8 million invested in such funds. This amount
increased by $17.4 million, or 121%, from $14.4 million at December 31, 2002.
The increase was primarily due to increased liquidity positions at both
subsidiary banks when compared to those at December 31, 2002.
Interest-bearing deposits at financial institutions decreased by $2.5 million,
or 17%, to $12.1 million at June 30, 2003 from $14.6 million at December 31,
2002. Included in interest-bearing deposits at financial institutions are demand
accounts, money market accounts, and certificates of deposit. The decrease was
the result of maturities of certificates of deposit totaling $2.0 million, which
were partially offset by purchases of $793 thousand, and decreases in money
market accounts of $1.3 million.
Securities increased by $12.4 million, or 15%, to $94.0 million at June 30, 2003
from $81.7 million at December 31, 2002. The increase was the result of a number
of transactions in the securities portfolio. Paydowns of $2.5 million were
received on mortgage-backed securities, and the amortization of premiums, net of
the accretion of discounts, was $288 thousand. Maturities and calls of
securities occurred in the amount of $10.8 million. These portfolio decreases
were offset by the purchase of an additional $25.3 million of securities,
classified as available for sale and a $668 thousand increase in the fair value
of securities, classified as available for sale.
Total loans receivable increased by $40.0 million, or 9%, to $489.7 million at
June 30, 2003 from $449.7 million at December 31, 2002. The increase was the
result of the origination or purchase of $349.5 million of commercial business,
consumer and real estate loans, less loan charge-offs, net of recoveries, of
$659 thousand, and loan repayments or sales of loans of $308.8 million. During
the six months ended June 30, 2003, Quad City Bank & Trust contributed $270.6
million, or 77%, and Cedar Rapids Bank & Trust contributed $78.9 million, or
23%, of the Company's loan originations or purchases. Cedar Rapids Bank & Trust
participated $11.7 million, or 15%, of their originations during the period to
Quad City Bank & Trust. The mix of loan types within the Company's portfolio at
June 30, 2003 reflected 80% commercial, 11% real estate and 9% consumer loans.
The majority of residential real estate loans originated by the Company were
sold on the secondary market to avoid the interest rate risk associated with
long term fixed rate loans. Loans originated for this purpose were classified as
held for sale.
The allowance for estimated losses on loans was $7.9 million at June 30, 2003
compared to $6.9 million at December 31, 2002, an increase of $1.0 million, or
15%. 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
June 30, 2003 was at a level adequate to absorb probable losses on existing
loans, there can be no assurance that such losses will not exceed the estimated
amounts or that the Company will not be required to make additional provisions
for loan losses in the future.
12
Asset quality is a priority for the Company and its subsidiaries. The ability to
grow profitably is in part dependent upon the ability to maintain that quality.
Along with other financial institutions, management shares a concern for the
outlook of the economy during the remainder of 2003. A slowdown in economic
activity beginning in 2001 severely impacted several major industries as well as
the economy as a whole. Even though there are indications of emerging strength,
it is not certain that this strength is sustainable. In addition, consumer
confidence may still be negatively impacted by the substantial decline in equity
prices experienced over the last three years. These events could still adversely
affect cash flows for both commercial and individual borrowers, as a result of
which, the Company could experience increases in problem assets, delinquencies
and losses on loans, and require further increases in the provision for loan
losses.
Net charge-offs for the six months ended June 30 were $659 thousand in 2003 and
$53 thousand in 2002. One measure of the adequacy of the allowance for estimated
losses on loans is the ratio of the allowance to the held for investment loan
portfolio. The allowance for estimated losses on loans as a percentage of gross
loans was 1.61% at June 30, 2003 and 1.53 % at December 31, 2002.
At June 30, 2003, total nonperforming assets were $5.7 million compared to $5.0
million at December 31, 2002. The $710 thousand increase was the result of a
$590 thousand increase in nonaccrual loans in combination with an increase of
$120 thousand in accruing loans past due 90 days or more. All of the
nonperforming assets were located in the loan portfolio at Quad City Bank &
Trust. The loans in the Cedar Rapids Bank & Trust loan portfolio have been
originated fairly recently, and none of the loans have been categorized as
nonperforming assets. As the loan portfolio at Cedar Rapids Bank & Trust
matures, it is likely that there will be nonperforming loans or charge-offs
associated with the portfolio.
Nonaccrual loans were $5.2 million at June 30, 2003 compared to $4.6 million at
December 31, 2002, an increase of $590 thousand. The increase in nonaccrual
loans was comprised of an increase in commercial loans of $900 thousand,
partially offset by decreases in both real estate loans of $307 thousand and
consumer loans of $3 thousand. Four large commercial lending relationships at
Quad City Bank & Trust, with an aggregate outstanding balance of $3.7 million,
comprised 72% of the nonaccrual loans at June 30, 2003. Management is
communicating closely with these customers to monitor their situations. Like
many other financial institutions, some of the Company's customers are
experiencing difficulty in the lagging economy, which could lead to further
increases in nonperforming assets and the need for an increased allowance for
loan losses. Given the continued soft economy, management is closely monitoring
the Company's loan portfolio and the need for increased provisions for possible
loan losses. Nonaccrual loans represented approximately one percent of the
Company's held for investment loan portfolio at June 30, 2003.
From December 31, 2002 to June 30, 2003, accruing loans past due 90 days or more
increased from $431 thousand to $551 thousand. Seasonal and/or temporary
setbacks experienced by two commercial loan customers at Quad City Bank & Trust
accounted for $496 thousand, or 90%, of the balance at June 30, 2003. Management
is working closely with these customers in an attempt to remedy their individual
situations.
Premises and equipment showed a decrease of $306 thousand, or 3%, to decline to
$8.9 million at June 30, 2003 from $9.2 million at December 31, 2002. During the
six-month period there were purchases of additional furniture, fixtures and
equipment and leasehold improvements of $485 thousand, which were more than
offset by the combination of a property sale of $263 thousand and depreciation
expense of $528 thousand. In January 2003, Quad City Bank & Trust's office
building adjacent to the Brady Street location was sold and resulted in a net
loss of $40 thousand. Quad City Bank & Trust is in the process of acquiring the
northern segment of its Davenport facility, which is currently owned by the
developer of the property. The purchase and development of this space, which
will be occupied by various operational and administrative functions, is
estimated to be $2.5 million. Quad City Bank & Trust has also initiated the
purchase of check and document imaging hardware and software, which is projected
to cost approximately $1.0 million over the next year.
Accrued interest receivable on loans, securities and interest-bearing deposits
with financial institutions decreased by $14 thousand, or less than 1%, to
remain unchanged at $3.2 million from December 31, 2002 to June 30, 2003.
13
Other assets decreased by $12.7 million, or 92%, to $1.1 million at June 30,
2003 from $13.8 million at December 31, 2002. The decrease was primarily due to
the final day of the period occurring on a Monday, and the routine receipt at
Quad City Bank of significant funds passing between Visa/Mastercard and their
merchants. On Monday, June 30, 2003 this amount was $13.3 million.
Deposits increased by $48.3 million, or 11%, to $483.0 million at June 30, 2003
from $434.7 million at December 31, 2002. The increase resulted from a $40.6
million net increase in non-interest bearing, NOW, money market and savings
accounts in combination with a $7.7 million net increase in interest-bearing
certificates of deposit. Interest-bearing demand and money market accounts for
commercial customers at the subsidiary banks were the primary contributors to
the increase in deposits for the period.
Short-term borrowings increased $3.4 million, or 10%, from $32.9 million at
December 31, 2002 to $36.3 million at June 30, 2003. The subsidiary banks offer
short-term repurchase agreements to some of their major customers. Also, on
occasion, the subsidiary banks purchase Federal funds for short-term funding
needs from the Federal Reserve Bank, or from some of their correspondent banks.
As of both June 30, 2003 and December 31, 2002, short-term borrowings were
comprised entirely of customer repurchase agreements.
Federal Home Loan Bank advances increased by $4.3 million, or 6%, to $79.3
million at June 30, 2003 from $75.0 million at December 31, 2002. As a result of
their memberships in the FHLB of Des Moines, the subsidiary banks have the
ability to borrow funds for short or long-term purposes under a variety of
programs. FHLB advances are utilized for loan matching as a hedge against the
possibility of rising interest rates, and when these advances provide a less
costly or more readily available source of funds than customer deposits.
Other borrowings increased to $7.0 million at June 30, 2003 for an increase of
$2.0 million, or 40%, from December 31, 2002. In September 2001, the Company
drew a $5.0 million advance on a line of credit at its primary correspondent
bank as partial funding for the initial capitalization of Cedar Rapids Bank &
Trust. In February 2003, the Company drew an additional $2.0 million advance as
funding to maintain the required level of regulatory capital at Cedar Rapids
Bank & Trust in light of the bank's growth.
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
June 30, 2003 and December 31, 2002.
Other liabilities were $7.8 million at June 30, 2003, down $619 thousand, or 7%,
from $8.4 million at December 31, 2002. Other liabilities were comprised of
unpaid amounts for various products and services, and accrued but unpaid
interest on deposits. At June 30, 2003, the most significant components of other
liabilities were $2.6 million of accounts payable, $2.2 million of accrued
expenses, and $1.4 million of interest payable.
Common stock at June 30, 2003 was $2.8 million, which was unchanged from
December 31, 2002. A slight increase of $16 thousand was the result of stock
issued from the exercise of stock options, net and stock purchased under the
employee stock purchase plan.
Additional paid-in capital totaled $16.9 million at June 30, 2003 up $107
thousand, or 1%, from $16.8 million at December 31, 2002. The increase resulted
primarily from proceeds received in excess of the $1.00 per share par value for
the 16,291 shares of common stock issued as the result of the exercise of stock
options, net and stock purchased under the employee stock purchase plan.
Retained earnings increased by $2.4 million, or 15%, to $18.1 million at June
30, 2003 from $15.7 million at December 31, 2002. The increase reflected net
income for the six-month period less the cash dividend declared to stockholders.
On May 8, 2003, the Company announced that the board of directors had declared a
cash dividend of $0.05 per share, or approximately $138 thousand, which was to
be paid on July 3, 2003, to stockholders of record on June 16, 2003.
Unrealized gains on securities available for sale, net of related income taxes,
totaled $2.6 million at June 30, 2003 as compared to $2.1 million at December
31, 2002. The increase in gains of $418 thousand was attributable to increases
during the period in fair value of the securities identified as available for
sale.
At both June 30, 2003 and December 31, 2002, the Company held 60,146 treasury
shares at a total cost of $855 thousand. The weighted average cost of the shares
was $14.21.
14
RESULTS OF OPERATIONS
OVERVIEW
Net income for the second quarter ended June 30, 2003 was $1.7 million as
compared to net income of $1.0 million for the same period in 2002, an increase
of $716 thousand or 71%. Basic earnings per share for the second quarter of
fiscal 2003 increased to $0.62 from $0.37 in fiscal 2002. For the second quarter
ended June 30, 2003, net interest income improved by 14%, noninterest income
improved by 59%, and the provision for loan losses declined 51% for a combined
improvement of $2.2 million when compared to the same period in 2002. Partially
offsetting these improvements for the Company was an increase in noninterest
expense of $1.0 million.
Net income for the six-month period ended June 30, 2003 was $2.6 million as
compared to net income of $1.6 million for the same period in 2002, an increase
of $929 thousand or 57%. Basic earnings per share for the six months ended June
30, 2003 increased to $0.92 from $0.59 for the first six months one year ago.
For the six months ended June 30, 2003, net interest income improved by 18%
while noninterest income improved by 48%, for a combined improvement of $3.4
million when compared to the same period in 2002. The improvement in noninterest
income was due primarily to a large increase in the gains on sales of
residential real estate loans at the subsidiary banks. Partially offsetting the
improvements in revenue for the Company were increases in noninterest expense of
$1.4 million and the provision for loan losses of $463 thousand. The increase in
noninterest expense was predominately due to growth in salaries and employee
benefits. After-tax income at Cedar Rapids Bank & Trust was $15 thousand for the
six months ended June 30, 2003, as compared to after-tax losses of $478 thousand
for the same period in 2002. Losses at the new bank charter have decreased at a
pace anticipated by management, and Cedar Rapids Bank and Trust's growth has
been more rapid than expected, as total assets surpassed $100 million in
February 2003 and ended at $128.5 million at June 30, 2003.
The Company's operating results are derived largely from net interest income.
Net interest income is the difference between interest income, principally from
loans and investment securities, and interest expense, principally on borrowings
and customer deposits. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
The Company realized a 0.14% decrease in the net interest spread declining from
3.25% for the six months ended June 30, 2002 to 3.11% for the six months ended
June 30, 2003. The average yield on interest-earning assets decreased 0.80% for
the six months ended June 30, 2003 when compared to the same period ended June
30, 2002. At the same time, the average cost of interest-bearing liabilities
declined 0.66%. The narrowing of the net interest spread created a reduction in
the Company's net interest margin. For the six months ended June 30, 2003, the
net interest margin was 3.52% compared to 3.77% for the same period in 2002.
Also, playing a role in the reduction of the Company's net interest margin were
prepayment penalties of $158 thousand incurred by Quad City Bank & Trust on the
early pay-off of several higher rate FHLB advances, which had been borrowed in a
much higher rate environment. Without these penalties, the Company's net
interest margin would have been 3.58% for the six months ended June 30, 2003.
Management has aggressively managed the Company's cost of funds during the
dramatic drop in short-term interest rates in 2001 and the continuation of a low
interest rate environment throughout 2002 and into 2003, and will continue to
closely monitor and manage net interest margin.
15
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
For 6 Months Ended June 30,
-------------------------------------------------------------------
2003 2002
---------------------------------- -------------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost
-------------------------------------------------------------------
ASSETS Interest earnings assets:
Federal funds sold .................................. $ 18,218 $ 102 1.12% $ 9,031 $ 121 2.68%
Interest-bearing deposits at
financial institutions ........................... 14,101 235 3.33% 20,119 465 4.62%
Investment securities (1) ........................... 82,394 1,928 4.68% 68,019 2,021 5.94%
Gross loans receivable (2) .......................... 458,465 14,111 6.16% 357,047 12,180 6.82%
----------------------- --------------------
Total interest earning assets .................... 573,177 16,376 5.71% 454,215 14,805 6.51%
Noninterest-earning assets:
Cash and due from banks ............................. $ 26,919 $ 20,175
Premises and equipment .............................. 9,012 9,261
Less allowance for estimated losses on loans ........ (7,385) (5,328)
Other ............................................... 22,955 16,992
--------- ---------
Total assets ..................................... $ 624,678 $ 495,715
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY Interest-bearing liabilities:
Interest-bearing demand deposits .................... $ 144,657 769 1.06% $ 111,010 878 1.58%
Savings deposits .................................... 12,120 35 0.58% 9,320 55 1.18%
Time deposits ....................................... 194,041 2,892 2.98% 172,693 3,225 3.73%
Short-term borrowings ............................... 37,987 189 1.00% 28,225 242 1.71%
Federal Home Loan Bank advances ..................... 77,064 1,723 4.47% 44,456 1,152 5.18%
COMR ................................................ 12,000 567 9.45% 12,000 567 9.45%
Other borrowings .................................... 6,500 110 3.38% 5,000 117 4.68%
----------------------- --------------------
Total interest-bearing
liabilities .................................. 484,369 6,285 2.60% 382,704 6,236 3.26%
Noninterest-bearing demand .......................... 89,283 67,703
Other noninterest-bearing
liabilities ...................................... 13,203 14,120
Total liabilities ................................... 586,854 464,527
Stockholders' equity ................................ 37,824 31,189
--------- ---------
Total liabilities and
stockholders' equity ......................... $ 624,678 $ 495,715
========= =========
Net interest income ................................. $ 10,091 $ 8,551
========= ========
Net interest spread ................................. 3.11% 3.25%
===== =====
Net interest margin ................................. 3.52% 3.77%
===== =====
Ratio of average interest earning
assets to average interest-
bearing liabilities .............................. 118.33% 118.79%
========= =========
<FN>
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
</FN>
16
Analysis of Changes of Interest Income/Interest Expense
For the six months ended June 30, 2003
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Period Rate Volume
--------------------------------
2003 vs. 2002
--------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ................................ $ (19) $ (186) $ 167
Interest-bearing deposits at financial institutions (230) (111) (119)
Investment securities (2) ......................... (93) (903) 810
Gross loans receivable (3) ........................ 1,931 (3,048) 4,979
-----------------------------
Total change in interest income ......... $ 1,589 $(4,248) $ 5,837
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................. $ (109) $ (610) $ 501
Savings deposits .................................. (20) (54) 34
Time deposits ..................................... (334) (1,195) 861
Short-term borrowings ............................. (53) (212) 159
Federal Home Loan Bank advances ................... 571 (442) 1,014
COMR .............................................. -- -- --
Other borrowings .................................. (7) (71) 64
-----------------------------
Total change in interest expense ........ $ 49 $(2,584) $ 2,633
-----------------------------
Total change in net interest income ............... 1,540 $(1,664) 3,204
=============================
<FN>
(1) The column "increase/decrease from prior period" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate for each period
presented.
(3) Loan fees are not material and are included in interest income from loans
receivable.
</FN>
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Interest income increased by $754 thousand to $8.3 million for the three-month
period ended June 30, 2003 when compared to $7.6 million for the quarter ended
June 30, 2002. The increase of 10% in interest income was attributable to
greater average, outstanding balances in interest earning assets, principally
with respect to loans receivable, partially offset by significant reductions in
interest rates. The Company's average yield on interest-earning assets decreased
0.71% for the three months ended June 30, 2003 when compared to the three months
ended June 30, 2002.
Interest expense increased by $120 thousand from $3.1 million for the
three-month period ended June 30, 2002 to $3.2 million for the three-month
period ended June 30, 2003. The 4% increase in interest expense was caused by
prepayment penalties of $158 thousand incurred by Quad City Bank & Trust on the
early pay-off of several higher rate FHLB advances. The Company's average cost
of interest-bearing liabilities declined 0.66% for the three months ended June
30, 2003 when compared to the three months ended June 30, 2002.
17
At June 30, 2003 and December 31, 2002, the Company had an allowance for
estimated losses on loans of 1.61% and 1.53 %, respectively, of gross loans. The
provision for loan losses decreased by $370 thousand from $728 thousand for the
three-month period ended June 30, 2002 to $358 thousand for the three-month
period ended June 30, 2003. During the second quarter of 2003, management made
monthly provisions for loan losses based upon a number of factors, including
principally the increase in loans and a detailed analysis of the loan portfolio.
During the second quarter of 2003, the $358 thousand provision to the allowance
for loan losses was attributed 79%, or $284 thousand, to net growth in the loan
portfolio, and 21%, or $74 thousand, to downgrades and write-offs within the
portfolio. For the three months ended June 30, 2003, commercial loan charge-offs
totaled $29 thousand, which resulted primarily from a single customer
relationship at Quad City Bank & Trust, and there were commercial recoveries of
$141 thousand. A majority of this recovery amount, or $120 thousand, was related
to a $758 thousand charge-off, which occurred during the first quarter of 2003
and was in addition to a $1.2 million charge-off, which occurred during the
quarter ended December 31, 2002. These recoveries resulted from the sale of the
borrower's real estate and equipment, and the liquidation of all of the
customer's other collateral. Quad City Bank and Trust expects additional modest
recoveries in future periods as gain from the sale of other real estate, which
has been deferred in accordance with current accounting rules, is recognized.
Consumer loan charge-offs and recoveries totaled $49 thousand and $46 thousand,
respectively, during the quarter. Residential real estate loans had no
charge-offs or recoveries for the three months ended June 30, 2003.
Noninterest income of $3.2 million for the three-month period ended June 30,
2003 was a $1.2 million, or 59%, increase from $2.0 million for the three-month
period ended June 30, 2002. Noninterest income during each of the quarters in
comparison consisted primarily of income from the merchant credit card
operation, fees from the trust department, depository service fees, gains on the
sale of residential real estate mortgage loans, and other miscellaneous income.
The quarter ended June 30, 2003, when compared to the same quarter in 2002,
posted a $3 thousand decrease in fees earned by the merchant credit card
operations of Bancard. Gains on the sale of residential real estate mortgage
loans, net, increased $873 thousand from the quarter ended June 30, 2002 to the
same quarter in calendar 2003. The activity within this area of the subsidiary
banks was stimulated by mortgage rates at, or below, forty year lows. Additional
variations in noninterest income consisted of a $10 thousand increase in trust
department fees, an $87 thousand increase in deposit service fees, and a $243
thousand increase in other noninterest income. Other noninterest income in each
quarter consisted primarily of investment advisory and management fees, earnings
on the cash surrender value of life insurance, ATM fees, Visa check card fees,
item processing fees, and income from associated companies.
Merchant credit card fees for the three months ended June 30, 2003 decreased by
less than 1%, reflecting minor effects of the sale of the independent sales
organization (ISO) related merchant credit card activity to iPayment, Inc. In
October 2002, the Company sold Bancard's ISO-related merchant credit card
operations to iPayment, Inc. for $3.5 million. After contractual compensation
and severance payments, transaction expenses, and income taxes, the transaction
resulted in a gain of $1.3 million, or $0.47 per share, which was realized
during the quarter ended December 31, 2002. Also included in the sale were all
of the merchant credit card processing relationships owned by Allied. Bancard
continues to provide credit card processing for its local merchants and
cardholders of the subsidiary banks and agent banks. During the three-month
period ended June 30, 2003, Bancard also temporarily continued to process ISO
related transactions for iPayment, Inc. for a fixed monthly fee rather than a
percentage of transaction volumes. Built into the sales contract with iPayment
was an agreement that the fixed monthly fee would increase as the temporary
processing period was extended. Extensions to the processing period and the
resulting growth in the fixed monthly fee have mitigated the drop in Bancard's
earnings that was expected to have occurred by this time. The Company
anticipates that this ISO processing will be transferred to another provider
during calendar 2003, which will reduce Bancard's monthly earnings
significantly. The Company continues to believe that Bancard will remain
profitable with its narrowed business focus of continuing to provide credit card
processing for its local merchants and agent banks and for cardholders of the
Company's subsidiary banks. At that time, the Company anticipates that quarterly
merchant credit card fees, net of processing costs, will be in a range of $250
thousand to $300 thousand from the Company's local merchant, cardholder, and
agent bank portfolios. As a result, Quad City Bancard's quarterly net income
will likely be approximately $50 thousand to $100 thousand initially, after the
iPayment processing is moved to another provider, as compared to net income of
$282 thousand for the second quarter of 2003.
18
For the quarter ended June 30, 2003, trust department fees increased $10
thousand, or 2%, to $581 thousand from $571 thousand for the same quarter in
2002. There was continued development of existing trust relationships and the
addition of new trust customers during the quarter, however the impact such was
almost entirely offset by the reduced market values of securities held in trust
accounts and distributions to trust customers, when compared to one year ago,
and the resulting impact in the calculation and realization of trust fees.
Deposit service fees increased $87 thousand, or 32%, to $363 thousand from $276
thousand for the three-month periods ended June 30, 2003 and June 30, 2002,
respectively. This increase was primarily a result of the growth in deposit
accounts of $106.7 million, or 28%, since June 30, 2002. Service charges and NSF
(non-sufficient funds) charges related to demand deposit accounts were the main
components of deposit service fees.
Gains on sales of loans, net, were $1.2 million for the three months ended June
30, 2003, which reflected an increase of 256%, or $873 thousand, from $341
thousand for the three months ended June 30, 2002. The increase resulted from
larger numbers of home refinances and/or home purchases, and the subsequent sale
of the majority of these loans into the secondary market. Depressed interest
rates, which have existed for the last several quarters, continued to stimulate
the activity within this area of the subsidiary banks throughout the second
quarter of 2003. While mortgage rates remain at historically low levels,
management does not anticipate that the level of gains on sales of loans, net
will continue throughout the entire year.
For the quarter ended June 30, 2003, other noninterest income increased $243
thousand, or 127%, to $434 thousand from $191 thousand for the same quarter in
2002. The increase was primarily due to a combination of increased earnings
realized by Nobel Electronic Transfer, LLC, one of the four associated companies
in which the Company holds an interest, gain realized on the sale of foreclosed
property, improved fees generated from the usage of Visa check cards by
customers of the subsidiary banks, improved earnings on the cash surrender value
of life insurance, and an increase in investment advisory and management fees.
Noninterest expenses for the three months ended June 30, 2003 were $5.4 million
as compared to $4.4 million for the same period in 2002, for an increase of $1.0
million or 23%. The primary components of noninterest expenses were salaries and
benefits, occupancy and equipment expenses, and professional and data processing
fees, for both quarters.
The following table sets forth the various categories of noninterest expenses
for the three months ended June 30, 2003 and 2002.
Noninterest Expenses
Three months ended
June 30,
--------------------------------
2003 2002 % change
--------------------------------
Salaries and employee benefits .............. $3,200,921 $2,764,849 15.8%
Professional and data processing fees ....... 530,436 299,533 77.1%
Advertising and marketing ................... 204,770 169,072 21.1%
Occupancy and equipment expense ............. 656,741 588,562 11.6%
Stationery and supplies ..................... 114,443 115,121 (0.6)%
Postage and telephone ....................... 164,557 129,918 26.7%
Other ....................................... 527,711 315,272 67.4%
--------------------------------
Total noninterest expenses .... $5,399,579 4,382,327 23.2%
================================
19
For the quarter ended June 30, 2003, total salaries and benefits increased to
$3.2 million or $436 thousand over the previous year's quarter total of $2.8
million. Salaries and benefits experienced the most significant dollar increase
of any noninterest expense component. The increase was primarily due to the
increased incentive compensation to real estate officers proportionate to the
increased volumes of gains on sales of loans. Professional and data processing
fees increased from $299 thousand for the three months ended June 30, 2002 to
$530 thousand for the same three-month period in 2003. The $231 thousand
increase was predominately due to increases in data processing and auditing fees
at the subsidiary banks. Occupancy and equipment expense increased $68 thousand
or 12% from quarter to quarter. The increase was predominately due to increased
levels of rent, utilities, depreciation, maintenance, and other occupancy
expenses associated with the Company's facilities. Postage and telephone
increased $35 thousand from $130 thousand for the three months ended June 30,
2002 to $165 thousand for the same period in 2003. The increase was
proportionate to the increased business activity throughout the Company. Other
noninterest expense increased $212 thousand, or 68%, for the three months ended
June 30, 2003 when compared to the like period in 2002. The increase was
primarily due to an increase in expenses related to other real estate owned, an
increase in insurance expense, and increased service charges from upstream
banks.
The provision for income taxes was $883 thousand for the three-month period
ended June 30, 2003 compared to $411 thousand for the three-month period ended
June 30, 2002 for an increase of $472 thousand or 115%. The increase was the
result of an increase in income before income taxes of $1.2 million, or 84%, for
the 2003 quarter when compared to the 2002 quarter, in combination with an
increase in the Company's effective tax rate, which was the result of tax-free
income representing a smaller portion of the Company's total income.
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Interest income increased by $1.6 million to $16.3 million for the six-month
period ended June 30, 2003 when compared to $14.7 million for the quarter ended
June 30, 2002. The increase of 11% in interest income was attributable to
greater average, outstanding balances in interest earning assets, principally
with respect to loans receivable, partially offset by significant reductions in
interest rates. The Company's average yield on interest-earning assets decreased
0.80% for the six months ended June 30, 2003 when compared to the six months
ended June 30, 2002.
Interest expense increased by $48 thousand from $6.2 million for the six-month
period ended June 30, 2002 to $6.3 million for the six-month period ended June
30, 2003. The less than 1% increase in interest expense was caused by prepayment
penalties of $158 thousand incurred by Quad City Bank & Trust on the early
pay-off of several higher rate FHLB advances, in combination with greater
average, outstanding balances in interest-bearing liabilities, principally with
respect to customers' deposits in subsidiary banks, Federal Home Loan Bank
advances and short-term borrowings, basically offset by significant reductions
in interest rates. The Company's average cost of interest-bearing liabilities
declined 0.66% for the six months ended June 30, 2003 when compared to the six
months ended June 30, 2002.
At June 30, 2003 and December 31, 2002, the Company had an allowance for
estimated losses on loans of 1.61% and 1.53 %, respectively, of gross loans. The
provision for loan losses increased by $463 thousand from $1.2 million for the
six-month period ended June 30, 2002 to $1.7 million for the six-month period
ended June 30, 2003. During the first six months of 2003, management made
monthly provisions for loan losses based upon a number of factors, including
principally the increase in loans and a detailed analysis of the loan portfolio.
During the first six months of 2003, the $1.7 million provision to the allowance
for loan losses was attributed 38%, or $646 thousand, to net growth in the loan
portfolio, and 62%, or $1.0 million, to downgrades and write-offs within the
portfolio. For the six months ended June 30, 2003, commercial loan charge-offs
totaled $787 thousand, which resulted primarily from a single customer
relationship at Quad City Bank & Trust, and there were $141 thousand commercial
recoveries, primarily due to this same relationship. The write-off of this
relationship accounted for 45% of the provision for loans losses during the
first six months of 2003 and was in addition to a $1.2 million charge-off, which
occurred during the quarter ended December 31, 2002. The additional losses were
a result of environmental issues associated with the collateral for the loan,
which were identified during the first quarter of 2003. The Company believed
that these environmental issues negatively impacted the value and salability of
the business and determined that it was appropriate to take a conservative
approach and write-down the loan balance to reflect no value in the real estate
and equipment collateral. During the second quarter of 2003, all of the
collateral, including the real estate and equipment, was sold which resulted in
a $120 thousand recovery. Quad City Bank and Trust expects additional modest
recoveries in future periods as gain from the sale of other real estate, which
has been deferred in accordance with current accounting rules, is recognized.
Consumer loan charge-offs and recoveries totaled $140 thousand and $127
thousand, respectively, during the period. Residential real estate loans had no
charge-offs or recoveries for the six months ended June 30, 2003.
20
Noninterest income of $5.7 million for the six-month period ended June 30, 2003
was a $1.8 million, or 48%, increase from $3.9 million for the six-month period
ended June 30, 2002. Noninterest income during each of the periods in comparison
consisted primarily of income from the merchant credit card operation, fees from
the trust department, depository service fees, gains on the sale of residential
real estate mortgage loans, and other miscellaneous income. The six months ended
June 30, 2003, when compared to the same period in 2002, posted a $79 thousand
decrease in fees earned by the merchant credit card operations of Bancard. This
7% decline in merchant credit card fees was a result of the sale of independent
sales organization (ISO) related merchant credit card activity to iPayment, Inc.
in October 2002. Gains on the sale of residential real estate mortgage loans,
net, increased $1.4 million from the six months ended June 30, 2002 to the same
period in calendar 2003. The activity within this area of the subsidiary banks
was stimulated by mortgage rates at, or below, forty year lows. Additional
variations in noninterest income consisted of a $23 thousand decrease in trust
department fees, a $163 thousand increase in deposit service fees, and a $400
thousand increase in other noninterest income. Other noninterest income in each
period consisted primarily of investment advisory and management fees, earnings
on the cash surrender value of life insurance, ATM fees, Visa check card fees,
item processing fees, and income from associated companies.
Merchant credit card fees for the six months ended June 30, 2003 decreased to
$995 thousand from $1.1 million for the same period in 2002, reflecting the
initial effects of the sale of the independent sales organization (ISO) related
merchant credit card activity to iPayment, Inc. In October 2002, the Company
sold Bancard's ISO-related merchant credit card operations to iPayment, Inc. for
$3.5 million. After contractual compensation and severance payments, transaction
expenses, and income taxes, the transaction resulted in a gain of $1.3 million,
or $0.47 per share, which was realized during the quarter ended December 31,
2002. Also included in the sale were all of the merchant credit card processing
relationships owned by Allied. Bancard continues to provide credit card
processing for its local merchants and cardholders of the subsidiary banks and
agent banks. During the six-month period ended June 30, 2003, Bancard also
temporarily continued to process ISO related transactions for iPayment, Inc. for
a fixed monthly fee rather than a percentage of transaction volumes. Built into
the sales contract with iPayment was an agreement that the fixed monthly fee
would increase as the temporary processing period was extended. Extensions to
the processing period and the resulting growth in the fixed monthly fee have
mitigated the drop in Bancard's earnings that was expected to have occurred by
this time. The Company anticipates that this ISO processing will be transferred
to another provider during calendar 2003, which will reduce Bancard's earnings
significantly. The Company continues to believe that Bancard will remain
profitable with its narrowed business focus of continuing to provide credit card
processing for its local merchants and agent banks and for cardholders of the
Company's subsidiary banks. At that time, the Company anticipates that quarterly
merchant credit card fees, net of processing costs, will likely be in a range of
$250 thousand to $300 thousand from the Company's local merchant, cardholder,
and agent bank portfolios. As a result, Quad City Bancard's quarterly net income
will likely be approximately $50 thousand to $100 thousand initially, after the
iPayment processing is moved to another provider, as compared to net income of
$385 thousand for the first six months of 2003.
For the six months ended June 30, 2003, trust department fees decreased $23
thousand, or 2%, to remain at $1.2 million, as they were for the same period in
2002. Although there was continued development of existing trust relationships
and the addition of new trust customers during the period, the impact was
entirely offset by the reduced market values of securities held in trust
accounts and distributions to trust customers, when compared to one year ago,
and the resulting impact in the calculation and realization of trust fees.
Deposit service fees increased $163 thousand, or 31%, to $694 thousand from $531
thousand for the six-month periods ended June 30, 2003 and June 30, 2002,
respectively. This increase was primarily a result of the growth in deposit
accounts of $106.7 million, or 28%, since June 30, 2002. Service charges and NSF
(non-sufficient funds) charges related to demand deposit accounts were the main
components of deposit service fees.
Gains on sales of loans, net, were $2.2 million for the six months ended June
30, 2003, which reflected an increase of 186%, or $1.4 million, from $759
thousand for the six months ended June 30, 2002. The increase resulted from
larger numbers of home refinances and/or home purchases, and the subsequent sale
of the majority of these loans into the secondary market. Depressed interest
rates, which have existed for the last several quarters, continued to stimulate
the activity within this area of the subsidiary banks throughout the first six
months of 2003. While mortgage rates remain at historically low levels,
management does not anticipate that the level of gains on sales of loans, net
will continue throughout the entire year.
21
For the quarter ended June 30, 2003, other noninterest income increased $400
thousand, or 118%, to $738 thousand from $338 thousand for the same period in
2002. The increase was primarily due to a combination of increased earnings
realized by Nobel Electronic Transfer, LLC, one of the four associated companies
in which the Company holds an interest, gain realized on the sale of foreclosed
property, improved earnings on the cash surrender value of life insurance, and
to improved fees generated from the usage of Visa check cards by customers of
the subsidiary banks.
Noninterest expenses for the six months ended June 30, 2003 were $10.2 million
as compared to $8.8 million for the same period in 2002, for an increase of $1.4
million or 16%. The primary components of noninterest expenses were salaries and
benefits, occupancy and equipment expenses, and professional and data processing
fees, for both periods.
The following table sets forth the various categories of noninterest expenses
for the six months ended June 30, 2003 and 2002.
Noninterest Expenses
Six months ended
June 30,
----------------------------------
2003 2002 % Change
---------------------------------
Salaries and employee benefits ............ $ 6,085,713 $ 5,303,225 14.8%
Professional and data processing fees ..... 959,506 626,069 53.3%
Advertising and marketing ................. 353,526 317,359 11.4%
Occupancy and equipment expense ........... 1,308,438 1,194,221 9.6%
Stationery and supplies ................... 224,720 240,392 (6.5)%
Postage and telephone ..................... 318,122 256,591 24.0%
Other ..................................... 933,397 839,657 11.2%
---------------------------------
Total noninterest expenses .. $10,183,422 8,777,514 16.0%
=================================
For the six months ended June 30, 2003, total salaries and benefits increased to
$6.1 million or $782 thousand over the previous year's six-month total of $5.3
million. Salaries and benefits experienced the most significant dollar increase
of any noninterest expense component. The increase was primarily due to the
addition of employees at the subsidiary banks, in combination with increased
incentive compensation to real estate officers proportionate to the increased
volumes of gains on sales of loans. Professional and data processing fees
increased from $626 thousand for the six months ended June 30, 2002 to $960
thousand for the same six-month period in 2003. The $333 thousand increase was
predominately due to increases in data processing and auditing fees at the
subsidiary banks. Occupancy and equipment expense increased $114 thousand or 10%
from period to period. The increase was predominately due to increased levels of
rent, utilities, depreciation, maintenance, and other occupancy expenses
associated with the Company's facilities. Postage and telephone increased $62
thousand from $257 thousand for the six months ended June 30, 2002 to $318
thousand for the same period in 2003. The increase was proportionate to the
increased business activity throughout the Company. Other noninterest expense
increased $94 thousand, or 11%, for the six months ended June 30, 2003 when
compared to the like period in 2002. The increase was primarily due to an
increase in expenses related to other real estate owned, an increase in
insurance expense, and increased service charges from upstream banks.
The provision for income taxes was $1.3 million for the six-month period ended
June 30, 2003 compared to $685 thousand for the six-month period ended June 30,
2002 for an increase of $594 thousand or 87%. The increase was the result of an
increase in income before income taxes of $1.5 million or 66% for the 2003
period when compared to the 2002 period, in combination with an increase in the
Company's effective tax rate, which was the result of tax-free income
representing a smaller portion of the Company's total income.
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customers' credit needs. The liquidity of the
Company primarily depends upon cash flows from operating, investing, and
financing activities. Net cash provided by operating activities, consisting
primarily of proceeds on sales of loans, was $18.3 million for the six months
ended June 30, 2003 compared to $3.0 million net cash provided in the same
period in 2002. Net cash used in investing activities, consisting principally of
loan originations to be held for investment, was $69.1 million for the six
months ended June 30, 2003 and $57.2 million for the six months ended June 30,
2002. Net cash provided by financing activities, consisting primarily of deposit
growth, for the six months ended June 30, 2003 was $57.9 million and for the
same period in 2002 was $52.9 million.
22
The Company has a variety of sources of short-term liquidity available to it,
including federal funds purchased from correspondent banks, sales of securities
available for sale, FHLB advances, lines of credit and loan participations or
sales. At June 30, 2003, the subsidiary banks had seven unused lines of credit
totaling $41.0 million, of which $4.0 million was secured and $37.0 million was
unsecured. At December 31, 2002, the subsidiary banks had seven unused lines of
credit totaling $38.0 million, of which $4.0 million was secured and $34.0
million was unsecured. At both June 30, 2003 and December 31, 2002, the Company
also had a line of credit at its primary correspondent bank for $10.0 million.
At December 31, 2002, $5.0 million had been drawn and used as partial funding
for the capitalization of Cedar Rapids Bank & Trust, and in February 2003 an
additional $2.0 million was drawn as funding to maintain the required level of
capital at Cedar Rapids Bank & Trust in light of the bank's growth. In July
2003, the Company transferred its line of credit to a new primary correspondent
and drew an additional $3.0 million for capital maintenance purposes at Cedar
Rapids Bank & Trust.
The Company paid its first cash dividend of $0.05 per share in January 2003.
Going forward, it is the Company's intention to consider the payment of
dividends on a semi-annual basis. The Company anticipates an ongoing need to
retain much of its operating income to help provide the capital for continued
growth, however believes that operating results have reached a level that can
sustain dividends to stockholders as well. The Company paid a $0.05 per share
cash dividend on July 3, 2003, to stockholders of record on June 16, 2003.
23
Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company realizes income principally from the spread between the interest
earned on loans, investments and other interest-earning assets and the interest
paid on deposits and borrowings. Loan volumes and yields, as well as the volume
of and rates on investments, deposits and borrowings, are affected by market
interest rates. Additionally, because of the terms and conditions on many of the
investments and the loan and deposit accounts, a change in interest rates could
also affect the projected maturities in the securities and loan portfolios
and/or the deposit base, which could alter the Company's sensitivity to future
changes in interest rates. Accordingly, management considers interest rate risk
to be a significant market risk.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within policy limits approved by the board of directors, while
taking into consideration, among other factors, the Company's overall credit,
operating income, operating cost, and capital profile. The subsidiary banks'
ALM/Investment Committees, which includes senior management representatives and
members of the board of directors, monitor and manage interest rate risk to
maintain an acceptable level of change to net interest income as a result of
changes in interest rates.
One method used to quantify interest rate risk is 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
March 31, 2003, projected that net portfolio value would decrease by
approximately 4.74% if interest rates would rise 200 basis points over the next
year. It projected an increase in net portfolio value of approximately 4.15% if
interest rates would drop 200 basis points. Both simulations are within the
board-established policy limits of a 10% decline in value.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2003. Based on that evaluation, the Company's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document contains, and future oral and written statements of the
Company and its management may contain, forward-looking statements, within the
meaning of such term in the Private Securities Litigation Reform Act of 1995,
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of the Company. Forward-looking
statements, which may be based upon beliefs, expectations and assumptions of the
Company's management and on information currently available to management, are
generally identifiable by the use of words such as "believe," "expect,"
"anticipate," "bode," "predict," "suggest," "appear," "plan," "intend,"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
24
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.
25
Part II
QCR HOLDINGS, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2 Changes in Securities and Use of Proceeds - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders - None
The annual meeting of stockholders was held at The Lodge (formerly Jumer's
Castle Lodge) located at 900 Spruce Hills Drive, Bettendorf, Iowa on Wednesday,
May 7, 2003 at 10:00 a.m. At the meeting, Michael A. Bauer, James J. Brownson,
and Henry Royer were re-elected to serve as Class I directors, with terms
expiring in 2006. Continuing as Class II directors, with terms expiring in 2004,
are Larry J. Helling, Douglas M. Hultquist, and John W. Schricker. Continuing as
Class III directors, with terms expiring in 2005, are Patrick S. Baird, John K.
Lawson, and Ronald G. Peterson.
There were 2,833,208 issued shares and 2,773,062 outstanding shares of common
stock entitled to vote at the annual meeting. Either in person or by proxy,
there were 2,384,857 common shares represented at the meeting, constituting
approximately 86.0% of the outstanding shares. The voting was as follows:
Votes Votes
For Withheld
-----------------------------
Michael A. Bauer ....................... 2,372,449 12,408
James J. Brownson ...................... 2,360,749 24,108
Henry Royer ............................ 2,368,449 16,408
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 1, 2003 under Item 12, which
reported the Company's financial information, including earnings
for the quarter ended March 31, 2003, in the form of a press
release.
A report on Form 8-K was filed on May 8, 2003 under Item 9, which
reported the Company's announcement of the declaration of a cash
dividend and the results of the Annual Stockholders Meeting that
was held May 7, 2003 in the form of a press release.
A report on Form 8-K was filed on May 13, 2003 under Item 12,
which reported the Company's financial information, including
earnings for the quarter ended March 31, 2003, in the form of a
shareholder letter dated May 2003.
A report on Form 8-K was filed on July 23, 2003 under Item 12,
which reported the Company's financial information, including
earnings for the quarter ended June 30, 2003, in the form of a
press release.
26
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 August 11, 2003 /s/ Michael A. Bauer
--------------- -----------------------------------
Michael A. Bauer, Chairman
Date August 11, 2003 /s/ Douglas M. Hultquist
--------------- -----------------------------------
Douglas M. Hultquist, President
Chief Executive Officer
Date August 11, 2003 /s/ Todd A. Gipple
--------------- -----------------------------------
Todd A. Gipple, Executive
Vice President
Chief Financial Officer
27