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, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number 0-22208
QCR HOLDINGS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 42-1397595
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer ID Number)
incorporation or organization)
3551 7th Street, Suite 204, Moline, Illinois 61265
--------------------------------------------------
(Address of principal executive offices)
(309) 736-3580
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: As of August 1, 2005, the
Registrant had outstanding 4,524,599 shares of common stock, $1.00 par value per
share.
1
QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets,
June 30, 2005 and December 31, 2004 3
Consolidated Statements of Income,
For the Three Months Ended June 30, 2005 and 2004 4
Consolidated Statements of Income,
For the Six Months Ended June 30, 2005 and 2004 5
Consolidated Statements of Cash Flows,
For the Six Months Ended June 30, 2005 and 2004 6
Notes to Consolidated Financial Statements 7-11
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-29
Item 3 Quantitative and Qualitative Disclosures 29
About Market Risk
Item 4 Controls and Procedures 30
Part II OTHER INFORMATION
Item 1 Legal Proceedings 31
Item 2 Unregistered Sales of Equity Securities and Use
of Proceeds 31
Item 3 Defaults Upon Senior Securities 31
Item 4 Submission of Matters to a Vote of Security
Holders 31
Item 5 Other Information 31
Item 6 Exhibits 31
Signatures 32
2
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2005 and December 31, 2004
June 30, December 31,
2005 2004
------------------------------
ASSETS
Cash and due from banks .................................. $ 26,590,606 $ 21,372,342
Federal funds sold ....................................... 10,480,000 2,890,000
Interest-bearing deposits at financial institutions ...... 1,617,766 3,857,563
Securities held to maturity, at amortized cost ........... 150,000 100,000
Securities available for sale, at fair value ............. 153,824,503 149,460,886
------------------------------
153,974,503 149,560,886
------------------------------
Loans receivable held for sale ........................... 6,174,450 3,498,809
Loans receivable held for investment ..................... 668,103,638 644,852,018
Less: Allowance for estimated losses on loans ............ (8,661,809) (9,261,991)
------------------------------
665,616,279 639,088,836
------------------------------
Premises and equipment, net .............................. 23,537,595 18,100,590
Accrued interest receivable .............................. 4,238,604 4,072,762
Bank-owned life insurance ................................ 16,843,794 15,935,000
Other assets ............................................. 17,161,930 15,205,568
------------------------------
Total assets ..................................... $ 920,061,077 $ 870,083,547
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing .................................... $ 103,981,616 $ 109,361,817
Interest-bearing ....................................... 491,734,639 478,653,866
------------------------------
Total deposits ................................... 595,716,255 588,015,683
------------------------------
Short-term borrowings .................................... 112,356,529 104,771,178
Federal Home Loan Bank advances .......................... 118,112,717 92,021,877
Other borrowings ......................................... 6,000,000 6,000,000
Junior subordinated debentures ........................... 25,775,000 20,620,000
Other liabilities ........................................ 9,161,121 7,881,009
------------------------------
Total liabilities ................................ 867,121,622 819,309,747
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; shares authorized 10,000,000 4,519,559 4,496,730
June 2005 - 4,519,559 shares issued and outstanding,
December 2004 - 4,496,730 shares issued and outstanding,
Additional paid-in capital ............................... 20,598,983 20,329,033
Retained earnings ........................................ 27,684,207 25,278,666
Accumulated other comprehensive income ................... 136,706 669,371
------------------------------
Total stockholders' equity ....................... 52,939,455 50,773,800
------------------------------
Total liabilities and stockholders' equity ....... $ 920,061,077 $ 870,083,547
==============================
See Notes to Consolidated Financial Statements
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30
2005 2004
----------------------------
Interest and dividend income:
Loans, including fees ........................................ $ 10,084,216 $ 8,024,411
Securities:
Taxable .................................................. 1,258,488 987,279
Nontaxable ............................................... 140,006 144,289
Interest-bearing deposits at financial institutions ........ 28,213 66,757
Federal funds sold ......................................... 27,947 2,989
----------------------------
Total interest and dividend income ..................... 11,538,870 9,225,725
----------------------------
Interest expense:
Deposits ..................................................... 2,650,998 1,519,714
Short-term borrowings ........................................ 647,800 237,687
Federal Home Loan Bank advances .............................. 1,010,319 860,472
Other borrowings ............................................. 87,587 10,172
Junior subordinated debentures ............................... 385,170 578,868
----------------------------
Total interest expense ................................. 4,781,874 3,206,913
----------------------------
Net interest income .................................... 6,756,996 6,018,812
Provision for loan losses ...................................... (147,418) 467,659
----------------------------
Net interest income after provision for loan losses .... 6,904,414 5,551,153
----------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ........... 383,758 302,085
Trust department fees ........................................ 719,918 608,031
Deposit service fees ......................................... 396,297 407,764
Gains on sales of loans, net ................................. 351,042 406,435
Securities gains, net ........................................ -- 26,188
Earnings on cash surrender value of life insurance ........... 140,235 240,550
Investment advisory and management fees ...................... 199,675 136,006
Other ........................................................ 243,953 252,353
----------------------------
Total noninterest income ............................... 2,434,878 2,379,412
----------------------------
Noninterest expenses:
Salaries and employee benefits ............................... 4,120,478 3,119,302
Professional and data processing fees ........................ 824,598 530,826
Advertising and marketing .................................... 307,584 287,198
Occupancy and equipment expense .............................. 1,022,246 790,760
Stationery and supplies ...................................... 164,238 132,247
Postage and telephone ........................................ 198,370 162,779
Bank service charges ......................................... 139,026 147,401
Insurance .................................................... 153,687 125,073
Other ........................................................ 513,114 141,994
----------------------------
Total noninterest expenses ............................. 7,443,341 5,437,580
----------------------------
Income before income taxes ............................. 1,895,951 2,492,985
Federal and state income taxes ................................. 633,428 821,773
----------------------------
Net income ............................................. $ 1,262,523 $ 1,671,212
============================
Earnings per common share:
Basic ........................................................ $ 0.28 $ 0.40
Diluted ...................................................... $ 0.27 $ 0.39
Weighted average common shares outstanding ................... 4,514,459 4,212,795
Weighted average common and common equivalent ................ 4,614,256 4,322,443
shares outstanding
Cash dividends declared per common share ....................... $ 0.04 $ 0.04
============================
Comprehensive income ........................................... $ 1,434,067 $ 84,736
============================
See Notes to Consolidated Financial Statements
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended June 30
2005 2004
-------------------------
Interest and dividend income:
Loans, including fees .............................. $19,404,460 $15,492,896
Securities:
Taxable .......................................... 2,423,510 1,978,684
Nontaxable ....................................... 276,249 287,101
Interest-bearing deposits at financial institutions 69,100 138,272
Federal funds sold ................................. 45,540 7,579
-------------------------
Total interest and dividend income ........... 22,218,859 17,904,532
-------------------------
Interest expense:
Deposits ........................................... 5,096,157 3,022,895
Short-term borrowings .............................. 1,113,919 379,937
Federal Home Loan Bank advances .................... 1,859,928 1,660,607
Other borrowings ................................... 188,872 46,050
Junior subordinated debentures ..................... 714,648 1,000,293
-------------------------
Total interest expense ....................... 8,973,524 6,109,782
-------------------------
Net interest income .......................... 13,245,335 11,794,750
Provision for loan losses ........................... 153,788 1,324,500
-------------------------
Net interest income after provision
for loan losses .............................. 13,091,547 10,470,250
-------------------------
Noninterest income:
Merchant credit card fees, net of processing costs . 802,717 841,283
Trust department fees .............................. 1,455,061 1,288,835
Deposit service fees ............................... 777,563 817,108
Gains on sales of loans, net ....................... 605,172 667,853
Securities gains (losses), net ..................... -- 26,188
Earnings on cash surrender value of life insurance . 318,962 335,766
Investment advisory and management fees ............ 339,854 261,631
Other .............................................. 652,024 499,484
-------------------------
Total noninterest income ..................... 4,951,353 4,738,148
-------------------------
Noninterest expenses:
Salaries and employee benefits ..................... 8,016,845 6,271,103
Professional and data processing fees .............. 1,437,394 996,102
Advertising and marketing .......................... 567,763 500,990
Occupancy and equipment expense .................... 1,998,199 1,521,750
Stationery and supplies ............................ 312,016 269,192
Postage and telephone .............................. 394,685 329,059
Bank service charges ............................... 257,499 285,243
Insurance .......................................... 306,842 225,567
Loss on redemption of junior subordinated debentures -- 747,490
Other .............................................. 904,803 380,172
-------------------------
Total noninterest expenses ................... 14,196,046 11,526,668
-------------------------
Income before income taxes ................... 3,846,854 3,681,730
Federal and state income taxes ....................... 1,260,581 1,174,601
-------------------------
Net income ................................... $ 2,586,273 $ 2,507,129
=========================
Earnings per common share:
Basic .............................................. $ 0.57 $ 0.60
Diluted ............................................ $ 0.56 $ 0.58
Weighted average common shares outstanding ......... 4,508,886 4,213,635
Weighted average common and common equivalent ...... 4,612,778 4,330,533
shares outstanding
Cash dividends declared per common share ............. $ 0.04 $ 0.04
==========================
Comprehensive income ................................. $ 2,053,608 $ 1,107,340
==========================
See Notes to Consolidated Financial Statements
5
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30
2005 2004
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 2,586,273 $ 2,507,129
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................................... 892,541 685,551
Provision for loan losses ....................................... 153,788 1,324,500
Amortization of offering costs on subordinated debentures ....... 7,158 10,775
Loss on redemption of junior subordinated debentures ............ -- 747,490
Amortization of premiums on securities, net ..................... 314,922 578,330
Investment securities gains, net ................................ -- (26,188)
Loans originated for sale ....................................... (45,011,732) (45,896,508)
Proceeds on sales of loans ...................................... 42,904,794 45,990,618
Net gains on sales of loans ..................................... (605,172) (667,853)
Tax benefit of nonqualified stock options exercised ............. 99,928 113,437
Increase in accrued interest receivable ......................... (165,842) (6,098)
Increase in other assets ........................................ (1,607,882) (4,049,784)
Increase in other liabilities ................................... 1,278,326 1,485,264
------------------------------
Net cash provided by operating activities ................... $ 847,102 $ 2,796,663
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold ................................ (7,590,000) (5,245,000)
Net decrease in interest-bearing deposits at financial institutions 2,239,797 730,232
Activity in securities portfolio:
Purchases ....................................................... (34,740,620) (31,993,964)
Calls and maturities ............................................ 28,548,500 25,848,001
Paydowns ........................................................ 612,666 1,002,010
Activity in bank-owned life insurance:
Purchases ....................................................... (589,812) (11,950,717)
Increase in cash value .......................................... (318,982) (321,680)
Net loans originated and held for investment ...................... (24,005,590) (69,360,755)
Purchase of premises and equipment ................................ (6,329,546) (2,676,872)
Proceeds from sales of premises and equipment ..................... -- 8,247
------------------------------
Net cash used in investing activities ....................... $(42,173,587) $(3,960,498)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts ....................... 7,700,572 (2,370,164)
Net increase in short-term borrowings ............................. 7,585,351 75,271,922
Activity in Federal Home Loan Bank advances:
Advances ........................................................ 29,700,000 28,500,000
Payments ........................................................ (3,609,160) (8,103,948)
Net decrease in other borrowings .................................. -- (3,000,000)
Proceeds from issuance of junior subordinated debentures .......... 5,155,000 20,620,000
Redemption of junior subordinated debentures ...................... -- (12,000,000)
Payment of cash dividends ......................................... (179,866) (167,838)
Payment of fractional shares on 3:2 stock split ................... -- (2,549)
Proceeds from issuance of common stock, net ....................... 192,852 47,667
------------------------------
Net cash provided by financing activities ................... $ 46,544,749 $98,795,090
------------------------------
Net increase in cash and due from banks ..................... 5,218,264 7,631,255
Cash and due from banks, beginning .................................. 21,372,342 24,427,573
------------------------------
Cash and due from banks, ending ..................................... $ 26,590,606 $32,058,828
==============================
Supplemental disclosure of cash flow information,
cash payments for:
Interest .......................................................... $ 8,705,122 $ 6,200,693
==============================
Income/franchise taxes ............................................ $ 357,982 $ 536,535
==============================
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income,
unrealized losses on securities available for sale, net ......... $ (532,665) $(1,399,789)
==============================
See Notes to Consolidated Financial Statements
6
Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include information
or footnotes necessary for a fair presentation of financial position, results of
operations and changes in financial condition in conformity with accounting
principles generally accepted in the United States of America. However, all
adjustments that are, in the opinion of management, necessary for a fair
presentation have been included. Any differences appearing between numbers
presented in financial statements and management's discussion and analysis are
due to rounding. Results for the periods ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005.
Certain amounts in the prior period financial statements have been reclassified,
with no effect on net income or stockholders' equity, to conform with the
current period presentation.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of QCR Holdings, Inc. (the "Company"), a Delaware
corporation, and its wholly owned subsidiaries, Quad City Bank and Trust Company
("Quad City Bank & Trust"), Cedar Rapids Bank and Trust Company ("Cedar Rapids
Bank & Trust"), Rockford Bank and Trust Company ("Rockford Bank & Trust"), Quad
City Bancard, Inc. ("Bancard"), and Quad City Liquidation Corporation ("QCLC").
All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company also wholly owns QCR Holdings Statutory Trust II
("Trust II"), QCR Holdings Statutory Trust III ("Trust III"), and QCR Holdings
Statutory Trust IV ("Trust IV"). These three entities were established by the
Company for the sole purpose of issuing trust preferred securities. As required
by a ruling of the Securities and Exchange Commission in December 2003, the
Company's equity investments in these entities are not consolidated, but are
included in other assets on the consolidated balance sheet for $776 thousand in
aggregate at June 30, 2005. In addition to these eight wholly owned
subsidiaries, the Company has an aggregate investment of $299 thousand in three
associated companies, Nobel Electronic Transfer, LLC, Nobel Real Estate
Investors, LLC, and Velie Plantation Holding Company. The Company owns 20%
equity positions in each of these associated companies. In June 2005, Cedar
Rapids Bank & Trust entered into a joint venture as a 50% owner of Cedar Rapids
Mortgage Company, LLC.
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 Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
----------------------------------------------------
Net income, as reported ................. $1,262,523 $1,671,212 $2,586,273 $2,507,129
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects .. (44,486) (30,864) (88,730) (64,563)
----------------------------------------------------
Net income ...................... $1,218,037 $1,640,348 $2,497,543 $2,442,566
====================================================
Earnings per share:
Basic:
As reported ......................... $ 0.28 $ 0.40 $ 0.57 $ 0.60
Pro forma ........................... $ 0.27 $ 0.39 $ 0.55 $ 0.58
Diluted:
As reported ......................... $ 0.27 $ 0.39 $ 0.56 $ 0.58
Pro forma ........................... $ 0.26 $ 0.38 $ 0.54 $ 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, 2005 and 2004: dividend rate of 0.36% to 0.43%; expected price
volatility of 24.25% to 24.88%; risk-free interest rate based upon current rates
at the date of grants (4.10% to 4.72% for stock options and 0.95% to 2.47% for
the employee stock purchase plan); and expected lives of 10 years for stock
options and 3 months to 6 months for the employee stock purchase plan.
NOTE 2 - EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a
basic and diluted basis.
Three months ended Six months ended,
June 30, June 30,
-------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------
Net income, basic and diluted
Earnings ........................... $1,262,523 $1,671,212 $2,586,273 $2,507,129
=================================================
Weighted average common shares
Outstanding ........................ 4,514,459 4,212,795 4,508,886 4,213,635
Weighted average common shares
issuable upon exercise of stock
options and under the
employee stock purchase plan ....... 99,797 109,648 103,892 116,898
-------------------------------------------------
Weighted average common and
common equivalent shares
outstanding ........................ 4,614,256 4,322,443 4,612,778 4,330,533
=================================================
NOTE 3 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is presented
as follows for the three-month and six-month periods ended June 30, 2005 and
2004, respectively.
Three months ended Six months ended
June 30, June 30,
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Revenue:
Commercial banking:
Quad City Bank & Trust .. $ 9,122,038 $ 8,196,704 $ 17,571,482 $ 15,812,914
Cedar Rapids Bank & Trust 3,462,067 2,308,882 6,671,090 4,336,672
Rockford Bank & Trust ... 161,973 0 218,960 0
Credit card processing .... 445,135 348,057 918,115 932,735
Trust management .......... 719,918 608,032 1,455,061 1,288,836
All other ................. 62,617 143,462 335,504 271,523
------------------------------------------------------------
Total revenue ....... $ 13,973,748 $ 11,605,137 $ 27,170,212 $ 22,642,680
============================================================
Net income (loss):
Commercial banking:
Quad City Bank & Trust .. $ 1,425,682 $ 1,683,680 $ 2,788,696 $ 2,810,881
Cedar Rapids Bank & Trust 465,465 263,294 843,164 405,713
Rockford Bank & Trust ... (353,754) (49,821) (732,478) (49,821)
Credit card processing .... 119,466 100,536 237,022 345,399
Trust management .......... 135,069 135,426 333,257 334,901
All other ................. (529,405) (461,903) (883,388) (1,339,944)
------------------------------------------------------------
Total net income .... $ 1,262,523 $ 1,671,212 $ 2,586,273 $ 2,507,129
============================================================
8
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company's subsidiary banks make various
commitments and incur certain contingent liabilities that are not presented in
the accompanying consolidated financial statements. The commitments and
contingent liabilities include various guarantees, commitments to extend credit,
and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the banks upon extension of credit, is based
upon management's credit evaluation of the counter-party. Collateral held varies
but may include accounts receivable, marketable securities, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The subsidiary banks hold collateral, as described
above, supporting those commitments if deemed necessary. In the event the
customer does not perform in accordance with the terms of the agreement with the
third party, the banks would be required to fund the commitments. The maximum
potential amount of future payments the banks could be required to make is
represented by the contractual amount. If the commitment is funded, the banks
would be entitled to seek recovery from the customer. At June 30, 2005 and
December 31, 2004, no amounts were recorded as liabilities for the banks'
potential obligations under these guarantees.
As of June 30, 2005 and December 31, 2004, commitments to extend credit
aggregated were $278.5 million and $257.6 million, respectively. As of June 30,
2005 and December 31, 2004, standby, commercial and similar letters of credit
aggregated were $15.5 million and $12.7 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 amounts of $6.2 million and $3.5 million, at June 30,
2005 and December 31, 2004, respectively. These amounts are included in loans
held for sale at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold
with varying recourse provisions. Essentially, all loan sales agreements require
the repurchase of a mortgage loan by the seller in situations such as breach of
representation, warranty, or covenant, untimely document delivery, false or
misleading statements, failure to obtain certain certificates or insurance,
unmarketability, etc. Certain loan sales agreements also contain repurchase
requirements based on payment-related defects that are defined in terms of the
number of days/months since the purchase, the sequence number of the payment,
and/or the number of days of payment delinquency. Based on the specific terms
stated in the agreements of investors purchasing residential mortgage loans from
the Company's subsidiary banks, the Company had $37.7 million and $35.6 million
of sold residential mortgage loans with recourse provisions still in effect at
June 30, 2005 and December 31, 2004, respectively. The subsidiary banks did not
repurchase any loans from secondary market investors under the terms of loans
sales agreements during the six months ended June 30, 2005 or the year ended
December 31, 2004. In the opinion of management, the risk of recourse to the
subsidiary banks is not significant, and accordingly no liabilities have been
established related to such.
9
During 2004, Quad City Bank & Trust joined the Federal Home Loan Bank's (FHLB)
Mortgage Partnership Finance (MPF) Program, which offers a "risk-sharing"
alternative to selling residential mortgage loans to investors in the secondary
market. Lenders funding mortgages through the MPF Program manage the credit risk
of the loans they originate. The loans are subsequently funded by the FHLB and
held within their portfolio, thereby managing the liquidity, interest rate, and
prepayment risks of the loans. Lenders participating in the MPF Program receive
monthly credit enhancement fees for managing the credit risk of the loans they
originate. Any credit losses incurred on those loans will be absorbed first by
private mortgage insurance, second by an allowance established by the FHLB, and
third by withholding monthly credit enhancements due to the participating
lender. At June 30, 2005, Quad City Bank & Trust had funded $13.4 million of
mortgages through the FHLB's MPF Program with an attached credit exposure of
$267 thousand. At December 31, 2004, Quad City Bank & Trust had funded $11.7
million of mortgages through the FHLB's MPF Program with an attached credit
exposure of $240 thousand. In conjunction with its participation in this
program, Quad City Bank & Trust had an allowance for credit losses on these
off-balance sheet exposures of $47 thousand and $11 thousand at June 30, 2005
and December 31, 2004, respectively.
Bancard is subject to the risk of cardholder chargebacks and its merchants being
incapable of refunding the amount charged back. Management attempts to mitigate
such risk by regular monitoring of merchant activity and in appropriate cases,
holding cash reserves deposited by the merchant. In August of 2004, Bancard
began making monthly provisions to an allowance for chargeback losses in an
amount equal to 5 basis points of the month's dollar volume of merchant credit
card activity. For the six months ended June 30, 2005, monthly provisions were
made totaling $28 thousand. A $73 thousand reversal to a specific merchant
reserve more than offset these provisions. At June 30, 2005 and December 31,
2004, Bancard had a merchant chargeback reserve of $119 thousand and $164
thousand, respectively. Management will continually monitor merchant credit card
activity and Bancard's level of the allowance for chargeback losses.
The Company also has a limited guarantee to MasterCard International,
Incorporated, which is backed by a $750 thousand letter of credit from The
Northern Trust Company. As of June 30, 2005 and December 31, 2004, there were no
significant pending liabilities.
NOTE 5 - JUNIOR SUBORDINATED DEBENTURES
In June 1999, the Company issued 1,200,000 shares of 9.2% cumulative trust
preferred securities through a newly formed subsidiary, Trust I, which used the
proceeds from the sale of the trust preferred securities to purchase junior
subordinated debentures of the Company. These securities were $12.0 million at
December 31, 2003. In February 2004, the Company issued, in a private
transaction, $12.0 million of fixed/floating rate capital securities and $8.0
million of floating rate capital securities through two newly formed
subsidiaries, Trust II and Trust III, respectively. The securities issued by
Trust II and Trust III mature in thirty years. The fixed/floating rate capital
securities are callable at par after seven years, and the floating rate capital
securities are callable at par after five years. The fixed/floating rate capital
securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly, and the floating rate capital securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the rate currently set at 6.34%.
Trust II and Trust III used the proceeds from the sale of the trust preferred
securities, along with the funds from their equity, to purchase junior
subordinated debentures of the Company in the amounts of $12.4 million and $8.2
million, respectively. These securities were $20.0 million in aggregate at June
30, 2005. On June 30, 2004, the Company redeemed the $12.0 million of 9.2%
cumulative trust preferred securities issued by Trust I in 1999. During 2004,
the Company recognized a loss of $747 thousand on the redemption of these trust
preferred securities at their earliest call date, which resulted from the
one-time write-off of unamortized costs related to the original issuance of the
securities in 1999.
On May 5, 2005, the Company announced the issuance of $5.0 million of floating
rate capital securities of QCR Holdings Statutory Trust IV. The securities
represent the undivided beneficial interest in Trust IV, which was established
by the Company for the sole purpose of issuing the Trust Preferred Securities.
The Trust Preferred Securities were sold in a private transaction exempt from
registration under the Securities Act of 1933, as amended and were not
registered under the Act.
10
The securities issued by Trust IV mature in thirty years, but are callable at
par after five years. The Trust Preferred Securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the current rate set at 5.40%.
Interest is payable quarterly. Trust IV used the $5.0 million of proceeds from
the sale of the Trust Preferred Securities, in combination with $155 thousand of
proceeds from its own equity, to purchase $5.2 million of junior subordinated
debentures of the Company. The Company treats these issuances as Tier 1 capital
for regulatory capital purposes, subject to current established limitations. The
Company incurred no issuance costs as a result of the transaction. The Company
used the net proceeds for general corporate purposes, including the paydown of
its other borrowings.
NOTE 6 - RECENT ACCOUNTING DEVELOPMENTS
On September 30, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") Issue No. 03-1-1
delaying the effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments",
which provides guidance for determining the meaning of "other-than-temporarily
impaired" and its application to certain debt and equity securities within the
scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", and investments accounted for under the cost method. The guidance
requires that investments which have declined in value due to credit concerns or
solely due to changes in interest rates must be recorded as
other-than-temporarily impaired unless the Company can assert and demonstrate
its intention to hold the security for a period of time sufficient to allow for
a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. On June 29, 2005, the Board decided not to provide additional
guidance on the meaning of other-than-temporary impairment, but directed the
staff to issue proposed FSP EITF 03-1-a, "Implementation Guidance for the
Application of Paragraph 16 of EITF Issue No. 03-1," as final. The final FSP
will supersede EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments," and EITF Topic No. D-44,
"Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a
Security Whose Cost Exceeds Fair Value." The final FSP (retitled FSP FAS 115-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments") will replace the guidance set forth in paragraphs 10-18 of Issue
03-1 with references to existing other-than-temporary impairment guidance, such
as FASB Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", SEC Staff Accounting Bulletin No. 59, "Accounting for
Noncurrent Marketable Equity Securities", and APB Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock." FSP FAS 115-1 will codify
the guidance set forth in EITF Topic D-44 and clarify that an investor should
recognize an impairment loss no later than when the impairment is deemed other
than temporary, even if a decision to sell has not been made. The Board decided
that FSP FAS 115-1 would be effective for other-than-temporary impairment
analysis conducted in periods beginning after September 15, 2005. The finalized
FSP is expected to be issued in August 2005. Management continues to closely
monitor and evaluate how the provisions of EITF 03-1 and FSP FAS 115-1 will
affect the Company.
In December 2004, FASB published Statement No. 123 (revised 2004), Share-Based
Payment ("FAS 123(R)") FAS 123(R) requires that the compensation cost relating
to share-based payment transactions, including grants of employee stock options
and shares under employee stock purchase plans, be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement. The
Statement was originally effective at the beginning of the Company's third
quarter in 2005, however, in April 2005 the adoption of a new rule, by the
Securities and Exchange Commission, changed the dates for compliance with this
standard. The Company will now be required to implement Statement No. 123(R)
beginning January 1, 2006.
As of the effective date, the Company will have the option of applying the
Statement using a modified prospective application or a modified retrospective
application. Under the prospective method compensation cost would be recognized
for (1) all awards granted after the required effective date and for awards
modified, cancelled, or repurchased after that date and (2) the portion of prior
awards for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated for pro forma disclosures under
SFAS 123. Under the retrospective application method compensation cost would be
recognized as in (1) above and (2) for prior periods would be restated
consistent with the pro forma disclosures required for those periods by SFAS
123. The Company has not yet made a decision on which method of application it
will elect.
The impact of this Statement on the Company after the effective date and beyond
will depend upon various factors, among them being the future compensation
strategy. The SFAS 123 pro forma compensation costs presented in the footnotes
to the financial statements have been calculated using a Black-Scholes
option-pricing model and may not be indicative of amounts, which should be
expected in future periods.
11
Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QCR Holdings, Inc. is the parent company of Quad City Bank & Trust, Cedar Rapids
Bank & Trust, Rockford Bank & Trust, and Quad City Bancard, Inc.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are Iowa-chartered
commercial banks, and Rockford Bank & Trust is an Illinois-chartered commercial
bank. All are members of the Federal Reserve System with depository accounts
insured to the maximum amount permitted by law by the Federal Deposit Insurance
Corporation. Quad City Bank & Trust commenced operations in 1994 and provides
full-service commercial and consumer banking, and trust and asset management
services to the Quad City area and adjacent communities through its five offices
that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. Cedar
Rapids Bank & Trust commenced operations in 2001 and provides full-service
commercial and consumer banking service to Cedar Rapids and adjacent communities
through its new main office located on First Avenue in downtown Cedar Rapids,
Iowa and its recently opened branch facility located on Council Street in
northern Cedar Rapids. Rockford Bank & Trust commenced operations in January
2005 and provides full-service commercial and consumer banking service to
Rockford and adjacent communities through its office located in downtown
Rockford.
Bancard provides merchant and cardholder credit card processing services.
Bancard currently provides credit card processing for its local merchants and
agent banks and for cardholders of the Company's subsidiary banks.
OVERVIEW
Net income for the first six months of 2005 was $2.6 million as compared to net
income of $2.5 million for the same period in 2004, a slight increase of $79
thousand, or 3%. Basic and diluted earnings per share for the first six months
of 2005 were $0.57 and $0.56, respectively, compared to $0.60 basic and $0.58
diluted earnings per share for the first six months of 2004. For the six months
ended June 30, 2005, total revenue experienced an improvement of $4.5 million
when compared to the same period in 2004. Contributing to this 20% improvement
in revenue for the Company were increases in net interest income of $1.5
million, or 12%, and in noninterest income of $213 thousand, or 5%. Also
positively impacting earnings was a decline in the provision for loan losses of
$1.2 million, or 88%. The first six months of 2005 reflected a significant
increase in noninterest expense of $2.7 million, or 23%, when compared to the
same period in 2004, which included a first quarter loss of $747 thousand on the
redemption of junior subordinated debentures. The increase in noninterest
expense was predominately due to anticipated increases in both personnel and
facilities costs, as the subsidiary banks opened four new banking locations
during 2005. In summary, the solid growth in revenue experienced during the
first six months of 2005, in combination with the reduced provision for loan
losses, more than offset the year-to-year increase in noninterest expense, which
resulted primarily from four new banking locations and the start-up of a new
charter, causing net income in the first half of 2005 to maintain a level
roughly equivalent to that in the first half 2004.
Net income for the second quarter of 2005 was $1.3 million as compared to net
income of $1.7 million for the same period in 2004, a decrease of $409 thousand,
or 24%. Basic and diluted earnings per share for the second quarter of 2005 were
$0.28 and $0.27, respectively, compared to $0.40 basic and $0.39 diluted
earnings per share for the second quarter of 2004. For the three months ended
June 30, 2005, total revenue experienced an improvement of $2.4 million when
compared to the same period in 2004. Contributing to this 20% improvement in
revenue for the Company were increases in net interest income of $738 thousand,
or 12%, and in noninterest income of $55 thousand, or 2%. Also positively
impacting earnings was a marked decline in the provision for loan losses of $615
thousand, or 132%. The second quarter of 2005 reflected a significant increase
in noninterest expense of $2.0 million, or 37%, when compared to the same period
in 2004. The increase in noninterest expense was predominately due to
anticipated increases in both personnel and facilities costs, as the subsidiary
banks opened four new banking locations during 2005. In summary, the solid
growth in revenue experienced during the second quarter of 2005 nearly offset
the year-to-year increase in noninterest expense, which resulted primarily from
four new banking locations, allowing the maintenance of second quarter core
earnings from one year ago, after an adjustment of $326 thousand for the
quarter's start-up losses incurred by Rockford Bank & Trust.
12
The Company's operating results are derived largely from net interest income.
Net interest income is the difference between interest income, principally from
loans and investment securities, and interest expense, principally on borrowings
and customer deposits. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
The Company realized a 0.06% decrease in its net interest spread, declining from
3.12% for the three months ended June 30, 2004 to 3.06% for the three months
ended June 30, 2005. The average yield on interest-earning assets increased
0.48% for the three months ended June 30, 2005 when compared to the same period
ended June 30, 2004. At the same time, the average cost of interest-bearing
liabilities increased 0.54%. The narrowing of the net interest spread resulted
in a 0.07% reduction in the Company's net interest margin. For the three months
ended June 30, 2005, the net interest margin was 3.33% compared to 3.40% for the
same period in 2004. The net interest margin of 3.33% for the second quarter of
2005 was an increase from that experienced in the first quarter of 2005, during
which the net interest margin was 3.26%.
The Company realized a 0.09% decrease in its net interest spread, declining from
3.11% for the six months ended June 30, 2004 to 3.02% for the six months ended
June 30, 2005. The average yield on interest-earning assets increased 0.33% for
the six months ended June 30, 2005 when compared to the same period ended June
30, 2004. At the same time, the average cost of interest-bearing liabilities
increased 0.42%. The narrowing of the net interest spread resulted in a 0.13%
reduction in the Company's net interest margin. For the six months ended June
30, 2005, the net interest margin was 3.29% compared to 3.42% for the same
period in 2004. Management constantly monitors and manages net interest margin.
From a profitability standpoint, an important challenge for the subsidiary banks
is the maintenance of their net interest margins. Management continually
addresses this issue with the use of alternative funding sources and pricing
strategies.
13
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
For the six months ended June 30,
-----------------------------------------------------------------------------
2005 2004
-----------------------------------------------------------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost
-----------------------------------------------------------------------------
ASSETS
Interest earnings assets:
Federal funds sold ............................ $ 3,885 $ 46 2.37% $ 4,975 8 0.32%
Interest-bearing deposits at
financial institutions ...................... 4,109 69 3.36% 11,369 138 2.43%
Investment securities (1) ..................... 151,060 2,842 3.76% 126,163 2,414 3.83%
Gross loans receivable (2) .................... 654,400 19,404 5.93% 555,271 15,493 5.58%
----------------------- ---------------------
Total interest earning assets ......... $ 813,454 22,361 5.50% $ 697,778 18,053 5.17%
Noninterest-earning assets:
Cash and due from banks ....................... $ 28,522 $ 30,652
Premises and equipment ........................ 20,954 12,975
Less allowance for estimated losses on loans .. (9,164) (9,325)
Other ......................................... 36,334 29,967
--------- ---------
Total assets .......................... $ 890,099 $ 762,047
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits .............. $ 170,741 944 1.11% $ 171,058 641 0.75%
Savings deposits .............................. 16,887 30 0.36% 14,816 24 0.32%
Time deposits ................................. 297,804 4,122 2.77% 206,965 2,358 2.28%
Short-term borrowings ......................... 109,724 1,114 2.03% 82,554 380 0.92%
Federal Home Loan Bank advances ............... 98,526 1,860 3.78% 87,950 1,660 3.77%
Junior subordinated debentures ................ 21,909 714 6.52% 25,965 1,000 7.70%
Other borrowings .............................. 9,125 189 4.14% 3,375 46 2.73%
----------------------- ---------------------
Total interest-bearing
liabilities ........................... $ 724,715 8,973 2.48% $ 592,683 6,109 2.06%
Noninterest-bearing demand .................... $ 106,116 $ 115,378
Other noninterest-bearing
liabilities ................................. 7,585 11,778
Total liabilities ............................. 838,415 719,839
Stockholders' equity .......................... 51,684 42,208
--------- ---------
Total liabilities and
stockholders' equity .................. $ 890,099 $ 762,047
========= =========
Net interest income ........................... $13,388 $11,944
======= =======
Net interest spread ........................... 3.02% 3.11%
====== ======
Net interest margin ........................... 3.29% 3.42%
====== ======
Ratio of average interest earning
assets to average interest-
bearing liabilities ......................... 112.24% 117.73%
========= =========
<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>
14
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
For the three months ended June 30,
----------------------------------------------------------------------------
2005 2004
-------------------------------------- -----------------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost
----------------------------------------------------------------------------
ASSETS
Interest earnings assets:
Federal funds sold ............................. $ 4,359 $ 28 2.57% $ 5,581 $ 3 0.22%
Interest-bearing deposits at
financial institutions ........................ 2,686 28 4.17% 11,781 67 2.27%
Investment securities (1) ...................... 153,116 1,471 3.84% 126,506 1,206 3.81%
Gross loans receivable (2) ..................... 660,877 10,084 6.10% 573,781 8,024 5.59%
----------------------- ---------------------
Total interest earning assets .......... $ 821,038 11,611 5.66% $ 717,649 9,300 5.18%
Noninterest-earning assets:
Cash and due from banks ........................ $ 28,590 $ 31,678
Premises and equipment ......................... 22,314 13,473
Less allowance for estimated losses on losses (8,905) (9,677)
Other .......................................... 38,572 33,773
--------- ---------
Total assets ........................... $ 901,609 $ 786,896
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ............... $ 170,206 508 1.19% $ 170,021 319 0.75%
Savings deposits ............................... 17,509 17 0.39% 15,061 12 0.32%
Time deposits .................................. 296,889 2,126 2.86% 211,632 1,189 2.25%
Short-term borrowings .......................... 113,525 648 2.28% 101,225 238 0.94%
Federal Home Loan Bank advances ................ 105,048 1,010 3.85% 92,346 860 3.73%
Junior subordinated debentures ................. 23,198 385 6.64% 29,620 579 7.82%
Other borrowings ............................... 8,500 88 4.14% 1,750 10 2.29%
----------------------- ---------------------
Total interest-bearing
liabilities ............................ $ 734,875 4,782 2.60% $ 621,655 3,207 2.06%
Noninterest-bearing demand ..................... $ 105,247 $ 109,900
Other noninterest-bearing
liabilities .................................. 9,280 12,567
Total liabilities .............................. 849,402 744,122
Stockholders' equity ........................... 52,207 42,774
--------- ---------
Total liabilities and
stockholders' equity ................... $ 901,609 $ 786,896
========= =========
Net interest income ............................ $ 6,829 $ 6,093
======== ========
Net interest spread ............................ 3.06% 3.12%
======= =======
Net interest margin ............................ 3.33% 3.40%
======= =======
Ratio of average interest earning
assets to average interest-
bearing liabilities .......................... 115.72% 115.44%
========= =========
<FN>
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate for each period
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
</FN>
15
Analysis of Changes of Interest Income/Interest Expense
For the six months ended June 30, 2005
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Period Rate Volume
---------------------------------
2005 vs. 2004
---------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ................................ $ 38 $ 44 $ (6)
Interest-bearing deposits at financial institutions (69) 106 (175)
Investment securities (2) ......................... 428 (116) 544
Gross loans receivable (3) ........................ 3,911 1,017 2,894
-------------------------------
Total change in interest income ........... $ 4,308 $ 1,051 $ 3,257
------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................. $ 303 $ 306 $ (3)
Savings deposits .................................. 6 3 3
Time deposits ..................................... 1,764 580 1,184
Short-term borrowings ............................. 734 577 157
Federal Home Loan Bank advances ................... 200 1 199
Junior subordinated debentures .................... (286) (142) (144)
Other borrowings .................................. 143 33 110
------------------------------
Total change in interest expense .......... $ 2,864 $ 1,358 $ 1,506
------------------------------
Total change in net interest income ............... $ 1,444 $ (307) $ 1,751
==============================
<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>
16
Analysis of Changes of Interest Income/Interest Expense
For the three months ended June 30, 2005
Components
Inc./(Dec.) of Change (1)
from ------------------
Prior Period Rate Volume
---------------------------------
2005 vs. 2004
---------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ................................ $ 25 $ 30 $ (5)
Interest-bearing deposits at financial institutions (39) 194 (233)
Investment securities (2) ......................... 265 9 256
Gross loans receivable (3) ........................ 2,060 773 1,287
------------------------------
Total change in interest income ........... $ 2,311 $ 1,006 $ 1,305
------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................. $ 189 $ 189 $ --
Savings deposits .................................. 5 3 2
Time deposits ..................................... 937 380 557
Short-term borrowings ............................. 410 378 32
Federal Home Loan Bank advances ................... 150 29 121
Junior subordinated debentures .................... (194) (80) (114)
Other borrowings .................................. 78 13 65
------------------------------
Total change in interest expense .......... $ 1,575 $ 912 $ 663
------------------------------
Total change in net interest income ............... $ 736 $ 94 $ 642
==============================
<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>
17
CRITICAL ACCOUNTING POLICY
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. Management may report a materially different amount for the
provision for loan losses in the statement of operations to change the allowance
for loan losses if its assessment of the above factors were different. This
discussion and analysis should be read in conjunction with the Company's
financial statements and the accompanying notes presented elsewhere herein, as
well as the portion of this Management's Discussion and Analysis, which
discusses the allowance for loan losses in the section entitled "Financial
Condition." Although management believes the levels of the allowance as of both
June 30, 2005 and December 31, 2004 were adequate to absorb losses inherent in
the loan portfolio, a decline in local economic conditions, or other factors,
could result in increasing losses that cannot be reasonably predicted at this
time.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Interest income increased by $2.3 million to $11.5 million for the three-month
period ended June 30, 2005 when compared to $9.2 million for the quarter ended
June 30, 2004. The increase of 25% in interest income was attributable to
greater average, outstanding balances in interest earning assets, principally
with respect to loans receivable, in combination with an improved aggregate
asset yield. The Company's average yield on interest earning assets increased
0.48% for the three months ended June 30, 2005 when compared to the three months
ended June 30, 2004.
Interest expense increased by $1.6 million from $3.2 million for the three-month
period ended June 30, 2004, to $4.8 million for the three-month period ended
June 30, 2005. The 49% increase in interest expense was the result of a
combination of greater average, outstanding balances in interest bearing
liabilities, principally with respect to customers' time deposits in subsidiary
banks, in combination with aggregate increased interest rates, principally with
respect to customers' time deposits in subsidiary banks and short-term
borrowings. The Company's average cost of interest bearing liabilities was 2.60%
for the three months ended June 30, 2005, which was an increase of 0.54% when
compared to the three months ended June 30, 2004.
18
At June 30, 2005 and December 31, 2004, the Company had an allowance for
estimated losses on loans of 1.28% and 1.43%, respectively. The provision for
loan losses decreased by $615 thousand from $468 thousand for the three-month
period ended June 30, 2004 to an expense reversal of $147 thousand for the
three-month period ended June 30, 2005. During the second quarter of 2005,
management determined whether monthly provisions for loan losses were warranted
based upon a number of factors, including the increase in loans and a detailed
analysis of the loan portfolio. During the second quarter of 2005, net growth in
the loan portfolio of $21.6 million warranted a $278 thousand provision to the
allowance for loan losses, however this amount was more than offset by $425
thousand of provision reversals attributed to upgrades within the portfolio
during the quarter. The successful resolution of some large credits in Quad City
Bank & Trust's loan portfolio, through payoff, credit upgrade, refinancing, or
the acquisition of additional collateral or guarantees, resulted in reductions
to both provision expense and the level of allowance for loan losses. During the
second quarter of 2004, net growth in the loan portfolio was $30.5 million,
which accounted for the entire provision for loan losses for that period. For
the three months ended June 30, 2005, there were commercial loan charge-offs of
$57 thousand, and there were commercial recoveries of $53 thousand. Consumer
loan charge-offs and recoveries totaled $52 thousand and $40 thousand,
respectively, during the quarter. Credit card loans accounted for 45% of the
second quarter consumer gross charge-offs. Residential real estate loans had $15
thousand of charge-offs with no recoveries for the three months ended June 30,
2005.
Noninterest income of $2.4 million for the three-month period ended June 30,
2005 was a $55 thousand, or 2%, increase from the three-month period ended June
30, 2004. Noninterest income during 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, 2005, when compared to the same quarter in 2004, posted an $82 thousand
increase in fees earned by the merchant credit card operations of Bancard. Trust
department fees improved $112 thousand from the second quarter of 2004 to the
second quarter of 2005. Deposit service fees were down $12 thousand from quarter
to quarter. Gains on the sale of residential real estate mortgage loans, net,
decreased by $55 thousand for the quarter ended June 30, 2005 when compared to
the same quarter in 2004. Additional variations in noninterest income consisted
of a $64 thousand increase in investment advisory and management fees, a $100
thousand decrease in earnings on cash surrender value of life insurance, and an
$8 thousand decrease in other noninterest income. Other noninterest income in
each quarter consisted primarily of income from associated companies, earnings
on other assets, and Visa check card fees.
Merchant credit card fees, net of processing costs for the three months ended
June 30, 2005 increased by 27% to $384 thousand from $302 thousand for the
second quarter of 2004. The increase from year to year was primarily the result
of an increase in credit card processing services provided to cardholders of the
Company's subsidiary ba.ks and agent banks.
For the quarter ended June 30, 2005, trust department fees increased $112
thousand, or 18%, to $720 thousand from $608 thousand for the same quarter in
2004. There was continued development of existing trust relationships and the
addition of new trust customers throughout the past twelve months, as well as an
improvement in market values of securities held in trust accounts, when compared
to one year ago. Each of these factors had a resulting impact on the calculation
of trust department fees.
Deposit service fees decreased $12 thousand, or 3%, to $396 thousand from $408
thousand for the three-month periods ended June 30, 2005 and June 30, 2004,
respectively. This decrease was primarily a result of the reduction in service
fees collected on the noninterest bearing demand deposit accounts at Quad City
Bank & Trust. The balance of consolidated noninterest bearing demand deposits at
June 30, 2005 was down $2.3 million from June 30, 2004. Service charges and NSF
(non-sufficient funds or overdraft) charges related to demand deposit accounts
were the main components of deposit service fees.
Gains on sales of loans, net, were $351 thousand for the three months ended June
30, 2005, which was a decrease of $55 thousand, when compared to $406 thousand
for the three months ended June 30, 2004. Loans originated for sale during the
second quarter of 2005 were $24.2 million and during the second quarter of 2004
were $25.7 million. Proceeds on the sales of loans during the second quarters of
2005 and 2004 were $22.2 million and $26.2 million, respectively.
During the second quarter of 2005, earnings on the cash surrender value of life
insurance decreased $100 thousand, or 72%, to $140 thousand from $240 thousand
for the second quarter of 2004. In February 2004, the Company made significant
investments in bank-owned life insurance (BOLI) on key executives at the two
existing subsidiary banks. Quad City Bank & Trust purchased $8.3 million of
BOLI, and Cedar Rapids Bank & Trust made a purchase of $3.6 million of BOLI.
During the first quarter of 2005, Rockford Bank & Trust purchased $590 thousand
of BOLI.
19
Investment advisory and management fees increased $64 thousand from $136
thousand for the three months ended June 30, 2004 to $200 thousand for the three
months ended June 30, 2005. The 32% increase from year to year was due to the
increased volume of investment services provided by representatives of LPL
Financial Services at the subsidiary banks, primarily at Quad City Bank & Trust.
For the quarter ended June 30, 2005, other noninterest income decreased $8
thousand, or 2%, to $244 thousand from $252 thousand for the same quarter in
2004. The decrease was primarily due to a decrease in income from associated
companies, which was almost entirely offset by an increase in earnings on other
assets. Income from associated companies, earnings on other assets, Visa check
card fees, and ATM fees were primary contributors to other noninterest income
during the second quarter of 2005.
Noninterest expenses for the three months ended June 30, 2005, were $7.4 million
and for the three months ended June 30, 2004, were $5.4 million. For the second
quarter of 2005, noninterest expenses for the new charter at Rockford Bank and
Trust were $566 thousand. The significant 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, 2005 and 2004.
Noninterest Expenses
Three months ended
June 30,
---------------------------------
2005 2004 % change
---------------------------------
Salaries and employee benefits ............. $4,120,478 $3,119,302 32.1%
Professional and data processing fees ...... 824,598 530,826 55.3%
Advertising and marketing .................. 307,584 287,198 7.1%
Occupancy and equipment expense ............ 1,022,246 790,760 29.3%
Stationery and supplies .................... 164,238 132,247 24.2%
Postage and telephone ...................... 198,370 162,779 21.9%
Bank service charges ....................... 139,026 147,401 (5.7)%
Insurance .................................. 153,687 123,073 22.9%
Other ...................................... 513,114 141,994 261.4%
-----------------------
Total noninterest expenses $7,443,341 5,437,580 36.9%
=======================
For the quarter ended June 30, 2005, total salaries and benefits increased to
$4.1 million, which was up $1.0 million from the previous year's quarter total
of $3.1 million. The increase of 32% was primarily due an increase in employees
from 229 full time equivalents (FTEs) to 286 from year-to-year. The staffing of
Rockford Bank & Trust created twelve FTEs and 32% of the increase in total
salaries and benefits. Other noninterest expense increased $371 thousand to $513
thousand for the first quarter of 2005 from $142 thousand for the first quarter
of 2004. The increase was primarily the result of a $238 thousand write-down in
the property value of other real estate owned (OREO) at Quad City Bank & Trust,
in combination with cardholder program expense at Bancard and other loan expense
at the subsidiary banks. Professional and data processing fees experienced a 55%
increase from $531 thousand for the second quarter of 2004 to $825 thousand for
the comparable quarter in 2005. The $294 thousand increase was primarily the
result of legal and other professional fees related to the organization of
Rockford Bank & Trust and legal fees incurred at Quad City Bank & Trust in
foreclosure proceedings with a significant commercial loan customer. Occupancy
and equipment expense increased $231 thousand, or 29%, from quarter to quarter.
The increase was a proportionate reflection of the Company's investment in new
facilities at the subsidiary banks, in combination with the related costs
associated with additional furniture, fixtures and equipment, such as
depreciation, maintenance, utilities, and property taxes. For the quarter ended
June 30, 2005, postage and telephone expense increased to $198 thousand, which
was up $35 thousand from the previous year's quarter total of $163 thousand. The
increase of 22% was primarily due to the Company's additional business resulting
from its investment in four new facilities from June 30, 2004 to June 30, 2005.
The provision for income taxes was $633 thousand for the three-month period
ended June 30, 2005 compared to $822 thousand for the three-month period ended
June 30, 2004 for a decrease of $189 thousand, or 23%. The decrease was the
result of a decrease in income before income taxes of $597 thousand, or 24%, for
the 2005 quarter when compared to the 2004 quarter. Primarily due to a decrease
in the proportionate share of tax-exempt income to total income from year to
year, the Company experienced an increase in the effective tax rate from 33.0%
for the first quarter of 2004 to 33.4% for the first quarter of 2005.
20
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Interest income increased by $4.3 million to $22.2 million for the six-month
period ended June 30, 2005 when compared to $17.9 million for the six months
ended June 30, 2004. The increase of 24% in interest income was attributable to
greater average, outstanding balances in interest earning assets, principally
with respect to loans receivable, in combination with an improved aggregate
asset yield. The Company's average yield on interest earning assets increased
0.33% for the six months ended June 30, 2005 when compared to the six months
ended June 30, 2004.
Interest expense increased by $2.9 million from $6.1 million for the six-month
period ended June 30, 2004, to $9.0 million for the six-month period ended June
30, 2005. The 47% increase in interest expense was the result of a combination
of greater average, outstanding balances in interest bearing liabilities,
principally with respect to customers' time deposits in subsidiary banks, in
combination with aggregate increased interest rates, principally with respect to
customers' time deposits in subsidiary banks and short-term borrowings. The
Company's average cost of interest bearing liabilities was 2.48% for the six
months ended June 30, 2005, which was an increase of 0.42% when compared to the
six months ended June 30, 2004.
At June 30, 2005 and December 31, 2004, the Company had an allowance for
estimated losses on loans of 1.28% and 1.43%, respectively. The provision for
loan losses decreased by $1.2 million from $1.3 million for the six-month period
ended June 30, 2004 to $154 thousand for the six-month period ended June 30,
2005. During the first six months of 2005, management determined whether monthly
provisions for loan losses were warranted based upon a number of factors,
including the increase in loans and a detailed analysis of the loan portfolio.
During the first six months of 2005, net growth in the loan portfolio of $25.9
million warranted a $333 thousand provision to the allowance for loan losses,
however this amount was partially offset by $179 thousand of provision reversals
attributed to upgrades within the portfolio during the period. The successful
resolution of some large credits in Quad City Bank & Trust's loan portfolio,
through payoff, credit upgrade, refinancing, or the acquisition of additional
collateral or guarantees, resulted in reductions to both provision expense and
the level of allowance for loan losses. During the first six months of 2004, net
growth in the loan portfolio was $69.7 million, which accounted for $1.1 million
of the $1.3 million provision for loan losses for that period. For the six
months ended June 30, 2005, there were commercial loan charge-offs of $808
thousand, and there were commercial recoveries of $156 thousand. The charge-off
a single, nonperforming loan at Quad City Bank & Trust for $726 thousand
accounted for 90% of the gross commercial charge-offs. Consumer loan charge-offs
and recoveries totaled $140 thousand and $53 thousand, respectively, during the
period. Credit card loans accounted for 97% of the consumer net charge-offs for
the first six months of 2005. Residential real estate loans had charge-offs of
$15 thousand and no recoveries for the six months ended June 30, 2005.
Noninterest income of $4.9 million for the six-month period ended June 30, 2005
was a $213 thousand, or 5%, increase from $4.7 million for the six-month period
ended June 30, 2004. 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, 2005, when compared to the same period in 2004, posted a $38 thousand
decrease in fees earned by the merchant credit card operations of Bancard. Trust
department fees improved $166 thousand from the first six months of 2004 to the
comparable period in 2005. Deposit service fees were down $39 thousand from
period to period. Gains on the sale of residential real estate mortgage loans,
net, decreased by $63 thousand for the six months ended June 30, 2005 when
compared to the same period in 2004. Additional variations in noninterest income
consisted of a $78 thousand increase in investment advisory and management fees,
a $153 thousand increase in other noninterest income, and a $17 thousand
decrease in earnings on cash surrender value of life insurance. Other
noninterest income in each period consisted primarily of income from associated
companies, earnings on other assets, and Visa check card fees.
21
Merchant credit card fees, net of processing costs for the six months ended June
30, 2005 decreased by 5% to $803 thousand from $841 thousand for the first six
months of 2004. In October 2002, the Company sold Bancard's ISO related merchant
credit card operations to iPayment, Inc., and Bancard's core business focus was
shifted to processing for its agent banks, cardholders, and local merchants.
Through September 2003, Bancard continued to process ISO-related transactions
for iPayment, Inc. for a fixed monthly service fee, which increased as the
temporary processing period was extended. In September 2003, the transfer of the
ISO-related Visa/Mastercard processing activity to iPayment, Inc. was completed
and significantly reduced Bancard's exposure to risk of credit card loss that
the ISO activity carried with it. Bancard had established and carried
ISO-specific reserves, which provided coverage for this exposure. In March 2004,
the Company recognized a recovery of $144 thousand from a reduction in these
ISO-specific reserves. For the first six months of 2004, Bancard's ISO-related
income was $196 thousand, and Bancard's core merchant credit card fees, net of
processing costs were $647 thousand. For the first six months of 2005, Bancard's
core merchant credit card fees, net of processing costs were $803 thousand,
which was an improvement of $156 thousand, or 24%, when compared to the first
six months of 2004. A significant contributor to the increase from year to year
was a reversal of $73 thousand during the first quarter of 2005 from a specific
allocation within the allowance for chargeback losses.
For the six months ended June 30, 2005, trust department fees increased $166
thousand, or 13%, to $1.5 million from $1.3 million for the same period in 2004.
There was continued development of existing trust relationships and the addition
of new trust customers throughout the past twelve months, as well as an
improvement in market values of securities held in trust accounts, when compared
to one year ago. Each of these factors had a resulting impact on the calculation
of trust department fees.
Deposit service fees decreased $39 thousand, or 5%, to $778 thousand from $817
thousand for the six-month periods ended June 30, 2005 and June 30, 2004,
respectively. This decrease was primarily a result of the reduction in service
fees collected on the noninterest bearing demand deposit accounts at Quad City
Bank & Trust. The balance of consolidated noninterest bearing demand deposits at
June 30, 2005 was down $2.3 million from June 30, 2004. Service charges and NSF
(non-sufficient funds or overdraft) charges related to demand deposit accounts
were the main components of deposit service fees.
Gains on sales of loans, net, were $605 thousand for the six months ended June
30, 2005, which was a decrease of $63 thousand, or 9%, when compared to $668
thousand for the six months ended June 30, 2004. Loans originated for sale
during the first six months of 2005 were $42.3 million and during the first six
months of 2004 were $45.9 million. Proceeds on the sales of loans during the
first two quarters of 2005 and 2004 were $40.0 million and $46.0 million,
respectively.
During the first six months of 2005, earnings on the cash surrender value of
life insurance decreased $17 thousand, or 5%, to $319 thousand from $336
thousand for the first six months of 2004. In February 2004, the Company made
significant investments in bank-owned life insurance (BOLI) on key executives at
the two existing subsidiary banks. Quad City Bank & Trust purchased $8.3 million
of BOLI, and Cedar Rapids Bank & Trust made a purchase of $3.6 million of BOLI.
During the first quarter of 2005, Rockford Bank & Trust purchased $590 thousand
of BOLI.
Investment advisory and management fees increased $78 thousand from $262
thousand for the six months ended June 30, 2004 to $340 thousand for the six
months ended June 30, 2005. The 30% increase from year to year was due to the
increased volume of investment services provided by representatives of LPL
Financial Services at the subsidiary banks, primarily at Quad City Bank & Trust.
For the six months ended June 30, 2005, other noninterest income increased $153
thousand, or 31%, to $652 thousand from $499 thousand for the same period in
2004. The increase was primarily due to income from associated companies. During
the first quarter of 2005, one of the Company's associated companies, Nobel
Electronic Transfer, LLC, completed a large, one-time sales transaction, which
contributed $219 thousand to other noninterest income. Income from associated
companies, earnings on other assets, Visa check card fees, and ATM fees were
primary contributors to other noninterest income during the first six months of
2005.
Noninterest expenses for the six months ended June 30, 2005, were $14.2 million
and for the six months ended June 30, 2004, were $11.5 million. For the first
six months of 2005, noninterest expenses for the new charter at Rockford Bank
and Trust were $1.1 million. The significant components of noninterest expenses
were salaries and benefits, occupancy and equipment expenses, and professional
and data processing fees, for both periods. During the first quarter of 2004,
there was also a significant loss on the redemption of junior subordinated
debentures.
22
The following table sets forth the various categories of noninterest expenses
for the six months ended June 30, 2005 and 2004.
Noninterest Expenses
Six months ended
June 30,
------------------------------------------
2005 2004 % change
------------------------------------------
Salaries and employee benefits ..................... $ 8,016,845 $ 6,271,103 27.8%
Professional and data processing fees .............. 1,437,394 996,102 44.3%
Advertising and marketing .......................... 567,763 500,990 13.3%
Occupancy and equipment expense .................... 1,998,199 1,521,750 31.3%
Stationery and supplies ............................ 312,016 269,192 15.9%
Postage and telephone .............................. 394,685 329,059 19.9%
Bank service charges ............................... 257,499 285,243 (9.7)%
Insurance .......................................... 306,842 225,567 36.0%
Loss on redemption of junior subordinated debentures 0 747,490 (100.0%)
Other .............................................. 904,803 380,172 138.0%
---------------------------
Total noninterest expenses ................. $ 14,196,046 $ 11,526,668 23.2%
===========================
The six months ended June 30, 2004 reflected a $747 thousand loss on the
redemption of trust preferred securities at their earliest call date of June 30,
2004. For the six months ended June 30, 2005, total salaries and benefits
increased to $8.0 million, which was up $1.7 million from the previous year's
period total of $6.3 million. The increase of 28% was primarily due to the
Company's increase in compensation and benefits related to an increase in
employees from 229 full time equivalents (FTEs) to 286 from year-to-year. The
staffing of Rockford Bank & Trust created twelve FTEs and 37% of the increase in
total salaries and benefits. Other noninterest expense increased $525 thousand
to $905 thousand for the first six months of 2005 from $380 thousand for the
first six months of 2004. The increase was primarily the result of $288 thousand
of write-downs on the property value of other real estate owned (OREO) at Quad
City Bank & Trust, $93 thousand of other expense incurred on OREO property, $59
thousand of cardholder program expense at Bancard and other loan expense at the
subsidiary banks. Occupancy and equipment expense increased $476 thousand, or
31%, from year to year. The increase was a proportionate reflection of the
Company's investment in new facilities at the subsidiary banks, in combination
with the related costs associated with additional furniture, fixtures and
equipment, such as depreciation, maintenance, utilities, and property taxes.
Professional and data processing fees experienced a 44% increase from $996
thousand for the first six months of 2004 to $1.4 million for the comparable
period in 2005. The $441 thousand increase was primarily the result of legal and
other professional fees related to the organization of Rockford Bank & Trust,
legal fees incurred at Quad City Bank & Trust in foreclosure proceedings with a
significant commercial loan customer, and increased data processing fees at the
subsidiary banks. For the six months ended June 30, 2005, insurance expense
increased to $307 thousand, which was up $81 thousand from the previous year's
six-month total of $226 thousand. The increase of 36% was primarily due to the
Company's $9.5 million increased investment in premises and equipment, net, from
June 30, 2004 to June 30, 2005.
The provision for income taxes was $1.3 million for the six-month period ended
June 30, 2005 compared to $1.2 million for the six-month period ended June 30,
2004 for an increase of $86 thousand, or 7%. The increase was the result of an
increase in income before income taxes of $165 thousand, or 4%, for the 2005
period when compared to the 2004 period. Primarily due to a decrease in the
proportionate share of tax-exempt income to total income from year to year, the
Company experienced an increase in the effective tax rate from 31.9% for the
first six months of 2004 to 32.8% for the first six months of 2005.
FINANCIAL CONDITION
Total assets of the Company increased by $50.0 million, or 6%, to $920.1 million
at June 30, 2005 from $870.1 million at December 31, 2004. The growth resulted
primarily from increases in Federal funds sold, the loan portfolio and in
premises and equipment, net, funded by Federal Home Loan Bank advances,
interest-bearing deposits and short-term borrowings.
Cash and due from banks increased by $5.2 million, or 24%, to $26.6 million at
June 30, 2005 from $21.4 million at December 31, 2004. Cash and due from banks
represented both cash maintained at its subsidiary banks, as well as funds that
the Company and its banks had deposited in other banks in the form of
non-interest bearing demand deposits.
23
Federal funds sold are inter-bank funds with daily liquidity. At June 30, 2005,
the subsidiary banks had $10.5 million invested in such funds. This amount
increased by $7.6 million, or 263%, from $2.9 million at December 31, 2004. The
increase was primarily a result of an increased demand for Federal fund
purchases by Quad City Bank & Trust's downstream correspondent banks.
Interest bearing deposits at financial institutions decreased by $2.3 million,
or 58%, to $1.6 million at June 30, 2005 from $3.9 million at December 31, 2004.
Included in interest bearing deposits at financial institutions are demand
accounts, money market accounts, and certificates of deposit. The decrease was
the result of decreases in money market accounts of $1.3 million and maturities
of certificates of deposit totaling $560 thousand, in combination with a
decrease in demand account balances of $398 thousand.
Securities increased by $4.4 million, or 3%, to $154.0 million at June 30, 2005
from $149.6 million at December 31, 2004. The increase was the result of a
number of transactions in the securities portfolio. Paydowns of $613 thousand
were received on mortgage-backed securities, and the amortization of premiums,
net of the accretion of discounts, was $315 thousand. Maturities and calls of
securities occurred in the amount of $28.5 million, and the portfolio
experienced a decrease in the fair value of securities, classified as available
for sale, of $851 thousand. These portfolio decreases were offset by the
purchase of an additional $34.7 million of securities, classified as available
for sale.
Total gross loans receivable increased by $25.9 million, or 4%, to $674.3
million at June 30, 2005 from $648.4 million at December 31, 2004. The increase
was the result of originations, renewals, additional disbursements or purchases
of $262.7 million of commercial business, consumer and real estate loans, less
loan charge-offs, net of recoveries, of $754 thousand, and loan repayments or
sales of loans of $236.1 million. During the six months ended June 30, 2005,
Quad City Bank & Trust contributed $161.4 million, or 61%, Cedar Rapids Bank &
Trust contributed $71.3 million, or 33%, and Rockford Bank & Trust contributed
$3.6 million, or 6%, of the Company's loan originations, renewals, additional
disbursements or purchases. The mix of loan types within the Company's portfolio
at June 30, 2005 reflected 81% commercial, 10% real estate and 9% consumer
loans. The majority of residential real estate loans originated by the Company
were sold on the secondary market to avoid the interest rate risk associated
with long term fixed rate loans. Loans originated for this purpose were
classified as held for sale.
The allowance for estimated losses on loans was $8.7 million at June 30, 2005
compared to $9.3 million at December 31, 2004, a decrease of $600 thousand, or
6%. The allowance for estimated losses on loans was determined based on factors
that included the overall composition of the loan portfolio, types of loans,
past loss experience, loan delinquencies, potential substandard and doubtful
credits, economic conditions, collateral positions, governmental guarantees and
other factors that, in management's judgement, deserved evaluation. To ensure
that an adequate allowance was maintained, provisions were made based on a
number of factors, including the increase in loans and a detailed analysis of
the loan portfolio. The loan portfolio was reviewed and analyzed monthly
utilizing the percentage allocation method. In addition, specific reviews were
completed each month on all loans risk-rated as "criticized" credits. 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, 2005 was at a level adequate to absorb losses on existing loans, there
can be no assurance that such losses will not exceed the estimated amounts or
that the Company will not be required to make additional provisions for loan
losses in the future. Unpredictable future events could adversely affect cash
flows for both commercial and individual borrowers, as a result of which, the
Company could experience increases in problem assets, delinquencies and losses
on loans, and require further increases in the provision. Asset quality is a
priority for the Company and its subsidiaries. The ability to grow profitably is
in part dependent upon the ability to maintain that quality. The Company
continually focuses efforts at its subsidiary banks with the intention to
improve the overall quality of the Company's loan portfolio.
Net charge-offs for the six months ended June 30 were $754 thousand in 2005 and
$222 thousand in 2004. One measure of the adequacy of the allowance for
estimated losses on loans is the ratio of the allowance to the gross loan
portfolio. The allowance for estimated losses on loans as a percentage of gross
loans was 1.28% at June 30, 2005 and 1.65% at June 30, 2004.
At June 30, 2005, total nonperforming assets were $8.0 million compared to $10.7
million at December 31, 2004. The $2.7 million decrease was the result of a $2.4
million decrease in nonaccrual loans and a decrease of $523 thousand in other
real estate owned, partially offset by an increase of $217 thousand in accruing
loans past due 90 days or more.
24
Nonaccrual loans were $5.2 million at June 30, 2005 compared to $7.6 million at
December 31, 2004, a decrease of $2.4 million. The decrease in nonaccrual loans
was comprised of decreases in commercial loans of $2.2 million and real estate
loans of $248 thousand, and an increase in consumer loans of $29 thousand. Four
large commercial lending relationships at Quad City Bank & Trust, with an
aggregate outstanding balance of $4.1 million, comprised 78% of the nonaccrual
loans at June 30, 2005. The existence of either a strong collateral position, a
governmental guarantee, or an improved payment status on several of the
nonperformers significantly reduces the Company's exposure to loss. Quad City
Bank & Trust continues to work for resolutions with all of these customers.
Management is continually monitoring the Company's loan portfolio and the level
of the allowance for loan losses. The allowance for loan losses to total loans
was 1.28% at June 30, 2005. Management's efforts are ongoing to improve the
overall quality of the loan portfolio. Nonaccrual loans represented
approximately one percent of the Company's held for investment loan portfolio at
June 30, 2005.
From December 31, 2004 to June 30, 2005, accruing loans past due 90 days or more
increased from $1.1 million to $1.3 million. Six significant lending
relationships at Quad City Bank & Trust comprised $954 thousand, or 71%, of this
balance at June 30, 2005. By mid July, three of these relationships totaling
$466 thousand had become current with their payments.
Premises and equipment increased by $5.4 million, or 30%, to $23.5 million at
June 30, 2005 from $18.1 million at December 31, 2004. During the six-month
period there were purchases of additional land, furniture, fixtures and
equipment and leasehold improvements of $6.3 million, which were partially
offset by depreciation expense of $893 thousand.
In September 2003, the Company announced plans for a fifth Quad City Bank &
Trust banking facility, to be located in west Davenport at Five Points. Total
costs were approximately $3.6 million, when the facility was completed and began
operations in March 2005. In February 2004, Cedar Rapids Bank & Trust announced
plans to build a facility in downtown Cedar Rapids. The Bank's main office was
relocated to this site on July 5, 2005. Costs for this facility during the first
six months of 2005 were $2.9 million, and total costs for this project to date
are $5.6 million. Total costs for this facility are projected to be $6.9
million. Cedar Rapids Bank & Trust also completed construction of a branch
office located on Council Street, which opened for business on June 2, 2005. The
Company has incurred costs for this project of $1.6 million during the first six
months of 2005 and $2.3 million to date. Total costs for this facility are
projected to be $2.3 million. During the first six months of 2005, costs
associated with the establishment of the full-service banking facility in leased
space in downtown Rockford, which opened as the Company's third bank charter on
January 3rd, were $273 thousand, and total costs were $486 thousand. Rockford
Bank & Trust is moving forward with plans for a second banking facility, which
will initially be located in a leased, modular building, subject to zoning and
regulatory approval. During the first six months of 2005, this project's costs
were $25 thousand.
Accrued interest receivable on loans, securities and interest-bearing deposits
with financial institutions increased by $166 thousand, or 4%, to $4.2 million
at June 30, 2005 from $4.1 million at December 31, 2004.
Bank-owned life insurance (BOLI) increased by $909 thousand from $15.9 million
at December 31, 2004 to $16.8 million at June 30, 2005. Banks may generally buy
BOLI as a financing or cost recovery vehicle for pre-and post-retirement
employee benefits. During 2004, the subsidiary banks purchased $8.0 million of
insurance to finance the expenses associated with the establish-ent of
supplemental retirement benefits plans for the executive officers. In addition,
the subsidiary banks purchased life insurance totaling $4.2 million on the lives
of a number of senior management personnel for the purpose of funding the
expenses of new deferred compensation arrangements for senior officers. During
the first quarter of 2005, Rockford Bank & Trust purchased $590 thousand of
BOLI. Benefit expense associated with both the supplemental retirement benefits
and deferred compensation arrangements was $88 thousand and $84 thousand,
respectively, for the six months ended June 30, 2005. These purchases in 2004,
combined with the previously purchased bank-owned life insurance, resulted in
Quad City Bank & Trust and Cedar Rapids Bank & Trust each holding investments in
bank-owned life insurance policies near the regulatory maximum of 25% of
capital. The banks monitor the risks associated with these holdings, including
diversification, lending-limit, concentration, interest rate risk, credit risk,
and liquidity. Earnings on BOLI totaled $319 thousand for the first six months
of 2005.
25
Other assets increased by $2.0 million, or 13%, to $17.2 million at June 30,
2005 from $15.2 million at December 31, 2004. Other assets included $8.4 million
of equity in Federal Reserve Bank and Federal Home Loan Bank stock, $3.0 million
of deferred tax assets, $1.4 million in other real estate owned (OREO), $1.1
million in investments in unconsolidated companies, $600 thousand of accrued
trust department fees, $409 thousand of unamortized prepaid trust preferred
securities offering expenses, $517 thousand of prepaid Visa/Mastercard
processing charges, other miscellaneous receivables, and various prepaid
expenses. During the second half of 2004, the Company accumulated OREO from four
credit relationships at the subsidiary banks, which totaled $1.9 million at
December 31, 2004. During the first quarter of 2005, one of these OREO
properties was sold for $301 thousand at a minimal gain, and during the first
six months of 2005, two of the property values were written down $288 thousand
in aggregate.
Deposits increased by $7.7 million, or slightly more than 1%, to $595.7 million
at June 30, 2005 from $588.0 million at December 31, 2004. The modest increase
resulted from an $11.8 million aggregate net increase in money market, savings,
and total transaction accounts offset by a $4.1 million net decrease in
interest-bearing certificates of deposit. The subsidiary banks experienced a net
increase in brokered certificates of deposit of $5.2 million during the first
six months of 2005.
Short-term borrowings increased $7.6 million, or 7%, from $104.8 million at
December 31, 2004 to $112.4 million at June 30, 2005. The subsidiary banks offer
short-term repurchase agreements to some of their major customers. Also, on
occasion, the subsidiary banks purchase Federal funds for short-term funding
needs from the Federal Reserve Bank, or from their correspondent banks. As a
result of the $50.0 million increase in assets during the first six months of
2005, primarily in the loan and securities portfolios, and the lagging growth in
deposits, the subsidiary banks utilized additional short-term borrowings.
Short-term borrowings were comprised of customer repurchase agreements of $56.6
million and $47.6 million at June 30, 2005 and December 31, 2004, respectively,
as well as federal funds purchased of $55.8 million at June 30, 2005 and $57.2
million at December 31, 2004.
Federal Home Loan Bank advances increased by $26.1 million, or 28%, to $118.1
million at June 30, 2005 from $92.0 million at December 31, 2004. As a result of
their memberships in either the FHLB of Des Moines or Chicago, the subsidiary
banks have the ability to borrow funds for short or long-term purposes under a
variety of programs. FHLB advances are utilized for loan matching as a hedge
against the possibility of rising interest rates, and when these advances
provide a less costly or more readily available source of funds than customer
deposits.
Other borrowings were $6.0 million at both June 30, 2005 and December 31, 2004.
In June 2004, the Company drew an advance of $7.0 million on a line of credit at
an upstream correspondent bank as partial funding for the early redemption of
$12.0 million in trust preferred securities, which had been issued in 1999. In
December 2004, the Company made a payment to reduce the balance by $1.0 million.
In January 2005, the Company drew an additional $5.0 million advance as partial
funding for the initial capitalization of Rockford Bank & Trust. In May 2005,
with proceeds from the issuance of the trust preferred securities of Trust IV,
the Company made a payment to reduce the balance on the line of credit by $5.0
million.
Junior subordinated debentures increased $5.2 million, or 25%, to $25.8 million
at June 30, 2005 from $20.6 million at December 31, 2004. In June 1999, the
Company issued $12.0 million of trust preferred securities through a newly
formed subsidiary, Trust I. The Company redeemed these securities on June 30,
2004. In February 2004, the Company formed two new subsidiaries and issued, in a
private transaction, $12.0 million of fixed rate trust preferred securities and
$8.0 million of floating rate trust preferred securities of Trust II and Trust
III, respectively. Trust II and Trust III used the proceeds from the sale of the
trust preferred securities, along with the funds from their equity, to purchase
junior subordinated debentures of the Company in the amounts of $12.4 million
and $8.2 million, respectively. On May 5, 2005, the Company announced the
issuance of $5.0 million of floating rate capital securities of QCR Holdings
Statutory Trust IV. Trust IV used the $5.0 million of proceeds from the sale of
the Trust Preferred Securities, in combination with $155 thousand of proceeds
from its equity, to purchase $5.2 million of junior subordinated debentures of
the Company.
Other liabilities were $9.2 million at June 30, 2005, up $1.3 million, or 16%,
from $7.9 million at December 31, 2004. Other liabilities were comprised of
unpaid amounts for vari/us products and services, and accrued but unpaid
interest on deposits. At June 30, 2005, the most significant components of other
liabilities were $3.6 million of accrued expenses, $2.3 million of accounts
payable, and $1.8 million of interest payable.
Common stock, at both June 30, 2005 and December 31, 2004, was $4.5 million. The
slight increase of $23 thousand was the result of stock issued from the net
exercise of stock options and stock purchased under the employee stock purchase
plan.
26
Additional paid-in capital totaled $20.6 million at June 30, 2005, up $270
thousand, or 1%, from $20.3 million at December 31, 2004. The increase resulted
from the proceeds received in excess of the $1.00 per share par value for the
22,829 shares of common stock issued as the result of the net exercise of stock
options and stock purchased under the employee stock purchase plan.
Retained earnings increased by $2.4 million, or 10%, to $27.7 million at June
30, 2005 from $25.3 million at December 31, 2004. The increase reflected net
income for the six-month period net of $180 thousand representing the four-cent
per share dividend, which was declared in May and paid in July 2005.
Unrealized gains on securities available for sale, net of related income taxes,
totaled $137 thousand at June 30, 2005 as compared to $669 thousand at December
31, 2004. The decrease in gains of $532 thousand was attributable to decreases
during the period in fair value of the securities identified as available for
sale, primarily due to a rise in interest rates.
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customers' credit needs. The liquidity of the
Company primarily depends upon cash flows from operating, investing, and
financing activities. Net cash provided by operating activities, consisting
primarily of proceeds on sales of loans, was $847 thousand for the six months
ended June 30, 2005 compared to $2.8 million net cash provided by operating
activities for the same period in 2004. Net cash used in investing activities,
consisting principally of purchases of available for sale securities, was $42.2
million for the six months ended June 30, 2005 and $94.0 million, consisting
primarily of loan originations to be held for investment, for the six months
ended June 30, 2004. Net cash provided by financing activities, consisting
primarily of proceeds from Federal Home Loan Bank advances, for the six months
ended June 30, 2005 was $46.5 million, and for the same period in 2004 was $98.8
million, consisting principally of funds from short-term borrowings.
The Company has a variety of sources of short-term liquidity available to it,
including federal funds purchased from correspondent banks, sales of securities
available for sale, FHLB advances, lines of credit and loan participations or
sales. At both June 30, 2005 and December 31, 2004, the subsidiary banks had
fourteen lines of credit totaling $99.5 million, of which $13.0 million was
secured and $86.5 million was unsecured. At June 30, 2005, Quad City Bank &
Trust had drawn $30.5 million of their available balance of $83.0 million, and
Cedar Rapids Bank & Trust had drawn none of their available balance of $16.5
million. At December 31, 2004, Quad City Bank & Trust had drawn $21.1 million of
their available balance of $83.0 million. As of both June 30, 2005 and December
31, 2004, the Company had two unsecured revolving credit notes totaling $15.0
million in aggregate, replacing a single note of $15.0 million previously held.
The Company had a 364-day revolving note, which matures December 29, 2005, for
$10.0 million and had a balance outstanding of $1.0 million at June 30, 2005 and
$6.0 million at December 31, 2004. The Company also had a 3-year revolving note,
which matures December 30, 2007, for $5.0 million and carried no balance as of
December 31, 2004. On January 3, 2005, the 3-year note was fully drawn as
partial funding for the capitalization of Rockford Bank & Trust. For both notes,
interest is payable monthly at the Federal Funds rate plus 1% per annum, as
defined in the credit agreements. As of December 31, 2004, the interest rate on
the 364-day note was 3.23%. At June 30, 2005, the interest rate on both notes
was 4.17%.
On February 18, 2004, the Company issued $12.0 million of fixed/floating rate
capital securities and $8.0 million of floating rate capital securities. The
securities represent undivided beneficial interests in Trust II and Trust III,
which were established by the Company for the purpose of issuing the trust
preferred securities. The securities issued by Trust II and Trust III mature in
thirty years. The fixed/floating rate capital securities are callable at par
after seven years, and the floating rate capital securities are callable at par
after five years. The fixed/floating rate capital securities have a fixed rate
of 6.93%, payable quarterly, for seven years, at which time they have a variable
rate based on the three-month LIBOR, reset quarterly, and the floating rate
capital securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the rate currently set at 6.34%. Trust II and Trust III used the
proceeds from the sale of the trust preferred securities, along with the funds
from their equity, to purchase junior subordinated debentures of the Company in
the amounts of $8.2 million and $12.4 million, respectively. The Company
incurred issuance costs of $429 thousand, which are being amortized over the
lives of the securities.
27
The Company used the net proceeds for general corporate purposes, which included
a net paydown of $3.0 million on the balance of the Company's unsecured
revolving credit note, an infusion of $3.0 million to Cedar Rapids Bank & Trust
for capital maintenance purposes, and an infusion of $1.0 million to Quad City
Bank & Trust for capital maintenance purposes. Management's primary use for the
balance of the proceeds was the redemption, in June 2004, of the $12.0 million
of 9.2% cumulative trust preferred securities issued by Trust I in 1999. Based
on this intended redemption, $747 thousand of unamortized issuance costs related
to the trust preferred securities of Trust I were expensed in March 2004.
On May 5, 2005, the Company announced the issuance of $5.0 million of floating
rate capital securities of QCR Holdings Statutory Trust IV. The securities
represent the undivided beneficial interest in Trust IV, which was established
by the Company for the sole purpose of issuing the Trust Preferred Securities.
The securities issued by Trust IV mature in thirty years, but are callable at
par after five years. The Trust Preferred Securities have a variable rate based
on the three-month LIBOR, reset quarterly, with the current rate set at 5.40%.
Interest is payable quarterly. Trust IV used the $5.0 million of proceeds from
the sale of the Trust Preferred Securities, in combination with $155 thousand of
proceeds from its own equity, to purchase $5.2 million of junior subordinated
debentures of the Company. The Company will treat these new issuances as Tier 1
capital for regulatory capital purposes, subject to current established
limitations. The Company incurred no issuance costs as a result of the
transaction. The Company used its net proceeds for general corporate purposes,
including the paydown of its other borrowings.
On April 28, 2005, the Company declared a cash dividend of $0.04 per share, or
$180 thousand, which was paid on July 6, 2005, to stockholders of record on June
15, 2005. It is the Company's intention to consider the payment of dividends on
a semi-annual basis. The Company anticipates an ongoing need to retain much of
its operating income to help provide the capital for continued growth, however
it believes that operating results have reached a level that can sustain
dividends to stockholders as well.
RECENT REGULATORY DEVELOPMENTS
Effective April 11, 2005, the Board of Governors of the Federal Reserve System
amended the risk-based capital standards for bank holding companies to allow the
continued inclusion of outstanding and prospective issuances of trust preferred
securities in the Tier 1 capital of bank holding companies, subject to stricter
standards. The new regulations limit the amount of trust preferred securities
(combined with all other restricted core capital elements) that a bank holding
company may include as Tier 1 capital to 25% of the sum of all core capital
elements, net of goodwill less any associated deferred tax liability. Amounts in
excess of the limits described above generally may be included in Tier 2
capital. The regulations also provide a transition period for bank holding
companies to conform their capital structures to the revised quantitative
limits. These limits will first become applicable to bank holding companies
beginning on March 31, 2009. At this time, due to the absence of goodwill on the
Company's balance sheet, management does not expect these new regulatory limits
to have a material impact on the Company's capital structure.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document contains, and future oral and written statements of the
Company and its management may contain, forward-looking statements, within the
meaning of such term in the Private Securities Litigation Reform Act of 1995,
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of the Company. Forward-looking
statements, which may be based upon beliefs, expectations and assumptions of the
Company's management and on information currently available to management, are
generally identifiable by the use of words such as "believe," "expect,"
"anticipate," "bode," "predict," "suggest," "project," "appear," "plan,"
"intend," "estimate," "may," "will," "would," "could," "should," "likely" or
other similar expressions. Additionally, all statements in this document,
including forward-looking statements, speak only as of the date they are made,
and the Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
28
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
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.
29
Interest rate risk management focuses on maintaining consistent growth in net
interest income within policy limits approved by the board of directors, while
taking into consideration, among other factors, the Company's overall credit,
operating income, operating cost, and capital profile. The subsidiary banks'
ALM/Investment Committees, which includes senior management representatives and
members of the board of directors, monitor and manage interest rate risk to
maintain an acceptable level of change to net interest income as a result of
changes in interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk
summary, which is a detailed and dynamic simulation model used to quantify the
estimated exposure of net interest income to sustained interest rate changes.
This simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all interest sensitive
assets and liabilities reflected on the Company's consolidated balance sheet.
This sensitivity analysis demonstrates net interest income exposure over a one
year horizon, assuming no balance sheet growth and a 200 basis point upward and
a 100 basis point downward shift in interest rates, where interest-bearing
assets and liabilities reprice at their earliest possible repricing date. The
model assumes a parallel and pro rata shift in interest rates over a
twelve-month period. Application of the simulation model analysis at March 31,
2005 demonstrated a 1.85% decrease in interest income with a 200 basis point
increase in interest rates, and a 3.70% decrease in interest income with a 100
basis point decrease in interest rates. Both simulations are within the
board-established policy limits of a 10% decline in value.
Part I
Item 4
CONTROLS AND PROCEDURES
Evaluation of disclosure 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, 2005. Based on that
evaluation, the Company's management, including the Chief Executive Officer and
Chief Financial Officer, concluded that the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed in
the reports filed and submitted under the Securities Exchange Act of 1934 was
recorded, processed, summarized and reported as and when required.
Limitations on the Effectiveness of Controls. It should be noted that any system
of controls and procedures, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system are
met. There are inherent limitations to the effectiveness of all control systems,
including the possibility of human error and the circumvention or overriding of
the controls and procedures. Therefore, even effective systems of controls and
procedures can provide only reasonable assurances of achieving their control
objectives. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting. The Company is currently
undergoing a comprehensive effort to ensure compliance with the requirements
under Section 404 of the Sarbanes-Oxley Act of 2002. As a result, enhancements
to the Company's internal controls over financial reporting are being or have
been implemented. During the second quarter of 2005, the Company implemented a
comprehensive Reconciliation and Account Certification Policy, which guides a
semi-centralized process up through the Company ending with a consolidated
reporting package for the Chief Financial Officer. At June 30, 2005, the Company
had not fully completed its evaluation nor had all control enhancements been
completed. Other than changes as described above, there have been no changes to
the Company's internal control over financial reporting during the period
covered by this report that have materially effected, or are reasonably likely
to affect the Company's internal control over financial reporting.
30
Part II
QCR HOLDINGS, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held at The Lodge located at 900 Spruce
Hills Drive, Bettendorf, Iowa on Wednesday, May 4, 2005 at 10:00 a.m. At the
meeting, Patrick S. Baird, John K. Lawson, and Ronald G. Peterson were
re-elected to serve as Class III directors, with terms expiring in 2008.
Continuing as Class I directors, with terms expiring in 2006, are Michael A.
Bauer, James J. Brownson, and Henry Royer. Continuing as Class II directors,
with terms expiring in 2007, are Larry J. Helling, Douglas M. Hultquist, and
Mark Kilmer. Also, at the meeting stockholders approved the QCR Holdings, Inc.
2005 Deferred Income Plan.
There were 4,509,622 issued and outstanding shares of common stock entitled to
vote at the annual meeting. Either in person or by proxy, there were 3,995,645
common shares represented at the meeting, constituting approximately 88.6% of
the outstanding shares. The voting was as follows:
Votes Votes
For Withheld
-----------------------------
Patrick S. Baird ....................... 3,988,870 6,775
John K. Lawson ......................... 3,982,183 13,462
Ronald G. Peterson ..................... 3,987,917 7,728
Votes Votes Votes
For Against Abstained
---------------------------------------
2005 Deferred Income Plan .......... 2,327,057 338,318 42,115
Item 5 Other Information
None
Item 6 Exhibits
(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.
31
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 9, 2005 /s/ Michael A. Bauer
----------------------------------------
Michael A. Bauer, Chairman
Date August 9, 2005 /s/ Douglas M. Hultquist
----------------------------------------
Douglas M. Hultquist, President
Chief Executive Officer
Date August 9, 2005 /s/ Todd A. Gipple
----------------------------------------
Todd A. Gipple, Executive Vice President
Chief Financial Officer
32