U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
Commission file number: 0-22208
QCR HOLDINGS, INC.
(F/K/A QUAD CITY HOLDINGS, INC.)
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(Exact name of registrant as specified in its charter)
Delaware 42-1397595
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(State of incorporation) (I.R.S. Employer Identification No.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
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Common stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of the voting common stock held by non-affiliates as
of August 21, 2002 was approximately $35,500,000. As of August 21, 2002, the
issuer had 2,749,447 shares of common stock outstanding.
Documents incorporated by reference:
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Part III of Form 10-K - Proxy statement for annual meeting of stockholders
to be held in October 2002.
1
Part I
Item 1. Business
General. QCR Holdings, Inc. (the "Company") is a multi-bank holding company
headquartered in Moline, Illinois that was formed in February 1993 under the
laws of the state of Delaware. The Company serves the Quad City and Cedar Rapids
communities. Its wholly owned subsidiaries, Quad City Bank and Trust Company,
("Quad City Bank & Trust") which is based in Bettendorf, Iowa and commenced
operations in 1994, and Cedar Rapids Bank and Trust Company, ("Cedar Rapids Bank
& Trust") which is based in Cedar Rapids, Iowa and commenced operations in 2001,
provide full-service commercial and consumer banking and trust and asset
management services. The Company also engages in merchant credit card processing
through its wholly owned subsidiary, Quad City Bancard, Inc., based in Moline,
Illinois. At the annual stockholders meeting held on October 24, 2001, the name
of the Company was changed to QCR Holdings, Inc., effective November 1, 2001.
Quad City Bank & Trust was capitalized on October 13, 1993 and commenced
operations on January 7, 1994. Quad City Bank & Trust is organized as an
Iowa-chartered commercial bank that is a member of the Federal Reserve System
with depository accounts insured to the maximum amount permitted by law by the
Federal Deposit Insurance Corporation. Quad City Bank & Trust provides full
service commercial and consumer banking, and trust and asset management services
in the Quad Cities and adjacent communities through its four offices that are
located in Bettendorf and Davenport, Iowa and in Moline, Illinois.
Cedar Rapids Bank and Trust Company is an Iowa-chartered commercial bank that is
a member of the Federal Reserve System with depository accounts insured to the
maximum amount permitted by law by the Federal Deposit Insurance Corporation.
The Company commenced operations in Cedar Rapids in June 2001 operating as a
branch of Quad City Bank & Trust. The Cedar Rapids branch operation then began
functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar
Rapids Bank & Trust provides full-service commercial and consumer banking
service to Cedar Rapids and adjacent communities through its office located in
the GreatAmerica Building in downtown Cedar Rapids, Iowa.
Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a
Delaware corporation that provides merchant credit card processing services.
This operation had previously been a division of Quad City Bank & Trust since
July 1994. Currently, approximately 23,700 merchants process transactions with
Bancard.
On March 29, 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), which generates merchant
credit card processing business. Bancard owns 100% of Allied.
QCR Holdings Capital Trust I ("Capital Trust") was formed in April 1999 and
capitalized in June 1999 in connection with the public offering of $12 million
of 9.2% trust preferred capital securities due June 30, 2029, which are callable
on June 30, 2004.
The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust, and
Bancard and 100% of the common securities of Capital Trust, and in addition to
such ownership invests its capital in stocks of financial institutions and
mutual funds, as well as participates in loans with Quad City Bank & Trust. In
addition, to its wholly- owned subsidiaries, the Company has an aggregate
investment of $255 thousand in four associated companies, Nobel Electronic
Transfer, LLC, Nobel Real Estate Investors, LLC, Velie Plantation Holding
Company, LLC and Clarity Merchant Services. Inc.
The Company and its subsidiaries collectively employed 208 individuals at June
30, 2002. No one customer accounts for more than 10% of revenues, loans or
deposits. In August 2002, the Company's board of directors elected to change the
Company's fiscla year end from June 30 to December 31. Because of this change,
the Company will file a Form 10-K for the transition period between July 1, 2002
and December 31, 2002 and it will hold its annual meetings in April of each year
instead of October. Therefore, after the 2002 annual meeting of stockholders
being held on October 23, 2002, the 2003 annual meeting will be held in April
2003. The Company's subsidiaries are also expected to change their fiscal years
to align their financial reporting with the Company's.
2
Competition. The Company currently has most of its operations in the highly
competitive environment of the Quad Cities area. The Cedar Rapids market is also
highly competitive with respect to financial services. Competitors include not
only other commercial banks, credit unions, thrift institutions, and mutual
funds, but also, insurance companies, finance companies, brokerage firms,
investment banking companies, and a variety of other financial services and
advisory companies. Many of these competitors are not subject to the same
regulatory restrictions as the Company. Many of these unregulated competitors
compete across geographic boundaries and provide customers increasing access to
meaningful alternatives to banking services. Additionally, the Company competes
in markets with a number of much larger financial institutions with
substantially greater resources and larger lending limits. These competitive
trends are likely to continue and may increase as a result of the continuing
reduction on restrictions on the interstate operations of financial
institutions. Under the Gramm-Leach-Bliley Act of 1999, effective in March of
2000, securities firms and insurance companies that elect to become financial
holding companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act may significantly change the competitive environment in
which the Company and its subsidiary banks conduct business. The financial
services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") regulates the Company and its subsidiaries. In addition, Quad City Bank
& Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent
of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance
Corporation (the "FDIC").
Business. The Company's principal business consists of attracting deposits from
the public and investing those deposits in loans and securities. The deposits of
Quad City Bank & Trust and Cedar Rapids Bank & Trust are insured to the maximum
amount allowable by the FDIC. The Company's results of operations are dependent
primarily on net interest income, which is the difference between the interest
earned on its loans and securities and the interest paid on deposits and
borrowings. Its operating results are affected by merchant credit card fees,
trust fees, deposit service charge fees, fees from the sales of residential real
estate loans and other income. Operating expenses include employee compensation
and benefits, occupancy and equipment expense, professional and data processing
fees, advertising and marketing expenses and other administrative expenses. The
Company's operating results are also affected by economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
Lending. The Company and its subsidiaries provide a broad range of commercial
and retail lending and investment services to corporations, partnerships,
individuals and government agencies. Quad City Bank & Trust and Cedar Rapids
Bank & Trust actively market their services to qualified lending customers.
Lending officers actively solicit the business of new borrowers entering their
market areas as well as long-standing members of the local business community.
The subsidiary banks have established lending policies which include a number of
underwriting factors to be considered in making a loan, including location, loan
to value ratio, cash flow, interest rate and the credit history of the borrower.
Quad City Bank & Trust's current lending limit is approximately $5.7 million.
Its loan portfolio is comprised primarily of loans in the areas of commercial,
residential real estate and consumer lending. As of June 30, 2002, commercial
loans made up approximately 77% of the loan portfolio, while residential
mortgages comprised approximately 12% and consumer lending comprised 11%.
Cedar Rapids Bank & Trust's current lending limit is approximately $1.5 million.
Its loan portfolio is comprised primarily of loans in the areas of commercial,
residential real estate and consumer lending. As of June 30, 2002, commercial
loans made up approximately 87% of the loan portfolio, while residential
mortgages comprised approximately 7% and consumer lending comprised 6%.
As part of the loan monitoring activity at both subsidiary banks, credit
administration personnel interact with senior bank management weekly. Each of
the banks has a loan review committee that meets on a monthly basis to review
the loan portfolio. The Company has also instituted a separate loan review
function to analyze credits of Quad City Bank & Trust and Cedar Rapids Bank &
Trust. Management has attempted to identify problem loans at an early stage and
to aggressively seek a resolution of these situations.
3
As noted above, both subsidiary banks are active commercial lenders. The areas
of emphasis include loans to wholesalers, manufacturers, building contractors,
developers, business services companies and retailers. Quad City Bank & Trust
and Cedar Rapids Bank & Trust provide a wide range of business loans, including
lines of credit for working capital and operational purposes and term loans for
the acquisition of equipment and other purposes. Collateral for these loans
generally includes accounts receivable, inventory, equipment and real estate. In
addition, the subsidiary banks often take personal guarantees to help assure
repayment. Loans may be made on an unsecured basis if warranted by the overall
financial condition of the borrower. Terms of commercial business loans
generally range from one to five years. A significant portion of the subsidiary
banks' commercial business loans has floating interest rates or reprice within
one year. Commercial real estate loans are also made. Collateral for these loans
generally includes the underlying real estate and improvements, and may include
additional assets of the borrower.
Residential mortgage lending has been a focal point of Quad City Bank & Trust
and Cedar Rapids Bank & Trust as they continue to build their real estate
lending business. As a result of this focus, the subsidiary banks' real estate
loan portfolios have grown from approximately $354 thousand at the end of the
1994 fiscal year, to approximately $45.4 million at the end of fiscal 2002. The
subsidiary banks currently have 7 mortgage originators.
The subsidiary banks sell a significant portion of their real estate loans in
the secondary market. They typically sell virtually all of the fixed rate loans
that they originate. During fiscal 2002, the subsidiary banks originated $175.5
million of real estate loans and sold $144.3 million of these loans. Generally,
the subsidiary banks' residential mortgage loans conform to the underwriting
requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to
resell loans in the secondary market. The subsidiary banks structure most loans
that will not conform to those underwriting requirements as adjustable rate
mortgages that mature in one to five years. The subsidiary banks generally
retain these loans in its portfolio. Servicing rights are not presently retained
on the loans sold in the secondary market.
The consumer lending departments of each bank provide all types of consumer
loans including motor vehicle, home improvement, home equity, signature loans
and small personal credit lines.
Appendices. The commercial banking business is a highly regulated business. See
Appendix A for a brief summary regarding federal and state statutes and
regulations, which are applicable to the Company and its subsidiaries.
Supervision, regulation and examination of banks and bank holding companies by
bank regulatory agencies are intended primarily for the protection of depositors
rather than stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative
statistical information required pursuant to the industry guides promulgated
under the Securities Act of 1933 and 1934, relating to the business of the
Company.
Item 2. Property
The main office of Quad City Bank & Trust is in a 6,700 square foot facility,
which was completed in January 1994. In March 1994, Quad City Bank & Trust
acquired that facility, which is located at 2118 Middle Road in Bettendorf,
Iowa.
Construction of a second full service banking facility was completed in July
1996 to provide for the convenience of customers and to expand the market
territory. Quad City Bank & Trust also owns its portion of that facility which
is located at 4500 Brady Street in Davenport, Iowa. The two-story building is in
two segments that are separated by an atrium. Quad City Bank & Trust owns the
south half of the building, while the northern portion is owned by the
developer. Each floor is 6,000 square feet. Quad City Bank & Trust occupies its
first floor and utilizes the basement for operational functions, item processing
and storage. Currently, approximately 1,500 square feet on the second floor is
leased to a professional services firm and approximately 4,500 square feet is
vacant and leasable. In addition, the residential real estate department of Quad
City Bank & Trust leases approximately 2,500 square feet on the first floor in
the north half of the building.
4
Renovation of a third full service banking facility was completed in February
1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near
the intersection of 7th Street and John Deere Road in Moline, Illinois near the
Rock Island/Moline border. The building is owned by a third party limited
liability company and Quad City Bank & Trust and Bancard are its major tenants.
The Company has purchased a 20% interest in the company that owns the building.
Bancard relocated its operations to the lower level of the 30,000 square foot
building in late 1997. The Company relocated its corporate headquarters to the
building in February 1998 and occupies approximately 2,000 square feet on the
second floor.
In March 1999, Quad City Bank & Trust acquired a 3,000 square foot office
building adjacent to the Brady Street location. The office space is utilized for
various operational and administrative functions.
Construction of a fourth full service banking facility was completed in October
2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City Bank & Trust leases
approximately 6,000 square feet on the first floor and 2,200 square feet on the
lower level of the 24,000 square foot facility. The office opened in October
2000.
The Company announced plans, in April 2001, to expand its banking operations to
the Cedar Rapids, Iowa market. Initially, from June until mid-September, 2001
the Cedar Rapids operation functioned as a branch of Quad City Bank & Trust
while waiting for regulatory approvals for a new state bank charter. On
September 14, 2001, the Cedar Rapids branch operation was converted into the new
charter and began operations as Cedar Rapids Bank and Trust Company. Cedar
Rapids Bank & Trust leases approximately 8,200 square feet in the GreatAmerica
Building, 625 First Street, S.E. in Cedar Rapids, which currently serves as its
only office.
Management believes that the facilities are of sound construction, in good
operating condition, are appropriately insured and are adequately equipped for
carrying on the business of the Company.
Quad City Bank & Trust and Cedar Rapids Bank & Trust intend to limit their
investment in premises to no more than 50% of their capital. The subsidiary
banks frequently invest in commercial real estate mortgages and also invest in
residential mortgages. Quad City Bank & Trust and Cedar Rapids Bank & Trust have
established lending policies which include a number of underwriting factors to
be considered in making a loan including, location, loan to value ratio, cash
flow, interest rate and credit worthiness of the borrower.
No individual real estate property or mortgage amounts to 10% or more of
consolidated assets.
Item 3. Legal Proceedings
Bancard was the holder of an account receivable in the approximate amount of
$1,700,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova
Information Systems, Inc. ("Nova"), which was acquired by U.S. Bancorp in July
2001. This receivable arose pursuant to Bancard's provision of electronic credit
card sales authorization and settlement services to PMT pursuant to a written
contract that includes PMT's obligation to indemnify Bancard for credit card
chargeback losses arising from those services. PMT failed to timely pay Bancard
for monthly invoices, including service charges and substantial chargeback
losses, for the period beginning May, 2000. On September 25, 2000, PMT filed a
lawsuit in federal court in Los Angeles, California, against Bancard and the
Company. This lawsuit alleged tortious acts and breaches of contract by Bancard,
the Company, and others and sought recovery from Bancard and the company of not
less than $3,600,000 of alleged actual damages, plus punitive damages. Bancard
and the Company filed lawsuits in federal and state courts in Davenport, Iowa
against PMT. These lawsuits sought a court order compelling PMT to participate
in arbitration in Bettendorf, Iowa, as provided for in the pertinent contract
documents, and to resolve the disputes between PMT, Bancard and the Company,
including the unpaid account receivable. The federal court in Iowa ruled that
the arbitration issue be determined by the state court in Iowa. Subsequently,
the Iowa District Court of Scott County ruled that all claims, including the
tort claims, would be arbitrated in Iowa. Because of that ruling, the California
lawsuit was dismissed, and arbitration proceedings were to begin in March 2002.
On February 21, 2002, the Company announced settlement of its arbitration
dispute with Nova. A settlement amount was paid by Nova to Bancard, which
resulted in the collection of the receivable due from Nova, less an amount that
approximated the costs of continued arbitration. The effect of the settlement
was a reduction in third quarter after-tax earnings of approximately $175
thousand. While management continued to believe that Nova's claims were without
merit, a determination was made that a settlement at that time was the most
effective option for the Company.
5
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of the Company for a vote
during the fourth quarter of the fiscal year ended June 30, 2002.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock, par value $1.00 per share of the Company is traded on The
Nasdaq SmallCap Market under the symbol "QCRH". The stock began trading on
October 6, 1993. As of June 30, 2002, there were 2,749,447 shares of common
stock outstanding held by approximately 2,500 holders of record. The following
table sets forth the high and low sales prices of the common stock, as reported
by The Nasdaq SmallCap Market, for the periods indicated. No cash dividends were
declared during the periods indicated.
Fiscal 2002 Fiscal 2001
Sales Price Sales Price
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High Low High Low
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First quarter ................. $ 12.500 $ 10.100 $ 17.250 $ 11.313
Second quarter ................ 11.790 10.800 12.250 9.938
Third quarter ................. 13.450 11.180 12.563 9.750
Fourth quarter ................ 15.150 13.000 10.813 9.250
Since its inception, the Company has retained all earnings to finance the growth
of the Company, Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Bancard.
If and when dividends are declared, the Company will likely be largely dependent
upon dividends from Quad City Bank & Trust, Cedar Rapids Bank & Trust, and
Bancard for funds to pay dividends on the common stock.
Under Iowa law, Quad City Bank & Trust and Cedar Rapids Bank & Trust will be
restricted as to the maximum amount of dividends they may pay on their common
stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in
an amount greater than its undivided profits. Quad City Bank & Trust and Cedar
Rapids Bank & Trust are members of the Federal Reserve System. The total of all
dividends declared by the subsidiary banks in a calendar year may not exceed the
total of their net profits of that year combined with their retained net profits
of the preceding two years. In addition, the Federal Reserve Board, the Iowa
Superintendent and the FDIC are authorized under certain circumstances to
prohibit the payment of dividends by Quad City Bank & Trust and Cedar Rapids
Bank & Trust. In the case of the Company, further restrictions on dividends may
be imposed by the Federal Reserve Board.
Item 6. Selected Financial Data
The "Selected Consolidated Financial Data" of the Company set forth below is
derived in part from, and should be read in conjunction with our consolidated
financial statements and the accompanying notes thereto. See Item 8 "Financial
Statements and Supplementary Data." Results for past periods are not necessarily
indicative of results to be expected for any future period.
6
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended June 30,
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2002 2001 2000 1999 1998
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(Dollars in Thousands, Except Per Share Data)
Statement of Income Data:
Interest income ............ $ 28,520 $ 28,544 $ 24,079 $ 20,116 $ 15,077
Interest expense ........... 12,870 16,612 13,289 11,027 8,342
Net interest income ........ 15,650 11,932 10,790 9,089 6,735
Provision for loan losses .. 2,265 889 1,052 892 902
Noninterest income (1) ..... 7,915 6,313 6,154 5,561 6,148
Noninterest expenses ....... 17,023 13,800 11,467 9,679 7,910
Pre-tax net income ......... 4,277 3,556 4,425 4,079 4,071
Income tax expense ......... 1,315 1,160 1,680 1,614 1,678
Net income ................. 2,962 2,396 2,745 2,465 2,393
Per Common Share Data:
Net income-basic ........... $ 1.10 $ 1.06 $ 1.19 $ 0.98 $ 1.00
Net income-diluted ......... 1.08 1.04 1.15 0.93 0.93
Balance Sheet:
Total assets ............... $518,828 $400,948 $367,622 $321,346 $250,151
Securities ................. 76,231 56,710 56,129 50,258 33,276
Loans ...................... 390,594 287,865 241,853 197,977 162,975
Allowance for estimated
losses on loans .......... 6,111 4,248 3,617 2,895 2,350
Deposits ................... 376,317 302,155 288,067 247,966 197,384
Stockholders' equity:
Common ................... 32,578 23,817 20,071 18,473 16,602
Preferred ................ 0 0 0 0 2,500
Key Ratios:
Return on average assets ... 0.64% 0.62% 0.82% 0.86% 1.14%
Return on average common
equity ................... 10.07 10.95 14.17 13.69 16.40
Net interest margin ........ 3.74 3.38 3.56 13.42 3.55
Efficiency ratio (2) ....... 72.20 75.64 67.68 66.07 61.40
Nonperforming assets to
total assets ............. 0.44 0.44 0.20 0.51 0.51
Allowance for estimated
losses on loans to total
loans .................... 1.56 1.48 1.50 1.46 1.44
Net charge-offs to average
loans .................... 0.12 0.10 0.16 0.26 0.13
Average common stockholders'
equity to average assets . 6.37 5.69 5.77 6.26 6.97
Average stockholders'
equity to average assets . 6.37 5.69 5.77 7.05 7.97
Earnings to fixed charges
Excluding interest on
deposits ............... 1.95 x 1.90 x 2.29 x 2.81 x 3.78 x
Including interest on
deposits ............... 1.32 1.21 1.33 1.36 1.48
(1) Year ended June 30, 1998 noninterest income includes a pre-tax gain of
$2,168 from Bancard's restructuring of an agreement with an independent
sales organization (ISO). Year ended June 30, 1999 noninterest income
includes amortization of $732 from Bancard's restructuring of an ISO
agreement.
(2) Noninterest expenses divided by the sum of net interest income before
provision for loan losses and noninterest income.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides additional information regarding our
operations for the fiscal years ended June 30, 2002, 2001 and 2000, and
financial condition for the fiscal years ended June 30, 2002 and 2001. This
discussion should be read in conjunction with "Selected Consolidated Financial
Data" and our consolidated financial statements and the accompanying notes
thereto included or incorporated by reference elsewhere in this document.
Overview
The Company was formed in February 1993 for the purpose of organizing Quad City
Bank & Trust. Quad City Bank & Trust opened in January 1994 with $4.5 million in
assets, and the Company has grown to $518.8 million in consolidated assets as of
June 30, 2002. Management expects continued opportunities for growth, even
though the rate of growth will probably be slower than that experienced to date.
The Company reported earnings of $3.0 million or $1.10 basic earnings per share
for fiscal 2002 as compared to $2.4 million and $1.06 basic earnings per share
for fiscal 2001 and $2.7 million and $1.19 basic earnings per share for fiscal
2000. The 24% increase in fiscal 2002 earnings from fiscal 2001 was attributable
primarily to significant increases in both net interest income and noninterest
income, partially offset by an increase in noninterest expense. The decrease in
fiscal 2001 earnings from fiscal 2000 was attributable to an increase in
noninterest expense partially offset by increases in both noninterest income and
net interest income.
When compared to fiscal 2001, fiscal 2002 reflected significant growth in both
net interest income and noninterest income for the Company. For fiscal 2002, net
interest and noninterest income improved by 31% and 25%, respectively, for a
combined increase of $5.3 million when compared to fiscal 2001. Quad City Bank &
Trust generated much of the improvement in net interest margin, as well as a
large increase in the gains on sales of residential real estate loans during the
year. Offsetting these revenue improvements for the Company were increases in
noninterest expense of $3.2 million and the provision for loan losses of $1.4
million. During fiscal 2002, pre-tax costs associated with the Company's
operation of the Cedar Rapids Bank & Trust subsidiary were approximately $2.4
million, and were the primary contributors to the climb in noninterest expense.
While the after-tax start-up losses at Cedar Rapids Bank & Trust, including the
pre-charter losses, were $1.1 million for fiscal 2002, these losses were less
than anticipated, and Cedar Rapids Bank and Trust's growth was more rapid than
expected. Management remains confident that the decision to enter the Cedar
Rapids market will provide significant long-term benefits to the Company. Also
impacting noninterest expense for fiscal 2002 were legal costs at Bancard,
related to its arbitration proceedings to collect a large customer receivable
and the subsequent settlement of the dispute in February 2002. As a result of
the settlement, an amount was paid by the customer to Bancard, which resulted in
the collection of the receivable, less an amount that approximated the costs of
continued arbitration.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between interest income, principally from loans
and investment securities, and interest expense, principally on customer
deposits and borrowings. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar level of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities. The Company's
average tax equivalent yield on interest earning assets decreased 1.27% for
fiscal 2002 as compared to fiscal 2001. With the same comparison, the average
cost of interest-bearing liabilities decreased 1.76%, which resulted in a 0.49%
increase in the net interest spread of 2.72% at June 30, 2001 to 3.21% % at June
30, 2002. The broadening of the net interest spread created a 0.36% increase in
the net interest margin. For fiscal 2002, net interest margin was 3.74% compared
to 3.38% for fiscal 2001. Management continues to closely monitor and manage net
interest margin. The primary challenge for the subsidiary banks currently, from
a profitability standpoint, is to continue these improvements in its net
interest margin. Very competitive loan rate environments have resulted in the
subsidiary banks' interest margin being below their national peer group.
Management continues to address this issue with alternative funding sources and
pricing strategies.
8
The Company's operating results are also affected by sources of noninterest
income, including merchant credit card fees, trust fees, deposit service charge
fees, gains from the sales of residential real estate loans and other income.
Operating expenses of the Company include employee compensation and benefits,
occupancy and equipment expense and other administrative expenses. The Company's
operating results are also affected by economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. The majority of the subsidiary banks' loan portfolios
are invested in commercial loans. Deposits from commercial customers represent a
significant funding source as well.
The Company has added facilities and employees to accommodate both its
historical growth and anticipated future growth. As such, overhead expenses have
had a significant impact on earnings. This trend is likely to continue as Cedar
Rapids Bank & Trust moved to its permanent facility in the fall of 2001, and
both banks continue to add the facilities and resources necessary to attract and
serve additional customers
During 1994, Quad City Bank & Trust began to develop internally a merchant
credit card processing operation and in 1995 transferred this function to
Bancard, a separate subsidiary of the Company. Bancard initially had an
arrangement to provide processing services exclusively to customers of a single
independent sales organization or ISO. This ISO was sold in 1998, and the
purchaser requested a reduction in the term of the contract. Bancard agreed to
amend the contract to reduce the term and accept a fixed monthly processing fee
of $25 thousand for merchants existing at the time the agreement was signed, and
a lower transaction fee for new merchants, in exchange for a payment of $2.9
million, the ability to transact business with other ISOs and the assumption of
the credit risk by the ISO. Approximately two thirds of the income from this
settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of
$732 thousand being recognized during fiscal 1999. Bancard terminated its
processing for this ISO in May 2000, eliminating approximately 64% of its
average monthly processing volume. Prior to this ISO's termination, Bancard's
average monthly processing volume for fiscal 2000 was $91 million. During both
fiscal 2001 and 2002, Bancard worked to establish additional ISO relationships
and further develop the relationships with existing ISOs successfully rebuilding
and expanding processing volumes. Bancard's average monthly dollar volume of
transactions processed during fiscal 2001 was $76 million. During fiscal 2002,
the average monthly dollar volume of transactions processed by Bancard increased
36% to $104 million. Monthly processing volumes at Bancard during fiscal 2002
climbed to a level above that existing prior to the termination of all
processing with the initial ISO.
During fiscal 1998, Quad City Bank & Trust expanded its presence in the mortgage
banking market by hiring several experienced loan originators and an experienced
underwriter. Cedar Rapids Bank & Trust currently has one mortgage loan
originator. Quad City Bank & Trust and Cedar Rapids Bank & Trust originate
mortgage loans on personal residences and sell the majority of these loans into
the secondary market to avoid the interest rate risk associated with long-term
fixed rate financing. The subsidiary banks realize revenue from this mortgage
banking activity from a combination of loan origination fees and gains on the
sale of the loans in the secondary market. During fiscal 2002, the subsidiary
banks originated $175.5 million of real estate loans and sold $144.3 million of
these loans, which resulted in gains of $2.0 million. The decrease in interest
rates during that time caused a significant increase in the subsidiary banks'
mortgage origination volume. In fiscal 2001, Quad City Bank & Trust originated
$97.6 million of real estate loans and sold $92.9 million, which resulted in
gains of $1.1 million.
Trust department income continues to be a significant contributor to noninterest
income, growing from $1.9 million in fiscal 2000 to $2.1 million in fiscal 2001
and to $2.2 million in fiscal 2002. Income is generated primarily from fees
charged based on assets under administration for corporate and personal trusts
and for custodial services. Assets under administration have grown from $617.5
at June 30, 2001 to $665.7 million at June 30, 2002. Growth in the current
fiscal year resulted primarily from new trust relationships.
The Company's initial public offering during the fourth calendar quarter of 1993
raised approximately $14 million. In order to provide additional capital to
support the growth of Quad City Bank & Trust, the Company formed a statutory
business trust, which issued $12 million of capital securities to the public for
cash in June 1999. In conjunction with the formation of Cedar Rapids Bank &
Trust, the Company sold approximately $5.0 million of its common stock through a
private placement offering in September 2001, primarily to investors in the
Cedar Rapids area.
9
Critical Accounting Policy
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision for loan losses in
the statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis section entitled "Financial Condition -
Allowance for Loan Losses." Although management believes the levels of the
allowance as of both June 30, 2002 and 2001 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
Fiscal 2002 compared with fiscal 2001
Overview. Net income for fiscal 2002 was $3.0 million as compared to net income
of $2.4 million in fiscal 2001 for an increase of $567 thousand or 24%. Basic
earnings per share for fiscal 2002 were $1.10 as compared to $1.06 for fiscal
2001. The increase in net income was comprised of an increase in net interest
income after provision for loan losses of $2.3 million and an increase in
noninterest income of $1.6 million partially offset by increases in noninterest
expenses of $3.2 million and an increase in federal and state income taxes of
$155 thousand. Several factors contributed to the improvement in net income
during fiscal 2002. Primary factors included the significant improvement of 36
basis points in net interest margin and the 75% increase in gains on sales of
real estate loans.
Interest income. Interest income was $28.5 million for fiscal 2001 and fiscal
2002. The stability in interest income was attributable to greater average
outstanding balances in interest-earning assets, principally loans receivable,
that was offset by the reduction in interest rates. The average yield on
interest earning assets for fiscal 2002 was 6.77% as compared to 8.04% for
fiscal 2001.
Interest expense. Interest expense decreased by $3.7 million, from $16.6 million
for fiscal 2001 to $12.9 million for fiscal 2002. The 23% decrease in interest
expense was primarily attributable to significant reductions in interest rates
partially offset by greater average outstanding balances in interest-bearing
liabilities. The average cost on interest bearing liabilities was 3.56% for
fiscal 2002 as compared to 5.32% for fiscal 2001.
10
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.56% of total loans at June 30, 2002
as compared to approximately 1.48% at June 30, 2001. The provision for loan
losses increased by $1.4 million, from $900 thousand for fiscal 2001 to $2.3
million for fiscal 2002. During the year, management made monthly provisions for
loan losses based upon a number of factors, principally the increase in loans
and a detailed analysis of the loan portfolio. For fiscal 2002, commercial loans
had total charge-offs of $437 thousand and total recoveries of $101 thousand.
Consumer loan charge-offs and recoveries totaled $204 thousand and $138
thousand, respectively, for fiscal 2002. Real estate loans had no charge-off or
recovery activity during fiscal 2002. The ability to grow profitably is, in
part, dependent upon the ability to maintain asset quality.
Noninterest income. Noninterest income increased by $1.6 million, from $6.3
million for fiscal 2001 to $7.9 million for fiscal 2002. Noninterest income for
fiscal 2002 and 2001 consisted 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 fees.
The 25% increase was primarily due to the increases in gains on sales of loans,
merchant credit card fees net of processing costs, and deposit service fees
received during the period.
During fiscal 2002, merchant credit card fees net of processing costs, increased
by $424 thousand to $2.1 million, from $1.7 million for fiscal 2001. The
increase was due to a 36% improvement in the volume of credit card transactions
processed during fiscal 2002, partially offset by the one-time charge during the
third quarter related to an arbitration settlement involving Bancard.
For fiscal 2002, trust department fees increased $90 thousand, or 4%, to $2.2
million from $2.1 million for fiscal 2001. The increase was primarily a
reflection of the development of existing trust relationships and the addition
of new trust relationships during the period, almost entirely offset by the
reduced market value of securities held in trust accounts and the resulting
impact on the calculation of trust fees.
Gains on sales of loans were $2.0 million for fiscal 2002, which reflected an
increase of 75%, or $855 thousand, from $1.1 million for fiscal 2001. The
increase resulted from a significant decline in mortgage rates over recent
months, which was driven by corresponding cuts by the Federal Reserve during
calendar 2001. This created significantly more home refinances and home
purchases during the fiscal year and the subsequent sale of the majority of
these loans into the secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 2002 were
$17.0 million as compared to $13.8 million for the same period in 2001 for an
increase of $3.2 million or 23%.
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 2002 and 2001.
Years Ended June 30,
------------------------------------
2002 2001 % Change
------------------------------------
Salaries and employee benefits ......................... $10,077,583 $ 8,014,268 26%
Professional and data processing fees .................. 1,410,770 1,159,929 22%
Advertising and marketing .............................. 604,002 579,524 4%
Occupancy and equipment expense ........................ 2,331,806 1,925,820 21%
Stationery and supplies ................................ 476,158 352,441 35%
Postage and telephone .................................. 486,053 409,626 19%
Other .................................................. 1,636,056 1,358,345 20%
-----------------------------------
Total noninterest expenses ............... $17,022,428 $13,799,953 23%
===================================
11
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2002, total salaries and benefits
increased to $10.1 million or $2.1 million over the fiscal 2001 total of $8.0
million. The change was primarily attributable to the addition of employees to
staff the Cedar Rapids Bank & Trust operation, which accounted for $1.7 million,
or 82%, of the increase. A slight increase in the number of Quad City Bank &
Trust employees, and increased incentive compensation to real estate officers
proportionate to the increased volumes of gains on sales of loans, comprised the
balance of the change. Occupancy and equipment expense increased $406 thousand
or 21% for the period. The increase was predominately due to the addition of
Quad City Bank & Trust's fourth full service banking facility in late October
2000, and Cedar Rapids Bank & Trust's permanent full service banking facility in
September 2001, and the resulting increased levels of rent, utilities,
depreciation, maintenance, and other occupancy expenses. Professional and data
processing fees increased $251 thousand, or 22%, during fiscal 2002. The
increase was primarily attributable to legal fees resulting from an arbitration
involving Bancard, combined with the additional professional and data processing
fees related to Cedar Rapids Bank & Trust. During fiscal 2002, stationary and
supplies increased 35%, or $124 thousand. The addition of Cedar Rapids Bank &
Trust accounted for $85 thousand, or 68% of this increase. Other noninterest
expense increased $278 thousand, or 20% for the fiscal year. Significantly
contributing to this increase was a $170 thousand merchant credit card loss
resulting from the settlement of an arbitration dispute between Bancard and Nova
Information Services, Inc. A settlement amount was paid to Bancard, which was
the receivable due from Nova less an amount that approximated the costs of
continued arbitration. Also contributing to the increase in noninterest expense
were increased insurance expense and increased expense incurred by subsidiary
banks for service charges from upstream banks.
Income tax expense. The provision for income taxes was $1.3 million for fiscal
2002 compared to $1.2 million for fiscal 2001, an increase of $155 thousand or
13%. The increase was primarily attributable to increased income before income
taxes of $722 thousand or 20% for fiscal 2002, partially offset by a reduction
in the Company's effective tax rate for fiscal 2002 of 30.7% versus 32.6% for
fiscal 2001.
Fiscal 2001 compared with fiscal 2000
Overview. Net income for fiscal 2001 was $2.4 million as compared to net income
of $2.7 million in fiscal 2000 for a decrease of $300,000 or 13%. Basic earnings
per share for fiscal 2001 were $1.06 as compared to $1.19 for fiscal 2000. The
decrease in net income was comprised of an increase in noninterest expenses of
$2.3 million partially offset by an increase in net interest income after
provision for loan losses of $1.3 million, an increase in noninterest income of
$200,000 and a decrease in federal and state income taxes of $500,000. Several
factors contributed to the reduction in net income. These factors included the
opening of the Company's fourth full-service banking facility on Utica Ridge
Road in Davenport, a reduction in processing volumes and profitability at Quad
City Bancard and initial start-up expenses associated with the Company's
expansion to the Cedar Rapids market.
Interest income. Interest income increased by $4.4 million, from $24.1 million
for fiscal 2000 to $28.5 million for fiscal 2001. The 19% rise in interest
income was basically attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable. Despite the Federal
Reserve's dramatic reduction in short-term interest rates by 2.75% between
January and June of 2001, the average yield on interest earning assets for
fiscal 2001 was 8.04% as compared to 7.91% for fiscal 2000.
Interest expense. Interest expense increased by $3.3 million, from $13.3 million
for fiscal 2000 to $16.6 million for fiscal 2001. The 25% increase in interest
expense was primarily attributable to greater average outstanding balances in
interest-bearing liabilities and higher interest rates. Despite the Federal
Reserve's dramatic reduction in short-term interest rates by 2.75% between
January and June of 2001, the average cost on interest bearing liabilities was
5.32% for fiscal 2001 as compared to 4.90% for 2000.
12
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.48% of total loans at June 30, 2001
as compared to approximately 1.50% at June 30, 2000. The provision for loan
losses decreased by $200,000, from $1.1 million for fiscal 2000 to $900,000 for
fiscal 2001. During the year, management made monthly provisions for loan losses
based upon the increase in loans and a detailed analysis of the loan portfolio.
For fiscal 2001, commercial loans combined for total charge-offs of $87,000 and
total recoveries of $2,000. Consumer loan charge-offs and recoveries totaled
$214,000 and $39,000, respectively, for fiscal 2001. Indirect auto loans
accounted for a majority of the consumer loan charge-offs. Because asset quality
is a priority for the Company and its subsidiaries, management made the decision
in the first quarter of fiscal 1999 to downscale indirect auto loan activity
based on charge-off history. The average balance in the indirect auto loan
portfolio for fiscal 2001 was $3.4 million compared to $8.2 million for fiscal
2000. This 59% decrease in the average portfolio brought with it a 56% decrease
in the net charge-offs of indirect auto loans. Net charge-offs for the indirect
auto loan portfolio were $46,000 for fiscal 2001 compared to $77,000 for fiscal
2000, for a decrease of $31,000. The ability to grow profitably is, in part,
dependent upon the ability to maintain asset quality.
Noninterest income. Noninterest income increased by $200,000, from $6.1 million
for fiscal 2000 to $6.3 million for fiscal 2001. Noninterest income for fiscal
2001 and 2000 consisted of income from the merchant credit card operation, the
trust department, depository service fees, gains on the sale of residential real
estate mortgage loans, and other miscellaneous fees. The 3% increase was
primarily due to an increase in gains on sales of loans, and increased trust
fees and deposit service fees received during the period, offset by the decrease
in merchant credit card fees.
During fiscal 2001, merchant credit card fees, net of processing costs,
decreased by $600,000 to $1.7 million, from $2.3 million for fiscal 2000. The
decrease was due to decreased volumes of credit card transactions processed
during fiscal 2001. As previously discussed, Bancard terminated processing for
its largest ISO in May 2000.
For fiscal 2001, trust department fees increased $200,000, or 10%, to $2.1
million from $1.9 million for fiscal 2000. The increase was primarily a
reflection of the development of additional trust relationships during the
period.
Gains on sales of loans were $1.1 million for fiscal 2001, which reflected an
increase of 159%, or $700,000, from $400,000 for fiscal 2000. The increase
resulted from a dramatic decline in interest rates between January and June
2001, which was driven by corresponding cuts by the Federal Reserve during the
first half of calendar 2001. This created significantly more home refinances and
home purchases during the fiscal year and the subsequent sale of the majority of
these loans into the secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 2001 were
$13.8 million as compared to $11.5 million for the same period in 2000 for an
increase of $2.3 million or 20%.
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 2001 and 2000.
Years Ended June 30,
------------------------------------
2001 2000 % Change
------------------------------------
Salaries and employee benefits ......................... $ 8,014,268 $ 6,878,213 17%
Professional and data processing fees .................. 1,159,929 860,216 35%
Advertising and marketing .............................. 579,524 410,106 41%
Occupancy and equipment expense ........................ 1,925,820 1,580,911 22%
Stationery and supplies ................................ 352,441 324,219 9%
Postage and telephone .................................. 409,626 361,623 13%
Other .................................................. 1,358,345 1,052,173 29%
-----------------------------------
Total noninterest expenses ............... $13,799,953 $11,467,461 20%
===================================
13
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2001, total salaries and benefits
increased to $8.0 million or $1.1 million over the fiscal 2000 total of $6.9
million. The change was primarily attributable to the addition of new Quad City
Bank & Trust employees during the period. Advertising and marketing increased
$200,000 or 41%. The increase was the result of the development and start-up of
Quad City Bank & Trust's new website (qcbt.com), the establishment of an online
partnership with America Online, Inc. creating local access to that website, and
media expenses incurred in support of marketing efforts for Quad City Bank &
Trust's Utica location and various Quad City Bank & Trust products and
departments. Professional and data processing fees increased $300,000 or 35%.
The increase was primarily attributable to legal fees resulting from an
arbitration involving Bancard, combined with increased fees to outside
consultants addressing compliance, efficiency and profitability issues for Quad
City Bank & Trust. Other noninterest expense increased $300,000 or 29% for the
fiscal year. The increase was primarily the result of increased service charges
from upstream banks incurred by Quad City Bank & Trust and increased expenses
related to Bancard's cardholder program.
Income tax expense. The provision for income taxes was $1.2 million for fiscal
2001 compared to $1.7 million for fiscal 2000, a decrease of $500,000 or 31%.
The decrease was primarily attributable to decreased net income generated in
fiscal 2001 compared to fiscal 2000, and a reduction in the effective tax rate
for fiscal 2001 of 32.6% versus 38.0% for fiscal 2000.
Financial Condition
Total assets of the Company increased by $117.9 million or 29% to $518.8 million
at June 30, 2002 from $400.9 million at June 30, 2001. The growth primarily
resulted from an increase in the loan portfolio funded by deposits received from
customers and by proceeds from Federal Home Loan Bank advances and short-term
borrowings.
Cash and Cash Equivalent Assets. Cash and due from banks increased by $6.0
million or 30% to $26.2 million at June 30, 2002 from $20.2 million at June 30,
2001. Cash and due from banks represented both cash maintained at the subsidiary
banks , as well as funds that the Company and its subsidiaries had deposited in
other banks in the form of demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
decreased by $7.0 million or 90% to $760 thousand at June 30, 2002 from $7.8
million at June 30, 2001. The decrease was attributable to the Company's ongoing
efforts to monitor and manage net interest margin.
Certificates of deposit at financial institutions decreased by $3.2 million or
31% to $7.3 million at June 30, 2002 from $10.5 million at June 30, 2001. During
fiscal 2002, the certificate of deposit portfolio had 50 maturities totaling
$4.9 million and 17 purchases totaling $1.7 million. Due to strong loan demand,
the subsidiary banks reduced their deposits in other banks in the form of
certificates of deposit.
Investments. Securities increased by $19.5 million or 34% to $76.2 million at
June 30, 2002 from $56.7 million at June 30, 2001. The net increase was the
result of a number of transactions in the securities portfolio. The Company
purchased additional securities, classified as available for sale, in the amount
of $29.9 million and classified as held to maturity, of $100 thousand, and
recognized an increase in unrealized gains on securities available for sale,
before applicable income tax of $1.2 million. These increases were partially
offset by paydowns of $1.8 million that were received on mortgage-backed
securities, proceeds from the sales of securities available for sale of $101
thousand, proceeds from calls and maturities of $9.7 million, and amortization
of premiums, net of the accretion of discounts, of $163 thousand.
Certain investment securities of the subsidiary banks are purchased with the
intent to hold the securities until they mature. These held to maturity
securities, comprised of municipal securities and other bonds, were recorded at
amortized cost at June 30, 2002 and June 30, 2001. The balance at June 30, 2002
was $425 thousand, a decrease of $151 thousand from $576 thousand at June 30,
2001. Market values at June 30, 2002 and June 30, 2001 were $437 thousand and
$583 thousand, respectively.
All of both the Company's and Cedar Rapids Bank & Trust's and a majority of Quad
City Bank & Trust's securities are placed in the available for sale category as
the securities may be liquidated to provide cash for operating, investing or
financing purposes. These securities were reported at fair value and increased
by $19.7 million, or 35%, to $75.8 million at June 30, 2002, from $56.1 million
at June 30, 2001. The amortized cost of such securities at June 30, 2002 and
June 30, 2001 was $73.7 million and $55.3 million, respectively.
14
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk and as of June 30, 2002 there existed no security in
the investment portfolio (other than U.S. Government and U.S. Government agency
securities) that exceeded 10% of stockholders' equity at that date.
Loans. Total gross loans receivable increased by $102.7 million or 36% to $390.6
million at June 30, 2002 from $287.9 million at June 30, 2001. The increase was
the result of the origination or purchase of $556.5 million of commercial
business, consumer and real estate loans, less loan charge-offs, net of
recoveries, of $402 thousand and loan repayments or sales of loans of $453.3
million. During fiscal 2002, Quad City Bank & Trust contributed $452.3 million,
or 81%, and Cedar Rapids Bank & Trust contributed $104.2 million, or 19% of the
company's loan originations or purchases. The majority of residential real
estate loans originated by the subsidiary banks were sold on the secondary
market to avoid the interest rate risk associated with long-term fixed rate
loans. As of June 30, 2002, Quad City Bank & Trust's legal lending limit was
approximately $5.7 million and Cedar Rapids Bank & Trust's legal lending limit
was approximately $1.5 million.
Allowance for Loan Losses. The allowance for estimated losses on loans was $6.1
million at June 30, 2002 compared to $4.2 million at June 30, 2001 for an
increase of $1.9 million or 44%. The adequacy of the allowance for estimated
losses on loans was determined by management based on factors that included the
overall composition of the loan portfolio, types of loans, past loss experience,
loan delinquencies, potential substandard and doubtful credits, economic
conditions and other factors that, in management's judgment, deserved evaluation
in estimating loan losses. To ensure that an adequate allowance was maintained,
provisions were made based on the increase in loans and a detailed analysis of
the loan portfolio. The loan portfolio was reviewed and analyzed monthly with
specific detailed reviews completed on all credits risk-rated less than "fair
quality" and carrying aggregate exposure in excess of $250 thousand. The
adequacy of the allowance for estimated losses on loans was monitored by the
credit administration staff, and reported to management and the board of
directors.
Net charge-offs for the years ended June 30, 2002 and 2001, were $402 thousand
and $260 thousand respectively. One measure of the adequacy of the allowance for
estimated losses on loans is the ratio of the allowance to the total loan
portfolio. Provisions were made monthly to ensure that an adequate level was
maintained. The allowance for estimated losses on loans as a percentage of total
loans was 1.56 % at June 30, 2002 and 1.48% at June 30, 2001.
Although management believes that the allowance for estimated losses on loans at
June 30, 2002 was at a level adequate to absorb losses on existing loans, there
can be no assurance that such losses will not exceed the estimated amounts or
that the Company will not be required to make additional provisions for loan
losses in the future. Asset quality is a priority for the Company and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality. Along with other financial institutions,
management shares a concern for the outlook of the economy during the remainder
of calendar 2002. A slowdown in economic activity beginning in 2001 severely
impacted several major industries as well as the economy as a whole. Even though
there are numerous indications of emerging strength, it is not certain that this
strength is sustainable. In addition, consumer confidence may still be
negatively impacted by the recent substantial decline in equity prices. These
events could still adversely affect cash flows for both commercial and
individual borrowers, as a result of which, the Company could experience
increases in problem assets, delinquencies and losses on loans, and require
further increases in the provision.
Nonperforming Assets. The policy of the Company is to place a loan on nonaccrual
status if: (a) payment in full of interest or principal is not expected or (b)
principal or interest has been in default for a period of 90 days or more unless
the obligation is both in the process of collection and well secured. Well
secured is defined as collateral with sufficient market value to repay principal
and all accrued interest. A debt is in the process of collection if collection
of the debt is proceeding in due course either through legal action, including
judgment enforcement procedures, or in appropriate circumstances, through
collection efforts not involving legal action which are reasonably expected to
result in repayment of the debt or in its restoration to current status.
15
Nonaccrual loans were $1.6 million at June 30, 2002 compared to $1.2 million at
June 30, 2001 for an increase of $328 thousand or 27%. The increase in
nonaccrual loans was comprised of increases in commercial loans of $760 thousand
partially offset by decreases in both real estate loans of $407 thousand and in
consumer loans of $25 thousand. The increase in nonaccrual commercial loans was
due primarily to the addition of a single, fully collateralized loan at Quad
City Bank & Trust with an outstanding balance of $737 thousand. Nonaccrual loans
at June 30, 2002 consisted primarily of loans that were well collateralized and
were not expected to result in material losses and represented less than one
half of one percent of the Company's loan portfolio. All of the Company's
nonperforming assets are located in the loan portfolio at Quad City Bank &
Trust. The loans in the Cedar Rapids Bank & Trust loan portfolio have been made
fairly recently, and none of the loans have been categorized as nonperforming
assets. As the loan portfolio at Cedar Rapids Bank & Trust matures, it is likely
that there will be nonperforming loans or charge-offs associated with the
portfolio.
As of June 30, 2002 and 2001, past due loans of 30 days or more amounted to $4.3
million and $3.2 million, respectively. Past due loans as a percentage of gross
loans receivable remained unchanged at 1.1% for both June 30, 2002 and June 30,
2001.
Other Assets. Premises and equipment increased by $548 thousand or 6% to $9.2
million at June 30, 2002 from $8.7 million at June 30, 2001. The increase
resulted from the purchase of additional furniture, fixtures and equipment
offset by depreciation expense. Additional information regarding the composition
of this account and related accumulated depreciation is described in footnote 5
to the consolidated financial statements.
Accrued interest receivable on loans, securities, and interest-bearing cash
accounts increased by $263 thousand or 9% to $3.1 million at June 30, 2002 from
$2.9 million at June 30, 2001. The increase was primarily due to greater average
outstanding balances in interest-bearing assets.
Other assets increased by $948 thousand or 9% to $11.5 million at June 30, 2002
from $10.6 million at June 30, 2001. The three largest components of other
assets at June 30, 2002 were $3.0 million in Federal Reserve Bank and Federal
Home Loan Bank stock, $2.6 million in cash surrender value of life insurance
contracts and $2.4 million in prepaid Visa/Mastercard processing fees Other
assets also included accrued trust department fees, other miscellaneous
receivables, and various prepaid expenses.
Deposits. Deposits increased by $74.1 million or 25% to $376.3 million at June
30, 2002 from $302.2 million at June 30, 2001. The increase resulted from a
$12.8 million net increase in noninterest-bearing, NOW, money market and other
savings accounts and a $61.3 million net increase in certificates of deposit.
Short-term Borrowings. Short-term borrowings increased by $6.3 million or 22%
from $28.3 million as of June 30, 2001 to $34.6 million as of June 30, 2002. The
subsidiary banks offer short-term repurchase agreements to some of their
significant deposit customers. Also, on occasion, the subsidiary banks must
purchase Federal funds for short-term funding needs from the Federal Reserve
Bank, or from a correspondent bank. Short-term borrowings were comprised of
customer repurchase agreements of $29.1 million and $28.3 million at June 30,
2002 and 2001, respectively, as well as federal funds purchased from
correspondent banks of $5.5 million at June 30, 2002 and none at June 30, 2001.
FHLB Advances and Other Borrowings. FHLB advances increased $22.7 million or 76%
from $29.7 million as of June 30, 2001 to $52.4 million as of June 30, 2002. As
of June 30, 2002, the subsidiary banks held $2.6 million of FHLB stock in
aggregate. As a result of their memberships in the FHLB of Des Moines, the
subsidiary banks have the ability to borrow funds for short-term or long-term
purposes under a variety of programs. Both Quad City Bank & Trust and Cedar
Rapids Bank & Trust utilized FHLB advances for loan matching as a hedge against
the possibility of rising interest rates or when these advances provided a less
costly source of funds than customer deposits.
In June 1999, the Company issued 1,200,000 shares of trust preferred securities
through its newly formed Capital Trust subsidiary. On the Company's financial
statements, these securities are listed as company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely subordinated
debentures and were $12,000,000 at both June 30, 2002 and 2001. Under current
regulatory guidelines, these securities are considered to be Tier 1 capital,
with certain limitations that are applicable to the Company.
16
Other liabilities increased by $971 thousand or 20% to $5.9 million as of June
30, 2002 from $4.9 million as of June 30, 2001. Other liabilities were comprised
of unpaid amounts for various products and services, and accrued but unpaid
interest on deposits. At June 30, 2002, the largest single component of other
liabilities was $1.9 million of interest payable.
Stockholders' Equity. Common stock of $2.3 million as of June 30, 2001 increased
by $484 thousand, or 21%, to $2.8 million at June 30, 2002. The increase was
primarily the result of the Company's private placement of 475,424 additional
shares of common stock at $11.00 per share in September 2001. The funds received
as a result of this issuance were largely from residents of the Cedar Rapids
area and were used as partial funding for the capitalization of Cedar Rapids
Bank & Trust. During fiscal 2001, the Company acquired 18,650 treasury shares at
a total cost of $255 thousand.
Additional paid-in capital increased to $16.7 million as of June 30, 2002 from
$12.1 million at June 30, 2001. The increase of $4.6 million, or 37%, resulted
primarily from proceeds received in excess of the $1.00 per share par value, net
of issuance costs, for the 475,424 shares of common stock issued as the result
of the Company's private placement offering.
Retained earnings increased by $3.0 million or 31% to $12.7 million as of June
30, 2002 from $9.7 million as of June 30, 2001. The increase reflected net
income for the year.
Accumulated other comprehensive income consisting of unrealized gains on
securities available for sale, net of related income taxes, was a $1.3 million
gain as of June 30, 2002 as compared to a $506 thousand gain as of June 30,
2001. The increase in the gain was attributable to the increase during the
period in the fair value of the securities identified as available for sale,
primarily as a result of a decline in market interest rates.
In April 2000, the Company announced that the board of directors approved a
stock repurchase program enabling the Company to repurchase approximately 60,000
shares of its common stock. This stock repurchase program was completed in the
fall of 2000 and at both June 30, 2002 and 2001, the Company had acquired 60,146
shares at a total cost of $855 thousand. The weighted average cost of the shares
was $14.21.
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. One source of
liquidity is cash and short-term assets, such as interest-bearing deposits in
other banks and federal funds sold, which totaled $34.2 million at June 30,
2002, compared with $38.5 million at June 30, 2001. Quad City Bank & Trust and
Cedar Rapids Bank & Trust have a variety of sources of short-term liquidity
available to them, including federal funds purchased from correspondent banks,
sales of securities available for sale, FHLB advances, lines of credit and loan
participations or sales. The Company also generates liquidity from the regular
principal payments and prepayments made on its portfolio of loans and
mortgage-backed securities.
The liquidity of the Company is comprised of three primary classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided by operating activities was
$3.5 million for fiscal 2002 compared to net cash used in operating activities
of $1.7 million for fiscal 2001. Net cash used in investing activities,
consisting principally of loan funding and the purchase of securities, was
$110.6 million for fiscal 2002 and $21.9 million for fiscal 2001. Net cash
provided by financing activities, consisting primarily of deposit growth and
proceeds from Federal Home Loan Bank advances and short-term borrowings was
$113.1 million for fiscal 2002 compared to $28.7 million for fiscal 2001.
Net cash used in operating activities was $1.7 million for fiscal 2001 compared
to $4.2 million net cash provided by operating activities for fiscal 2000. Net
cash used in investing activities, consisting principally of loan funding and
the purchase of securities, was $21.9 million for fiscal 2001 and $46.1 million
for fiscal 2000. Net cash provided by financing activities, consisting primarily
of deposit growth and proceeds from Federal Home Loan Bank advances, for fiscal
2001 was $28.7 million and for fiscal 2000 was $48.5 million, consisting
primarily of deposit growth and proceeds from short-term borrowings.
17
The Company has a variety of sources of short-term liquidity available to it,
including federal funds purchased from correspondent banks, sales of securities
available for sale, FHLB advances, lines of credit and loan participations or
sales. At June 30, 2002, the subsidiary banks had seven unused lines of credit
totaling $36.0 million of which $4.0 million was secured and $32.0 million was
unsecured. At June 30, 2002, the Company also had a secured line of credit for
$10.0 million, of which $5.0 million had been used as partial funding for the
capitalization of Cedar Rapids Bank and Trust. At June 30, 2001, Quad City Bank
& Trust had six unused lines of credit totaling $31.0 million of which $8.0
million was secured and $23.0 million was unsecured. Also at June 30, 2001, the
Company had an unused line of credit for $3.0 million, which was secured.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Impact of New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement 141,
"Business Combinations" and Statement 142, "Goodwill and Other Intangible
Assets". Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. For the Company, the provisions of the Statements were
adopted and approved by the board of directors in September 2001. Implementation
of the standards has not had a material effect on the Company's consolidated
financial statements.
The Financial Accounting Standards Board has issued Statement 143, "Accounting
for Asset Retirement Obligations" and Statement 144, " Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Statement 144 supersedes FASB Statement
121 and the accounting and reporting provisions of APB Opinion No. 30. Statement
144 establishes a single accounting model for long-lived assets to be disposed
of by sale at the lower of its carrying amount or its fair value less costs to
sell and to cease depreciation/amortization. For the Company, the provisions of
Statement 143 and 144 are effective July 1, 2002. Implementation of the
Statements is not expected to have a material impact on the Company's financial
statements.
The Financial Accounting Standards Board has issued Statement 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement rescinds FASB Statements No. 4 and 64,
relative to debt extinguishments and provides that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will
distinguish transactions that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the criteria for
classification as an extraordinary item. The Statement amends FASB Statement No.
13, "Accounting for Leases" to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Finally, the Statement rescinds FASB Statement No.
44, "Accounting for Intangible Assets of Motor Carriers" and amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of the Statement relative to accounting for leases were effective for
transactions occurring after May 15, 2002. Implementation of these provisions of
the Statement had no impact on the Company's consolidated financial statements.
For the Company, the provisions of the Statement relative to accounting for debt
extinguishment are effective July 1, 2002. Implementation of these provisions of
the Statement is not expected to have a material impact on the Company's
consolidated financial statements.
18
Forward Looking Statements
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "bode," "predict,"
"suggest," "appear," "plan," "intend," "estimate," "may," "will," "would,"
"could," "should" or other similar expressions. Additionally, all statements in
this document, including forward-looking statements, speak only as of the date
they are made, and the Company undertakes no obligation to update any statement
in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of the terrorist attacks that occurred on September
11th, as well as any future threats and attacks, and the response of the
United States to any such threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
19
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and
indirect market risk. Direct market risk exists from changes in interest rates.
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Each subsidiary bank has an
asset/liability management committee of the board of directors that meets
quarterly to review the bank's interest rate risk position and profitability,
and to make or recommend adjustments for consideration by the full board of each
bank . Management also reviews Quad City Bank & Trust and Cedar Rapids Bank &
Trust's securities portfolios, formulates investment strategies, and oversees
the timing and implementation of transactions to assure attainment of the
board's objectives in the most effective manner. Notwithstanding the Company's
interest rate risk management activities, the potential for changing interest
rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the board and management
attempt to manage the Company's interest rate risk while maintaining or
enhancing net interest margins. At times, depending on the level of general
interest rates, the relationship between long-term and short-term interest
rates, market conditions and competitive factors, the board and management may
decide to increase the Company's interest rate risk position somewhat in order
to increase its net interest margin. The Company's results of operations and net
portfolio values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long-term and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value
analysis. In essence, this analysis calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance-sheet contracts. The following table sets forth, at June
30, 2002 and June 30, 2001, an analysis of the Company's interest rate risk as
measured by the estimated changes in the net portfolio value resulting from
instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis
points).
Change in Estimated Increase
Interest Estimated (Decrease) in NPV
---------------------------------------------------------------
Rates NPV Amount Amount Percent
- ---------------------------------------------------------------------------------------------------------------------
(Basis points) June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 $ 40,931 $ 24,705 $ (2,754) $ (4,282) (6.30)% (14.77)%
--- $ 43,685 $ 28,987
-200 $ 46,162 $ 27,572 $ 2,477 $ (1,415) 5.67% (4.88)%
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the board of directors, the Company does not
intend to engage in such activities in the immediate future. Interest rate risk
is the most significant market risk affecting the Company. Other types of market
risk, such as foreign currency exchange rate risk and commodity price risk, do
not arise in the normal course of the Company's business activities.
20
Item 8. Financial Statements
QCR HOLDINGS, INC.
Index to Consolidated Financial Statements
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated balance sheets as of June 30, 2002 and 2001
Consolidated statements of income for the years ended June 30,
2002, 2001, and 2000
Consolidated statements of changes in stockholders' equity for the
years ended June 30, 2002, 2001 and 2000
Consolidated statements of cash flows for the years ended June 30,
2002, 2001, and 2000
Notes to consolidated financial statements
21
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
QCR Holdings, Inc.
Moline, Illinois
We have audited the accompanying consolidated balance sheets of QCR Holdings,
Inc. (formerly known as Quad City Holdings, Inc.) and subsidiaries as of June
30, 2002 and 2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended June 30, 2002, 2001,
and 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QCR Holdings, Inc.
and subsidiaries as of June 30, 2002 and 2001, and the results of their
operations and their cash flows for the years ended June 30, 2002, 2001, and
2000, in conformity with accounting principles generally accepted in the United
States of America.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
July 26, 2002
22
QCR HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and 2001
ASSETS 2002 2001
- -----------------------------------------------------------------------------------------------------
Cash and due from banks ............................................ $ 26,207,676 $ 20,217,219
Federal funds sold ................................................. 760,000 7,775,000
Certificates of deposit at financial institutions .................. 7,272,213 10,512,585
Securities held to maturity, at amortized cost (fair value
2002 $437,116; 2001 $583,411) (Note 3) ........................... 425,440 575,559
Securities available for sale, at fair value (Note 3) .............. 75,805,678 56,134,521
------------------------------
76,231,118 56,710,080
------------------------------
Loans receivable, held for sale (Note 4) ........................... 8,498,345 5,823,820
Loans receivable, held for investment (Note 4) ..................... 382,095,469 282,040,946
Less allowance for estimated losses on loans (Note 4) ............ (6,111,454) (4,248,182)
------------------------------
384,482,360 283,616,584
------------------------------
Premises and equipment, net (Note 5) ............................... 9,206,761 8,658,883
Accrued interest receivable ........................................ 3,125,992 2,863,178
Other assets ....................................................... 11,542,375 10,594,405
------------------------------
Total assets ............................................... $ 518,828,495 $ 400,947,934
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ............................................ $ 65,384,902 $ 52,582,264
Interest-bearing ............................................... 310,932,407 249,572,960
------------------------------
Total deposits (Note 6) .................................... 376,317,309 302,155,224
Short-term borrowings (Note 7) ..................................... 34,628,709 28,342,542
Federal Home Loan Bank advances (Note 8) ........................... 52,414,323 29,712,759
Other borrowings (Note 9) .......................................... 5,000,000 --
Company Obligated Mandatorily Redeemable Preferred Securities
of subsidiary trust holding solely subordinated debentures (Note 10) 12,000,000 12,000,000
Other liabilities .................................................. 5,890,551 4,919,949
------------------------------
Total liabilities .......................................... 486,250,892 377,130,474
------------------------------
Commitments and Contingencies (Note 16)
Stockholders' Equity (Notes 14 and 15):
Preferred stock, stated value of $1 per share; shares
authorized 250,000; shares issued none ......................... -- --
Common stock, $1 par value; shares authorized 5,000,000;
June 2002 - shares issued 2,809,593 and outstanding
2,749,447; June 2001 - 2,325,566 and 2,265,420, respectively ... 2,809,593 2,325,566
Additional paid-in capital ....................................... 16,684,605 12,148,759
Retained earnings ................................................ 12,654,202 9,691,749
Accumulated other comprehensive income ........................... 1,283,739 505,922
------------------------------
33,432,139 24,671,996
Less cost of 60,146 common shares acquired for the treasury ........ 854,536 854,536
------------------------------
Total stockholders' equity ................................. 32,577,603 23,817,460
------------------------------
Total liabilities and stockholders' equity ................. $ 518,828,495 $ 400,947,934
==============================
See Notes to Consolidated Financial Statements.
23
QCR HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2002, 2001, and 2000
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ..................................... $ 23,718,322 $ 22,970,407 $ 18,364,812
Interest and dividends on securities:
Taxable ...................................................... 3,166,323 3,067,722 3,214,722
Nontaxable ................................................... 429,138 290,990 233,793
Interest on certificates of deposit at financial institutions .. 589,946 701,663 753,630
Interest on federal funds sold ................................. 258,256 1,267,062 1,488,267
Other interest ................................................. 358,152 246,092 23,974
-------------------------------------------
Total interest income .................................... 28,520,137 28,543,936 24,079,198
-------------------------------------------
Interest expense:
Interest on deposits ........................................... 8,894,578 13,022,210 10,125,235
Interest on company obligated mandatorily redeemable
preferred securities ......................................... 1,133,506 1,134,541 1,137,402
Interest on short-term borrowings .............................. 2,640,655 2,454,998 2,025,956
Interest on other borrowings ................................... 201,415 -- --
-------------------------------------------
Total interest expense ................................... 12,870,154 16,611,749 13,288,593
-------------------------------------------
Net interest income ...................................... 15,649,983 11,932,187 10,790,605
Provision for loan losses (Note 4) ............................... 2,264,965 889,670 1,051,818
-------------------------------------------
Net interest income after provision for loan losses ...... 13,385,018 11,042,517 9,738,787
-------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ............. 2,097,209 1,673,444 2,346,296
Trust department fees .......................................... 2,161,677 2,071,971 1,884,310
Deposit service fees ........................................... 994,630 816,489 600,219
Gains on sales of loans, net ................................... 1,991,437 1,136,572 438,799
Securities gains (losses), net ................................. 6,433 (14,047) (28,221)
Other .......................................................... 663,273 628,639 913,013
-------------------------------------------
Total noninterest income ................................. 7,914,659 6,313,068 6,154,416
-------------------------------------------
Noninterest expenses:
Salaries and employee benefits ................................. 10,077,583 8,014,268 6,878,213
Professional and data processing fees .......................... 1,410,770 1,159,929 860,216
Advertising and marketing ...................................... 604,002 579,524 410,106
Occupancy and equipment expense ................................ 2,331,806 1,925,820 1,580,911
Stationery and supplies ........................................ 476,158 352,441 324,219
Postage and telephone .......................................... 486,053 409,626 361,623
Other .......................................................... 1,636,056 1,358,345 1,052,173
-------------------------------------------
Total noninterest expenses ............................... 17,022,428 13,799,953 11,467,461
-------------------------------------------
Income before income taxes ............................... 4,277,249 3,555,632 4,425,742
Federal and state income taxes (Note 11) ......................... 1,314,796 1,159,900 1,680,215
-------------------------------------------
Net income ............................................... $ 2,962,453 $ 2,395,732 $ 2,745,527
===========================================
Earnings per common share (Note 15):
Basic .......................................................... $ 1.10 $ 1.06 $ 1.19
Diluted ........................................................ $ 1.08 $ 1.04 $ 1.15
Weighted average common shares outstanding ..................... 2,685,996 2,268,465 2,309,453
Weighted average common and common equivalent shares outstanding 2,743,805 2,314,334 2,385,840
See Notes to Consolidated Financial Statements.
24
QCR HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2002, 2001, and 2000
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 ....................... $2,296,251 $11,959,080 $ 4,550,490 $ (332,350) $ -- $18,473,471
Comprehensive income:
Net income ............................... -- -- 2,745,527 -- -- 2,745,527
Other comprehensive (loss), net of tax
(Note 2) ............................... -- -- -- (766,168) -- (766,168)
------------
Comprehensive income ................. 1,979,359
------------
Proceeds from issuance of 37,310 shares of
common stock, as a result of warrants
and stock options exercised (Note 13) .... 37,310 219,544 -- -- -- 256,854
Exchange of 8,145 shares of common
stock in connection with options exercised (8,145) (111,818) -- -- -- (119,963)
Tax benefit of nonqualified stock options
exercised ................................ -- 81,178 -- -- -- 81,178
Purchase of 41,496 shares of common stock
for the treasury ......................... -- -- -- -- (599,480) (599,480)
-----------------------------------------------------------------------------------
Balance, June 30, 2000 ....................... 2,325,416 12,147,984 7,296,017 (1,098,518) (599,480) 20,071,419
Comprehensive income:
Net income ............................... -- -- 2,395,732 -- -- 2,395,732
Other comprehensive gain, net of tax
(Note 2) ............................... -- -- -- 1,604,440 -- 1,604,440
------------
Comprehensive income ................. 4,000,172
------------
Proceeds from issuance of 150 shares of
common stock as a result of stock
options exercised (Note 13) .............. 150 775 -- -- -- 925
Purchase of 18,650 shares of common stock
for the treasury ......................... -- -- -- -- (255,056) (255,056)
-----------------------------------------------------------------------------------
Balance, June 30, 2001 ....................... 2,325,566 12,148,759 9,691,749 505,922 (854,536) 23,817,460
Comprehensive income:
Net income ............................... -- -- 2,962,453 -- -- 2,962,453
Other comprehensive gain, net of tax
(Note 2) ............................... -- -- -- 777,817 -- 777,817
------------
Comprehensive income ................. 3,740,270
------------
Proceeds from issuance of 23,375 shares of
common stock as a result of stock
options exercised (Note 13) .............. 23,375 133,607 -- -- -- 156,982
Exchange of 14,772 shares of common
stock in connection with options exercised (14,772) (171,291) -- -- -- (186,063)
Proceeds from issuance of 475,424 shares
of common stock .......................... 475,424 4,513,198 -- -- -- 4,988,622
Tax benefit of nonqualified stock options
exercised ................................ -- 60,332 -- -- -- 60,332
-----------------------------------------------------------------------------------
Balance, June 30, 2002 ....................... $2,809,593 $16,684,605 $12,654,202 $1,283,739 $(854,536) $ 32,577,603
===================================================================================
See Notes to Consolidated Financial Statements.
25
QCR HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2002, 2001, and 2000
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income .............................................. $ 2,962,453 $ 2,395,732 $ 2,745,527
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation .......................................... 923,747 768,310 633,418
Provision for loan losses ............................. 2,264,965 889,670 1,051,818
Deferred income taxes ................................. (634,045) (362,995) (398,971)
Amortization of offering costs on subordinated
debentures ........................................... 29,506 29,506 29,453
Amortization of premiums on securities, net ........... 162,642 60,062 62,539
Investment securities (gains) losses, net ............. (6,433) 14,047 28,221
Loans originated for sale ............................. (146,973,634) (97,605,425) (36,774,571)
Proceeds on sales of loans ............................ 146,290,546 94,039,651 38,124,921
Net gains on sales of loans ........................... (1,991,437) (1,136,572) (438,799)
Tax benefit of nonqualified stock options exercised ... 60,332 -- 81,178
(Increase) in accrued interest receivable ............. (262,814) (230,058) (626,617)
(Increase) decrease in other assets ................... (283,790) (1,166,767) 170,192
Increase (decrease) in other liabilities .............. 970,602 633,631 (528,780)
----------------------------------------------
Net cash provided by (used in) operating activities 3,512,640 (1,671,208) 4,159,529
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Cash Flows from Investing Activities:
Net decrease in federal funds sold ...................... 7,015,000 18,330,000 13,020,000
Net (increase) decrease in certificates of deposit at
financial institutions ................................ 3,240,372 2,263,878 (241,270)
Purchase of securities available for sale ............... (29,934,923) (17,003,552) (23,659,480)
Purchase of securities held to maturity ................. (100,000) -- (50,000)
Proceeds from calls and maturities of securities ........ 9,702,500 15,045,000 6,200,000
Proceeds from paydowns on securities .................... 1,789,042 1,537,072 1,389,269
Proceeds from sales of securities available for sale .... 101,285 1,262,841 5,191,661
Purchase of life insurance contracts .................... (401,087) -- (2,023,543)
Increase in cash value of life insurance contracts ...... (115,888) (87,840) (14,640)
Net loans originated and held for investment ............ (100,456,216) (41,568,458) (45,117,584)
Purchase of premises and equipment, net ................. (1,471,625) (1,713,387) (795,423)
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Net cash used in investing activities ............. (110,631,540) (21,934,446) (46,101,010)
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Cash Flows from Financing Activities:
Net increase in deposit accounts ........................ 74,162,085 14,088,468 40,100,877
Net increase in short-term borrowings ................... 6,286,167 7,570,818 11,085,847
Proceeds from Federal Home Loan Bank advances ........... 25,000,000 16,750,000 8,000,000
Payments on Federal Home Loan Bank advances ............. (2,298,436) (9,462,639) (10,180,492)
Proceeds from other borrowings .......................... 5,000,000 -- --
Purchase of treasury stock ...