U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------ to -------------
Commission file number 0-22208
QCR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 42-1397595
(State or other jurisdiction of (I.R.S. EmployerID Number)
incorporation or organization)
3551 7th Street, Suite 204, Moline, Illinois 61265
(Address of principal executive offices)
(309) 736-3580
(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: As of August 1, 2004,
the Registrant had outstanding 4,229,453 shares of common stock, $1.00 par value
per share.
1
QCR HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets,
June 30, 2004 and December 31, 2003 3
Consolidated Statements of Income,
For the Three Months Ended June 30, 2004 and 2003 4
Consolidated Statements of Income,
For the Six Months Ended June 30, 2004 and 2003 5
Consolidated Statements of Cash Flows,
For the Six Months Ended June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7-10
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-26
Item 3 Quantitative and Qualitative Disclosures 26-27
About Market Risk
Item 4 Controls and Procedures 27-28
Part II OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 2 Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 29
Item 3 Defaults Upon Senior Securities 29
Item 4 Submission of Matters to a Vote of Security Holders 29
Item 5 Other Information 29
Item 6 Exhibits and Reports on Form 8-K 29-30
Signatures 31
2
Part I
Item 1
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2004 and December 31, 2003
June 30, December 31,
2004 2003
-------------- ---------------
ASSETS
Cash and due from banks $ 32,058,828 $ 24,427,573
Federal funds sold 9,275,000 4,030,000
Interest-bearing deposits at
financial institutions 9,695,860 10,426,092
Securities held to maturity,
at amortized cost 400,008 400,116
Securities available for sale,
at fair value 130,796,692 128,442,926
-------------- ---------------
131,196,700 128,843,042
-------------- ---------------
Loans receivable held for sale 4,363,774 3,790,031
Loans receivable held for investment 587,820,591 518,681,380
Less: Allowance for estimated losses
on loans (9,745,968) (8,643,012)
-------------- --------------
582,438,397 513,828,399
-------------- --------------
Premises and equipment, net 14,011,606 12,028,532
Accrued interest receivable 3,652,206 3,646,108
Bank-owned life insurance 15,358,194 3,085,797
Other assets 13,853,895 9,724,012
------------- --------------
Total assets $ 811,540,686 $ 710,039,555
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 106,271,687 $ 130,962,916
Interest-bearing 403,010,012 380,688,947
-------------- ---------------
Total deposits 509,281,699 511,651,863
-------------- ---------------
Short-term borrowings 126,881,723 51,609,801
Federal Home Loan Bank advances 96,628,400 76,232,348
Other borrowings 7,000,000 10,000,000
Junior subordinated debentures 20,620,000 12,000,000
Other liabilities 8,209,212 6,722,808
-------------- --------------
Total liabilities 768,621,034 668,216,820
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value;
shares authorized, June 2004 -
10,000,000 and December 2003 -
5,000,000; June 2004 - 4,224,462
shares issued and outstanding,
December 2003 - 4,295,985*
shares issued and 4,205,766*
outstanding 4,224,462 2,863,990
Additional paid-in capital 15,543,326 17,143,868
Retained earnings 22,748,989 20,866,749
Accumulated other comprehensive income 402,875 1,802,664
------------ --------------
42,919,652 42,677,271
Less: Cost of common shares acquired for
the treasury; June 2004 - none;
December 2003 - 90,219 - (854,536)
------------ --------------
Total stockholders' equity 42,919,652 41,822,735
------------ -------------
Total liabilities and stockholders'
equity $ 811,540,686 $ 710,039,555
============== ===============
* Share and per share data has been retroactively adjusted to effect a 3:2
common stock split, which occurred on May 28, 2004, as if it had occurred
on January 1, 2003.
See Notes to Consolidated Financial Statements
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30
2004 2003
-------------------------------
Interest and dividend income:
Loans, including fees 8,024,411 7,302,264
Securities:
Taxable 987,279 757,712
Nontaxable 144,289 119,985
Interest-bearing deposits at
financial institutions 66,757 111,856
Federal funds sold 2,989 54,407
---------- -----------
Total interest and dividend income 9,225,725 8,346,224
---------- -----------
Interest expense:
Deposits 1,519,714 1,826,459
Short-term borrowings 237,687 101,556
Federal Home Loan Bank advances 860,472 957,189
Other borrowings 10,172 58,555
Junior subordinated debentures 578,868 283,377
--------- -----------
Total interest expense 3,206,913 3,227,136
--------- -----------
Net interest income 6,018,812 5,119,088
Provision for loan losses 467,659 358,000
--------- -----------
Net interest income after provision
for loan loss 5,551,153 4,761,088
Noninterest income:
Merchant credit card fees, net of
processing costs 302,085 657,754
Trust department fees 608,031 580,579
Deposit service fees 407,764 362,923
Gains on sales of loans, net 406,435 1,214,011
Securities gains, net 26,188 (591)
Other 628,909 434,062
--------- ----------
Total noninterest income 2,379,412 3,248,738
--------- ----------
Noninterest expenses:
Salaries and employee benefits 3,119,302 3,200,921
Professional and data processing fees 530,826 530,436
Advertising and marketing 287,198 204,770
Occupancy and equipment expense 790,760 656,741
Stationery and supplies 132,247 114,443
Postage and telephone 162,779 164,557
Bank service charges 147,401 111,581
Insurance 125,073 102,403
Other 141,994 313,728
--------- ----------
Total noninterest expenses 5,437,580 5,399,579
--------- ----------
Income before income taxes 2,492,985 2,610,247
Federal and state income taxes 821,773 883,347
--------- ----------
Net income $ 1,671,212 $ 1,726,900
========= ==========
Earnings per common share: *
Basic $ 0.40 $ 0.41
Diluted $ 0.39 $ 0.41
Weighted average common shares outstanding 4,212,795 4,165,878
Weighted average common and common equivalent 4,322,443 4,265,559
shares outstanding
Cash dividends declared per common share* $ 0.00 $ 0.00
========= ==========
Comprehensive income $ 84,736 $ 2,069,385
========= ==========
*Share and per share data has been retroactively adjusted to effect
a 3:2 common stock split, which occurred on May 28, 2004, as if it
had occurred on January 1, 2003.
See Notes to Consolidated Financial Statements
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended June 30
2004 2003
-----------------------------
Interest and dividend income:
Loans, including fees $ 15,492,896 $ 14,111,493
Securities:
Taxable 1,978,684 1,563,881
Nontaxable 287,101 240,242
Interest-bearing deposits at
financial institutions 138,272 234,918
Federal funds sold 7,579 101,757
------------- -------------
Total interest and dividend income 17,904,532 16,252,291
------------- -------------
Interest expense:
Deposits 3,022,895 3,695,524
Short-term borrowings 379,937 188,864
Federal Home Loan Bank advances 1,660,607 1,723,436
Other borrowings 46,050 110,515
Junior subordinated debentures 1,000,293 566,753
------------- ------------
Total interest expense 6,109,782 6,285,092
------------- ------------
Net interest income 11,794,750 9,967,199
Provision for loan losses 1,324,500 1,688,427
------------- ------------
Net interest income after provision
for loan losses 10,470,250 8,278,772
Noninterest income:
Merchant credit card fees, net of
processing costs 841,283 995,247
Trust department fees 1,288,835 1,141,721
Deposit service fees 817,108 693,771
Gains on sales of loans, net 667,853 2,169,420
Securities gains (losses), net 26,188 (591)
Other 1,096,881 737,993
------------- -----------
Total noninterest income 4,738,148 5,737,561
------------- -----------
Noninterest expenses:
Salaries and employee benefits 6,271,103 6,085,713
Professional and data processing fees 996,102 959,506
Advertising and marketing 500,990 353,526
Occupancy and equipment expense 1,521,750 1,308,438
Stationery and supplies 269,192 224,720
Postage and telephone 329,059 318,122
Bank service charges 285,243 223,263
Insurance 225,567 209,209
Loss on redemption of junior
subordinated debentures 747,490 -
Other 380,172 500,926
------------- -----------
Total noninterest expenses 11,526,668 10,183,422
------------- -----------
Income before income taxes 3,681,730 3,832,911
Federal and state income taxes 1,174,601 1,279,063
------------- -----------
Net income $ 2,507,129 $ 2,553,848
============= ===========
Earnings per common share:*
Basic $ 0.60 $ 0.61
Diluted $ 0.58 $ 0.60
Weighted average common shares outstanding 4,213,635 4,158,200
Weighted average common and common equivalent 4,330,533 4,253,576
Cash dividends declared per common share* 0.04 0.03
============= ===========
Comprehensive income $ 1,107,340 $ 2,971,765
============= ===========
* Share and per share data has been retroactively adjusted to effect
a 3:2 common stock split, which occurred on May 28, 2004, as if it
had occurred on January 1, 2003.
See Notes to Consolidated Financial Statements
5
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30
2004 2003
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,507,129 $ 2,553,848
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 685,551 527,914
Provision for loan losses 1,324,500 1,688,427
Amortization of offering costs on
subordinated debentures 10,775 14,753
Loss on redemption of junior
subordinated debentures 747,490 -
Amortization of premiums on
securities, net 578,330 287,770
Investment securities (gains) losses, net (26,188) 591
Loans originated for sale (45,896,508) (140,594,814)
Proceeds on sales of loans 45,990,618 143,917,116
Net gains on sales of loans (667,853) (2,169,420)
Net losses on sales of premises and
equipment - 40,299
Tax benefit of nonqualified stock
options exercised 113,437 113,489
(Increase) decrease in accrued interest
receivable (6,098) 13,908
(Increase) decrease in other assets (4,049,784) 12,538,885
Increase (decrease) in other liabilities 1,485,264 (619,978)
------------ -----------
Net cash provided by operating activities $ 2,796,663 18,312,788
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold (5,245,000) (17,355,000)
Net decrease in interest-bearing deposits
at financial institutions 730,232 2,481,216
Activity in securities portfolio:
Purchases (31,993,964) (25,280,886)
Calls and maturities 25,848,001 10,750,000
Paydowns 1,002,010 2,530,330
Activity in bank-owned life insurance:
Purchases (11,950,717) (66,312)
Increase in cash value (321,680) (73,738)
Net loans originated and held for investment (69,360,755) (41,829,346)
Purchase of premises and equipment (2,676,872) (484,675)
Proceeds from sales of premises and equipment 8,247 222,479
------------ -----------
Net cash used in investing activities $ (93,960,498) (69,105,932)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts (2,370,164) 48,303,419
Net increase in short-term borrowings 75,271,922 3,395,132
Activity in Federal Home Loan Bank advances:
Advances 28,500,000 10,350,000
Payments (8,103,948) (6,043,425)
Net (decrease) increase in other borrowings (3,000,000) 2,000,000
Proceeds from issuance of junior
subordinated debentures 20,620,000 -
Redemption of junior subordinated debentures (12,000,000) -
Payment of cash dividends (167,838) (138,146)
Payment of fractional shares on 3:2 stock split (2,549) -
Proceeds from issuance of common stock, net 47,667 10,133
------------ -----------
Net cash provided by financing activities $ 98,795,090 57,877,113
------------ -----------
Net increase in cash and due from banks 7,631,255 7,083,969
Cash and due from banks, beginning 24,427,573 24,906,003
------------ -----------
Cash and due from banks, ending $ 32,058,828 $31,989,972
============ ===========
Supplemental disclosure of cash flow information,
cash payments for:
Interest $ 6,200,693 $ 6,713,509
============ ===========
Income/franchise taxes $ 536,535 $ 2,312,153
============ ===========
Supplemental schedule of noncash investing
activities:
Change in accumulated other comprehensive
income, unrealized (losses)/gains on
securities available for sale, net $ (1,399,789) $ 417,917
============= ============
6
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include information
or footnotes necessary for a fair presentation of financial position, results of
operations and changes in financial condition in conformity with accounting
principles generally accepted in the United States of America. However, all
adjustments that are, in the opinion of management, necessary for a fair
presentation have been included. Any differences appearing between numbers
presented in financial statements and management's discussion and analysis are
due to rounding. Results for the periods ended June 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.
Certain amounts in the prior period financial statements have been
reclassified, with no effect on net income or stockholders' equity, to conform
with the current period presentation.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of QCR Holdings, Inc. (the "Company"), a
Delaware corporation, and its wholly owned subsidiaries, Quad City Bank and
Trust Company ("Quad City Bank & Trust"), Cedar Rapids Bank and Trust Company
("Cedar Rapids Bank & Trust"), Quad City Bancard, Inc. ("Bancard"), and Quad
City Liquidation Corporation ("QCLC"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company also wholly owns
QCR Holdings Statutory Trust II ("Trust II"), and QCR Holdings Statutory Trust
III ("Trust III"). These two entities were both established by the Company for
the sole purpose of issuing trust preferred securities. As required by a ruling
of the Securities and Exchange Commission in December 2003, the Company's equity
investments in these entities are not consolidated, but are included in other
assets on the consolidated balance sheet for $620 thousand in aggregate. In
addition to these six wholly owned subsidiaries, the Company has an aggregate
investment of $330 thousand in three associated companies, Nobel Electronic
Transfer, LLC, Nobel Real Estate Investors, LLC, and Velie Plantation Holding
Company. The Company owns 20% equity positions in each of these associated
companies.
Stock-based compensation plans: The Company accounts for its stock-based
employee compensation plans under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
-----------------------------------------------
Net income, as reported $1,671,212 $1,726,900 $2,507,129 $2,553,848
Deduct total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (30,864) (25,416) (64,563) (51,613)
-----------------------------------------------
Net income $1,640,348 $1,701,484 $2,442,566 $ 2,502,235
===============================================
Earnings per share:*
Basic
As reported $0.40 $0.41 $0.60 $0.61
Pro forma 0.39 0.41 0.58 0.60
Diluted:
As reported $0.39 $0.41 $0.58 $0.60
Pro forma 0.38 0.40 0.57 0.59
* Share and per share data has been retroactively adjusted to effect a 3:2
common stock split, which occurred on May 28, 2004, as if it had occurred on
January 1, 2003.
7
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions for grants during the six months
ended June 30, 2004 and 2003: dividend rate of 0.38% to 0.43% for the six months
ended June 30, 2004 and 0.59% for the six months ended June 30, 2003; expected
price volatility of 23.54% to 24.88%; risk-free interest rate based upon current
rates at the date of grants (3.68% to 4.72% for stock options and 0.82% to 1.29%
for the employee stock purchase plan); and expected lives of 10 years for stock
options and 3 months to 6 months for the employee stock purchase plan.
NOTE 2 - EARNINGS PER SHARE
The following information was used in the computation of earnings per
share on a basic and diluted basis. Share and per share data has been
retroactively adjusted to effect a 3:2 common stock split, which occurred on May
28, 2004, as if it had occurred on January 1, 2003.
Three months ended Six months ended
June30, June 30,
------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net income, basic and diluted
Earnings $1,671,212 $1,726,900 $2,507,129 $2,553,848
========== ========== ========== ==========
Weighted avereage common shares
Outstanding 4,212,795 4,165,878 4,213,635 4,158,200
Weighted average common shares
issuable upon exercise of stock
options and under the
employee stock purchase plan 109,648 99,681 116,898 95,376
------- ------ ------- ------
Weighted average common and
common equivalent shares
outstanding 4,322,443 4,265,559 4,330,533 4,253,576
========= ========= ========= =========
NOTE 3 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is
presented as follows for both the three-month and six-month periods ended June
30, 2004 and 2003, respectively.
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenue:
Commercial banking $10,505,587 $10,250,725 $20,149,586 $19,605,673
Credit card processing 348,056 698,852 932,735 1,080,362
Trust management 608,032 580,578 1,288,836 1,141,721
All other 143,462 64,807 271,523 162,096
----------- ----------- ----------- -----------
Total revenue $11,605,137 $11,594,962 $22,642,680 $21,989,852
=========== =========== =========== ===========
Net income (loss):
Commercial banking $ 1,897,154 $ 1,660,457 $ 3,166,773 $ 2,540,163
Credit card processing 100,535 334,005 345,399 491,712
Trust management 135,426 129,027 334,901 257,679
All other (461,903) (396,589) (1,339,944) (735,706)
----------- ----------- ----------- ------------
Total net income $ 1,671,212 $ 1,726,900 $ 2,507,129 $ 2,553,848
=========== =========== =========== ============
8
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company's subsidiary banks make
various commitments and incur certain contingent liabilities that are not
presented in the accompanying consolidated financial statements. The commitments
and contingent liabilities include various guarantees, commitments to extend
credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the banks upon extension of credit, is based
upon management's credit evaluation of the counter-party. Collateral held varies
but may include accounts receivable, marketable securities, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the banks
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The subsidiary banks hold collateral, as described
above, supporting those commitments if deemed necessary.
In the event the customer does not perform in accordance with the terms of the
agreement with the third party, the banks would be required to fund the
commitments. The maximum potential amount of future payments the banks
could be required to make is represented by the contractual amount. If the
commitment is funded, the banks would be entitled to seek recovery from the
customer. At June 30, 2004 and December 31, 2003, no amounts were recorded
as liabilities for the banks' potential obligations under these guarantees.
As of June 30, 2004 and December 31, 2003, commitments to extend credit
aggregated $233.5 million and $194.9 million, respectively. As of June 30, 2004
and December 31, 2003, standby letters of credit aggregated $11.4 million and
$6.0 million, respectively. Management does not expect that all of these
commitments will be funded.
The Company has also executed contracts for the sale of mortgage loans in
the secondary market in the amount of $4.4 million and $3.8 million, at June 30,
2004 and December 31, 2003, respectively. These amounts are included in loans
held for sale at the respective balance sheet dates.
Bancard is subject to the risk of cardholder chargebacks and its merchants
being incapable of refunding the amount charged back. Management attempts to
mitigate such risk by regular monitoring of merchant activity and in appropriate
cases, holding cash reserves deposited by the merchant.
The Company also has a guarantee to MasterCard International,
Incorporated, which is backed by a performance bond in the amount of $1.0
million. As of June 30, 2004 and December 31, 2003, there were no significant
pending liabilities.
A significant portion of residential mortgage loans sold to investors in
the secondary market are sold with recourse. Specifically, certain loan sales
agreements provide that if the borrower becomes delinquent a number of payments
or a number of days, within six months to one year of the sale, the banks must
repurchase the loan from the subject investor. The banks did not repurchase any
loans from secondary market investors under the terms of these loan sales
agreements during the six months ended June 30, 2004 and the year ended December
31, 2003, respectively. In the opinion of management, the risk of recourse to
the banks is not significant and, accordingly, no liability has been established
related to such.
9
NOTE 5 - JUNIOR SUBORDINATED DEBENTURES
In June 1999, the Company issued 1,200,000 shares of 9.2% cumulative trust
preferred securities through a newly formed subsidiary, Trust I, which used the
proceeds from the sale of the trust preferred securities to purchase junior
subordinated debentures of the Company. These securities were $12.0 million at
December 31, 2003. In February 2004, the Company issued, in a private
transaction, $8.0 million of floating rate trust preferred securities and $12.0
million of fixed rate trust preferred securities through two newly formed
subsidiaries, Trust II and Trust III, respectively. Trust II and Trust III used
the proceeds from the sale of the trust preferred securities, along with the
funds from their equity, to purchase junior subordinated debentures of the
Company in the amounts of $8.2 million and $12.4 million, respectively. In
February 2004, the Federal Reserve provided confirmation to the Company for
their treatment of these new issuances as Tier 1 capital for regulatory capital
purposes, subject to current established limitations. These securities were
$20.0 million in aggregate at June 30, 2004. On June 30, 2004, the Company
redeemed the $12.0 million of 9.2% cumulative trust preferred securities issued
by Trust I in 1999. During the six months ended June 30, 2004, the Company
recognized a loss of $747 thousand on the redemption of these trust preferred
securities at their earliest call date, which resulted from the one-time
write-off of unamortized costs related to the original issuance of the
securities in 1999.
NOTE 6 - RECENT ACCOUNTING DEVELOPMENTS
SEC Staff Accounting Bulletin ("SAB") No. 105 "Application of Accounting
Principles to Loan Commitments" was released in March 2004. This release
summarizes the SEC staff position regarding the application of GAAP to loan
commitments accounted for as derivative instruments. The Company accounts for
interest rate lock commitments issued on mortgage loans that will be held for
sale as derivative instruments. Consistent with SAB No. 105, the Company
considers the fair value of these commitments to be zero at the commitment date,
with subsequent changes in fair value determined solely on changes in market
interest rates. The Company's adoption of this bulletin had no impact on the
consolidated financial statements.
At the March 17-18, 2004 Emerging Issues Task Force ("EITF") meeting, the
Task Force reached a consensus on Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments".
EITF 03-1 provides guidance for determining the meaning of
"other-than-temporarily impaired" and its application to certain debt and equity
securities within the scope of Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115") and investments accounted for under the cost method. The guidance set
forth in the Statement is effective for the Company in the September 30, 2004
consolidated financial statements. Issue 03-1 is not expected to have a material
impact on the consolidated financial statements.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QCR Holdings, Inc. is the parent company of Quad City Bank & Trust, Cedar
Rapids Bank & Trust, and Quad City Bancard, Inc.
Quad City Bank & Trust and Cedar Rapids Bank & Trust are Iowa-chartered
commercial banks that are members of the Federal Reserve System with depository
accounts insured to the maximum amount permitted by law by the Federal Deposit
Insurance Corporation. Quad City Bank & Trust commenced operations in 1994 and
provides full-service commercial and consumer banking, and trust and asset
management services to the Quad City area and adjacent communities through its
four offices that are located in Bettendorf and Davenport, Iowa and Moline,
Illinois. Cedar Rapids Bank & Trust commenced operations in 2001 and provides
full-service commercial and consumer banking service to Cedar Rapids and
adjacent communities through its office located in the GreatAmerica Building in
downtown Cedar Rapids, Iowa.
Bancard provides merchant and cardholder credit card processing services.
In October 2002, the Company sold Bancard's independent sales organization (ISO)
related merchant credit card operations to iPayment, Inc. Until September 24,
2003, Bancard continued to temporarily process transactions for iPayment, Inc.,
and approximately 32,500 merchants. Since iPayment, Inc. discontinued processing
with Bancard, processing volumes have decreased significantly. Bancard does,
however, continue to provide credit card processing for its local merchants and
agent banks and for cardholders of the Company's subsidiary banks.
OVERVIEW
Net income for the first six months of 2004 was $2.5 million as compared
to net income of $2.6 million for the same period in 2003, a decrease of $47
thousand, or 2%. Basic earnings per share for the first six months of 2004 were
$0.60 and for the first six months of 2003 were $0.61. As a result of the common
stock split, which occurred on May 28, 2004, all share and per share data has
been retroactively adjusted to effect a three-for-two common stock split as if
it had occurred on January 1, 2003. For the six months ended June 30, 2004, net
interest income improved by $1.8 million, or 18%, while, as a result of the
dramatic drop in residential mortgage refinancing and the proportionate decrease
in gain on sales of loans, noninterest income declined by $999 thousand, or 17%,
to combine for a net improvement of $828 thousand when compared to the same
period in 2003. Enhancing this 5% improvement in revenue for the Company was a
decline in the provision for loan losses of $364 thousand, or 22%. The first six
months of 2004 reflected an increase in noninterest expense of 13%, when
compared to the same period in 2003. The increase in noninterest expense was
predominately due to the one-time write-off of unamortized costs relating to the
issuance of trust preferred securities ("TPS"), in combination with $213
thousand of growth in occupancy and equipment expense. After-tax income at Cedar
Rapids Bank & Trust was $329 thousand for the six months ended June 30, 2004, as
compared to $15 thousand for the same period in 2003. While profitability at the
second bank charter has improved at a pace anticipated by management, Cedar
Rapids Bank & Trust's asset growth has been more rapid than expected, as total
assets were $187.9 million at June 30, 2004.
In March 2004, as a result of the Company's intention to redeem $12.0
million of trust preferred securities issued in 1999 at their June 30, 2004 call
date, the Company realized significant non-recurring expense in the form of a
write-off of unamortized TPS issuance costs. This refinancing strategy, expected
to provide long-term benefits for the Company, resulted in an increase to
noninterest expense of $747 thousand, and combined with the additional interest
costs of the new trust preferred securities, reduced after-tax net income for
the first six months of 2004 by $712 thousand, or $0.16 in diluted earnings per
share. Excluding this one-time write-off of unamortized TPS issuance costs and
the additional interest costs, net income for the six months ended June 30, 2004
would have been $3.2 million, or diluted earnings per share of $0.74. Although
excluding the impact of this event is a non-GAAP measure, management believes
that it is important to provide such information due to the non-recurring nature
of this expense and to more accurately compare the results of the periods
presented.
11
In June 2004, the Company announced its expansion into the Rockford,
Illinois market through the proposed creation of a third de novo bank charter.
Consistent with the strategies of both Quad City Bank & Trust and Cedar Rapids
Bank & Trust, the new bank, Rockford Bank and Trust Company ("Rockford Bank &
Trust") will focus on the local community and on the creation of personalized
banking relationships with a team of outstanding local bankers. It is expected
that this new bank will operate initially as a bank of Quad City Bank & Trust,
until the new charter can be approved by regulators. During the first six months
of 2004, the Company experienced a $50 thousand reduction in after-tax net
income as a result of start-up costs associated with the creation of Rockford
Bank & Trust.
The Company's operating results are derived largely from net interest
income. Net interest income is the difference between interest income,
principally from loans and investment securities, and interest expense,
principally on borrowings and customer deposits. Changes in net interest income
result from changes in volume, net interest spread and net interest margin.
Volume refers to the average dollar levels of interest-earning assets and
interest-bearing liabilities. Net interest spread refers to the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to the net interest
income divided by average interest-earning assets and is influenced by the level
and relative mix of interest-earning assets and interest-bearing liabilities.
The Company realized a 0.04% decrease in its net interest spread,
declining from 3.16% for the three months ended June 30, 2003 to 3.12% for the
three months ended June 30, 2004. The average yield on interest-earning assets
decreased 0.61% for the three months ended June 30, 2004 when compared to the
same period ended June 30, 2003. At the same time, the average cost of
interest-bearing liabilities decreased 0.57%. The narrowing of the net interest
spread resulted in a 0.17% reduction in the Company's net interest margin
percentage. For the three months ended June 30, 2004, the net interest margin
was 3.40% compared to 3.57% for the same period in 2003. Without the June 2004
redemption of $12.0 million of capital securities issued in 1999, the related
issuance of $20.6 million in new trust preferred securities, and the subsequent
pay-off of the Company's $10.0 million line of credit during the first quarter
of 2004, the Company's net interest margin would have been 3.50% for the three
months ended June 30, 2004. Although excluding the impact of these events is a
non-GAAP measure, management believes that it is important to provide such
information due to the non-recurring nature of the related expense and to more
accurately compare the results of the periods presented.
For both the six months ended June 30, 2004 and the six months ended June
30, 2003, the Company demonstrated stability in the net interest spread at
3.11%. The average yield on interest-earning assets decreased 0.54% for the six
months ended June 30, 2004 when compared to the same period ended June 30, 2003.
At the same time, the average cost of interest-bearing liabilities also
decreased 0.54%. While the net interest spread remained stable, a decline in the
ratio of earning assets to paying liabilities, combined with the lower rate
environment, resulted in a 0.10% reduction in the Company's net interest margin
percentage. For the six months ended June 30, 2004, the net interest margin was
3.42% compared to 3.52% for the same period in 2003. Without the June, 2004
redemption of $12.0 million of capital securities issued in 1999, the related
issuance of $20.6 million in new trust preferred securities, and the subsequent
pay-off of the Company's $10.0 million line of credit during the first quarter
of 2004, the Company's net interest margin would have been 3.51% for the three
six ended June 30, 2004.
12
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
For the three months ended June 30,
2004 2003
--------------------------- -----------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost
--------------------------- ------------------------------
ASSETS
Interest earnings assets:
Federal funds sold $ 5,581 3 0.22% $ 17,317 54 1.25%
Interest-bearing deposits at
financial institutions 11,781 67 2.27% 14,382 112 3.12%
Investment securities (1) 126,506 1,206 3.81% 83,314 940 4.51%
Gross loans receivable (2). 573,781 8,024 5.59% 465,679 7,302 6.27%
---------------- ------------------
Total interest earning assets 717,649 9,300 5.18% 580,692 8,408 5.79%
Noninterest-earning assets:
Cash and due from banks $ 31,678 $ 27,774
Premises and equipment 13,473 8,974
Less allowance for estimated
losses on loans (9,677) (7,583)
Other 33,773 31,650
--------- ----------
Total assets $786,896 $ 641,507
========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits $170,021 319 0.75% $ 148,280 404 1.09%
Savings deposits 15,061 12 0.32% 12,263 18 0.59%
Time deposits 211,632 1,189 2.25% 194,770 1,406 2.89%
Short-term borrowings 101,225 238 0.94% 37,855 101 1.07%
Federal Home Loan Bank advances 92,346 860 3.73% 78,023 957 4.91%
Junior subordinated debentures 29,620 579 7.82% 12,000 283 9.43%
Other borrowings 1,750 10 2.29% 7,000 58 3.31%
----------------- -------------------
Total interest-bearing
liabilities 621,655 3,207 2.06% 490,191 3,227 2.63%
Noninterest-bearing demand 109,900 92,453
Other noninterest-bearing
liabilities 12,567 20,315
Total liabilities 744,122 602,959
Stockholders' equity 42,774 38,548
-------- ----------
Total liabilities and
stockholders' equity $786,896 $ 641,507
======== =========
Net interest income $ 6,093 $ 5,181
======= ========
Net interest spread 3.12% 3.16%
======= =======
Net interest margin 3.40% 3.57%
======= =======
Ratio of average interest earning
assets to average interest-
bearing liabilities 115.44% 118.46%
========= =========
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
13
Analysis of Changes of Interest Income/Interest Expense
For the three months ended June 30, 2004
Components
Inc./(Dec.) of Change (1)
from ---------------------------
Prior Period Rate Volume
----------------------------------------
2004 vs. 2003
----------------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold $ (51) $ (28) $ (23)
Interest-bearing deposits at
financial institutions (45) (27) (18)
Investment securities (2) 266 (836) 1,102
Gross loans receivable (3) 722 (4,080) 4,802
----------------------------------------
Total change in interest income $ 892 $ (4,971) $ 5,863
----------------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits $ (85) $ (380) $ 295
Savings deposits (6) (26) 20
Time deposits (217) (857) 640
Short-term borrowings 137 (81) 218
Federal Home Loan Bank advances (97) (853) 756
Junior subordinated debentures 296 (317) 613
Other borrowings (48) (14) (34)
----------------------------------------
Total change in interest expense $ (20) $ (2,528) $ 2,508
----------------------------------------
Total change in net interest income 912 $ (2443) 3,355
========================================
(1) The column "increase/decrease from prior period" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate for each period
presented.
(3) Loan fees are not material and are included in interest income from loans
receivable.
14
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
For the six months ended June 30,
2004 2003
--------------------------- -----------------------------
Interest Average Interest Average
Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost
--------------------------- ------------------------------
ASSETS
Interest earnings assets:
Federal funds sold $ 4,975 8 0.32% $ 18,218 102 1.12%
Interest-bearing deposits at
financial institutions 11,369 138 2.43% 14,101 235 3.33%
Investment securities (1) 126,163 2,414 3.83% 82,394 1,928 4.68%
Gross loans receivable (2). 555,272 15,493 5.58% 458,465 14,111 6.16%
---------------- ------------------
Total interest earning assets 697,778 18,053 5.17% 573,177 16,376 5.71%
Noninterest-earning assets:
Cash and due from banks $ 30,652 $ 26,919
Premises and equipment 12,975 9,012
Less allowance for estimated
losses on loans (9,325) (7,385)
Other 29,967 22,955
--------- ----------
Total assets $762,047 $ 624,678
========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits $171,058 641 0.75% $ 144,657 769 1.06%
Savings deposits 14,816 24 0.32% 12,120 35 0.58%
Time deposits 206,965 2,358 2.28% 194,041 2,894 2.98%
Short-term borrowings 82,554 380 0.92% 37,987 188 0.99%
Federal Home Loan Bank advances 87,950 1,660 3.77% 77,064 1,723 4.47%
Junior subordinated debentures 25,965 1,000 7.70% 12,000 566 9.43%
Other borrowings 3,375 46 2.73% 6,500 110 3.38%
----------------- -------------------
Total interest-bearing
liabilities 592,682 6,109 2.06% 484,369 6,285 2.60%
Noninterest-bearing demand 115,379 89,283
Other noninterest-bearing
liabilities 11,778 13,203
Total liabilities 719,839 586,854
Stockholders' equity 42,208 37,824
-------- ----------
Total liabilities and
stockholders' equity $762,047 $ 624,678
======== =========
Net interest income $11,944 $ 10,091
======= ========
Net interest spread 3.11% 3.11%
======= =======
Net interest margin 3.42% 3.52%
======= =======
Ratio of average interest earning
assets to average interest-
bearing liabilities 117.73% 118.33%
========= =========
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate for each period
presented.
(2) Loan fees are not material and are included in interest income from loans
receivable.
15
Analysis of Changes of Interest Income/Interest Expense
For the six months ended June 30, 2004
Components
Inc./(Dec.) of Change (1)
from ---------------------------
Prior Period Rate Volume
----------------------------------------
2004 vs. 2003
----------------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold $ (94) $ (47) $ (47)
Interest-bearing deposits at
financial institutions (97) (57) (40)
Investment securities (2) 486 (923) 1,409
Gross loans receivable (3) 1,381 (3,235) 4,616
----------------------------------------
Total change in interest income $ 1,676 $ (4,262) $ 5,938
----------------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits $ (128) $ (426) $ 298
Savings deposits (11) (28) 17
Time deposits (536) (1,019) 483
Short-term borrowings 192 (38) 230
Federal Home Loan Bank advances (63) (544) 481
Junior subordinated debentures 435 (299) 734
Other borrowings (64) (18) (46)
----------------------------------------
Total change in interest expense $ (175) $ (2,372) $ 2,197
----------------------------------------
Total change in net interest income 1,851 $ (1,890) 3,741
========================================
(1) The column "increase/decrease from prior period" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate for each period
presented.
(3) Loan fees are not material and are included in interest income from loans
receivable.
CRITICAL ACCOUNTING POLICY
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
financial information contained within these statements is, to a significant
extent, financial information that is based on approximate measures of the
financial effects of transactions and events that have already occurred. Based
on its consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. Management may report a materially different amount for the
provision for loan losses in the statement of operations to change the allowance
for loan losses if its assessment of the above factors were different. This
discussion and analysis should be read in conjunction with the Company's
financial statements and the accompanying notes presented elsewhere herein, as
well as the portion of this Management's Discussion and Analysis, which
discusses the allowance for loan losses in the section entitled "Financial
Condition." Although management believes the levels of the allowance as of both
June 30, 2004 and December 31, 2003 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.
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Interest income increased by $880 thousand to $9.2 million for the
three-month period ended June 30, 2004 when compared to $8.3 million for the
quarter ended June 30, 2003. The increase of 11% in interest income was
attributable to greater average, outstanding balances in interest earning
assets, principally with respect to loans receivable, partially offset by
significant reductions in interest rates. The Company's average yield on
interest-earning assets decreased 0.61% for the three months ended June 30, 2004
when compared to the three months ended June 30, 2003.
Interest expense decreased by $20 thousand to remain stable at $3.2
million for the three-month period ended June 30, 2004, as it had been for the
three-month period ended June 30, 2003. The less than 1% decrease in interest
expense was the result of a combination of significant reductions in interest
rates, principally with respect to customers' deposits in subsidiary banks,
almost entirely offset by greater average, outstanding balances in
interest-bearing liabilities, principally with respect to Federal Home Loan Bank
advances and customers' deposits in subsidiary banks. The Company's average cost
of interest-bearing liabilities was 2.06% for the three months ended June 30,
2004, which was down 0.57% when compared to the three months ended June 30,
2003. Without the June, 2004 redemption of $12.0 million of trust preferred
securities issued in 1999, the related issuance of new trust preferred
securities, and the subsequent pay-off of the Company's line of credit, the
Company's average cost of interest-bearing liabilities would have instead
decreased from 2.56% for the comparable period one year ago to 1.94% for the
three months ended June 30, 2004. Although excluding the impact of these events
is a non-GAAP measure, management believes that it is important to provide such
information due to the non-recurring nature of the related expense and to more
accurately compare the results of the periods presented.
At June 30, 2004 and March 31, 2004, the Company had an allowance for
estimated losses on loans of 1.65% and 1.69%, respectively. The provision for
loan losses increased by $110 thousand from $358 thousand for the three-month
period ended June 30, 2003 to $468 thousand for the three-month period ended
June 30, 2004. During the second quarter of 2004, management made monthly
provisions for loan losses based upon a number of factors, including the
increase in loans and a detailed analysis of the loan portfolio. During the
second quarter of 2004, the $468 thousand provision to the allowance for loan
losses was attributed entirely to net growth in the loan portfolio and was
offset slightly by a recovery received by Quad City Bank & Trust in June. For
the three months ended June 30, 2004, there was a single commercial loan
charge-off of $221 thousand, and there were commercial recoveries of $77
thousand. Consumer loan charge-offs and recoveries totaled $60 thousand and $6
thousand, respectively, during the quarter. Credit card loans accounted for 38%
of the second quarter consumer charge-offs. Residential real estate loans had no
charge-offs or recoveries for the three months ended June 30, 2004.
Noninterest income of $2.4 million for the three-month period ended June
30, 2004 was an $869 thousand, or 27%, decrease from $3.2 million for the
three-month period ended June 30, 2003. Noninterest income during each of the
quarters in comparison consisted primarily of income from the merchant credit
card operation, fees from the trust department, depository service fees, gains
on the sale of residential real estate mortgage loans, and other miscellaneous
income. The quarter ended June 30, 2004, when compared to the same quarter in
2003, posted a $356 thousand decrease in fees earned by the merchant credit card
operations of Bancard. Gains on the sale of residential real estate mortgage
loans, net, decreased $808 thousand from the quarter ended June 30, 2003 to the
same quarter in 2004, as a result of the significant decline in the refinancing
of residential home mortgages. Additional variations in noninterest income
consisted of a $27 thousand increase in trust department fees, a $45 thousand
increase in deposit service fees, and a $195 thousand increase in other
noninterest income. Other noninterest income in each quarter consisted primarily
of investment advisory and management fees, earnings on the cash surrender value
of life insurance, and income from associated companies.
Merchant credit card fees, net of processing costs for the three months
ended June 30, 2004 decreased by 54% to $302 thousand from $658 thousand for the
second quarter of 2003. In October 2002, the Company sold Bancard's ISO related
merchant credit card operations to iPayment, Inc., and Bancard's core business
focus was shifted to processing for its agent banks, cardholders, and local
merchants. Through September 2003, Bancard continued to process ISO related
transactions for iPayment, Inc. for a fixed monthly service fee, which increased
as the temporary processing period was extended. For the second quarter of 2003,
net fixed monthly service fees collected from iPayment totaled $321 thousand,
and Bancard's core merchant credit card fees, net of processing costs were $337
thousand. In September 2003, the transfer of the ISO related Visa/Mastercard
processing activity to iPayment, Inc. was completed and significantly reduced
Bancard's exposure to risk of credit card loss that the ISO activity carried
with it. Bancard had established and carried ISO reserves, which provided
coverage for this exposure. In March 2004, the Company recognized a recovery of
$144 thousand from a reduction in these ISO reserves. For the second quarter of
2004, Bancard's core merchant credit card fees, net of processing costs were
$302 thousand, or a decline of 10% when compared to the second quarter of the
previous year.
17
For the quarter ended June 30, 2004, trust department fees increased $27
thousand, or 5%, to $608 thousand from $581 thousand for the same quarter in
2003. There was continued development of existing trust relationships and the
addition of new trust customers throughout the past twelve months, as well as an
improvement in market values of securities held in trust accounts, when compared
to one year ago. Each of these factors had a resulting impact in the calculation
and realization of trust fees.
Deposit service fees increased $45 thousand, or 12%, to $408 thousand from
$363 thousand for the three-month periods ended June 30, 2004 and June 30, 2003,
respectively. This increase was primarily a result of the growth in noninterest
bearing demand deposit accounts of $7.1 million, or 7%, since June 30, 2003.
Service charges and NSF (non-sufficient funds) charges related to demand deposit
accounts were the main components of deposit service fees.
Gains on sales of loans, net, were $406 thousand for the three months
ended June 30, 2004, which reflected a decrease of 67%, or $808 thousand, from
$1.2 million for the three months ended June 30, 2003. The decrease resulted
from the steep decline in mortgage refinances, which has been experienced in
recent months, and its effect on the subsequent sale of the majority of
residential mortgages into the secondary market. Management anticipates that the
level of gains on sales of loans, net, will continue to be depressed
significantly from those experienced throughout much of 2003.
For the quarter ended June 30, 2004, other noninterest income increased
$195 thousand, or 45%, to $629 thousand from $434 thousand for the same quarter
in 2003. The increase was primarily due to a combination of the improved
generation of investment advisory and management fees from the subsidiary banks'
investment center operations, increased earnings on the cash surrender value of
life insurance, and the increase in income from associated companies.
Noninterest expenses for both the three months ended June 30, 2004, and
the three months ended June 30, 2003, were $5.4 million. The significant
components of noninterest expenses were salaries and benefits, occupancy and
equipment expenses, and professional and data processing fees, for both
quarters.
The following table sets forth the various categories of noninterest
expenses for the three months ended June 30, 2004 and 2003.
Noninterest Expenses
Three months ended
June 30,
--------
2004 2003 % change
---------- ---------- --------
Salaries and employee benefits $3,119,302 $3,200,921 (2.6)%
Professional and data processing fees 530,826 530,436 0.1%
Advertising and marketing 287,198 204,770 40.3%
Occupancy and equipment expense 790,760 656,741 20.4%
Stationery and supplies 132,247 114,443 15.6%
Postage and telephone 162,779 164,557 (1.1)%
Bank service charges 147,401 111,581 32.1%
Insurance 125,073 102,403 22.1%
Other 141,994 313,728 (54.7)%
---------- ---------
Total noninterest expenses $5,437,580 $5,399,579 0.7%
========== ==========
For the quarter ended June 30, 2004, total salaries and benefits decreased
to $3.1 million, which was down $82 thousand from the previous year's quarter
total of $3.2 million. The decrease of 3% was primarily due to the Company's
decreased expenses related to both tax benefit rights and stock appreciation
rights and decreased real estate commissions which were proportionate to the
decline in gains on sales of loans, net. Offsetting a large portion of these
reductions was an increase in compensation and benefits related to an increase
in employees from 203 full time equivalents to 229 from year-to-year. Occupancy
and equipment expense increased $134 thousand, or 20%, from quarter to quarter.
The increase was a proportionate reflection of the additional furniture,
fixtures and equipment and leasehold improvements at the subsidiary banks.
Advertising and marketing fees increased 40% from $205 thousand for the three
months ended June 30, 2003 to $287 thousand for the same three-month period in
2004. Bank service charges increased 32% from $112 thousand for the second
quarter of 2003 to $147 thousand for the comparable quarter in 2004. The $36
thousand increase was a reflection of the increase in activity between the
subsidiary banks and their upstream banks. Insurance expense experienced a 32%
increase from $102 thousand for the second quarter of 2003 to $125 thousand for
the like quarter in 2004. This $23 thousand increase was a reflection of the
facilities expansions taking place at the subsidiary banks, along with the
general growth of the Company. Stationary and supplies experienced an $18
thousand increase for the second quarter of 2004, when compared to the like
period in 2003. Increases in the volume of bank forms and copier/fax supplies
used at the subsidiary banks were the primary contributors to the 16% increase.
Other noninterest expense decreased $172 thousand, or 55%, for the three months
ended June 30, 2004 when compared to the like period in 2003. The decrease was
primarily due to loan expense incurred during the second quarter of 2003, which
was related to other real estate owned.
18
The provision for income taxes was $822 thousand for the three-month
period ended June 30, 2004 compared to $883 thousand for the three-month period
ended June 30, 2003 for a decrease of $62 thousand, or 7%. The decrease was the
result of a decrease in income before income taxes of $117 thousand, or 4%, for
the 2004 quarter when compared to the 2003 quarter, in combination with a
decrease in the effective tax rate from 33.8 % in 2003 to 33.0% in 2004.
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Interest income increased by $1.7 million to $17.9 million for the
six-month period ended June 30, 2004 when compared to $16.3 million for the six
months ended June 30, 2003. The increase of 10% in interest income was
attributable to greater average, outstanding balances in interest earning
assets, principally with respect to loans receivable, partially offset by
significant reductions in interest rates. The Company's average yield on
interest-earning assets decreased 0.54% for the six months ended June 30, 2004
when compared to the six months ended June 30, 2003.
Interest expense decreased by $175 thousand from $6.3 million for the
six-month period ended June 30, 2003 to $6.1 million for the six-month period
ended June 30, 2004. The 3% decrease in interest expense was the result of a
combination of significant reductions in interest rates, principally with
respect to customers' deposits in subsidiary banks, almost entirely offset by
greater average, outstanding balances in interest-bearing liabilities,
principally with respect to junior subordinated debentures and customers'
deposits in subsidiary banks. The Company's average cost of interest-bearing
liabilities was 2.06% for the six months ended June 30, 2004, which was down
0.54% when compared to the six months ended June 30, 2003. Without the
redemption in June 2004 of $12.0 million of trust preferred securities issued in
1999, the related issuance of new trust preferred securities, and the subsequent
pay-off of the Company's line of credit, the Company's average cost of
interest-bearing liabilities would have instead decreased from 2.60% for the
comparable period one year ago to 1.97% for the six months ended June 30, 2004.
Although excluding the impact of these events is a non-GAAP measure, management
believes that it is important to provide such information due to the
non-recurring nature of the related expense and to more accurately compare the
results of the periods presented.
At both June 30, 2004 and December 31, 2003, the Company had an allowance
for estimated losses on loans of 1.65%. The provision for loan losses decreased
by $364 thousand from $1.7 million for the six-month period ended June 30, 2003
to $1.3 million for the six-month period ended June 30, 2004. During the first
six months of 2004, management made monthly provisions for loan losses based
upon a number of factors, including the increase in loans and a detailed
analysis of the loan portfolio. During the first six months of 2004, the $1.3
million provision to the allowance for loan losses was attributed 87%, or $1.1
million, to net growth in the loan portfolio, and 13%, or $177 thousand, to
downgrades within the portfolio. For the six months ended June 30, 2004, there
were $221 thousand commercial loan charge-offs, and there were commercial
recoveries of $86 thousand. Consumer loan charge-offs and recoveries totaled
$119 thousand and $32 thousand, respectively, during the period. Credit card
loans accounted for 39% of the first six months of consumer charge-offs.
Residential real estate loans had no charge-offs or recoveries for the six
months ended June 30, 2004.
Noninterest income of $4.7 million for the six-month period ended June 30,
2004 was a $999 thousand, or 17%, decrease from $5.7 million for the six-month
period ended June 30, 2003. Noninterest income during each of the periods in
comparison consisted primarily of income from the merchant credit card
operation, fees from the trust department, depository service fees, gains on the
sale of residential real estate mortgage loans, and other miscellaneous income.
The six months ended June 30, 2004, when compared to the same period in 2003,
posted a $154 thousand decrease in fees earned by the merchant credit card
operations of Bancard. Gains on the sale of residential real estate mortgage
loans, net, decreased $1.5 million from the six months ended June 30, 2003 to
the same period in 2004, as a result of the significant decline in the
refinancing of residential home mortgages. Additional variations in noninterest
income consisted of a $147 thousand increase in trust department fees, a $123
thousand increase in deposit service fees, and a $359 thousand increase in other
noninterest income. Other noninterest income in each period consisted primarily
of investment advisory and management fees, earnings on the cash surrender value
of life insurance, and income from associated companies.
Merchant credit card fees, net of processing costs for the six months
ended June 30, 2004 decreased by 15% to $841 thousand from $995 thousand for the
first six months of 2003. In October 2002, the Company sold Bancard's ISO
related merchant credit card operations to iPayment, Inc., and Bancard's core
business focus was shifted to processing for its agent banks, cardholders, and
local merchants. Through September 2003, Bancard continued to process ISO
related transactions for iPayment, Inc. for a fixed monthly service fee, which
increased as the temporary processing period was extended. For the first six
months of 2003, net fixed monthly service fees collected from iPayment totaled
$481 thousand, and Bancard's core merchant credit card fees, net of processing
costs were $514 thousand. In September 2003, the transfer of the ISO related
Visa/Mastercard processing activity to iPayment, Inc. was completed and
significantly reduced Bancard's exposure to risk of credit card loss that the
ISO activity carried with it. Bancard had established and carried ISO reserves,
which provided coverage for this exposure.
19
In March 2004, the Company recognized a recovery of $144 thousand from a
reduction in these ISO reserves. Less this recovery and an additional $50
thousand of service fees collected from iPayment, Bancard's core merchant
credit card fees, net of processing costs were $647 thousand for the first
six months of 2004, or an improvement of 26% over the first six months of the
previous year.
For the six months ended June 30, 2004, trust department fees increased
$147 thousand, or 13%, to $1.3 million from $1.1 million for the same period in
2003. There was continued development of existing trust relationships and the
addition of new trust customers throughout the past twelve months, as well as an
improvement in market values of securities held in trust accounts, when compared
to one year ago. Each of these factors had a resulting impact in the calculation
and realization of trust fees.
Deposit service fees increased $123 thousand, or 18%, to $817 thousand
from $694 thousand for the six-month periods ended June 30, 2004 and June 30,
2003, respectively. This increase was primarily the result of the growth in
noninterest bearing demand deposit accounts of $7.1 million, or 7%, since June
30, 2003. Service charges and NSF (non-sufficient funds) charges related to
demand deposit accounts were the main components of deposit service fees.
Gains on sales of loans, net, were $668 thousand for the six months ended
June 30, 2004, which reflected a decrease of 69%, or $1.5 million, from $2.2
million for the six months ended June 30, 2003. The decrease resulted from the
steep decline in mortgage refinances, which has been experienced in recent
months, and its effect on the subsequent sale of the majority of residential
mortgages into the secondary market. Management anticipates that the level of
gains on sales of loans, net, will continue to be depressed significantly from
those experienced throughout much of 2003.
For the six months ended June 30, 2004, other noninterest income increased
$359 thousand, or 49%, to $1.1 million from $738 thousand for the same period in
2003. The increase was primarily due to a combination of the improved generation
of investment advisory and management fees from the subsidiary banks' investment
center operations, increased earnings on the cash surrender value of life
insurance, and the increase in income from associated companies.
Noninterest expenses for the six months ended June 30, 2004 were $11.5
million, as compared to $10.2 million for the same period in 2003, for an
increase of $1.3 million, or 13%. The primary contributor to this significant
increase was the $747 thousand loss on redemption of junior subordinated
debentures, which reflected the write-off of unamortized TPS issuance costs
related to the redemption, on June 30, 2004, of $12.0 million of capital
securities issued in June 1999. Other significant components of noninterest
expenses were salaries and benefits, occupancy and equipment expenses, and
professional and data processing fees, for both periods.
The following table sets forth the various categories of noninterest
expenses for the six months ended June 30, 2004 and 2003.
Noninterest Expenses
Six months ended
June 30,
--------
2004 2003 % change
----------- ----------- --------
Salaries and employee benefits $ 6,271,103 $ 6,085,713 3.1%
Professional and data
processing fees 996,102 959,506 3.8%
Advertising and marketing 500,990 353,526 41.7%
Occupancy and equipment expense 1,521,750 1,308,438 16.3%
Stationery and supplies 269,192 224,720 19.8%
Postage and telephone 329,059 318,122 3.4%
Bank service charges 285,243 223,263 27.8%
Insurance 225,567 209,209 7.8%
Loss on redemption of junior
subordinated debentures 747,490 - NA
Other 380,172 500,926 (24.1)%
----------- -----------
Total noninterest expenses $11,526,668 $10,183,422 13.2%
=========== ===========
20
The six months ended June 30, 2004 reflected a $747 thousand loss on the
redemption of trust preferred securities at their earliest call date of June 30,
2004. For the six months ended June 30, 2004, total salaries and benefits
increased to $6.3 million or $185 thousand over the previous year's six-month
total of $6.1 million. The increase of $185 thousand was primarily due to the
Company's increase in employees from 203 full time equivalents to 229 from
year-to-year, in combination with decreased expenses for both real estate
commissions and for tax benefit rights and stock appreciation rights. Occupancy
and equipment expense increased $213 thousand, or 16%, from period to period.
The increase was a proportionate reflection of the additional furniture,
fixtures and equipment and leasehold improvements at the subsidiary banks.
Advertising and marketing fees increased 42% from $354 thousand for the six
months ended June 30, 2003 to $501 thousand for the same six-month period in
2004. Bank service charges increased 28% from $223 thousand for the first six
months of 2003 to $285 thousand for the comparable period in 2004. The $62
thousand increase was a reflection of the increase in activity between the
subsidiary banks and their upstream banks. Stationary and supplies experienced a
$44 thousand increase for the first six months of 2004, when compared to the
like period in 2003. Increases in the volume of bank forms and copier/fax
supplies used at the subsidiary banks were the primary contributors to the 20%
increase. Other noninterest expense decreased $121 thousand, or 24%, for the six
months ended June 30, 2004 when compared to the like period in 2003. The
decrease was primarily due to loan expense incurred during the second quarter of
2003, which was related to other real estate owned.
The provision for income taxes was $1.2 million for the six-month period
ended June 30, 2004 compared to $1.3 million for the six-month period ended June
30, 2003 for a decrease of $104 thousand, or 8%. The decrease was the result of
a decrease in income before income taxes of $151 thousand, or 4%, for the 2004
period when compared to the 2003 period, in combination with a decrease in the
effective tax rate from 33.4 % in 2003 to 31.9% in 2004.
FINANCIAL CONDITION
Total assets of the Company increased by $101.5 million, or 14%, to $811.5
million at June 30, 2004 from $710.0 million at December 31, 2003. The growth
resulted primarily from increases in the loan portfolio and in bank-owned life
insurance, funded by short-term borrowings and Federal Home Loan Bank advances.
Cash and due from banks increased by $7.7 million, or 31%, to $32.1
million at June 30, 2004 from $24.4 million at December 31, 2003. Cash and due
from banks represented both cash maintained at its subsidiary banks, as well as
funds that the Company and its banks had deposited in other banks in the form of
non-interest bearing demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. At June 30,
2004, the subsidiary banks had $9.3 million invested in such funds. This amount
increased by $5.3 million, or 130%, from $4.0 million at December 31, 2003. The
increase was primarily a result of the demands for Federal funds by Quad City
Bank & Trust's downstream correspondent banks.
Interest-bearing deposits at financial institutions decreased by $730
thousand, or 7%, to $9.7 million at June 30, 2004 from $10.4 million at December
31, 2003. Included in interest-bearing deposits at financial institutions are
demand accounts, money market accounts, and certificates of deposit. The
decrease was the result of increases in money market accounts of $734 thousand
and maturities of certificates of deposit totaling $1.5 million.
Securities increased by $2.4 million, or 2%, to $131.2 million at June 30,
2004 from $128.8 million at December 31, 2003. The increase was the result of a
number of transactions in the securities portfolio. Paydowns of $1.0 million
were received on mortgage-backed securities, and the amortization of premiums,
net of the accretion of discounts, was $578 thousand. Maturities and calls of
securities occurred in the amount of $25.8 million, and the portfolio
experienced a decrease in the fair value of securities, classified as available
for sale, of $2.2 million. These portfolio decreases were offset by the purchase
of an additional $32.0 million of securities, classified as available for sale.
21
Total gross loans receivable increased by $69.7 million, or 13%, to $592.2
million at June 30, 2004 from $522.5 million at December 31, 2003. The increase
was the result of the origination or purchase of $270.3 million of commercial
business, consumer and real estate loans, less loan charge-offs, net of
recoveries, of $222 thousand, and loan repayments or sales of loans of $200.4
million. During the six months ended June 30, 2004, Quad City Bank & Trust
contributed $158.0 million, or 58%, and Cedar Rapids Bank & Trust contributed
$112.3 million, or 42%, of the Company's loan originations or purchases. Cedar
Rapids Bank & Trust participated $25.8 million, or 23%, of their originations
during the period to Quad City Bank & Trust. The mix of loan types within the
Company's portfolio at June 30, 2004 reflected 82% commercial, 9% real estate
and 9% consumer loans. The majority of residential real estate loans originated
by the Company were sold on the secondary market to avoid the interest rate risk
associated with long term fixed rate loans. Loans originated for this purpose
were classified as held for sale.
The allowance for estimated losses on loans was $9.7 million at June 30,
2004 compared to $8.7 million at December 31, 2003, an increase of $1.0 million,
or 13%. The allowance for estimated losses on loans was determined based on
factors that included the overall composition of the loan portfolio, types of
loans, past loss experience, loan delinquencies, potential substandard and
doubtful credits, economic conditions, and other factors that, in management's
judgement, deserved evaluation. To ensure that an adequate allowance was
maintained, provisions were made based on a number of factors, including the
increase in loans and a detailed analysis of the loan portfolio. The loan
portfolio was reviewed and analyzed monthly utilizing the percentage allocation
method. In addition, specific reviews were completed on all credits risk-rated
less than "fair quality" and carrying aggregate exposure in excess of $250
thousand. The adequacy of the allowance for estimated losses on loans was
monitored by the loan review staff, and reported to management and the board of
directors.
Although management believes that the allowance for estimated losses on
loans at June 30, 2004 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. The Company is focusing efforts at its
subsidiary banks in an attempt to improve the overall quality of the Company's
loan portfolio. 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. Future 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.
Net charge-offs for the six months ended June 30 were $222 thousand in
2004 and $659 thousand in 2003. One measure of the adequacy of the allowance for
estimated losses on loans is the ratio of the allowance to the gross loan
portfolio. The allowance for estimated losses on loans as a percentage of gross
loans was 1.65% at both June 30, 2004 and December 31, 2003.
At June 30, 2004, total nonperforming assets were $6.7 million compared to
$5.0 million at December 31, 2003. The $1.7 million increase was the result of a
$1.5 million increase in nonaccrual loans in combination with an increase of
$250 thousand in accruing loans past due 90 days or more. All of the
nonperforming assets were located in the loan portfolio at Quad City Bank &
Trust. The loans in the Cedar Rapids Bank & Trust loan portfolio have been
originated since the bank's inception in 2001, 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.
22
Nonaccrual loans were $5.7 million at June 30, 2004 compared to $4.2
million at December 31, 2003, an increase of $1.5 million. The increase in
nonaccrual loans was comprised of increases in commercial loans of $830
thousand, real estate loans of $414 thousand and consumer loans of $241
thousand. The $830 thousand increase in nonaccrual commercial loans for the
period was primarily due to the addition of two commercial lending relationships
totaling $1.1 million at Quad City Bank & Trust. Six large commercial lending
relationships at Quad City Bank & Trust, with an aggregate outstanding balance
of $3.9 million, comprised 69% of the nonaccrual loans at June 30, 2004.
Management maintained the Company's percentage of allowance for estimated loan
losses to total loans at 1.65% at June 30, 2004, as it had been at December 31,
2003. Management is closely monitoring the Company's loan portfolio and the
level of allowance for loan losses. Management continues to focus efforts to
improve the overall quality of the loan portfolio. Nonaccrual loans represented
approximately one percent of the Company's held for investment loan portfolio at
June 30, 2004.
From December 31, 2003 to June 30, 2004, accruing loans past due 90 days
or more increased from $756 thousand to $1.0 million. Seven lending
relationships at Quad City Bank & Trust comprised $847 thousand, or 84%, of this
balance at June 30, 2004.
Premises and equipment showed an increase of $2.0 million, or 16%, to
climb to $14.0 million at June 30, 2004 from $12.0 million at December 31, 2003.
During the six-month period there were purchases of additional land, furniture,
fixtures and equipment and leasehold improvements of $2.7 million, which were
partially offset by depreciation expense of $686 thousand.
In August 2003, Quad City Bank & Trust purchased the northern segment of
its Brady Street facility in Davenport, which had previously been owned by the
developer of the property. Project costs incurred during the first six months of
2004 totaled $583 thousand. In September 2003, the Company announced plans for a
fifth Quad City Bank & Trust banking facility, to be located in west Davenport.
During October 2003, the Company purchased a site for this location, and during
the first six months of 2004, the Company experienced costs of $250 thousand for
demolition and site preparation. Total costs for this project are anticipated to
be approximately $1.7 million, which will likely be completed in late 2004 or
early 2005. In the fall of 2003, Quad City Bank & Trust initiated the purchase
of check and document imaging hardware and software. During the first six months
of 2004, purchases related to this project totaled $485 thousand. In February
2004, Cedar Rapids Bank & Trust announced plans to build a facility in downtown
Cedar Rapids. The Bank's main office will be relocated to this site in early
2005, when completion is anticipated. Costs for this facility during the first
six months of 2004 were $834 thousand, and total costs are projected to be $5.0
million at completion. Cedar Rapids Bank & Trust also intends to construct a
branch office during 2004. The Company has incurred costs for this project of
$51 thousand during the first six months of 2004.
Accrued interest receivable on loans, securities and interest-bearing
deposits with financial institutions increased by $6 thousand, or less than 1%,
to remain at $3.6 million at June 30, 2004 as at December 31, 2003.
Bank-owned life insurance increased by $12.3 million from $3.1 million at
December 31, 2003 to $15.4 million at June 30, 2004. The subsidiary banks
purchased life insurance of $8.0 million in connection with the establishment of
benefit plans for the executive officers of the Company. These plans prescribe
the payment of supplemental retirement benefits to the executive officers at
retirement. In addition, the Company purchased life insurance totaling $3.9
million on the lives of a number of senior management personnel in connection
with the execution of employment agreements and the establishment of deferred
compensation arrangements with these officers. These new purchases during the
first quarter, combined with the existing bank-owned life insurance, resulted in
each subsidiary bank holding investments in bank-owned life insurance contracts
near the regulatory maximum allowable. These purchases were made due to the
significant tax-equivalent yields available on bank-owned life insurance, and
the possibility of legislative action that could restrict or eliminate the tax
advantaged status of future purchases of bank-owned life insurance. Earnings on
bank-owned life insurance totaled $322 thousand for the six months ended June
30, 2004, and benefit expense associated with the supplemental retirement
benefits and deferred compensation arrangements was $72 thousand and $54
thousand, respectively, for the same period.
23
Other assets increased by $4.2 million, or 43%, to $13.9 million at June
30, 2004 from $9.7 million at December 31, 2003. Other assets included $6.1
million of equity in Federal Reserve Bank and Federal Home Loan Bank stock, $2.4
million of deferred tax assets, $950 thousand in investments in unconsolidated
companies, $547 thousand of accrued trust department fees, $424 thousand of
unamortized prepaid TPS offering expenses, $488 thousand of prepaid
Visa/Mastercard processing charges, other miscellaneous receivables, and various
prepaid expenses.
Deposits decreased by $2.3 million, or less than 1%, to $509.3 million at
June 30, 2004 from $511.6 million at December 31, 2003. The decrease resulted
from a $29.0 million net decrease in non-interest bearing, NOW, money market and
savings accounts offset by a $26.7 million net increase in interest-bearing
certificates of deposit. As anticipated for several quarters, the merchant
credit card processing for the independent sales organization ("ISO") portfolio,
which was sold to iPayment, Inc. in October 2001, was transferred to another
processor on February 1, 2004. Funds related to this transfer accounted for
$16.3 million of the decrease in non-interest bearing deposits from December 31,
2003 to June 30, 2004.
Short-term borrowings increased $75.3 million, or 146%, from $51.6 million
at December 31, 2003 to $126.9 million at June 30, 2004. The subsidiary banks
offer short-term repurchase agreements to some of their major customers. Also,
on occasion, the subsidiary banks purchase Federal funds for short-term funding
needs from the Federal Reserve Bank, or from their correspondent banks. As a
result of the significant growth in assets during the first six months of 2004,
primarily the loan portfolio and bank-owned life insurance, and the concurrent
decline in deposits, the subsidiary banks utilized short-term borrowings for
their funding needs. Short-term borrowings were comprised of customer repurchase
agreements of $45.0 million and $34.7 million at June 30, 2004 and December 31,
2003, respectively, as well as federal funds purchased of $81.9 million at June
30, 2004 and $16.9 million at December 31, 2003.
Federal Home Loan Bank advances increased by $20.4 million, or 27%, to
$96.6 million at June 30, 2004 from $76.2 million at December 31, 2003. As a
result of their memberships in the FHLB of Des Moines, the subsidiary banks have
the ability to borrow funds for short or long-term purposes under a variety of
programs. FHLB advances are utilized for loan matching as a hedge against the
possibility of rising interest rates, and when these advances provide a less
costly or more readily available source of funds than customer deposits.
Other borrowings were $7.0 million at June 30, 2004 for a decrease of $3.0
million from December 31, 2003. In September 2001, the Company had drawn a $5.0
million advance on a line of credit at an upstream correspondent bank as partial
funding for the initial capitalization of Cedar Rapids Bank & Trust. In February
and July 2003, the Company drew additional advances of $2.0 million and $3.0
million, respectively, as funding to maintain the required level of regulatory
capital at Cedar Rapids Bank & Trust in light of the bank's growth. In February
2004, the Company formed two trusts, which, in a private transaction, issued
$8.0 million of floating rate trust preferred securities and $12.0 million of
fixed rate trust preferred securities. Partial proceeds from this transaction
were used to pay off the $10.0 million secured credit note balance existing on
that date. In June 2004, the Company drew an advance of $7.0 million as partial
funding for the redemption of the $12.0 million in trust preferred securities,
which had been issued in 1999.
Junior subordinated debentures increased $8.6 million, or 72%, from $12.0
million at December 31, 2003 to $20.6 million at June 30, 2004. In June 1999,
the Company issued 1,200,000 shares of trust preferred securities through a
newly formed subsidiary, Trust I. These securities were $12.0 million at
December 31, 2003. The Company redeemed these securities on June 30, 2004. In
February 2004, the Company formed two new subsidiaries and issued, in a private
transaction, the $8.0 million of floating rate trust preferred securities and
$12.0 million of fixed rate trust preferred securities of Trust II and Trust
III, respectively. Trust II and Trust III used the proceeds from the sale of the
trust preferred securities, along with the funds from their equity, to purchase
junior subordinated debentures of the Company in the amounts of $8.2 million and
$12.4 million, respectively.
Other liabilities were $8.2 million at June 30, 2004, up $1.5 million, or
22%, from $6.7 million at December 31, 2003. Other liabilities were comprised of
unpaid amounts for various products and services, and accrued but unpaid
interest on deposits. At June 30, 2004, the most significant components of other
liabilities were $1.8 million of accounts payable, $4.3 million of accrued
expenses, and $1.1 million of interest payable.
Common stock at June 30, 2004 was $4.2 million, which was up 48% from $2.9
million at December 31, 2003. The increase of $1.4 million was the net result of
a three-for-two common stock split, which was paid in the form of a stock
dividend on May 28, 2004, stock issued from the net exercise of stock options,
stock purchased under the employee stock purchase plan, and the retirement of
treasury shares.
24
Additional paid-in capital totaled $15.5 million at June 30, 2004, down
$1.6 million, or 9%, from $17.1 million at December 31, 2003. The decrease
resulted primarily from a three-for-two common stock split, which was paid in
the form of a stock dividend on May 28, 2004 and the retirement of treasury
shares, partially offset by the proceeds received in excess of the $1.00 per
share par value for the 18,832 shares of common stock issued as the result of
the net exercise of stock options and stock purchased under the employee stock
purchase plan.
Retained earnings increased by $1.8 million, or 9%, to $22.7 million at
June 30, 2004 from $20.9 million at December 31, 2003. The increase reflected
net income for the six-month period, partially offset by the retirement of
treasury shares, the payout for fractional shares resulting from the common
stock split, and for the declaration of a cash dividend of $0.04 per share,
which was paid on July 2, 2004.
Unrealized gains on securities available for sale, net of related income
taxes, totaled $403 thousand at June 30, 2004 as compared to $1.8 million at
December 31, 2003. The decrease in gains of $1.4 million was attributable to
decreases during the period in fair value of the securities identified as
available for sale.
At December 31, 2003, the Company held 90,219 treasury shares at a total
cost of $855 thousand. The weighted average cost of the shares was $9.47. On
April 30, 2004, these treasury shares were retired by the Company.
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations
and its existing commitments, to withstand fluctuations in deposit levels, to
fund its operations, and to provide for customers' credit needs. The liquidity
of the Company primarily depends upon cash flows from operating, investing, and
financing activities. Net cash provided by operating activities, consisting
primarily of proceeds on sales of loans, was $2.8 million for the six months
ended June 30, 2004 compared to $18.3 million net cash provided in the same
period in 2003. Net cash used in investing activities, consisting principally of
loan originations to be held for investment and purchases of available for sale
securities, was $94.0 million for the six months ended June 30, 2004 and $69.1
million for the six months ended June 30, 2003. Net cash provided by financing
activities, consisting primarily of proceeds from short-term borrowings and from
Federal Home Loan Bank advances, for the six months ended June 30, 2004 was
$98.8 million, and for the same period in 2003 was $57.9 million.
The Company has a variety of sources of short-term liquidity available to
it, including federal funds purchased from correspondent banks, sales of
securities available for sale, FHLB advances, lines of credit and loan
participations or sales. At June 30, 2004, the subsidiary banks had ten lines of
credit totaling $78.0 million, of which $8.0 million was secured and $70.0
million was unsecured. At December 31, 2003, the subsidiary banks had seven
lines of credit totaling $41.0 million, of which $4.0 million was secured and
$37.0 million was unsecured. At both June 30, 2004 and December 31, 2003, the
Company also had an unsecured revolving credit note, which was renewed in July
2004, at an upstream correspondent bank for $15.0 million. At June 30, 2004,
there was an outstanding balance of $7.0 million on this note. At December 31,
2003, the note had an outstanding balance of $10.0 million.
On February 18, 2004, the Company issued $8.0 million of floating rate
trust preferred securities and $12.0 million of fixed rate trust preferred
securities. The securities represent undivided beneficial interests in Trust II
and Trust III, which were established by the Company for the purpose of issuing
the trust preferred securities. The securities issued by Trust II and Trust III
mature in 30 years. The floating rate trust preferred securities are callable at
par after five years and the fixed rate trust preferred securities are callable
at par after seven years. The floating rate trust preferred securities have a
variable rate based on the three-month LIBOR, reset quarterly, with the current
rate set at 4.44%, and the fixed rate trust preferred securities have a fixed
rate of 6.93%, payable quarterly, for seven years, at which time they will
convert to a variable rate based on the three-month LIBOR, reset quarterly.
Trust II and Trust III used the proceeds from the sale of the trust preferred
securities, along with the funds from their equity, to purchase junior
subordinated debentures of the Company in the amounts of $8.2 million and $12.4
million, respectively. The Company incurred issuance costs of $429 thousand,
which are being amortized over the lives of the securities.
The Company used the net proceeds for general corporate purposes, which
included a net paydown of $3.0 million on the balance of the Company's unsecured
revolving credit note, an infusion of $3.0 million to Cedar Rapids Bank & Trust
for capital maintenance purposes, and an infusion of $1.0 million to Quad City
Bank & Trust for capital maintenance purposes. Management's primary use for the
balance of the proceeds was the redemption, in June 2004, of the $12.0 million
of 9.2% cumulative trust preferred securities issued by Trust I in 1999. Based
on this intended redemption, $747 thousand of unamortized issuance costs related
to the trust preferred securities of Trust I were expensed in March 2004.
25
On April 23, 2004, the Company declared a cash dividend of $0.04 per
share, or $169 thousand, which was paid on July 2, 2004. It is the Company's
intention to consider the payment of dividends on a semi-annual basis. The
Company anticipates an ongoing need to retain much of its operating income to
help provide the capital for continued growth, however it believes that
operating results have reached a level that can sustain dividends to
stockholders as well.
RECENT REGULATORY DEVELOPMENTS
Trust Preferred Securities. On May 6, 2004, the Board of Governors of the
Federal Reserve System (the "Board") issued a Notice of Proposed Rulemaking in
which it proposed to allow the continued inclusion of trust preferred securities
in the tier 1 capital of bank holding companies, subject to stricter standards.
The Board is proposing to limit the aggregate amount of a bank holding company's
cumulative perpetual preferred stock, trust preferred securities and other
minority interests to 25% of the company's core capital elements, net of
goodwill. Current regulations do not require the deduction of goodwill. The
proposal also provides that amounts of qualifying trust preferred securities and
certain minority interests in excess of the 25% limit may be included in tier 2
capital but would be limited, together with subordinated debt and limited-life
preferred stock, to 50% of tier 1 capital. The proposal provides a three-year
transition period for bank holding companies to meet these quantitative
limitations. Implementation of the proposal, in its present form, is not
expected to have a material impact on the consolidated financial statements.
Bank Sales of Securities. On June 17, 2004, the Securities and Exchange
Commission (the "SEC") issued a Proposed Rule in which it described the
parameters under which banks may sell securities to their customers without
having to register as broker-dealers with the SEC in accordance with Title II of
the Gramm-Leach-Bliley Act of 1999. The proposal, which is designated as
Regulation B, clarifies, among other things: (i) the limitations on the amount
that unregistered bank employees may be compensated for making referrals in
connection with a third-party brokerage arrangement; (ii) the manner by which
banks may be compensated for effecting securities transactions for its customers
in a fiduciary capacity; and (iii) the extent to which banks may engage in
certain securities transactions as a custodian. At this time, it is not possible
to predict the impact that this proposal would have on the Company and its
subsidiaries.
Expanded Branching Authority. Until 2001, an Iowa-chartered bank could only
establish a branch office within the boundaries of the counties contiguous to,
or cornering upon, the county in which the principal place of business of the
bank was located. In 2001, the Iowa Banking Act was amended to allow
Iowa-chartered banks to establish up to three branches at any location in Iowa,
subject to regulatory approval, in addition to any branches established under
the branching rules described above. Beginning July 1, 2004, Iowa-chartered
banks are permitted to establish any number of branches at any location in Iowa,
subject to regulatory approval.
Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company realizes income principally from the spread between the
interest earned on loans, investments and other interest-earning assets and the
interest paid on deposits and borrowings. Loan volumes and yields, as well as
the volume of and rates on investments, deposits and borrowings, are affected by
market interest rates. Additionally, because of the terms and conditions on many
of the investments and the loan and deposit accounts, a change in interest rates
could also affect the projected maturities in the securities and loan portfolios
and/or the deposit base, which could alter the Company's sensitivity to future
changes in interest rates. Accordingly, management considers interest rate risk
to be a significant market risk.
Interest rate risk management focuses on maintaining consistent growth in
net interest income within policy limits approved by the board of directors,
while taking into consideration, among other factors, the Company's overall
credit, operating income, operating cost, and capital profile. The subsidiary
banks' ALM/Investment Committees, which includes senior management
representatives and members of the board of directors, monitor and manage
interest rate risk to maintain an acceptable level of change to net interest
income as a result of changes in interest rates.
26
One method used to quantify interest rate risk is a short-term earnings at risk
summary, which is a detailed and dynamic simulation model used to quantify the
estimated exposure of net interest income to sustained interest rate changes.
This simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all interest sensitive
assets and liabilities reflected on the Company's consolidated balance sheet.
This sensitivity analysis demonstrates net interest income exposure over a one
year horizon, assuming no balance sheet growth and a 200 basis point upward
and a 100 basis point downward shift in interest rates, where interest-bearing
assets and liabilities reprice at their earliest possible repricing date. The
model assumes a parallel and pro rata shift in interest rates over a
twelve-month period. Application of the simulation model analysis at March 31,
2004 demonstrated a 1.15% decrease in interest income with a 200 basis point
increase in interest rates, and a 1.23% decrease in interest income with a 100
basis point decrease in interest rates. Both simulations are within the
board-established policy limits of a 10% decline in value.
Part I
Item 4
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2004. Based on that evaluation, the Company's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform
Act of 1995. This document contains, and future oral and written statements of
the Company and its management may contain, forward-looking statements, within
the meaning of such term in the Private Securities Litigation Reform Act of
1995, with respect to the financial condition, results of operations, plans,
objectives, future performance and business of the Company. Forward-looking
statements, which may be based upon beliefs, expectations and assumptions of the
Company's management and on information currently available to management, are
generally identifiable by the use of words such as "believe," "expect,"
"anticipate," "bode," "predict," "suggest," "appear," "plan," "intend,"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the
strength of the local economies in which the Company conducts
its operations which may be less favorable than expected and
may result in, among other things, a deterioration in the
credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks,
acts of war or threats thereof, and the response of the United
States to any such threats and attacks.
o The effects of, and changes in, federal, state and local laws,
regulations and policies affecting banking, securities,
insurance and monetary and financial matters.
27
o The effects of changes in interest rates (including the
effects of changes in the rate of prepayments of the Company's
assets) and the policies of the Board of Governors of the
Federal Reserve System.
o The ability of the Company to compete with other financial
institutions as effectively as the Company currently intends
due to increases in competitive pressures in the financial
services sector.
o The inability of the Company to obtain new customers and to
retain existing customers.
o The timely development and acceptance of products and
services, including products and services offered through
alternative delivery channels such as the Internet.
o Technological changes implemented by the Company and by other
parties, including third party vendors, which may be more
difficult or more expensive than anticipated or which may have
unforeseen consequences to the Company and its customers.
o The ability of the Company to develop and maintain
secure and reliable electronic systems.
o The ability of the Company to retain key executives and
employees and the difficulty that the Company may experience
in replacing key executives and employees in an effective
manner.
o Consumer spending and saving habits which may change in a
manner that affects the Company's business adversely.
o Business combinations and the integration of acquired
businesses which may be more difficult or expensive than
expected.
o The costs, effects and outcomes of existing or future
litigation.
o Changes in accounting policies and practices, as may be
adopted by state and federal regulatory agencies and the
Financial Accounting Standards Board.
o The ability of the Company to manage the risks associated with
the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Additional information concerning the Company and its business,
including other factors that could materially affect the Company's financial
results, is included in the Company's filings with the Securities and Exchange
Commission.
28
Part II
QCR HOLDINGS, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary
routine litigation incidental to their respective businesses.
Item 2 Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders -
The annual meeting of stockholders was held at The Lodge located at 900
Spruce Hills Drive, Bettendorf, Iowa on Wednesday, May 5, 2004 at 10:00 a.m. At
the meeting, Mark C. Kilmer was elected to serve as a Class II director, with a
term expiring in 2007, and Larry J. Helling and Douglas M. Hultquist were
re-elected to serve as Class II directors, with terms expiring in 2007.
Continuing as Class III directors, with terms expiring in 2005, are Patrick S.
Baird, John K. Lawson, and Ronald G. Peterson. Continuing as Class I directors,
with terms expiring in 2006, are Michael A. Bauer, James J. Brownson, and Henry
Royer. Also, at the meeting an amendment was approved to the Certificate of
Incorporation increasing the number of authorized shares of common stock from
5,000,000 shares, par value of $1.00 per share, to 10,000,000 shares, par value
of $1.00 per share, and there was approval of the QCR Holdings 2004 Stock
Incentive Plan.
There were 2,873,561 issued shares and 2,813,415 outstanding shares of common
stock entitled to vote at the annual meeting. Either in person or by proxy,
there were 2,439,380 common shares represented at the meeting, constituting
approximately 86.7% of the outstanding shares. The voting was as follows:
Votes Votes
For Withheld
---------------------------------------
Larry J. Helling 2,430,743 8,637
Douglas M. Hultquist 2,396,894 42,486
Mark C. Kilmer 2,431,841 7,539
Votes Votes Votes
For Against Abstained
---------------------------------------
Amendment to Certificate 2,366,004 66,335 7,041
of Incorporation
Votes Votes Votes
For Against Abstained
---------------------------------------
2004 Stock Incentive Plan 1,342,205 219,555 19,095
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement between QCR Holdings, Inc. and Thomas Budd dated
June 2004.
10.2 Employment Agreement between QCR Holdings, Inc. and Shawn Way dated
June 2004.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
29
b) Reports on Form 8-K
A report on Form 8-K was filed on April 23, 2004, which reported the
Company's financial information, including earnings for the quarter
ended March 31, 2004, pursuant to Item 12, as well as the Company's
declaration of a 3:2 common stock split effected in the form of a
dividend and also a cash dividend of $0.04 per share, pursuant to
Item 5.
A report on Form 8-K was filed on May 13, 2004 under Item 12, which
reported the Company's financial information, including earnings for
the quarter ended March 31, 2004, in the form of a shareholder letter
dated May 2004.
A report on Form 8-K was filed on May 17, 2004 under Item 5, which
announced in the form of a press release, that the Company's
subsidiary, QCR Holdings Capital Trust I, would redeem on June 30,
2004 all of its 9.20% Trust Preferred Securities and its 9.20% common
securities.
A report on Form 8-K was filed on June 24, 2004 under Item 5, which
announced, in the form of a press release, that the Company will
establish a new financial institution in Rockford, Illinois.
A report on Form 8-K was filed on July 1, 2004 under Item 5, which
announced, in the form of a press release, that the Company's
subsidiary, QCR Holdings Capital Trust I, redeemed on June 30, 2004
all of its 9.20% Trust Preferred Securities and its 9.20% common
securities.
A report on Form 8-K was filed on July 23, 2003, pursuant to Item 12,
which reported in the form of a press release, the Company's
financial information, including earnings for the quarter ended June
30, 2004.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QCR HOLDINGS, INC.
(Registrant)
Date August 11, 2004 /s/ Michael A. Bauer
----------------------------------------
Michael A. Bauer, Chairman
Date August 11, 2004 /s/ Douglas M. Hultquist
----------------------------------------
Douglas M. Hultquist,
Chief Executive Officer
Date August 11, 2004 /s/ Todd A. Gipple
----------------------------------------
Todd A. Gipple, Executive Vice President
Chief Financial Officer
31