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 September 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. Employer ID Number)
incorporation or organization)
3551 7th Street, Suite 204, Moline, Illinois 61265
--------------------------------------------------
(Address of principal executive offices)
(309) 736-3580
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ x ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: As of November 1, 2004, the
Registrant had outstanding 4,245,004 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, September 30,
2004 and December 31, 2003 3
Consolidated Statements of Income, For the
Three Months Ended September 30, 2004 and 2003 4
Consolidated Statements of Income, For the Nine
Months Ended September 30, 2004 and 2003 5
Consolidated Statements of Cash Flows, For the Nine
Months Ended September 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 27
About Market Risk
Item 4 Controls and Procedures 27-28
Part II OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 2 Unregistered Sales of Issuer Securities and Use
of Proceeds 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 29
Signatures 30
2
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2004 and December 31, 2003
September 30, December 31,
2004 2003
------------------------------
ASSETS
Cash and due from banks ........................................................ $ 26,163,953 $ 24,427,573
Federal funds sold ............................................................. 3,455,000 4,030,000
Interest-bearing deposits at financial institutions ............................ 4,063,795 10,426,092
Securities held to maturity, at amortized cost ................................. 150,000 400,116
Securities available for sale, at fair value ................................... 138,084,198 128,442,926
------------------------------
138,234,198 128,843,042
------------------------------
Loans receivable held for sale ................................................. 3,113,195 3,790,031
Loans receivable held for investment ........................................... 622,993,573 518,681,380
Less: Allowance for estimated losses on loans .................................. (10,134,357) (8,643,012)
------------------------------
615,972,411 513,828,399
------------------------------
Premises and equipment, net .................................................... 15,414,152 12,028,532
Accrued interest receivable .................................................... 4,012,063 3,646,108
Bank-owned life insurance ...................................................... 15,788,589 3,085,797
Other assets ................................................................... 13,262,817 9,724,012
------------------------------
Total assets ........................................................... $ 836,366,978 $ 710,039,555
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ......................................................... $ 106,760,072 $ 130,962,916
Interest-bearing ............................................................ 422,613,051 380,688,947
------------------------------
Total deposits ......................................................... 529,373,123 511,651,863
------------------------------
Short-term borrowings .......................................................... 129,888,622 51,609,801
Federal Home Loan Bank advances ................................................ 96,575,464 76,232,348
Other borrowings ............................................................... 7,000,000 10,000,000
Junior subordinated debentures ................................................. 20,620,000 12,000,000
Other liabilities .............................................................. 7,643,407 6,722,808
------------------------------
Total liabilities ...................................................... 791,100,616 668,216,820
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; .................................................... 4,240,407 2,863,990
shares authorized, September 2004 - 10,000,000 and December 2003 - 5,000,000;
September 2004 - 4,240,407 shares issued and outstanding,
December 2003 - 4,295,985* shares issued and 4,205,766* outstanding
Additional paid-in capital ..................................................... 15,726,101 17,143,868
Retained earnings .............................................................. 24,171,646 20,866,749
Accumulated other comprehensive income ......................................... 1,128,208 1,802,664
------------------------------
45,266,362 42,677,271
Less: Cost of common shares acquired for the treasury;
September 2004 - none; December 2003 - 90,219* ............................. -- (854,536)
------------------------------
Total stockholders' equity ............................................. 45,266,362 41,822,735
------------------------------
Total liabilities and stockholders' equity ............................. $ 836,366,978 $ 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 September 30
2004 2003
-----------------------
Interest and dividend income:
Loans, including fees ................................... $8,560,941 $7,553,395
Securities:
Taxable ............................................... 1,040,293 790,934
Nontaxable ............................................ 139,886 119,754
Interest-bearing deposits at financial institutions ..... 43,242 110,911
Federal funds sold ...................................... 15,216 47,578
-----------------------
Total interest and dividend income ................ 9,799,578 8,622,572
-----------------------
Interest expense:
Deposits ................................................ 1,708,404 1,709,104
Short-term borrowings ................................... 378,125 64,235
Federal Home Loan Bank advances ......................... 915,142 773,614
Other borrowings ........................................ 50,488 59,127
Junior subordinated debentures .......................... 316,196 283,376
-----------------------
Total interest expense ............................ 3,368,355 2,889,456
-----------------------
Net interest income ............................... 6,431,223 5,733,116
Provision for loan losses ................................. 411,385 939,000
-----------------------
Net interest income after provision for loan losses 6,019,838 4,794,116
-----------------------
Noninterest income:
Merchant credit card fees, net of processing costs ...... 253,107 783,688
Trust department fees ................................... 616,506 550,551
Deposit service fees .................................... 421,223 386,109
Gains on sales of loans, net ............................ 242,896 1,162,172
Securities gains, net ................................... -- 596
Other ................................................... 485,825 376,718
-----------------------
Total noninterest income .......................... 2,019,557 3,259,834
-----------------------
Noninterest expenses:
Salaries and employee benefits .......................... 3,458,437 3,294,285
Professional and data processing fees ................... 620,242 506,258
Advertising and marketing ............................... 232,654 178,715
Occupancy and equipment expense ......................... 841,827 655,588
Stationery and supplies ................................. 124,915 111,003
Postage and telephone ................................... 169,626 157,342
Bank service charges .................................... 146,569 113,590
Insurance ............................................... 126,032 120,771
Other ................................................... 192,972 218,681
-----------------------
Total noninterest expenses ........................ 5,913,274 5,356,233
-----------------------
Income before income taxes ........................ 2,126,121 2,697,717
Federal and state income taxes ............................ 703,464 889,569
-----------------------
Net income ........................................ $1,422,657 $1,808,148
=======================
Earnings per common share: *
Basic ................................................... $ 0.33 $ 0.43
Diluted ................................................. $ 0.33 $ 0.42
Weighted average common shares outstanding .............. 4,246,741 4,180,334
Weighted average common and common equivalent ........... 4,349,317 4,301,778
shares outstanding
Cash dividends declared per common share * ................ $ -- $ --
=======================
Comprehensive income ...................................... $2,147,990 $1,034,535
=======================
* 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)
Nine Months Ended September 30
2004 2003
-------------------------
Interest and dividend income:
Loans, including fees ................................... $24,053,837 $21,664,888
Securities:
Taxable ............................................... 3,018,977 2,354,815
Nontaxable ............................................ 426,987 359,996
Interest-bearing deposits at financial institutions ..... 181,514 345,829
Federal funds sold ...................................... 22,795 149,335
-------------------------
Total interest and dividend income ................ 27,704,110 24,874,863
-------------------------
Interest expense:
Deposits ................................................ 4,731,299 5,404,628
Short-term borrowings ................................... 758,062 253,099
Federal Home Loan Bank advances ......................... 2,575,749 2,497,050
Other borrowings ........................................ 96,538 169,642
Junior subordinated debentures .......................... 1,316,489 850,129
-------------------------
Total interest expense ............................ 9,478,137 9,174,548
-------------------------
Net interest income ............................... 18,225,973 15,700,315
Provision for loan losses ................................ 1,735,885 2,627,427
-------------------------
Net interest income after provision for loan losses 16,490,088 13,072,888
-------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ...... 1,094,390 1,778,935
Trust department fees ................................... 1,905,341 1,692,272
Deposit service fees .................................... 1,238,331 1,079,880
Gains on sales of loans, net ............................ 910,749 3,331,592
Securities gains (losses), net .......................... 26,188 5
Other ................................................... 1,582,706 1,114,711
-------------------------
Total noninterest income .......................... 6,757,705 8,997,395
-------------------------
Noninterest expenses:
Salaries and employee benefits .......................... 9,729,540 9,379,998
Professional and data processing fees ................... 1,616,344 1,465,764
Advertising and marketing ............................... 733,644 532,241
Occupancy and equipment expense ......................... 2,363,577 1,964,026
Stationery and supplies ................................. 394,107 335,723
Postage and telephone ................................... 498,685 475,464
Bank service charges .................................... 431,812 336,853
Insurance ............................................... 351,599 329,980
Loss on redemption of junior subordinated debentures .... 747,490 --
Other ................................................... 573,144 719,606
-------------------------
Total noninterest expenses ........................ 17,439,942 15,539,655
-------------------------
Income before income taxes ........................ 5,807,851 6,530,628
Federal and state income taxes ............................ 1,878,065 2,168,632
-------------------------
Net income ....................................... $ 3,929,786 $ 4,361,996
=========================
Earnings per common share:*
Basic ................................................... $ 0.93 $ 1.05
Diluted ................................................. $ 0.91 $ 1.02
Weighted average common shares outstanding .............. 4,224,670 4,165,577
Weighted average common and common equivalent ........... 4,336,794 4,269,642
shares outstanding
Cash dividends declared per common share* ................. $ 0.04 $ 0.03
=========================
Comprehensive income ...................................... $ 3,255,330 $ 4,006,300
=========================
* 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)
Nine Months Ended September 30
2004 2003
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 3,929,786 $ 4,361,996
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................................... 1,076,959 799,267
Provision for loan losses ......................................... 1,735,885 2,627,427
Amortization of offering costs on subordinated debentures ......... 14,354 22,129
Loss on redemption of junior subordinated debentures .............. 747,490 --
Amortization of premiums on securities, net ....................... 795,404 494,280
Investment securities gains, net .................................. (26,188) (5)
Loans originated for sale ......................................... (65,023,902) (224,765,775)
Proceeds on sales of loans ........................................ 66,611,487 234,223,023
Net gains on sales of loans ....................................... (910,749) (3,331,592)
Net losses on sales of premises and equipment ..................... 0 45,128
Tax benefit of nonqualified stock options exercised ............... 169,977 170,455
Increase in accrued interest receivable ........................... (365,955) (100,042)
Increase in other assets .......................................... (4,065,360) (1,266,162)
Increase in other liabilities ..................................... 1,257,415 1,664,911
--------------------------------
Net cash provided by operating activities ..................... $ 5,946,603 $ 14,945,040
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold .................................. $ 575,000 $ 3,430,000
Net decrease (increase) in interest-bearing deposits at financial
institutions ...................................................... 6,362,297 (2,744,020)
Activity in securities portfolio:
Purchases ......................................................... (52,514,428) (55,703,206)
Calls and maturities .............................................. 39,831,001 28,920,000
Paydowns .......................................................... 1,444,332 3,566,250
Activity in bank-owned life insurance:
Purchases ......................................................... (12,221,428) (66,312)
Increase in cash value ............................................ (481,364) (131,498)
Net loans originated and held for investment ........................ (104,556,733) (53,488,700)
Purchase of premises and equipment .................................. (4,470,826) (2,807,019)
Proceeds from sales of premises and equipment ....................... 8,247 224,654
--------------------------------
Net cash used in investing activities ......................... $(126,023,902) $ (78,799,851)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts .................................... 17,721,260 $ 62,838,673
Net increase in short-term borrowings ............................... 78,278,821 1,896,373
Activity in Federal Home Loan Bank advances:
Advances .......................................................... 32,500,000 10,350,000
Payments .......................................................... (12,156,884) (7,254,944)
Net (decrease) increase in other borrowings ......................... (3,000,000) 5,029,065
Proceeds from issuance of junior subordinated debentures ............ 20,620,000 --
Redemption of junior subordinated debentures ........................ (12,000,000) --
Payment of cash dividends ........................................... (336,816) (277,086)
Payment of fractional shares on 3:2 stock split ..................... (2,549) --
Proceeds from issuance of common stock, net ......................... 189,847 74,766
--------------------------------
Net cash provided by financing activities ..................... $ 121,813,679 $ 72,656,847
--------------------------------
Net increase in cash and due from banks ....................... 1,736,380 8,802,036
Cash and due from banks, beginning .................................... 24,427,573 24,906,003
--------------------------------
Cash and due from banks, ending ....................................... $ 26,163,953 $ 33,708,039
================================
Supplemental disclosure of cash flow information, cash payments for:
Interest ............................................................ $ 9,508,452 $ 9,757,764
=================================
Income/franchise taxes .............................................. $ 1,763,468 $ 3,137,809
=================================
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income,
unrealized losses on securities available for sale, net ........... $ (674,456) $ (355,696)
=================================
Due to broker for purchase of security available for sale ........... $ -- $ 401,400
=================================
See Notes to Consolidated Financial Statements
6
Part I
Item 1
QCR HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 September 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 $323 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 Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
-------------------------------- --------------------------------
Net income, as reported ............... $ 1,422,657 $ 1,808,148 $ 3,929,786 $ 4,361,996
Deduct total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects .. (32,584) (22,638) (97,147) (74,251)
----------------------------------------------------------------
Net income .................... $ 1,390,073 $ 1,785,510 $ 3,832,639 $ 4,287,745
================================================================
Earnings per share:*
Basic:
As reported ....................... $ 0.33 $ 0.43 $ 0.93 $ 1.05
Pro forma ......................... 0.33 0.43 0.91 1.03
Diluted:
As reported ....................... 0.33 0.42 0.91 1.02
Pro forma ......................... 0.32 0.41 0.89 1.01
* 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 nine months
ended September 30, 2004 and 2003: dividend rate of 0.38% to 0.44% for the nine
months ended September 30, 2004 and 0.59% for the nine months ended September
30, 2003; expected price volatility of 23.54% to 27.18%; 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 1.59% 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 Nine months ended
September 30, September 30,
-------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------
Net income, basic and diluted
Earnings ...................... $1,422,657 $1,808,148 $3,929,786 $4,361,996
=================================================
Weighted average common shares
Outstanding ................... 4,246,741 4,180,334 4,224,670 4,165,577
Weighted average common shares
issuable upon exercise of stock
options and under the
employee stock purchase plan .. 102,576 121,444 112,124 104,065
-------------------------------------------------
Weighted average common and
common equivalent shares
outstanding ................... 4,349,317 4,301,778 4,336,794 4,269,642
=================================================
NOTE 3 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is
presented as follows for both the three-month and nine-month periods ended
September 30, 2004 and 2003, respectively.
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------------
Revenue:
Commercial banking ... $ 10,824,447 $ 10,373,181 $ 30,974,033 $ 29,978,854
Credit card processing 304,111 830,539 1,236,846 1,910,901
Trust management ..... 616,505 550,551 1,905,341 1,692,272
All other ............ 74,072 128,135 345,595 290,231
------------------------------------------------------------
Total revenue .. $ 11,819,135 $ 11,882,406 $ 34,461,815 $ 33,872,258
============================================================
Commercial banking ... $ 1,678,293 $ 1,637,592 $ 4,845,066 $ 4,177,755
Credit card processing 25,098 388,631 370,497 880,343
Trust management ..... 147,023 123,896 481,924 381,575
All other ............ (427,757) (341,971) (1,767,701) (1,077,677)
------------------------------------------------------------
Total net income $ 1,422,657 $ 1,808,148 $ 3,929,786 $ 4,361,996
============================================================
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company's subsidiary banks make various
commitments and incur certain contingent liabilities that are not presented in
the accompanying consolidated financial statements. The commitments and
contingent liabilities include various guarantees, commitments to extend credit,
and standby letters of credit.
8
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the banks upon extension of credit, is based
upon management's credit evaluation of the counter-party. Collateral held varies
but may include accounts receivable, marketable securities, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The 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 September 30, 2004 and
December 31, 2003, no amounts were recorded as liabilities for the banks'
potential obligations under these guarantees.
As of September 30, 2004 and December 31, 2003, commitments to extend credit
aggregated were $238.1 million and $194.9 million, respectively. As of September
30, 2004 and December 31, 2003, standby letters of credit aggregated were $12.4
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 $3.1 million and $3.8 million, at September
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. At September 30, 2004, Bancard
also had established a merchant chargeback reserve of $208 thousand to mitigate
such risk.
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
September 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 nine months ended September 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.
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 September 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 nine months ended September 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.
9
NOTE 6 - RECENT ACCOUNTING DEVELOPMENTS
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed statement, Share-Based Payment, that addresses the accounting for
share-based payment transactions (for example, stock options and awards of
restricted stock) in which an employer receives employee-services in exchange
for equity securities of the company or liabilities that are based on the fair
value of the company's equity securities. This proposal, when finalized, would
eliminate use of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and generally would require such transactions be accounted for using a
fair-value-based method and recording compensation expense rather than optional
pro forma disclosure of what expense amounts might be. The proposal, when
approved, would substantially amend FASB Statement No. 123, Accounting for
Stock-Based Compensation. Legislation has been introduced to substantially limit
the FASB proposal. Uncertainty continues as to whether the proposal will be
finalized and the FASB has recently announced some major proposed revisions to
it, including material changes to the fair-value methodology, among other
things. Currently, the most recent announcements suggest that this guidance may
become effective for periods beginning after June 15, 2005 for public companies.
Management has not completed its review of the proposal or assessed its
potential impact on the Company.
10
Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QCR Holdings, Inc. is the parent company of Quad City Bank & Trust, Cedar Rapids
Bank & Trust, 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 and Rockford areas and adjacent communities
through its five offices that are located in Bettendorf and Davenport, Iowa and
Moline and Rockford, 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
continue to provide credit card processing for its local merchants and agent
banks and for cardholders of the Company's subsidiary banks.
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.
OVERVIEW
Net income for the first nine months of 2004 was $3.9 million as compared to net
income of $4.4 million for the same period in 2003, a decrease of $432 thousand,
or 10%. Basic earnings per share for the first nine months of 2004 were $0.93
and for the first nine months of 2003 were $1.05. For the nine months ended
September 30, 2004, net interest income improved by $2.5 million, or 16%, 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
$2.2 million, or 25%, to combine for a net improvement of $286 thousand when
compared to the same period in 2003. Enhancing this 1% improvement in revenue
for the Company was a decline in the provision for loan losses of $892 thousand,
or 34%. The first nine months of 2004 reflected an increase in noninterest
expense of 12%, when compared to the same period in 2003. The increase in
noninterest expense was predominately due to the onetime write-off of
unamortized costs relating to the issuance of trust preferred securities, in
combination with $400 thousand of growth in occupancy and equipment expense.
After-tax income at Cedar Rapids Bank & Trust was $563 thousand for the nine
months ended September 30, 2004, as compared to $147 thousand for the same
period in 2003. Cedar Rapids Bank & Trust also experienced significant asset
growth, as total assets grew to $203.8 million at September 30, 2004 from $142.3
million at September 30, 2003.
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 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 nine
months of 2004 by $721 thousand, or $0.17 in diluted earnings per share.
Excluding this onetime write-off of unamortized issuance costs and the
additional interest costs, net income for the nine months ended September 30,
2004 would have been $4.7 million, or diluted earnings per share of $1.08.
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. In September 2004, the
Rockford facility opened initially as a branch of Quad City Bank & Trust.
Operations will continue as such, until a new charter for Rockford Bank & Trust
is approved by regulators, which is anticipated to occur in early 2005. During
the first nine months of 2004, the Company experienced a $184 thousand reduction
in after-tax net income as a result of start-up costs associated with the
creation of Rockford Bank & Trust. As previously announced, the Company is
currently conducting a private placement of up to $5.0 million of its common
stock with the proceeds to be used as partial capitalization of Rockford Bank &
Trust. It is anticipated that this offering will close in late 2004.
The Company's operating results are derived largely from net interest income.
Net interest income is the difference between interest income, principally from
loans and investment securities, and interest expense, principally on borrowings
and customer deposits. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar levels of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
The Company realized a 0.06% decrease in its net interest spread, declining from
3.28% for the three months ended September 30, 2003 to 3.22% for the three
months ended September 30, 2004. The average yield on interest-earning assets
decreased 0.22% for the three months ended September 30, 2004 when compared to
the same period ended September 30, 2003. At the same time, the average cost of
interest-bearing liabilities decreased 0.16%. The narrowing of the net interest
spread resulted in a 0.20% reduction in the Company's net interest margin
percentage. For the three months ended September 30, 2004, the net interest
margin was 3.46% compared to 3.66% for the same period in 2003. The net interest
margin of 3.46% for the third quarter of 2004 was improved over those
experienced in both the first and second quarters of the year, when the
quarterly net interest margins were 3.45% and 3.40%, respectively.
For the nine months ended September 30, 2004, the net interest spread was 3.14%,
which was down 0.03% when compared to 3.17% for the nine months ended September
30, 2003. The average yield on interest-earning assets decreased 0.43% for the
nine months ended September 30, 2004 when compared to the same period ended
September 30, 2003. At the same time, the average cost of interest-bearing
liabilities decreased by 0.40%. The tightening of the net interest spread
produced a 0.13% reduction in the Company's net interest margin percentage. For
the nine months ended September 30, 2004, the net interest margin was 3.44%
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 in February 2004, 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 3.49%
for the nine months ended September 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.
12
Consolidated Average Balance Sheets and Analysis of Net Interest Earnings
For 3 Months Ended September 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 ............................ $ 7,521 $ 15 0.80% $ 22,082 $ 47 0.85%
Interest-bearing deposits at
financial institutions ..................... 7,606 43 2.26% 16,530 111 2.69%
Investment securities (1) ..................... 133,026 1,252 3.76% 93,513 973 4.16%
Gross loans receivable (2) .................... 602,739 8,561 5.68% 501,385 7,553 6.03%
----------------------- ---------------------
Total interest earning assets .............. 750,892 9,871 5.26% 633,510 8,684 5.48%
Noninterest-earning assets:
Cash and due from banks ....................... $ 31,073 30,837
Premises and equipment ........................ 14,748 9,903
Less allowance for estimated losses on loans (9,813) (8,184)
Other ......................................... 31,884 17,721
--------- ---------
Total assets ............................... $ 818,784 $ 683,787
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits .............. $ 174,157 344 0.79% 169,822 351 0.83%
Savings deposits .............................. 16,264 13 0.32% 13,216 12 0.36%
Time deposits ................................. 225,214 1,351 2.40% 203,551 1,346 2.65%
Short-term borrowings ......................... 117,438 378 1.29% 37,659 64 0.68%
Federal Home Loan Bank advances ............... 98,223 915 3.73% 78,697 774 3.93%
Junior subordinated debentures ................ 20,620 316 6.13% 12,000 283 9.43%
Other borrowings .............................. 7,000 51 2.91% 9,272 59 2.55%
----------------------- --------------------
Total interest-bearing
liabilities ............................ 658,916 3,368 2.04% 524,217 2,889 2.20%
Noninterest-bearing demand .................... 111,102 106,453
Other noninterest-bearing
liabilities ................................ 4,529 13,129
Total liabilities ............................. 774,547 643,799
Stockholders' equity .......................... 44,237 39,988
--------- ---------
Total liabilities and
stockholders' equity ................... $ 818,784 683,787
========= =========
Net interest income ........................... $ 6,503 $ 5,795
========= ========
Net interest spread ........................... 3.22% 3.28%
====== ======
Net interest margin ........................... 3.46% 3.66%
====== ======
Ratio of average interest earning
assets to average interest-
bearing liabilities ........................ 113.96% 120.85%
=========== ==========
(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.
13
Analysis of Changes of Interest Income/Interest Expense
For the three months ended September 30, 2004
Inc./(Dec.) Components
From of Change (1)
Prior ------------------
Period Rate Volume
-------------------------------
2004 vs. 2003
-------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ................................ $ (32) $ (3) $ (29)
Interest-bearing deposits at financial institutions (68) (15) (53)
Investment securities (2) ......................... 279 (555) 834
Gross loans receivable (3) ........................ 1,008 (2,469) 3,477
-----------------------------
Total change in interest income ......... $ 1,187 $(3,042) $ 4,229
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................. $ (7) $ (50) $ 43
Savings deposits .................................. 1 (7) 8
Time deposits ..................................... 5 (532) 537
Short-term borrowings ............................. 314 93 221
Federal Home Loan Bank advances ................... 141 (245) 386
Junior subordinated debentures .................... 33 (522) 555
Other borrowings .................................. (8) 40 (48)
-----------------------------
Total change in interest expense ........ $ 479 $(1,223) $ 1,702
-----------------------------
Total change in net interest income ............... $ 708 $(1,819) $ 2,527
=============================
(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 9 Months Ended September 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 ........................... $ 5,823 $ 23 0.53% $ 19,506 $ 148 1.01%
Interest-bearing deposits at
financial institutions .................... 10,114 181 2.39% 14,911 346 3.09%
Investment securities (1) .................... 128,450 3,666 3.81% 86,100 2,901 4.49%
Gross loans receivable (2) ................... 571,095 24,054 5.62% 472,772 21,664 6.11%
----------------------- ---------------------
Total interest earning assets ............. 715,482 27,924 5.20% 593,288 25,059 5.63%
Noninterest-earning assets:
Cash and due from banks ...................... 30,792 28,225
Premises and equipment ....................... 13,566 9,309
Less allowance for estimated losses on loans (9,487) (7,651)
Other ........................................ 30,606 21,210
--------- ---------
Total assets .............................. $ 780,959 $ 644,381
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ............. $ 172,091 985 0.76% $ 153,045 1,120 0.98%
Savings deposits ............................. 15,299 37 0.32% 12,485 47 0.50%
Time deposits ................................ 213,048 3,709 2.32% 197,211 4,240 2.87%
Short-term borrowings ........................ 94,182 758 1.07% 37,878 252 0.89%
Federal Home Loan Bank advances .............. 91,374 2,575 3.76% 77,608 2,497 4.29%
Junior subordinated debentures ............... 24,183 1,317 7.26% 12,000 849 9.43%
Other borrowings ............................. 4,583 97 2.82% 7,424 169 3.04%
----------------------- ---------------------
Total interest-bearing
liabilities ........................... 614,760 9,478 2.06% 497,651 9,174 2.46%
Noninterest-bearing demand ................... 113,953 95,006
Other noninterest-bearing
liabilities ............................... 9,362 13,178
Total liabilities ............................ 738,075 605,835
Stockholders' equity ......................... 42,884 38,545
--------- ---------
Total liabilities and
stockholders' equity .................. $ 780,959 $ 644,381
========= =========
Net interest income .......................... $18,446 $15,885
======= =======
Net interest spread .......................... 3.14% 3.17%
====== ======
Net interest margin .......................... 3.44% 3.57%
====== ======
Ratio of average interest earning
assets to average interest-
bearing liabilities ....................... 116.38% 119.22%
========== ==========
(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.
15
Analysis of Changes of Interest Income/Interest Expense
For the nine months ended September 30, 2004
Components
Inc./(Dec.) of Change (1)
From -------------------
Prior Period Rate Volume
--------------------------------
2004 vs. 2003
--------------------------------
(Dollars in Thousands)
INTEREST INCOME
Federal funds sold ................................ $ (125) $ (51) $ (74)
Interest-bearing deposits at financial institutions (165) (69) (96)
Investment securities (2) ......................... 765 (722) 1,487
Gross loans receivable (3) ........................ 2,390 (2,694) 5,084
-----------------------------
Total change in interest income ......... $ 2,865 $(3,536) $ 6,401
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................. $ (135) $ (322) $ 187
Savings deposits .................................. (10) (23) 13
Time deposits ..................................... (531) (1,012) 481
Short-term borrowings ............................. 506 62 444
Federal Home Loan Bank advances ................... 78 (454) 532
Junior subordinated debentures .................... 468 (339) 807
Other borrowings .................................. (72) (11) (61)
-----------------------------
Total change in interest expense ........ $ 304 $(2,099) $ 2,403
-----------------------------
Total change in net interest income ............... $ 2,561 $(1,437) $ 3,998
=============================
(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
September 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 SEPTEMBER 30, 2004 AND 2003
Interest income increased by $1.2 million to $9.8 million for the three-month
period ended September 30, 2004 when compared to $8.6 million for the quarter
ended September 30, 2003. The increase of 14% 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 yields. The Company's average yield on interest
earning assets decreased 0.22% for the three months ended September 30, 2004
when compared to the three months ended September 30, 2003.
Interest expense increased by $479 thousand from $2.9 million for the
three-month period ended September 30, 2003, to $3.4 million for the three-month
period ended September 30, 2004. The 17% increase in interest expense was the
result of a combination of greater average, outstanding balances in interest
bearing liabilities, principally with respect to junior subordinated debentures
and customers' deposits in subsidiary banks, almost entirely offset by
significant reductions in interest rates, principally with respect to customers'
deposits in subsidiary banks and junior subordinated debentures. The Company's
average cost of interest bearing liabilities was 2.04% for the three months
ended September 30, 2004, which was down 0.16% when compared to the three months
ended September 30, 2003.
At September 30, 2004 and June 30, 2004, the Company had an allowance for
estimated losses on loans of 1.62% and 1.65%, respectively. The provision for
loan losses decreased by $528 thousand from $939 thousand for the three-month
period ended September 30, 2003 to $411 thousand for the three-month period
ended September 30, 2004. During the third 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
third quarter of 2004, the $411 thousand provision to the allowance for loan
losses was attributed entirely to net growth in the loan portfolio and was
offset slightly by recoveries received by Quad City Bank & Trust during the
quarter. For the three months ended September 30, 2004, there were two
commercial loan charge-offs for $21 thousand, and there were commercial
recoveries of $12 thousand. Consumer loan charge-offs and recoveries totaled $50
thousand and $36 thousand, respectively, during the quarter. Credit card loans
accounted for 38% of the third quarter consumer charge-offs. Residential real
estate loans had no charge-offs or recoveries for the three months ended
September 30, 2004.
Noninterest income of $2.0 million for the three-month period ended September
30, 2004 was a $1.3 million, or 38%, decrease from $3.3 million for the
three-month period ended September 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 September 30, 2004, when compared to the
same quarter in 2003, posted a $531 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 $919 thousand from the quarter ended
September 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 $66 thousand increase in trust department
fees, a $35 thousand increase in deposit service fees, and a $109 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
September 30, 2004 decreased by 68% to $253 thousand from $784 thousand for the
third 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 third quarter of 2003,
net fixed monthly service fees collected from iPayment totaled $365 thousand,
and Bancard's core merchant credit card fees, net of processing costs were $419
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-specific reserves, which
provided coverage for this exposure. In March 2004, the Company recognized a
recovery of $144 thousand from a reduction in these ISO-specific reserves. In
September 2004, the Company recognized a recovery of $133 thousand from the
elimination of the remaining balance in the ISO-specific reserves. For the third
quarter of 2004, Bancard's core merchant credit card fees, net of processing
costs were $120 thousand, which was a decline of $299 thousand or 71%, when
compared to the third quarter of the previous year. The significant decrease
from year to year was primarily the result of provisions for local merchant
chargeback losses of $208 thousand made during the third quarter of 2004.
17
For the quarter ended September 30, 2004, trust department fees increased $66
thousand, or 12%, to $617 thousand from $551 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 $35 thousand, or 9%, to $421 thousand from $386
thousand for the three-month periods ended September 30, 2004 and September 30,
2003, respectively. This increase was primarily a result of the growth in
service fees collected on the noninterest bearing demand deposit accounts of
downstream correspondent banks of Quad City Bank & Trust. Service charges and
NSF (non-sufficient funds or overdraft) charges related to demand deposit
accounts were the main components of deposit service fees.
Gains on sales of loans, net, were $243 thousand for the three months ended
September 30, 2004, which reflected a decrease of 79%, or $919 thousand, from
$1.2 million for the three months ended September 30, 2003. The decrease
resulted from the steep decline in mortgage refinances, which has been
experienced across much of the country 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 reduced significantly from those experienced throughout much
of 2003.
For the quarter ended September 30, 2004, other noninterest income increased
$109 thousand, or 29%, to $486 thousand from $377 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 and increased earnings on the cash surrender value
of life insurance.
Noninterest expenses for the three months ended September 30, 2004, were $5.9
million and for the three months ended September 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 September 30, 2004 and 2003.
Noninterest Expenses
Three months ended
September 30,
------------------------------------
2004 2003 % change
------------------------------------
Salaries and employee benefits ........... $3,458,437 $3,294,285 5.0%
Professional and data processing fees .... 620,242 506,258 22.5%
Advertising and marketing ................ 232,654 178,715 30.2%
Occupancy and equipment expense .......... 841,827 655,588 28.4%
Stationery and supplies .................. 124,915 111,003 12.5%
Postage and telephone .................... 169,626 157,342 7.8%
Bank service charges ..................... 146,569 113,590 29.0%
Insurance ................................ 126,032 120,771 4.4%
Other .................................... 192,972 218,681 (11.8)%
------------------------
Total noninterest expenses ....... $5,913,274 5,356,233 10.4%
========================
18
For the quarter ended September 30, 2004, total salaries and benefits increased
to $3.5 million, which was up $164 thousand from the previous year's quarter
total of $3.3 million. The increase of 5% was primarily due to the Company's
increase in compensation and benefits related to an increase in employees from
207 full time equivalents to 238 from year-to-year. Offsetting a large portion
of this increase were decreased compensation expenses related to both tax
benefit rights and stock appreciation rights and also, decreased real estate
commissions which were proportionate to the decline in gains on sales of loans,
net. Occupancy and equipment expense increased $186 thousand, or 28%, from
quarter to quarter. The increase was a proportionate reflection of the
additional furniture, fixtures and equipment and leasehold improvements at the
subsidiary banks. Professional and data processing fees experienced a 23%
increase from $506 thousand for the third quarter of 2003 to $620 thousand for
the comparable quarter in 2004. The $114 thousand increase was primarily the
result of legal and other professional fees related to the organization of
Rockford Bank & Trust. Advertising and marketing fees increased 30% from $178
thousand for the three months ended September 30, 2003 to $233 thousand for the
same three-month period in 2004. The increase was a proportionate reflection of
the business growth from year-to-year at the subsidiary banks. Bank service
charges increased 29% from $114 thousand for the third quarter of 2003 to $147
thousand for the comparable quarter in 2004. The $33 thousand increase was a
reflection of the increase in activity between the subsidiary banks and their
upstream correspondent banks. Other noninterest expense decreased $26 thousand,
or 12%, for the three months ended September 30, 2004 when compared to the like
period in 2003. The decrease experienced in 2004 was primarily due to a higher
level of cardholder processing expense incurred at Bancard during the third
quarter of 2003, in combination with loan expense incurred at that time, which
was related to other real estate owned.
The provision for income taxes was $703 thousand for the three-month period
ended September 30, 2004 compared to $890 thousand for the three-month period
ended September 30, 2003 for a decrease of $186 thousand, or 21%. The decrease
was the result of a decrease in income before income taxes of $572 thousand, or
21%, for the 2004 quarter when compared to the 2003 quarter.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Interest income increased by $2.8 million to $27.7 million for the nine-month
period ended September 30, 2004 when compared to $24.9 million for the nine
months ended September 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 yields. The Company's average yield on interest
earning assets decreased 0.43% for the nine months ended September 30, 2004 when
compared to the nine months ended September 30, 2003.
Interest expense increased by $304 thousand from $9.2 million for the nine-month
period ended September 30, 2003 to $9.5 million for the nine-month period ended
September 30, 2004. The 3% increase in interest expense was the result of a
combination of greater average, outstanding balances in interest bearing
liabilities, principally with respect to junior subordinated debentures and
customers' deposits in subsidiary banks, almost entirely offset by significant
reductions in interest rates, principally with respect to customers' deposits in
subsidiary banks. The Company's average cost of interest bearing liabilities was
2.06% for the nine months ended September 30, 2004, which was down 0.40% when
compared to the nine months ended September 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 2.46% for the comparable period
one year ago to 2.00% for the nine months ended September 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 September 30, 2004 and December 31, 2003, the Company had an allowance for
estimated losses on loans of 1.62% and 1.65%, respectively. The provision for
loan losses decreased by $892 thousand from $2.6 million for the nine-month
period ended September 30, 2003 to $1.7 million for the nine-month period ended
September 30, 2004. During the first nine 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 nine months of 2004, the $1.7 million provision to the allowance for loan
losses was attributed 97%, or $1.6 million, to net growth in the loan portfolio,
and 3%, or $58 thousand, to net downgrades within the portfolio. For the nine
months ended September 30, 2004, there were $242 thousand commercial loan
charge-offs, and there were commercial recoveries of $99 thousand. Consumer loan
charge-offs and recoveries totaled $169 thousand and $67 thousand, respectively,
during the period. Credit card loans accounted for 38% of the first nine months
of consumer charge-offs. Residential real estate loans had no charge-offs or
recoveries for the nine months ended September 30, 2004.
19
Noninterest income of $6.8 million for the nine-month period ended September 30,
2004 was a $2.2 million, or 25%, decrease from $9.0 million for the nine-month
period ended September 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 nine months ended September 30, 2004, when compared to the same period in
2003, posted a $685 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 $2.4 million from the nine months ended September 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 $213 thousand increase in trust department fees, a $158
thousand increase in deposit service fees, and a $468 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 nine months ended
September 30, 2004 decreased by 38% to $1.1 million from $1.8 million for the
first nine 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 nine
months of 2003, net fixed monthly service fees collected from iPayment totaled
$846 thousand, and Bancard's core merchant credit card fees, net of processing
costs were $933 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-specific
reserves, which provided coverage for this exposure. In March 2004, the Company
recognized a recovery of $144 thousand from a reduction in these ISO-specific
reserves. In September 2004, the Company also recognized a recovery of $133
thousand from the elimination of the remaining balance in the ISO-specific
reserves. Less these recoveries and an additional $50 thousand of service fees
collected from iPayment, Bancard's core merchant credit card fees, net of
processing costs were $767 thousand for the first nine months of 2004, or a
decrease of 18% over the first nine months of the previous year. The $166
thousand decrease from year to year was primarily the result of provisions for
local merchant chargeback losses of $208 thousand made during the third quarter
of 2004.
For the nine months ended September 30, 2004, trust department fees increased
$213 thousand, or 13%, to $1.9 million from $1.7 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 $158 thousand, or 15%, to $1.2 million from $1.1
million for the nine-month periods ended September 30, 2004 and September 30,
2003, respectively. This increase was primarily a result of the growth in
service fees collected on the noninterest bearing demand deposit accounts of
downstream correspondent banks of Quad City Bank & Trust, in combination with
the growth in service fees collected on demand accounts at Cedar Rapids bank &
Trust. Service charges and NSF (non-sufficient funds or overdraft) charges
related to demand deposit accounts were the main components of deposit service
fees.
Gains on sales of loans, net, were $911 thousand for the nine months ended
September 30, 2004, which reflected a decrease of 73%, or $2.4 million, from
$3.3 million for the nine months ended September 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 reduced significantly
from those experienced throughout much of 2003.
For the nine months ended September 30, 2004, other noninterest income increased
$468 thousand, or 42%, to $1.6 million from $1.1 million 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 nine months ended September 30, 2004 were $17.4
million, as compared to $15.5 million for the same period in 2003, for an
increase of $1.9 million, or 12%. The primary contributor to this 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.
20
The following table sets forth the various categories of noninterest expenses
for the nine months ended September 30, 2004 and 2003.
Noninterest Expenses
Nine months ended
September 30,
------------------------------------
2004 2003 % change
------------------------------------
Salaries and employee benefits ..................... $ 9,729,540 $ 9,379,998 3.7%
Professional and data processing fees .............. 1,616,344 1,465,764 10.3%
Advertising and marketing .......................... 733,644 532,241 37.8%
Occupancy and equipment expense .................... 2,363,577 1,964,026 20.3%
Stationery and supplies ............................ 394,107 335,723 17.4%
Postage and telephone .............................. 498,685 475,464 4.9%
Bank service charges ............................... 431,812 336,853 28.2%
Insurance .......................................... 351,599 329,980 6.6%
Loss on redemption of junior subordinated debentures 747,490 -- NA
Other .............................................. 573,144 719,606 (20.4)%
-------------------------
Total noninterest expenses ....... $17,439,942 15,539,655 12.2%
=========================
The nine months ended September 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 nine months ended September 30, 2004, total salaries and benefits
increased to $9.7 million or $350 thousand over the previous year's nine-month
total of $9.4 million. The increase of $350 thousand was primarily due to the
Company's increase in employees from 207 full time equivalents to 238 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 $400 thousand, or 20%, 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 38% from $532 thousand for the nine
months ended September 30, 2003 to $734 thousand for the same nine-month period
in 2004. The $202 thousand increase was predominately due to special events and
marketing materials showcasing the ten year anniversary of Quad City Bank &
Trust. Bank service charges increased 28% from $337 thousand for the first nine
months of 2003 to $432 thousand for the comparable period in 2004. The $95
thousand increase was a reflection of the increase in activity between the
subsidiary banks and their upstream correspondent banks. Stationary and supplies
experienced a $58 thousand increase for the first nine months of 2004, when
compared to the like period in 2003. Increases in the volume of bank forms and
stationary/envelopes used at the subsidiary banks were the primary contributors
to the 17% increase. Other noninterest expense decreased $146 thousand, or 20%,
for the nine months ended September 30, 2004 when compared to the like period in
2003. The decrease experienced in 2004 was primarily due to expense of $109
thousand incurred during the second quarter of 2003, which was related to other
real estate owned.
The provision for income taxes was $1.9 million for the
nine-month period ended September 30, 2004 compared to $2.2 million for the
nine-month period ended September 30, 2003 for a decrease of $291 thousand, or
13%. The decrease was the result of a decrease in income before income taxes of
$723 thousand, or 11%, for the 2004 period when compared to the 2003 period, in
combination with a decrease in the effective tax rate from 33.2% in 2003 to
32.3% in 2004.
FINANCIAL CONDITION
Total assets of the Company increased by $126.4 million, or 18%, to $836.4
million at September 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 interest-bearing deposits.
Cash and due from banks increased by $1.8 million, or 7%, to $26.2 million at
September 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 September 30,
2004, the subsidiary banks had $3.5 million invested in such funds. This amount
decreased by $575 thousand, or 14%, from $4.0 million at December 31, 2003. The
decrease was primarily a result of lower demand for Federal funds by Quad City
Bank & Trust's downstream correspondent banks.
21
Interest bearing deposits at financial institutions decreased by $6.3 million,
or 61%, to $4.1 million at September 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 decreases in money market accounts of $4.5 million and maturities
of certificates of deposit totaling $2.3 million, in combination with a decrease
in demand account balances of $381 thousand.
Securities increased by $9.4 million, or 7%, to $138.2 million at September 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 $1.4 million
were received on mortgage-backed securities, and the amortization of premiums,
net of the accretion of discounts, was $795 thousand. Maturities and calls of
securities occurred in the amount of $39.8 million, and the portfolio
experienced a decrease in the fair value of securities, classified as available
for sale, of $1.1 million. These portfolio decreases were offset by the purchase
of an additional $52.5 million of securities, classified as available for sale.
Total gross loans receivable increased by $103.6 million, or 20%, to $626.1
million at September 30, 2004 from $522.5 million at December 31, 2003. The
increase was the result of originations, renewals, additional disbursements or
purchases of $415.2 million of commercial business, consumer and real estate
loans, less loan charge-offs, net of recoveries, of $245 thousand, and loan
repayments or sales of loans of $311.4 million. During the nine months ended
September 30, 2004, Quad City Bank & Trust contributed $244.5 million, or 59%,
and Cedar Rapids Bank & Trust contributed $170.7 million, or 41%, of the
Company's loan originations, renewals, additional disbursements or purchases.
Cedar Rapids Bank & Trust participated $35.4 million, or 21%, of their
originations during the period to Quad City Bank & Trust. The mix of loan types
within the Company's portfolio at September 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 $10.1 million at September 30,
2004 compared to $8.7 million at December 31, 2003, an increase of $1.4 million,
or 17%. 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
September 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 nine months ended September 30 were $245 thousand in
2004 and $711 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 1.62% at September 30, 2004 and 1.65% at December 31, 2003.
At September 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
$203 thousand increase in nonaccrual loans in combination with an increase of
$1.3 million in accruing loans past due 90 days or more, and an increase of $245
thousand in other real estate owned. All of the nonperforming assets were 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 $4.4 million at September 30, 2004 compared to $4.2
million at December 31, 2003, an increase of $203 thousand. The increase in
nonaccrual loans was comprised of a decrease in commercial loans of $374
thousand, and increases in both real estate loans of $333 thousand and consumer
loans of $244 thousand. Six large commercial lending relationships at Quad City
Bank & Trust, with an aggregate outstanding balance of $3.2 million, comprised
72% of the nonaccrual loans at September 30, 2004. Management is working closely
with each of these customers. Management maintained the Company's percentage of
allowance for estimated loan losses to total loans at 1.62% at September 30,
2004, and 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 less than
one percent of the Company's held for investment loan portfolio at September 30,
2004.
From December 31, 2003 to September 30, 2004, accruing loans past due 90 days or
more increased from $756 thousand to $2.0 million. Three significant lending
relationships at Quad City Bank & Trust comprised $1.8 million, or 86%, of this
balance at September 30, 2004. In each of these three relationships,
management's belief that the customer's nonperforming issue can be resolved is
based on the presence of a strong reserve, strong collateral, strong guarantors
and/or a valid restructuring plan.
Premises and equipment increased by $3.4 million, or 28%, to $15.4 million at
September 30, 2004 from $12.0 million at December 31, 2003. During the
nine-month period there were purchases of additional land, furniture, fixtures
and equipment and leasehold improvements of $4.5 million, which were partially
offset by depreciation expense of $1.1 million.
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 nine months
of 2004 to complete the project totaled $618 thousand, and total costs were $3.3
million. 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 nine
months of 2004, the Company incurred costs of $927 thousand for demolition, site
preparation, and early construction. Total costs for this project are
anticipated to be approximately $3.8 million, which will likely be completed in
2005. In the fall of 2003, Quad City Bank & Trust initiated the purchase of
check and document imaging hardware and software. During the first nine months
of 2004, purchases related to this project totaled $508 thousand, and total
costs to date were $1.4 million. 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 mid 2005, when completion is
anticipated. Costs for this facility during the first nine months of 2004 were
$1.2 million, and total costs are projected to be $5.0 million at completion.
Cedar Rapids Bank & Trust also initiated plans to construct a branch office to
be located on Council Street. The Company has incurred costs for this project of
$402 thousand during the first nine months of 2004. The expansion of the Company
to the Rockford area was announced in June 2004. During the first nine months of
2004, costs associated with the establishment of a full-service banking facility
in downtown Rockford were $42 thousand.
Accrued interest receivable on loans, securities and interest-bearing deposits
with financial institutions increased by $366 thousand, or 10%, to $4.0 million
at September 30, 2004 from $3.6 million at December 31, 2003.
Bank-owned life insurance (BOLI) increased by $12.7 million from $3.1 million at
December 31, 2003 to $15.8 million at September 30, 2004. Banks may generally
buy BOLI as a financing or cost recovery vehicle for pre-and post-retirement
employee benefits. The subsidiary banks purchased $8.0 million of insurance to
finance the expenses associated with the establishment of supplemental
retirement benefits plans for the executive officers. In addition, the
subsidiary banks purchased life insurance totaling $4.2 million on the lives of
a number of senior management personnel for the purpose of funding the expenses
of new deferred compensation arrangements for senior officers. Benefit expense
associated with the supplemental retirement benefits and deferred compensation
arrangements was $108 thousand and $88 thousand, respectively, for the nine
months ended September 30, 2004. These 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 policies near
the regulatory maximum of 25% of capital. The banks monitor the risks associated
with these holdings, including diversification, lending-limit, concentration,
interest rate risk, credit risk, and liquidity. Earnings on BOLI totaled $481
thousand for the nine months ended September 30, 2004.
23
Other assets increased by $3.6 million, or 36%, to $13.3 million at September
30, 2004 from $9.7 million at December 31, 2003. Other assets included $6.9
million of equity in Federal Reserve Bank and Federal Home Loan Bank stock, $1.9
million of deferred tax assets, $943 thousand in investments in unconsolidated
companies, $554 thousand of accrued trust department fees, $420 thousand of
unamortized prepaid trust preferred securities offering expenses, $505 thousand
of prepaid Visa/Mastercard processing charges, other miscellaneous receivables,
and various prepaid expenses.
Deposits increased by $17.8 million, or 3%, to $529.4 million at September 30,
2004 from $511.6 million at December 31, 2003. The increase resulted from a
$26.0 million net decrease in non-interest bearing, NOW, money market and
savings accounts offset by a $43.8 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
$16.5 million of the decrease in non-interest bearing deposits from December 31,
2003 to September 30, 2004. The subsidiary banks also issued brokered
certificates of deposit totaling $20.5 million during 2004.
Short-term borrowings increased $78.3 million, or 152%, from $51.6 million at
December 31, 2003 to $129.9 million at September 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 nine months of 2004,
primarily the loan portfolio and bank-owned life insurance, and the smaller
increase in deposits, the subsidiary banks utilized additional short-term
borrowings. Short-term borrowings were comprised of customer repurchase
agreements of $39.1 million and $34.7 million at September 30, 2004 and December
31, 2003, respectively, as well as federal funds purchased of $90.8 million at
September 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 September 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 September 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 September 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, $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 $7.6 million at September 30, 2004, up $921 thousand, or
14%, 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 September 30, 2004, the most significant components of
other liabilities were $2.2 million of accounts payable, $2.8 million of accrued
expenses, and $1.2 million of interest payable.
Common stock at September 30, 2004 was $4.2 million, which was up 48% from $2.9
million at December 31, 2003. The increase of $1.3 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 $15.7 million at September 30, 2004, down
$1.4 million, or 8%, 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 29,296 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 $3.3 million, or 16%, to $24.2 million at
September 30, 2004 from $20.9 million at December 31, 2003. The increase
reflected net income for the nine-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 $1.1 million at September 30, 2004 as compared to $1.8 million at
December 31, 2003. The decrease in gains of $674 thousand 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 $5.9 million for the nine months
ended September 30, 2004 compared to $14.9 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 $126.0 million for the nine months ended September 30, 2004 and
$78.8 million for the nine months ended September 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 nine months ended
September 30, 2004 was $121.8 million, and for the same period in 2003 was $72.7
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 September 30, 2004, the subsidiary banks had fourteen lines of credit
totaling $99.5 million, of which $13.0 million was secured and $86.5 million was
unsecured. At 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 September 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 September 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 4.83%, 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. On October 29, 2004, the Company
declared a cash dividend of $0.04 per share, or $170 thousand, payable on
January 7, 2005, to stockholders of record on December 24, 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
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.
The Company is applying for an Illinois bank charter to be located in Rockford,
Illinois. On August 20, 2004, Illinois Governor Blagojevich signed legislation
that permits state-chartered banks and national banks that are headquartered
outside of Illinois to establish de novo branches and to acquire branches in
Illinois, provided that the states in which they are headquartered grant
reciprocal privileges to banks that are headquartered in Illinois. This
legislation will allow state-chartered banks and national banks headquartered in
Illinois to establish de novo branches and to acquire branches in states that
have similar reciprocity laws. On September 13, 2004, the Illinois Department of
Financial and Professional Regulation published guidance, in the form of
Interpretive Letter 2004-01, that lists those states that have similar
reciprocity laws.
26
Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company realizes income principally from the spread between the interest
earned on loans, investments and other interest-earning assets and the interest
paid on deposits and borrowings. Loan volumes and yields, as well as the volume
of and rates on investments, deposits and borrowings, are affected by market
interest rates. Additionally, because of the terms and conditions on many of the
investments and the loan and deposit accounts, a change in interest rates could
also affect the projected maturities in the securities and loan portfolios
and/or the deposit base, which could alter the Company's sensitivity to future
changes in interest rates. Accordingly, management considers interest rate risk
to be a significant market risk.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within policy limits approved by the board of directors, while
taking into consideration, among other factors, the Company's overall credit,
operating income, operating cost, and capital profile. The subsidiary banks'
ALM/Investment Committees, which includes senior management representatives and
members of the board of directors, monitor and manage interest rate risk to
maintain an acceptable level of change to net interest income as a result of
changes in interest rates.
One method used to quantify interest rate risk is 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 June 30,
2004 demonstrated a 2.08% decrease in interest income with a 200 basis point
increase in interest rates, and an 0.11% 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
September 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," "project," "appear," "plan,"
"intend," "estimate," "may," "will," "would," "could," "should," "likely" or
other similar expressions. Additionally, all statements in this document,
including forward-looking statements, speak only as of the date they are made,
and the Company undertakes no obligation to update any statement in light of new
information or future events.
27
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.
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 Unregistered Sales of Equity Securities and
Use of Proceeds - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders - None
Item 5 Other Information - None
Item 6 Exhibits
(a) Exhibits
10.1 Lease Agreement between Quad City Bank and Trust Company
and 127 North Wyman Development, L.L.C. dated November 3,
2004 (exhibit is being filed herewith).
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
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 November 10, 2004 /s/ Michael A. Bauer
-------------------------------
Michael A. Bauer, Chairman
Date November 10, 2004 /s/ Douglas M. Hultquist
-------------------------------
Douglas M. Hultquist, President
Chief Executive Officer
Date November 10, 2004 /s/ Todd A. Gipple
-------------------------------
Todd A. Gipple, Executive Vice
President Chief Financial
Officer
30