U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003.
Commission file number: 0-22208
QCR HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 42-1397595
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(State of incorporation) (I.R.S. Employer Identification No.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Preferred Securities of QCR Holdings Capital Trust I
Securities registered pursuant to Section 12(g) of the
Exchange Act:
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Common stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ x ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on The
Nasdaq SmallCap Market on June 30, 2003, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$51,600,000.
Documents incorporated by reference:
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Part III of Form 10-K - Proxy statement for annual meeting of
stockholders to be held in May 2004.
1
Part I
Item 1. Business
General. QCR Holdings, Inc. (the "Company") is a multi-bank holding company
headquartered in Moline, Illinois that was formed in February 1993 under the
laws of the state of Delaware. The Company serves the Quad City and Cedar Rapids
communities. Its wholly owned subsidiaries, Quad City Bank and Trust Company,
("Quad City Bank & Trust") which is based in Bettendorf, Iowa and commenced
operations in 1994, and Cedar Rapids Bank and Trust Company, ("Cedar Rapids Bank
& Trust") which is based in Cedar Rapids, Iowa and commenced operations in 2001,
provide full-service commercial and consumer banking and trust and asset
management services. The Company also engages in merchant credit card processing
through its wholly owned subsidiary, Quad City Bancard, Inc., based in Moline,
Illinois.
Quad City Bank & Trust was capitalized on October 13, 1993 and commenced
operations on January 7, 1994. Quad City Bank & Trust is organized as an
Iowa-chartered commercial bank that is a member of the Federal Reserve System
with depository accounts insured to the maximum amount permitted by law by the
Federal Deposit Insurance Corporation. Quad City Bank & Trust provides full
service commercial and consumer banking, and trust and asset management services
in the Quad Cities and adjacent communities through its four offices that are
located in Bettendorf and Davenport, Iowa and in Moline, Illinois.
Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member
of the Federal Reserve System with depository accounts insured to the maximum
amount permitted by law by the Federal Deposit Insurance Corporation. The
Company commenced operations in Cedar Rapids in June 2001 operating as a branch
of Quad City Bank & Trust. The Cedar Rapids branch operation then began
functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar
Rapids Bank & Trust provides full-service commercial and consumer banking, and
trust and asset management services to Cedar Rapids and adjacent communities
through its office located in downtown Cedar Rapids, Iowa.
Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a
Delaware corporation that provides merchant and cardholder credit card
processing services. This operation had previously been a division of Quad City
Bank & Trust since July 1994. On October 22, 2002, the Company announced
Bancard's sale of its independent sales organization (ISO) related merchant
credit card operations to iPayment, Inc. Until September 24, 2003, Bancard
continued to process transactions for iPayment, Inc., and approximately 32,500
merchants. Since iPayment, Inc. discontinued processing with Bancard, processing
volumes decreased significantly. Bancard does, however, continue to provide
credit card processing for its local merchants and agent banks and for
cardholders of the Company's subsidiary banks.
On March 29, 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), to generate merchant
credit card processing business. Bancard owned 100% of Allied. As a result of
Bancard's sale of its ISO related merchant credit card operations to iPayment,
Inc. in October 2002, Allied ceased its operations as an ISO. Included in the
sale to iPayment, Inc., were all of the merchant credit card processing
relationships owned by Allied. Allied was liquidated on December 31, 2003.
QCR Holdings Capital Trust I ("Trust I") was formed in April 1999 and
capitalized in June 1999 in connection with the public offering of $12 million
of 9.2% trust preferred capital securities due June 30, 2029, which are callable
on June 30, 2004. As a wholly owned subsidiary of the Company, Trust I's assets
had previously been included in the Company's balance sheet consolidation. A
U.S. Securities and Exchange Commission (SEC) ruling, made on December 19, 2003
based on the Financial Accounting Standards Board Interpretation (FIN) No. 46,
required bank holding companies to deconsolidate trust preferred securities from
the balance sheet as of December 31, 2003 for calendar year end companies.
Therefore, the Company's equity investment in Trust I at December 31, 2003, of
$390 thousand, was included in other assets on the fiscal 2003 year-end balance
sheet. A detailed explanation of FIN No. 46 and its impact on the Company is
presented in the "Impact of New Accounting Standards" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Additional information related to the Company's adoption of FIN No. 46 is
included in Note 1 to the consolidated financial statements.
In February 2004, the Company issued $8.0 million of floating rate capital
securities and $12.0 million of fixed rate capital securities (together, the
"Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II")
and QCR Holdings Statutory Trust III ("Trust III"). 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
Trust Preferred Securities were sold in a private transaction exempt from
registration under the Securities Act of 1933, as amended (the "Act") and have
not been registered under the Act.
2
The securities issued by Trust II and Trust III mature in 30 years. The floating
rate capital securities are callable at par after five years and the fixed rate
capital securities are callable at par after seven years. The floating rate
capital securities have a variable rate based on the three-month LIBOR, reset
quarterly, with the initial rate set at 3.97%, and the fixed rate capital
securities have a fixed rate of 6.93%, payable quarterly, for seven years, at
which time they have a variable rate based on the three-month LIBOR, reset
quarterly. Both Trust II and Trust III used the proceeds from the sale of the
Trust Preferred Securities to purchase junior subordinated debentures of QCR
Holdings, Inc. The Company incurred issuance costs of $410 thousand, which will
be amortized over the lives of the securities.
The Company intends to use its net proceeds for general corporate purposes,
including the possible redemption in June 2004 of the $12.0 million of 9.2%
cumulative trust preferred securities issued by Trust I in 1999. If redeemed,
the trust preferred securities issued in 1999 carry approximately $750 thousand
of unamortized issuance costs, which will be expensed as of June 30, 2004.
The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust, and
Bancard, and 100% of the common securities of Trust I. In addition to such
ownership, the Company invests its capital in stocks of financial institutions
and mutual funds, as well as participates in loans with the subsidiary banks. In
addition, to its wholly -owned subsidiaries, the Company has an aggregate
investment of $307 thousand in three associated companies, Nobel Electronic
Transfer, LLC, Nobel Real Estate Investors, LLC, and Velie Plantation Holding
Company, LLC. The Company had previously held an investment in Clarity Merchant
Services Inc., which was liquidated on December 31, 2003.
The Company and its subsidiaries collectively employed 233 individuals at
December 31, 2003. No one customer accounts for more than 10% of revenues, loans
or deposits. In August 2002, the Company's board of directors elected to change
the Company's fiscal year end from June 30 to December 31. Due to this change,
the Company filed a Form 10-K for the transition period from July 1, 2002 to
December 31, 2002 and now holds its annual meetings in May of each year instead
of October. The 2003 annual meeting will be held on May 5, 2004. The Company's
subsidiaries have also changed their fiscal years aligning their financial
reporting with that of the Company. Throughout this document references to
fiscal 2003 are for the year ended December 31, 2003. References to the
transition period are for the six months ended December 31, 2002. References to
fiscal 2002 and fiscal 2001 are for the years ended June 30, 2002 and 2001,
respectively. In most instances, results are shown for the fiscal year ended
December 31, 2003 along with the six-month transition period and the two
previous fiscal years ended June 30.
Competition. The Company currently operates in the highly competitive Quad City
and Cedar Rapids markets. Competitors include not only other commercial banks,
credit unions, thrift institutions, and mutual funds, but also, insurance
companies, finance companies, brokerage firms, investment banking companies, and
a variety of other financial services and advisory companies. Many of these
competitors are not subject to the same regulatory restrictions as the Company.
Many of these unregulated competitors compete across geographic boundaries and
provide customers increasing access to meaningful alternatives to banking
services. Additionally, the Company competes in markets with a number of much
larger financial institutions with substantially greater resources and larger
lending limits. These competitive trends are likely to continue and may increase
as a result of the continuing reduction on restrictions on the interstate
operations of financial institutions. Under the Gramm-Leach-Bliley Act of 1999,
effective in March of 2000, securities firms and insurance companies that elect
to become financial holding companies may acquire banks and other financial
institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which the Company and its subsidiary banks conduct
business. The financial services industry is also likely to become more
competitive as further technological advances enable more companies to provide
financial services.
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") regulates the Company and its subsidiaries. In addition, Quad City Bank
& Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent
of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance
Corporation (the "FDIC").
3
Business. The Company's principal business consists of attracting deposits from
the public and investing those deposits in loans and securities. The deposits of
Quad City Bank & Trust and Cedar Rapids Bank & Trust are insured to the maximum
amount allowable by the FDIC. The Company's results of operations are dependent
primarily on net interest income, which is the difference between the interest
earned on its loans and securities and the interest paid on deposits and
borrowings. Its operating results are affected by merchant credit card fees,
trust fees, deposit service charge fees, fees from the sale of residential real
estate loans and other income. Operating expenses include employee compensation
and benefits, occupancy and equipment expense, professional and data processing
fees, advertising and marketing expenses, bank service charges, insurance, and
other administrative expenses. The Company's operating results are also affected
by economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
Lending. The Company and its subsidiaries provide a broad range of commercial
and retail lending and investment services to corporations, partnerships,
individuals and government agencies. Quad City Bank & Trust and Cedar Rapids
Bank & Trust actively market their services to qualified lending customers.
Lending officers actively solicit the business of new borrowers entering their
market areas as well as long-standing members of the local business community.
The subsidiary banks have established lending policies which include a number of
underwriting factors to be considered in making a loan, including location,
loan-to-value ratio, cash flow, interest rate and the credit history of the
borrower.
Quad City Bank & Trust's current legal lending limit is approximately $7.2
million. Its loan portfolio is comprised primarily of commercial, residential
real estate and consumer loans. As of December 31, 2003, commercial loans made
up approximately 81% of the loan portfolio, while residential mortgages
comprised approximately 8% and consumer loans comprised approximately 11%.
Cedar Rapids Bank & Trust's current corporate lending limit is approximately
$2.5 million. Its loan portfolio is comprised primarily of commercial,
residential real estate and consumer loans. As of December 31, 2003, commercial
loans made up approximately 92% of the loan portfolio, while residential
mortgages comprised approximately 3% and consumer loans comprised approximately
5%.
As part of the loan monitoring activity at both subsidiary banks, credit
administration personnel interact with senior bank management weekly. The
Company has also instituted a separate loan review function to analyze credits
of Quad City Bank & Trust and Cedar Rapids Bank & Trust. Management has
attempted to identify problem loans at an early stage and to aggressively seek a
resolution of these situations.
As noted above, both subsidiary banks are active commercial lenders. The areas
of emphasis include loans to wholesalers, manufacturers, building contractors,
developers, business services companies and retailers. Quad City Bank & Trust
and Cedar Rapids Bank & Trust provide a wide range of business loans, including
lines of credit for working capital and operational purposes and term loans for
the acquisition of facilities, equipment and other purposes. Collateral for
these loans generally includes accounts receivable, inventory, equipment and
real estate. In addition, the subsidiary banks often take personal guarantees to
help assure repayment. Loans may be made on an unsecured basis if warranted by
the overall financial condition of the borrower. Terms of commercial business
loans generally range from one to five years. A significant portion of the
subsidiary banks' commercial business loans has floating interest rates or
reprice within one year. Commercial real estate loans are also made. Collateral
for these loans generally includes the underlying real estate and improvements,
and may include additional assets of the borrower.
Residential mortgage lending has been a focal point of Quad City Bank & Trust
and Cedar Rapids Bank & Trust as they continue to build their real estate
lending business. The subsidiary banks' real estate loan portfolios were
approximately $35.6 million at December 31, 2003. The subsidiary banks currently
have eight mortgage originators.
The subsidiary banks sell the majority of their real estate loans in the
secondary market. They typically sell the majority of the fixed rate loans that
they originate. During the year ended December 31, 2003, the subsidiary banks
originated $268.8 million of real estate loans and sold $241.6 million, or90%,
of these loans. During the six months ended December 31, 2002, the subsidiary
banks originated $145.1 million of real estate loans and sold $121.5 million, or
84%, of these loans. During fiscal 2002, the subsidiary banks originated $175.5
million of real estate loans and sold $144.3 million, or 82%, of these loans.
Generally, the subsidiary banks' residential mortgage loans conform to the
underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary
banks to resell loans in the secondary market. The subsidiary banks structure
most loans that will not conform to those underwriting requirements as
adjustable rate mortgages that mature in one to five years. The subsidiary banks
generally retain these loans in their portfolios. Servicing rights are not
presently retained on the loans sold in the secondary market.
4
The consumer lending departments of each bank provide all types of consumer
loans including motor vehicle, home improvement, home equity, signature loans
and small personal credit lines.
Appendices. The commercial banking business is a highly regulated business. See
Appendix A for a brief summary of the federal and state statutes and
regulations, which are applicable to the Company and its subsidiaries.
Supervision, regulation and examination of banks and bank holding companies by
bank regulatory agencies are intended primarily for the protection of depositors
rather than stockholders of bank holding companies and banks.
See Appendix B for tables and schedules that show selected comparative
statistical information required pursuant to the industry guides promulgated
under the Securities Act of 1933 and 1934, relating to the business of the
Company. Consistent with the information presented in Form 10-K, results are
presented for the fiscal year ended December 31, 2003, along with the six-month
transition period ended December 31, 2002, and the two previous fiscal years
ended June 30. A second presentation shows comparative financial information
restated in calendar year periods for 1999, 2000, 2001 and 2002 consistent with
the Company's current fiscal year.
The Company maintains Internet sites for its two banking subsidiaries and the
Company makes available free of charge through these sites its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act after it electronically files such material with, or furnishes it to, the
Securities and Exchange Commission. The sites are www.qcbt.com and www.crbt.com.
Item 2. Property
The original office of Quad City Bank & Trust is in a 6,700 square foot
facility, which was completed in January 1994. In March 1994, Quad City Bank &
Trust acquired that facility, which is located at 2118 Middle Road in
Bettendorf, Iowa.
Construction of a second full service banking facility was completed in July
1996 to provide for the convenience of customers and to expand the market
territory. Quad City Bank & Trust also owns that facility which is located at
4500 Brady Street in Davenport, Iowa. The two-story building is in two segments
that are separated by an atrium. Originally, Quad City Bank & Trust owned the
south half of the building, while the north half was owned by the developer.
Quad City Bank & Trust acquired the northern segment of this facility in August
2003. Each segment has two floors that are 6,000 square feet. In addition, the
southern segment has a 6,000 square foot basement level. In the southern
segment, Quad City Bank & Trust occupies the first floor and utilizes the
basement for operational functions, item processing and storage. At December 31,
2003, approximately 1,500 square feet on the second floor of the southern
segment were leased to a professional services firm, and approximately 4,500
square feet were occupied by various operational and administrative functions,
which prior to January 2003 had been located in an adjacent office building.
Renovations are nearly complete on both floors of the northern segment of the
building, which will be utilized by additional operational and administrative
functions of Quad City Bank & Trust and the Company.
Renovation of a third full service banking facility was completed in February
1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near
the intersection of 7th Street and John Deere Road in Moline, Illinois near the
Rock Island/Moline border. The building is owned by a third party limited
liability company, in which the Company has a 20% interest. Quad City Bank &
Trust and Bancard are the building's major tenants. Quad City Bank & Trust
occupies the main floor of the structure. Bancard relocated its operations to
the lower level of the 30,000 square foot building in late 1997. The Company
relocated its corporate headquarters to the building in February 1998 and
occupies approximately 2,000 square feet on the second floor.
In March 1999, Quad City Bank & Trust acquired a 3,000 square foot office
building adjacent to the Brady Street location. At December 31, 2002, the office
space was utilized for various operational and administrative functions. In
January 2003, this building was sold, and these operations were moved to occupy
vacant space on the second floor of the Brady street facility.
Construction of a fourth full service banking facility was completed in October
2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City Bank & Trust leases
approximately 6,000 square feet on the first floor and 2,200 square feet on the
lower level of the 24,000 square foot facility. The office opened in October
2000.
Plans were announced in October 2003 for Quad City Bank & Trust to add a fifth
full service banking facility. The facility is to be located in the Five Points
area of west Davenport, Iowa. Demolition of existing structures on the site has
been completed, and construction of the new facility is scheduled for completion
in late 2004 or early 2005.
5
The Company announced plans, in April 2001, to expand its banking operations to
the Cedar Rapids, Iowa market. Initially, from June until mid-September 2001,
the Cedar Rapids operation functioned as a branch of Quad City Bank & Trust
while waiting for regulatory approvals for a new state bank charter. On
September 14, 2001, the Cedar Rapids branch operation was converted into the new
charter and began operations as Cedar Rapids Bank & Trust Company. Cedar Rapids
Bank & Trust leases approximately 8,200 square feet in the GreatAmerica
Building, 625 First Street, S.E. in Cedar Rapids, which currently serves as its
only office.
In February 2004, Cedar Rapids Bank & Trust announced plans to build a four
floor building in downtown Cedar Rapids. The bank's main office will be
relocated to this site when construction is completed, which is anticipated to
be early in 2005. Cedar Rapids Bank & Trust will own the lower three floors of
the facility, and an unrelated third party will own the fourth floor in a
condominium arrangement with the bank. The bank is also considering the
construction of a branch office in Cedar Rapids during 2004.
Management believes that the facilities are of sound construction, in good
operating condition, are appropriately insured and are adequately equipped for
carrying on the business of the Company.
Quad City Bank & Trust and Cedar Rapids Bank & Trust intend to limit their
investment in premises to no more than 50% of their capital. The subsidiary
banks frequently invest in commercial real estate mortgages and also invest in
residential mortgages. Quad City Bank & Trust and Cedar Rapids Bank & Trust have
established lending policies which include a number of underwriting factors to
be considered in making a loan including, location, loan-to-value ratio, cash
flow, interest rate and credit worthiness of the borrower.
No individual real estate property or mortgage amounts to 10% or more of
consolidated assets.
Item 3. Legal Proceedings
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 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of the Company for a vote
during the fourth quarter of the fiscal year ended December 31, 2003.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities The common stock, par value $1.00 per
share, of the Company is traded on The Nasdaq SmallCap Market under the symbol
"QCRH". The stock began trading on October 6, 1993. As of December 31, 2003,
there were 2,803,844 shares of common stock outstanding held by approximately
2,400 holders of record. The following table sets forth the high and low sales
prices of the common stock, as reported by The Nasdaq SmallCap Market, for the
periods indicated.
Six Months Ended
Fiscal 2003 December 31, 2002 Fiscal 2002
Sales Price Sales Price Sales Price
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High Low High Low High Low
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First quarter ............... $18.150 $16.830 $15.500 $13.620 $12.500 $10.100
Second quarter .............. 20.000 17.450 17.000 14.560 10.800 10.800
Third quarter ............... 25.000 19.810 NA N/A 13.450 11.180
Fourth quarter .............. 29.080 22.500 NA N/A 15.150 13.000
On May 8, 2003, the board of directors declared a cash dividend of $0.05 payable
on July 3, 2003, to stockholders of record on June 16, 2003. On October 23,
2003, the board of directors declared a cash dividend of $0.06 per share payable
on January 5, 2004, to stockholders of record on December 15, 2003. In the
future, it is the Company's intention to continue 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, but believes that operating results have reached a level that can
sustain dividends to stockholders as well. The Company has issued junior
subordinated debentures in two private placements and one public offering. Under
the terms of the debentures, the Company may be prohibited, under certain
circumstances, from paying dividends on shares of its common stock. None of
these circumstances currently exist.
6
Under Iowa law, Quad City Bank & Trust and Cedar Rapids Bank & Trust are
restricted as to the maximum amount of dividends they may pay on their common
stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in
an amount greater than its undivided profits. Quad City Bank & Trust and Cedar
Rapids Bank & Trust are members of the Federal Reserve System. The total of all
dividends declared by the subsidiary banks in a calendar year may not exceed the
total of their net profits of that year combined with their retained net profits
of the preceding two years. In addition, the Federal Reserve Board, the Iowa
Superintendent and the FDIC are authorized under certain circumstances to
prohibit the payment of dividends by Quad City Bank & Trust and Cedar Rapids
Bank & Trust. In the case of the Company, further restrictions on dividends may
be imposed by the Federal Reserve Board.
There were no repurchases of the Company's own stock during the fourth quarter
of 2003.
7
Item 6. Selected Financial Data
The following "Selected Consolidated Financial Data" of the Company is derived
in part from, and should be read in conjunction with, our consolidated financial
statements and the accompanying notes thereto. See Item 8 "Financial Statements
and Supplementary Data." Results for past periods are not necessarily indicative
of results to be expected for any future period.
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
Years Ended June 30,
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Year Six Months
Ended Ended
December December
31, 2003 31, 2002 2002 2001 2000 1999
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Statement of Income Data
Interest income ........... $33,378 $16,120 $28,520 $28,544 $24,079 $20,116
Interest expense .......... 11,950 6,484 12,870 16,612 13,289 11,027
Net interest income ....... 21,428 9,636 15,650 11,932 10,790 9,089
Provision for loan losses . 3,405 2,184 2,265 889 1,052 892
Noninterest income (1) .... 11,168 8,840 7,915 6,313 6,154 5,561
Noninterest expenses ...... 21,035 11,413 17,023 13,800 11,467 9,679
Pre-tax net income......... 8,156 4,879 4,277 3,556 4,425 4,079
Income tax expense ........ 2,695 1,683 1,315 1,160 1,680 1,614
Net income ................ 5,461 3,196 2,962 2,396 2,745 2,465
Per Common Share Data:
Net income-basic .......... $1.96 $1.16 $1.10 $1.06 $1.19 $0.98
Net income-diluted ........ 1.91 1.13 1.08 1.04 1.15 0.93
Cash dividends declared ... 0.11 0.05 - - - -
Dividend payout ratio ..... 5.61% 4.31% -% -% -% - %
Balance Sheet
Total assets .............. $710,040 $604,600 $518,828 $400,948 $367,622 $321,346
Securities ................ 128,843 81,654 76,231 56,710 56,129 50,258
Loans ..................... 522,471 449,736 390,594 287,865 241,853 197,977
Allowance for estimated
losses on loans ........... 8,643 6,879 6,111 4,248 3,617 2,895
Deposits .................. 511,652 434,748 376,317 302,155 288,067 247,966
Stockholders' equity:
Common .................. 41,823 36,587 32,578 23,817 20,071 18,473
Preferred ............... - - - - - -
Key Ratios:
Return on average assets .. 0.83% 1.13% 0.64% 0.62% 0.82% 0.86%
Return on average
common equity ............ 13.93 18.41 10.07 10.95 14.17 13.69
Net interest margin (TEY). 3.55 3.68 3.74 3.38 3.56 3.42
Efficiency ratio (2) ..... 64.53 61.71 72.20 75.64 67.68 66.07
Nonperforming assets to
total assets ............. 0.70 0.83 0.44 0.44 0.20 0.51
Allowance for estimated
losses on loan to total 1.50
loans .................... 1.65 1.53 1.56 1.48 1.46
Net charge-offs to
average loans ............ 0.34 0.34 0.12 0.10 0.16 0.26
Average common
stockholders' equity to
average assets ........... 5.94 6.12 6.38 5.69 5.77 6.26
Average stockholders'
equity to average assets . 5.94 6.12 6.38 5.69 5.77 7.05
Earnings to fixed charges
Excluding interest on
Deposits .............. 2.51 x 2.90 x 1.95 x 1.90 x 2.29 x 2.81 x
Including interest on
Deposits .............. 1.66 1.73 1.32 1.21 1.33 1.36
(1) Year ended June 30, 1999 noninterest income includes amortization of $732
from Bancard's restructuring of an ISO agreement. Six months ended December
31, 2002 noninterest income includes a pre-tax gain of $3,460 from
Bancard's gain on sale of merchant credit card portfolio
(2) Noninterest expenses divided by the sum of net interest income before
provision for loan losses and noninterest income.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides additional information regarding our
operations for the twelve months ended December 31, 2003 and 2002, the six
months ended December 31, 2002 and 2001, and the fiscal years ended June 30,
2002 and 2001, and financial condition at December 31, 2003, December 31, 2002,
and June 30, 2002. In August 2002, the Company's board of directors elected to
change the Company's fiscal year end from June 30 to December 31. Due to this
change, the Company filed last year for the transition period from July 1, 2002
to December 31, 2002. Throughout this document, reference to fiscal 2003, the
transition period, fiscal 2002 and 2001 are for the year ended December 31,
2003, the six months ended December 31, 2002, and the years ended June 30, 2002
and 2001, respectively. This discussion should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the accompanying notes thereto included or incorporated by reference
elsewhere in this document.
Overview
The Company was formed in February 1993 for the purpose of organizing Quad City
Bank & Trust and has grown to $710.0 million in consolidated assets as of
December 31, 2003. Management expects continued opportunities for growth, even
though the rate of growth may be slower than that experienced to date.
The Company reported earnings of $5.5 million or $1.96 basic earnings per share
for fiscal 2003 as compared to $4.8 million or $1.75 basic earnings per share
for the twelve months ended December 31, 2002, $3.2 million or $1.16 basic
earnings per share for the six-month transition period ended December 31, 2002,
$3.0 million or $1.10 basic earnings per share for fiscal 2002, and $2.4 million
or $1.06 basic earnings per share for fiscal 2001. In October 2002, the Company
sold its ISO-related merchant credit card portfolio to iPayment, Inc., however
Bancard continued to process the portfolio's transactions through September
2003. The Company's earnings for fiscal 2003 were positively impacted by the
continued processing of these ISO volumes. This continued ISO processing
resulted in additional net income in fiscal 2003 of $900 thousand or $0.32 per
share. The sale in October 2002 resulted in a gain of $1.3 million, after income
tax and related expenses, or $0.47 in diluted earnings per share, and was a
significant contributor to the 139% increase in earnings for the six-months
ended December 31, 2002 when compared to the same period in 2001. The 24%
increase in fiscal 2002 earnings from fiscal 2001 was attributable primarily to
significant increases in both net interest income and noninterest income,
partially offset by an increase in noninterest expense.
Excluding both the one-time gain from the sale of the ISO portfolio in October
2002, as well as the non-recurring revenue from the continued processing through
September 2003, net income for the twelve months ended December 31, 2002 would
have been $3.5 million, or diluted earnings per share of $1.24, and net income
for the twelve months ended December 31, 2003 would have been $4.6 million, or
diluted earnings per share of $1.61. This represents a 30% improvement in
adjusted diluted earnings per share year to year. 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 this income and
to more accurately compare the results of the periods presented.
When compared to the same period in 2002, the fiscal year ended December 31,
2003 reflected significant growth in both net interest income and gains on sales
of loans, net, for the Company. For fiscal 2003, net interest income and gains
on sales of loans, net, improved by 19% and 40%, respectively, for a combined
increase of $4.4 million when compared to the twelve months ended December 31,
2002. Both Quad City Bank & Trust and Cedar Rapids Bank & Trust generated marked
improvement in net interest margin, as well as increases in the gains on sales
of residential real estate loans for fiscal 2003. Bancard's continued processing
through the first nine months of 2003 of the ISO-related merchant credit card
portfolio that was sold, contributed $1.3 million of noninterest income.
Partially offsetting these revenue contributions for the Company was an increase
in noninterest expense of $845 thousand. The primary contributor to the increase
in noninterest expense was salaries and employee benefits, which increased $1.3
million from the same period in 2002. Stock appreciation rights (SAR) expense
was $915 thousand for the year, as the Company's stock price grew from $16.90 to
$28.00 during 2003. For the fiscal year ended December 31, 2003, net income for
Cedar Rapids Bank & Trust was $192 thousand as compared to a net loss of $753
thousand for the same period in 2002. Management is pleased with the outstanding
progress that Cedar Rapids Bank & Trust has made in only its second full year of
operation.
9
The Company's results of operations are dependent primarily on net interest
income, which is the difference between interest income, principally from loans
and investment securities, and interest expense, principally on customer
deposits and borrowings. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar level of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities. The Company's
average tax equivalent yield on interest earning assets decreased 0.80% for the
twelve months ended December 31, 2003 as compared to the same period in 2002.
With the same comparison, the average cost of interest-bearing liabilities
decreased 0.74%, which resulted in a 0.06% decrease in the net interest spread
of 3.21% at December 31, 2002 compared to 3.15% at December 31, 2003. Resulting
from the prolonged low rate environment, the relative stability in the net
interest spread from year to year did not carry over to the net interest margin.
For the fiscal year ended December 31, 2003, net interest margin was 3.55%
compared to 3.72% for the like period in 2002. Management continues to closely
monitor and manage net interest margin. From a profitability standpoint, an
important challenge for the subsidiary banks is to maintain their net interest
margins. Management continues to address this issue with alternative funding
sources and pricing strategies.
The Company's operating results are also affected by sources of noninterest
income, including merchant credit card fees, trust fees, deposit service charge
fees, gains from the sales of residential real estate loans and other income.
Operating expenses of the Company include employee compensation and benefits,
occupancy and equipment expense and other administrative expenses. The Company's
operating results are also affected by economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. The majority of the subsidiary banks' loan portfolios
are invested in commercial loans. Deposits from commercial customers represent a
significant funding source as well.
The Company has added facilities and employees to accommodate both its
historical growth and anticipated future growth. As such, overhead expenses have
had a significant impact on earnings. This trend is likely to continue as both
banks continue to add the facilities and resources necessary to attract and
serve additional customers
During 1994, Quad City Bank & Trust began to develop internally a merchant
credit card processing operation and in 1995 transferred this function to
Bancard, a separate subsidiary of the Company. Bancard initially had an
arrangement to provide processing services exclusively to merchants of a single
independent sales organization or ISO. This ISO was sold in 1998, and the
purchaser requested a reduction in the term of the contract. Bancard agreed to
amend the contract to reduce the term and accept a fixed monthly processing fee
of $25 thousand for merchants existing at the time the agreement was signed, and
a lower transaction fee for new merchants, in exchange for a payment of $2.9
million, the ability to transact business with other ISOs and the assumption of
the credit risk by the ISO. Approximately two thirds of the income from this
settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of
$732 thousand being recognized during fiscal 1999. Bancard terminated its
processing for this ISO in May 2000, eliminating approximately 64% of its
average monthly processing volume. Prior to this ISO's termination, Bancard's
average monthly processing volume for fiscal 2000 was $91 million. During both
fiscal 2001 and 2002, Bancard worked to establish additional ISO relationships
and further develop the relationships with existing ISOs successfully rebuilding
and expanding processing volumes. Bancard's average monthly dollar volume of
transactions processed during fiscal 2001 was $76 million. During fiscal 2002,
the average monthly dollar volume of transactions processed by Bancard increased
36% to $104 million. Monthly processing volumes at Bancard during fiscal 2002
climbed to a level above that existing prior to the termination of all
processing with the initial ISO.
10
On October 22, 2002, the Company announced Bancard's sale of its ISO related
merchant credit card operations to iPayment, Inc. for $3.5 million. After
contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a net gain of $1.3 million, or $0.47
per share, which was realized during the quarter ended December 31, 2002. Also
included in the sale were all of the merchant credit card processing
relationships owned by Bancard's subsidiary, Allied. Bancard will continue to
provide credit card processing for its local merchants and cardholders of the
subsidiary banks and agent banks. The Company anticipated that the termination
of the ISO-related merchant credit card processing would reduce Bancard's future
earnings. Bancard continued to process transactions for iPayment, Inc. through
September 2003. As anticipated, the reduced processing volumes that Bancard
experienced during the fourth quarter of 2003 resulted in a decline in quarterly
merchant credit card fees, net of processing costs for the Company. The fourth
quarter of 2003 generated $416 thousand of merchant credit card fees, net of
processing costs, as compared to $784 thousand for the third quarter of 2003.
Regardless of this decline in processing volumes and fees and the resulting
reduction in operating results from prior quarters, the Company believes that on
a smaller scale Bancard will remain profitable with its narrowed business focus
of providing credit card processing for its local merchants and agent banks and
for cardholders of the Company's subsidiary banks.
During fiscal 1998, Quad City Bank & Trust expanded its presence in the mortgage
banking market by hiring several experienced loan originators and an experienced
underwriter, and now has eight loan originators on staff. Quad City Bank & Trust
and Cedar Rapids Bank & Trust originate mortgage loans on personal residences
and sell the majority of these loans into the secondary market to avoid the
interest rate risk associated with long-term fixed rate financing. The
subsidiary banks realize revenue from this mortgage banking activity from a
combination of loan origination fees and gains on the sale of the loans in the
secondary market. During the twelve months ended December 31, 2003, the
subsidiary banks originated $268.8 million of real estate loans and sold $241.6
million, or90%, of these loans resulting in gains of $3.7 million. During the
six months ended December 31, 2002, the subsidiary banks originated $145.1
million of real estate loans and sold $121.5 million, or 84%, of these loans
resulting in gains of $1.9 million. During fiscal 2002, the subsidiary banks
originated $175.5 million of real estate loans and sold $144.3 million, or 82%,
of these loans, which resulted in gains of $2.0 million. The depressed interest
rates during these periods have caused a significant increase in the subsidiary
banks' mortgage origination volume. In fiscal 2001, Quad City Bank & Trust
originated $97.6 million of real estate loans and sold $92.9 million, or 95%, of
these loans resulting in gains of $1.1 million.
Trust department income continues to be a significant contributor to noninterest
income. Trust department fees contributed $2.2 million in revenues during fiscal
2003. In the six months ended December 31, 2002, trust department fees
contributed $1.0 million in revenues. Trust department fees grew from $2.1
million in fiscal 2001 to $2.2 million in fiscal 2002. Income is generated
primarily from fees charged based on assets under administration for corporate
and personal trusts and for custodial services. Assets under administration at
December 31, 2003 increased to $673.5 million, resulting primarily from the
development of existing relationships and the addition of new trust
relationships. At December 31, 2002, assets under administration were $642.7
million. The decrease of $23.0 million in trust assets from June 30 to December
31, 2002 was a reflection of the reduced market values of securities held in
trust accounts. Primarily as a result of new trust relationships, assets under
administration had grown from $617.5 at June 30, 2001 to $665.7 million at June
30, 2002.
The Company's initial public offering during the fourth calendar quarter of 1993
raised approximately $14 million. In order to provide additional capital to
support the growth of Quad City Bank & Trust, the Company formed a statutory
business trust, which issued $12 million of capital securities to the public for
cash in June 1999. In conjunction with the formation of Cedar Rapids Bank &
Trust, the Company sold approximately $5.0 million of its common stock through a
private placement offering in September 2001, primarily to investors in the
Cedar Rapids area. In February 2004, the Company formed two additional trusts,
which, in a private transaction, issued $8.0 million of floating rate capital
securities and $12.0 million of fixed rate capital securities. The Company
intends to use the net proceeds for general corporate purposes, including the
possible redemption, in June 2004, of the $12.0 million of capital securities
issued in 1999.
11
Critical Accounting Policy
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be that related to the allowance for loan losses.
The Company's allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Company's historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements. Qualitative factors include the general economic environment in
the Company's markets, including economic conditions throughout the Midwest and
in particular, the state of certain industries. Size and complexity of
individual credits in relation to loan structure, existing loan policies and
pace of portfolio growth are other qualitative factors that are considered in
the methodology. As the Company adds new products and increases the complexity
of its loan portfolio, it will enhance its methodology accordingly. Management
may report a materially different amount for the provision for loan losses in
the statement of operations to change the allowance for loan losses if its
assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Company's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis section entitled "Financial Condition -
Allowance for Loan Losses." Although management believes the levels of the
allowance as of both December 31, 2002 and 2003 and both June 30, 2002 and 2001
were adequate to absorb losses inherent in the loan portfolio, a decline in
local economic conditions, or other factors, could result in increasing losses
that cannot be reasonably predicted at this time.
Results of Operations
Fiscal 2003 compared with the twelve months ended December 31, 2002
Overview. Net income for the twelve months ended December 31, 2003 was $5.5
million as compared to net income of $4.8 million for the twelve-month period
ended December 31, 2002 for an increase of $640 thousand or 13%. Basic earnings
per share for fiscal 2003 were $1.96 as compared to $1.75 for the comparable
period in 2002. The increase in net income was comprised of an increase in net
interest income after provision for loan losses of $3.4 million, partially
offset by a decrease in noninterest income of $1.5 million, and increases in
noninterest expenses of $845 thousand and federal and state income taxes of $327
thousand. Several specific factors contributed to the improvement in net income
from 2002 to 2003 for the twelve-month periods. Primary factors included a 19%
improvement in net interest income prompted by increased volume, and a 40%
increase in gains on sales of real estate loans.
Interest income. Interest income grew from $30.8 million for the twelve months
ended December 31, 2002 to $33.4 million for fiscal 2003. The increase in
interest income was attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable, partially offset by a
decrease in interest rates. The average yield on interest earning assets for the
twelve months ended December 31, 2003 was 5.50% as compared to 6.30% for the
twelve-month period ended December 31, 2002.
Interest expense. Interest expense decreased by $770 thousand, from $12.7
million for the twelve months ended December 31, 2002 to $11.9 million for
fiscal 2003. The 6% decrease in interest expense was primarily attributable to a
reduction in interest rates, which was almost entirely offset by greater average
outstanding balances in interest-bearing liabilities. The average cost on
interest bearing liabilities was 2.35% for the twelve months ended December 31,
2003 as compared to 3.09% for the like period in 2002.
12
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.65% of total gross loans at
December 31, 2003, as compared to approximately 1.53% at December 31, 2002,
1.56% at June 30, 2002 and 1.48% at June 30, 2001. The provision for loan losses
remained stable at $3.4 million for fiscal 2003, as it had been for the twelve
months ended December 31, 2002. During both periods, management made monthly
provisions for loan losses based upon a number of factors, principally the
increase in loans and a detailed analysis of the loan portfolio. During fiscal
2003, the $3.4 million provision to the allowance for loan losses was attributed
35%, or $1.2 million, to net growth in the loan portfolio, and 65%, or $2.2
million, to downgrades and write-offs within the portfolio. For the twelve
months ended December 31, 2003, commercial loans had total charge-offs of $1.8
million, which resulted primarily from a single customer relationship at Quad
City Bank & Trust, and there were $192 thousand of commercial recoveries, due
primarily to this same relationship. The net write-off of this relationship
accounted for 17% of the provision for loans losses during fiscal 2003 and was
in addition to a $1.1 million charge-off, which occurred during the quarter
ended December 31, 2002. The additional losses were a result of environmental
issues associated with the collateral for the loan, which were identified during
the first quarter of 2003. The Company believed that these environmental issues
negatively impacted the value and salability of the business and determined that
it was appropriate to take a conservative approach and write down the loan
balance to reflect no value in the real estate and equipment collateral. During
the second quarter of 2003, all of the collateral, including the real estate and
equipment, was sold resulting in a $120 thousand recovery. In the third and
fourth quarters, there were recoveries of $50 thousand, as Quad City Bank &
Trust realized gain from the sale of other real estate, which had been deferred
in accordance with current accounting rules. Consumer loan charge-offs and
recoveries totaled $298 thousand and $242 thousand, respectively, for the twelve
months ended December 31, 2003. Real estate loans had no charge-off or recovery
activity during fiscal 2003. The ability to grow profitably is, in part,
dependent upon the ability to maintain asset quality. The Company is focusing
efforts at its subsidiary banks in an attempt to improve the overall quality of
the Company's loan portfolio.
Noninterest income. Noninterest income decreased by $1.5 million from $12.7
million for the twelve months ended December 31, 2002 to $11.2 million for
fiscal 2003. In the twelve months ended December 31, 2002, the largest component
of noninterest income was the gain on sale of the ISO related portion of the
merchant credit card portfolio of $3.5 million, which accounted for 27% of the
total. Noninterest income for both periods consisted of income from the merchant
credit card operation, fees from the trust department, depository service fees,
gains on the sale of residential real estate mortgage loans, and other
miscellaneous fees. Making significant improvements from year to year in the
noninterest income category were increases in gains on sales of loans and other
miscellaneous fees.
During the twelve-month period ended December 31, 2003, merchant credit card
fees net of processing costs, decreased by $172 thousand to $2.2 million, from
$2.4 million for the comparable period in 2002, reflecting little effect of the
sale of the independent sales organization (ISO) related merchant credit card
activity to iPayment, Inc. In October 2002, the Company sold Bancard's
ISO-related merchant credit card operations to iPayment, Inc. for $3.5 million.
After contractual compensation and severance payments, transaction expenses, and
income taxes, the transaction resulted in a gain of $1.3 million, or $0.47 per
share, which was realized during the quarter, ended December 31, 2002. Also
included in the sale were all of the merchant credit card processing
relationships owned by Allied. Bancard continues to provide credit card
processing for its local merchants and cardholders of the subsidiary banks and
agent banks. Through September 24, 2003, Bancard also temporarily continued to
process ISO related transactions for iPayment, Inc. for a fixed monthly fee
rather than a percentage of transaction volumes. Built into the sales contract
with iPayment was an agreement that the fixed monthly fee would increase as the
temporary processing period was extended. Extensions to the processing period
and the resulting growth in the fixed monthly fee mitigated the drop in
Bancard's earnings that was expected to occur. The transfer of this ISO
processing to another provider occurred in September 2003, just prior to the
close of the third quarter. As the Company anticipated, Bancard's monthly
earnings were reduced significantly in the final quarter of 2003. For the three
quarters through September 30, 2003, Bancard's net income was $741 thousand, and
for the fourth quarter of fiscal 2003, Bancard's net income was $125 thousand.
While future operating results are anticipated to be reduced, the Company
believes that Bancard will, on a smaller scale, remain profitable with its
narrowed business focus of continuing to provide credit card processing for its
local merchants and agent banks and for cardholders of the Company's subsidiary
banks.
13
For the twelve-month periods ended both December 31, 2003 and 2002, trust
department fees were $2.2 million. The $33 thousand, or 2%, increase from year
to year was primarily a reflection of the further development of existing trust
relationships throughout 2003 and the addition of a significant volume of new
trust relationships occurring late in the fourth quarter, which were almost
entirely offset by the reduction of approximately $50.0 million during the first
quarter of a single trust account and its resulting impact on the calculation of
trust fees for the remainder of the year.
Deposit service fees increased $377 thousand, or 33%, to $1.5 million from $1.1
million for the twelve-month periods ended December 31, 2003 and December 31,
2002, respectively. This increase was primarily a result of the growth in
noninterest bearing demand deposit accounts of $41.3 million, or 46%, since
December 31, 2002. Service charges and NSF (non-sufficient funds) charges
related to demand deposit accounts were the main components of deposit service
fees.
Gains on sales of loans were $3.7 million for fiscal 2003, which reflected an
increase of 40%, or $1.1 million, from $2.6 million for the same period in 2002.
The increase resulted from the lower mortgage rates that originated in calendar
2002 and continued throughout 2003. This situation created significantly more
home refinances during the period and the subsequent sale of the majority of
these loans into the secondary market. Because the gains on sales of loans
typically have an inverse relationship with mortgage interest rates, it is
unlikely that the subsidiary banks will continue to maintain this level of
activity in the long term. During the fourth quarter of fiscal 2003, refinancing
volumes slowed dramatically from the pace that had existed in the three previous
quarters.
For the twelve months ended December 31, 2003, other noninterest income
increased $700 thousand, or 82%, to $1.6 million from $857 thousand for the same
period in 2002. The increase was primarily due to a combination of improved
earnings on the cash surrender value of life insurance, gain realized on the
sale of foreclosed property, increased earnings realized by Nobel Electronic
Transfer, LLC, one of the three associated companies in which the Company holds
an interest, dividends earned on Federal Reserve Bank and Federal Home Loan Bank
stock, and increased fees generated from investment services offered at the
subsidiary banks.
Noninterest expenses. For the fiscal year ended December 31, 2003, the main
components of noninterest expenses were primarily salaries and benefits,
occupancy and equipment expenses, and professional and data processing fees. For
the twelve months ended December 31, 2002, the main components of noninterest
expenses were primarily salaries and benefits, compensation and other expenses
related to sale of merchant credit card portfolio, occupancy and equipment
expenses, and professional and data processing fees. Noninterest expenses for
the twelve-month period ended December 31, 2003 were $21.0 million as compared
to $20.2 million for the same period in 2002 for an increase of $845 thousand or
4%.
The following table sets forth the various categories of noninterest expenses
for the twelve months ended December 31, 2003 and 2002.
Twelve Months Ended December 31,
----------------------------------------
2003 2002 % Change
----------------------------------------
Salaries and employee benefits ........................................... $12,710,505 $11,379,110 12%
Compensation and other expenses related to sale of .......................
merchant credit card portfolio ......................................... -- 1,413,734 -100%
Professional and data processing fees .................................... 1,962,243 1,498,819 31%
Advertising and marketing ................................................ 786,054 658,452 19%
Occupancy and equipment expense .......................................... 2,640,602 2,517,047 5%
Stationery and supplies .................................................. 460,421 469,458 -2%
Postage and telephone .................................................... 632,354 548,328 15%
Bank service charges ..................................................... 454,367 391,886 16%
Insurance ................................................................ 444,947 356,529 25%
Other .................................................................... 943,759 957,202 -1%
---------------------------------------
Total noninterest expenses ................................. $21,035,252 $20,190,565 4%
========================================
14
For the fiscal year ended December 31, 2003, total salaries and benefits
increased to $12.7 million or $1.3 million over the $11.4 million for the
comparable period in 2002. Stock appreciation rights (SAR) expense was $915
thousand for the year, as the Company's stock price grew from $16.90 to $28.00
during 2003. Also contributing to the increase in salaries and benefits were
increased incentive compensation to real estate officers and processors
proportionate to the increased volumes of gains on sales of loans, and the
addition of employees at both subsidiary banks. Compensation and other expenses
related to the sale of the ISO-related merchant credit card portfolio of $1.4
million accounted for 7% of the $20.2 million total in noninterest expenses for
the twelve months ended December 31, 2002. Contractual bonus and severance
payments were based on the gain realized from the sale of Bancard's ISO-related
merchant credit card operations to iPayment, Inc. in October 2002. Occupancy and
equipment expense increased $124 thousand, or 5%, for the period. The increase
was due primarily to increased levels of rent, property taxes, utilities,
depreciation, maintenance, and other occupancy expenses, in conjunction with $46
thousand in losses on disposals of assets. Professional and data processing fees
increased $463 thousand, or 31%, when comparing fiscal 2003 to the comparable
period in 2002. The increase was primarily attributable to a combination of
additional data processing fees incurred by the subsidiary banks and other
professional fees incurred by the parent company. When comparing fiscal 2003 to
the comparable period in 2002, advertising and marketing expense grew $128
thousand, insurance expense increased $88 thousand, postage and phone expense
grew $84 thousand, and bank service charges increased $62 thousand. These
increases were all proportionate reflections of the Company's growth during the
year.
Income tax expense. The provision for income taxes was $2.7 million for the
fiscal year ended December 31, 2003 compared to $2.4 million for the comparable
period in 2002, an increase of $327 thousand or 14%. The increase was primarily
attributable to increased income before income taxes of $967 thousand or 13% for
the twelve-month period ended December 31, 2003, in combination with a slight
increase in the Company's effective tax rate for the 2003 period to 33.0% from
32.9% for the same period in 2002.
Six months ended December 31, 2002 compared with six months ended December 31,
2001
Overview. Net income for the six months ended December 31, 2002 was $3.2 million
as compared to net income of $1.3 million for the six-month period ended
December 31, 2001 for an increase of $1.9 million or 139%. Basic earnings per
share for the six-month period ended December 31, 2002 were $1.16 as compared to
$0.51 for the comparable period in 2001. The increase in net income was
comprised of an increase in net interest income after provision for loan losses
of $1.3 million and an increase in noninterest income of $4.8 million, partially
offset by increases in noninterest expenses of $3.2 million and an increase in
federal and state income taxes of $1.1 million. Several specific factors
contributed to the improvement in net income from 2001 to 2002 for the six-month
periods. Primary factors included the $3.5 million gain on sale of the merchant
credit card portfolio, a 34% improvement in net interest income prompted by
increased volume, and a 51% increase in gains on sales of real estate loans.
Interest income. Interest income grew from $13.8 million for the six months
ended December 31, 2001 to $16.1 million for the comparable period in 2002. The
increase in interest income was attributable to greater average outstanding
balances in interest-earning assets, principally loans receivable, partially
offset by a decrease in interest rates. The average yield on interest earning
assets for the six months ended December 31, 2002 was 6.13% as compared to 7.05%
for the six-month period ended December 31, 2001.
Interest expense. Interest expense decreased by $150 thousand, from $6.6 million
for the six months ended December 31, 2001 to $6.5 million for the same period
in 2002. The 2% decrease in interest expense was primarily attributable to a
reduction in interest rates almost entirely offset by greater average
outstanding balances in interest-bearing liabilities. The average cost on
interest bearing liabilities was 2.90% for the six months ended December 31,
2002 as compared to 3.89% for the like period in 2001.
15
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.53% of total gross loans at
December 31, 2002, as compared to approximately 1.56% at June 30, 2002 and 1.43%
at December 31, 2001. The provision for loan losses increased by $1.2 million,
from $1.0 million for the six months ended December 31, 2001 to $2.2 million for
the six-month period ended December 31, 2002. During the period, management made
monthly provisions for loan losses based upon a number of factors, principally
the increase in loans and a detailed analysis of the loan portfolio. During the
six months ended December 31, 2002, $786 thousand, or 36%, of the provision for
loan losses resulted from the deterioration of a single, significant loan
relationship at Quad City Bank and Trust. For the six-month period ended
December 31, 2002, commercial loans had total, net charge-offs of $1.3 million.
The charge-off of a single commercial loan relationship at Quad City Bank and
Trust accounted for $1.1 million, or 82%, of the commercial loan charge-offs for
the period. Consumer loan charge-offs and recoveries totaled $105 thousand and
$37 thousand, respectively, for the six months ended December 31, 2002. Real
estate loans had no charge-off or recovery activity during this period in 2002.
The ability to grow profitably is, in part, dependent upon the ability to
maintain asset quality.
Noninterest income. Noninterest income increased by $4.8 million from $4.0
million for the six months ended December 31, 2001 to $8.8 million for the same
period in 2002. In the six months ended December 31, 2002, the primary component
of the increase in noninterest income was the gain on sale of the ISO related
portion of the merchant credit card portfolio of $3.5 million, which accounted
for 72% of the increase. Noninterest income for both periods consisted of income
from the merchant credit card operation, fees from the trust department,
depository service fees, gains on the sale of residential real estate mortgage
loans, and other miscellaneous fees. Also making significant contributions to
the 119% increase in noninterest income from year to year were increases in
gains on sales of loans and merchant credit card fees net of processing costs.
During the six-month period ended December 31, 2002, merchant credit card fees
net of processing costs, increased by $270 thousand to $1.3 million, from $1.0
million for the comparable period in 2001. The increase was due to a 66%
improvement from year to year in the volume of credit card transactions
processed during the six months ended December 31. During the six-month period
ended December 31, 2001, Bancard processed $568.3 million of transactions, which
grew to $941.6 million for the same period in 2002. As a result of the sale of
the ISO-related merchant credit card operations, processing volumes are expected
to decrease dramatically in future months. Bancard will operate with a narrowed
focus of processing for its local merchants and agent banks and for cardholders
of the Company's subsidiary banks.
For the six-month periods ended both December 31, 2002 and 2001, trust
department fees were $1.0 million. The $48 thousand, or 5%, increase from year
to year was primarily a reflection of the further development of existing trust
relationships and the addition of new trust relationships during the 2002
period, almost entirely offset by the reduced market value of securities held in
trust accounts and the resulting impact on the calculation of trust fees.
Gains on sales of loans were $1.9 million for the six months ended December 31,
2002, which reflected an increase of 51%, or $632 thousand, from $1.2 million
for the like period in 2001. The increase resulted from the decline in mortgage
rates during calendar year 2002. This situation created significantly more home
refinances during the period and the subsequent sale of the majority of these
loans into the secondary market. Because the gains on sales of loans have an
indirect relationship with interest and mortgage rates, it is unlikely that the
subsidiary banks will continue to maintain this level of activity in the long
term.
The $3.5 million gain on sale of merchant credit card portfolio made the most
significant contribution to the increase in noninterest income for the six
months ended December 31, 2002 over the comparable period in 2001. In October
2002, the Company sold Bancard's ISO related merchant credit card operations to
iPayment, Inc. Also included in the sale were all of the merchant credit card
processing relationships owned by Allied.
16
Noninterest expenses. For the six months ended December 31, 2002, the main
components of noninterest expenses were primarily salaries and benefits,
compensation and other expenses related to sale of merchant credit card
portfolio, occupancy and equipment expenses, and professional and data
processing fees. For the six months ended December 31, 2001 noninterest expenses
were comprised predominately of salaries and benefits, occupancy and equipment
expenses, and professional and data processing fees. Noninterest expenses for
the six-month period ended December 31, 2002 were $11.4 million as compared to
$8.2 million for the same period in 2001 for an increase of $3.2 million or 38%.
The following table sets forth the various categories of noninterest expenses
for the six months ended December 31, 2002 and 2001.
Six Months Ended December 31,
----------------------------------------
2002 2001 % Change
----------------------------------------
Salaries and employee benefits ........................................... $ 6,075,885 $ 4,774,358 27%
Compensation and other expenses related to sale of .......................
merchant credit card portfolio ......................................... 1,413,734 -- NA
Professional and data processing fees .................................... 872,750 784,701 11%
Advertising and marketing ................................................ 341,093 286,643 19%
Occupancy and equipment expense .......................................... 1,322,826 1,137,585 16%
Stationery and supplies .................................................. 229,066 235,766 -3%
Postage and telephone .................................................... 291,737 229,462 27%
Bank service charges ..................................................... 211,873 177,535 19%
Insurance ................................................................ 186,308 193,458 -4%
Other .................................................................... 467,779 425,406 10%
----------------------------------------
Total noninterest expenses ................................. $11,413,051 $ 8,244,914 38%
========================================
Compensation and other expenses related to the sale of the merchant credit card
portfolio of $1.4 million accounted for 45% of the $3.2 million increase
experienced in noninterest expenses in aggregate. Contractual bonus and
severance payments were based on the gain realized from the sale of Bancard's
ISO related merchant credit card operations to iPayment, Inc. in October 2002.
For the six months ended December 31, 2002, total salaries and benefits
increased to $6.1 million or $1.3 million over the $4.8 million for the
comparable period in 2001. The change was attributable to increased incentive
compensation to real estate officers and processors proportionate to the
increased volumes of gains on sales of loans, in combination with the addition
of employees at Cedar Rapids Bank & Trust and a slight increase in the number of
Quad City Bank & Trust employees. Occupancy and equipment expense increased $185
thousand, or 16%, for the period. The increase was predominately due to
increased levels of rent, property taxes, utilities, depreciation, maintenance,
and other occupancy expenses. Professional and data processing fees increased
$88 thousand, or 11%, when comparing the six months ended December 31, 2001 to
the comparable period in 2002. The increase was primarily attributable to the
additional data processing fees incurred by the subsidiary banks. From 2001 to
2002, postage and telephone expense for the six months ended December 31,
increased 27%, or $62 thousand. The growth at Cedar Rapids Bank & Trust
accounted for $40 thousand, or 65% of this increase. For the six-month period
ended December 31, 2002, bank service charges increased $34 thousand, or 19%.
Growth at Cedar Rapids Bank & Trust contributed $20 thousand, or 59% of this
increase.
Income tax expense. The provision for income taxes was $1.7 million for the six
months ended December 31, 2002 compared to $630 thousand for the comparable
period in 2001, an increase of $1.1 million or 167%. The increase was primarily
attributable to increased income before income taxes of $2.9 million or 148% for
the six-month period ended December 31, 2002, in combination with an increase in
the Company's effective tax rate for the 2002 period to 34.5% from 32.0% for the
same period in 2001. The increase in the Company's effective tax rate was due to
a much lower percentage of the Company's income coming from federal tax-exempt
securities, (primarily tax-free municipal bonds) in 2002 versus 2001.
17
Fiscal 2002 compared with fiscal 2001
Overview. Net income for fiscal 2002 was $3.0 million as compared to net income
of $2.4 million in fiscal 2001 for an increase of $567 thousand or 24%. Basic
earnings per share for fiscal 2002 were $1.10 as compared to $1.06 for fiscal
2001. The increase in net income was comprised of an increase in net interest
income after provision for loan losses of $2.3 million and an increase in
noninterest income of $1.6 million partially offset by increases in noninterest
expenses of $3.2 million and an increase in federal and state income taxes of
$155 thousand. Several factors contributed to the improvement in net income
during fiscal 2002. Primary factors included the significant improvement of 36
basis points in net interest margin and the 75% increase in gains on sales of
real estate loans.
Interest income. Interest income was $28.5 million for fiscal 2001 and fiscal
2002. The stability in interest income was attributable to greater average
outstanding balances in interest-earning assets, principally loans receivable,
that was offset by the reduction in interest rates. The average yield on
interest earning assets for fiscal 2002 was 6.77% as compared to 8.04% for
fiscal 2001.
Interest expense. Interest expense decreased by $3.7 million, from $16.6 million
for fiscal 2001 to $12.9 million for fiscal 2002. The 23% decrease in interest
expense was primarily attributable to significant reductions in interest rates
partially offset by greater average outstanding balances in interest-bearing
liabilities. The average cost on interest bearing liabilities was 3.56% for
fiscal 2002 as compared to 5.32% for fiscal 2001.
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. The Company had an allowance for
estimated losses on loans of approximately 1.56% of total loans at June 30, 2002
as compared to approximately 1.48% at June 30, 2001. The provision for loan
losses increased by $1.4 million, from $900 thousand for fiscal 2001 to $2.3
million for fiscal 2002. During fiscal 2002, management made monthly provisions
for loan losses based upon a number of factors, principally the increase in
loans and a detailed analysis of the loan portfolio. For fiscal 2002, commercial
loans had total charge-offs of $437 thousand and total recoveries of $101
thousand. Consumer loan charge-offs and recoveries totaled $204 thousand and
$138 thousand, respectively, for fiscal 2002. Real estate loans had no
charge-off or recovery activity during fiscal 2002. The ability to grow
profitably is, in part, dependent upon the ability to maintain asset quality.
Noninterest income. Noninterest income increased by $1.6 million, from $6.3
million for fiscal 2001 to $7.9 million for fiscal 2002. Noninterest income for
fiscal 2002 and 2001 consisted of income from the merchant credit card
operation, fees from the trust department, depository service fees, gains on the
sale of residential real estate mortgage loans, and other miscellaneous fees.
The 25% increase was primarily due to the increases in gains on sales of loans,
merchant credit card fees net of processing costs, and deposit service fees
received during the period.
During fiscal 2002, merchant credit card fees net of processing costs increased
by $424 thousand to $2.1 million, from $1.7 million for fiscal 2001. The
increase was due to a 36% increase in the volume of credit card transactions
processed during fiscal 2002, partially offset by the one-time charge during the
third quarter related to an arbitration settlement involving Bancard.
For fiscal 2002, trust department fees increased $90 thousand, or 4%, to $2.2
million from $2.1 million for fiscal 2001. The increase was primarily a
reflection of the development of existing trust relationships and the addition
of new trust relationships during the period, almost entirely offset by the
reduced market value of securities held in trust accounts and the resulting
impact on the calculation of trust fees.
Gains on sales of loans were $2.0 million for fiscal 2002, which reflected an
increase of 75%, or $855 thousand, from $1.1 million for fiscal 2001. The
increase resulted from a significant decline in mortgage rates, which was driven
by corresponding cuts by the Federal Reserve during calendar 2001. This created
significantly more home refinances and home purchases during the fiscal year and
the subsequent sale of the majority of these loans into the secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 2002 were
$17.0 million as compared to $13.8 million for the same period in 2001 for an
increase of $3.2 million or 23%.
18
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 2002 and 2001.
Years Ended June 30,
----------------------------------------
2002 2001 % Change
----------------------------------------
Salaries and employee benefits ......................... $10,077,583 $ 8,014,268 26%
Professional and data processing fees .................. 1,410,770 1,159,929 22%
Advertising and marketing .............................. 604,002 579,524 4%
Occupancy and equipment expense ........................ 2,331,806 1,925,820 21%
Stationery and supplies ................................ 476,158 352,441 35%
Postage and telephone .................................. 486,053 409,626 19%
Bank service charges ................................... 357,550 293,012 22%
Insurance .............................................. 351,873 328,405 7%
Other .................................................. 926,633 736,928 26%
----------------------------------------
Total noninterest expenses ............... $17,022,428 $13,799,953 23%
========================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2002, total salaries and benefits
increased to $10.1 million or $2.1 million over the fiscal 2001 total of $8.0
million. The change was primarily attributable to the addition of employees to
staff the Cedar Rapids Bank & Trust operation, which accounted for $1.7 million,
or 82%, of the increase. A slight increase in the number of Quad City Bank &
Trust employees, and increased incentive compensation to real estate officers
proportionate to the increased volumes of gains on sales of loans, comprised the
balance of the change. Occupancy and equipment expense increased $406 thousand
or 21% for the period. The increase was predominately due to the addition of
Quad City Bank & Trust's fourth full service banking facility in late October
2000, and Cedar Rapids Bank & Trust's permanent full service banking facility in
September 2001, and the resulting increased levels of rent, utilities,
depreciation, maintenance, and other occupancy expenses. Professional and data
processing fees increased $251 thousand, or 22%, during fiscal 2002. The
increase was primarily attributable to legal fees resulting from an arbitration
involving Bancard, combined with the additional professional and data processing
fees related to Cedar Rapids Bank & Trust. During fiscal 2002, stationary and
supplies increased 35%, or $124 thousand. The addition of Cedar Rapids Bank &
Trust accounted for $85 thousand, or 68% of this increase. Other noninterest
expense increased $190 thousand, or 26% for the fiscal year. Significantly
contributing to this increase was a $170 thousand merchant credit card loss
resulting from the settlement of an arbitration dispute between Bancard and Nova
Information Services, Inc. A settlement amount was paid to Bancard, which was
the receivable due from Nova less an amount that approximated the costs of
continued arbitration. For fiscal 2002, postage and telephone expense grew $76
thousand and bank service charges increased $65 thousand. Both reflected the
growth of the subsidiary banks during the period.
Income tax expense. The provision for income taxes was $1.3 million for fiscal
2002 compared to $1.2 million for fiscal 2001, an increase of $155 thousand or
13%. The increase was primarily attributable to increased income before income
taxes of $722 thousand or 20% for fiscal 2002, partially offset by a reduction
in the Company's effective tax rate for fiscal 2002 of 30.7% versus 32.6% for
fiscal 2001.
Financial Condition
Total assets of the Company increased by $105.4 million or 17% to $710.0 million
at December 31, 2003 from $604.6 million at December 31, 2002. The growth
primarily resulted from an increase in the loan portfolio funded by deposits
received from customers and by proceeds from short-term and other borrowings.
Total assets of the Company increased by $85.8 million or 17% to $604.6 million
at December 31, 2002 from $518.8 million at June 30, 2002. During this period
the growth primarily resulted from an increase in the loan portfolio funded by
deposits received from customers and by proceeds from Federal Home Loan Bank
advances.
Cash and Cash Equivalent Assets. Cash and due from banks decreased by $461
thousand or 2% to $24.4 million at December 31, 2003 from $24.9 million at
December 31, 2002. Cash and due from banks increased by $6.5 million or 35% to
$24.9 million at December 31, 2002 from $18.4 million at June 30, 2002. Cash and
due from banks represented both cash maintained at the subsidiary banks, as well
as funds that the Company and its subsidiaries had deposited in other banks in
the form of noninterest-bearing demand deposits.
19
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
decreased by $10.4 million to $4.0 million at December 31, 2003 from $14.4
million at December 31, 2002. Federal funds sold increased by $13.6 million to
$14.4 million at December 31, 2002 from $760 thousand at June 30, 2002. These
fluctuations were attributable to the Company's varying levels of liquidity at
the subsidiary banks.
Interest-bearing deposits at financial institutions decreased by $4.2 million or
29% to $10.4 million at December 31, 2003 from $14.6 million at December 31,
2002. Included in interest-bearing deposits at financial institutions are demand
accounts, money market accounts, and certificates of deposit. During fiscal
2003, the certificate of deposit portfolio had 35 maturities totaling $3.4
million and 30 purchases totaling $2.8 million. Interest-bearing deposits at
financial institutions decreased by $502 thousand or 3% to $14.6 million at
December 31, 2002 from $15.1 million at June 30, 2002. During the six months
ended December 31, 2002, the certificate of deposit portfolio had 19 maturities
totaling $1.9 million and no purchases. As the result of lower short-term
interest rates and a strong loan demand during 2002 and 2003, the subsidiary
banks reduced their deposits in other banks in the form of certificates of
deposit and increased their utilization of Federal funds sold.
Investments. Securities increased by $47.1 million or 58% to $128.8 million at
December 31, 2003 from $81.7 million at December 31, 2002. The net increase was
the result of a number of transactions in the securities portfolio. The Company
purchased additional securities, classified as available for sale, in the amount
of $91.7 million. This increase was partially offset by paydowns of $4.0 million
that were received on mortgage-backed securities, proceeds from calls and
maturities of $39.2 million, the amortization of premiums, net of the accretion
of discounts, of $788 thousand, and the recognition a decrease in unrealized
gains on securities available for sale, before applicable income tax of $549
thousand.
Securities increased by $5.5 million or 7% to $81.7 million at December 31, 2002
from $76.2 million at June 30, 2002. The net increase was the result of a number
of transactions in the securities portfolio. The Company purchased additional
securities, classified as available for sale, in the amount of $14.8 million,
and recognized an increase in unrealized gains on securities available for sale,
before applicable income tax of $1.4 million. These increases were partially
offset by paydowns of $1.2 million that were received on mortgage-backed
securities, proceeds from the sales of securities available for sale of $2.1
million, proceeds from calls and maturities of $7.3 million, and amortization of
premiums, net of the accretion of discounts, of $149 thousand.
Certain investment securities of the subsidiary banks are purchased with the
intent to hold the securities until they mature. These held to maturity
securities, comprised of municipal securities and other bonds, were recorded at
amortized cost at December 31, 2003, December 31, 2002, and June 30, 2002. The
balance at December 31, 2003 was $400 thousand, which was a decrease of $25
thousand from the balance of $425 thousand at both December 31, 2002 and June
30, 2002. Market values at December 31 2003, December 31, 2002, and June 30,
2002 were $417 thousand, $451 thousand, and $437 thousand, respectively.
All of the Company's and Cedar Rapids Bank & Trust's securities, and a majority
of Quad City Bank & Trust's securities are placed in the available for sale
category as the securities may be liquidated to provide cash for operating,
investing or financing purposes. These securities were reported at fair value
and increased by $47.2 million, or 58%, to $128.4 million at December 31, 2003,
from $81.2 million at December 31, 2002. These securities were reported at fair
value and increased by $5.4 million, or 7%, to $81.2 million at December 31,
2002, from $75.8 million at June 30, 2002. The amortized cost of such securities
at December 31, 2003, December 31, 2002, and June 30, 2002 was $125.6 million,
$77.8 million, and $73.7 million, respectively.
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk and as of December 31, 2003 there existed no security
in the investment portfolio (other than U.S. Government and U.S. Government
agency securities) that exceeded 10% of stockholders' equity at that date.
Loans. Total gross loans receivable increased by $72.8 million or 16% to $522.5
million at December 31, 2003 from $449.7 million at December 31, 2002. The
increase was the result of the origination or purchase of $691.1 million of
commercial business, consumer and real estate loans, less loan charge-offs, net
of recoveries, of $1.6 million and loan repayments or sales of loans of $616.7
million. During the fiscal year ended December 31, 2003, Quad City Bank & Trust
contributed $536.3 million, or 78%, and Cedar Rapids Bank & Trust contributed
$154.8 million, or 22% of the Company's loan originations or purchases. The
majority of residential real estate loans originated by the subsidiary banks
were sold on the secondary market to avoid the interest rate risk associated
with long-term fixed rate loans. As of December 31, 2003, Quad City Bank &
Trust's legal lending limit was approximately $7.2 million and Cedar Rapids Bank
& Trust's legal lending limit was approximately $2.5 million.
20
Total gross loans receivable increased by $59.1 million or 15% to $449.7 million
at December 31, 2002 from $390.6 million at June 30, 2002. The increase was the
result of the origination or purchase of $305.1 million of commercial business,
consumer and real estate loans, less loan charge-offs, net of recoveries, of
$1.4 million and loan repayments or sales of loans of $244.6 million. During the
six months ended December 31, 2002, Quad City Bank & Trust contributed $231.4
million, or 76%, and Cedar Rapids Bank & Trust contributed $73.7 million, or 24%
of the company's loan originations or purchases. The majority of residential
real estate loans originated by the subsidiary banks were sold on the secondary
market to avoid the interest rate risk associated with long-term fixed rate
loans. As of December 31, 2002, Quad City Bank & Trust's legal lending limit was
approximately $6.4 million and Cedar Rapids Bank & Trust's legal lending limit
was approximately $1.6 million.
Allowance for Loan Losses. The allowance for estimated losses on loans was $8.6
million at December 31, 2003 compared to $6.9 million at December 31, 2002, for
an increase of $1.7 million or 26%. The allowance for estimated losses on loans
was $6.9 million at December 31, 2002 compared to $6.1 million at June 30, 2002,
for an increase of $800 thousand or 13%. The adequacy of the allowance for
estimated losses on loans was determined by management based on factors that
included the overall composition of the loan portfolio, types of loans, past
loss experience, loan delinquencies, potential substandard and doubtful credits,
economic conditions and other factors that, in management's judgment, deserved
evaluation in estimating loan losses. To ensure that an adequate allowance was
maintained, provisions were made based on the increase in loans and a detailed
analysis of the loan portfolio. The loan portfolio was reviewed and analyzed
monthly with specific detailed reviews completed on all credits risk-rated less
than "fair quality" and carrying aggregate exposure in excess of $250 thousand.
The adequacy of the allowance for estimated losses on loans was monitored by the
credit administration staff, and reported to management and the board of
directors.
Net charge-offs for the years ended December 31, 2003 and 2002, were $1.6
million and $1.5 million, respectively. Net charge-offs for the six months ended
December 31, 2002 and 2001, were $1.4 million and $349 thousand respectively.
One measure of the adequacy of the allowance for estimated losses on loans is
the ratio of the allowance to the total loan portfolio. Provisions were made
monthly to ensure that an adequate level was maintained. The allowance for
estimated losses on loans as a percentage of total gross loans was 1.65% at
December 31, 2003, 1.53% at December 31, 2002, and 1.56% at June 30, 2002.
Although management believes that the allowance for estimated losses on loans at
December 31, 2003 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. In addition, consumer confidence may still be
negatively impacted by the substantial decline in equity security prices
experienced in the period from 2000 through 2002. These events could still
adversely affect cash flows for both commercial and individual borrowers, as a
result of which, the Company could experience increases in problem assets,
delinquencies and losses on loans, and require further increases in the
provision.
Nonperforming Assets. The policy of the Company is to place a loan on nonaccrual
status if: (a) payment in full of interest or principal is not expected or (b)
principal or interest has been in default for a period of 90 days or more unless
the obligation is both in the process of collection and well secured. Well
secured is defined as collateral with sufficient market value to repay principal
and all accrued interest. A debt is in the process of collection if collection
of the debt is proceeding in due course either through legal action, including
judgment enforcement procedures, or in appropriate circumstances, through
collection efforts not involving legal action which are reasonably expected to
result in repayment of the debt or in its restoration to current status.
21
Nonaccrual loans were $4.2 million at December 31, 2003 compared to $4.6 million
at December 31, 2002, for a decrease of $404 thousand or 9%. The decrease in
nonaccrual loans was comprised of decreases in commercial loans of $302 thousand
and real estate loans of $139 thousand, partially offset by an increase in
consumer loans of $36 thousand. The decrease in nonaccrual commercial loans was
due primarily to the write-off of a single customer relationship at Quad City
Bank for $1.3 million, partially offset by the transfer to nonaccrual status of
another commercial lending relationship at Quad City Bank & Trust with an
outstanding balance at December 31, 2003 of $702 thousand. Nonaccrual loans at
December 31, 2003 represented less than one percent of the Company's loan
portfolio. All of the Company's nonperforming assets were located in the loan
portfolio at Quad City Bank & Trust. The loans in the Cedar Rapids Bank & Trust
loan portfolio have been made since its 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.
Nonaccrual loans were $4.6 million at December 31, 2002 compared to $1.6 million
at June 30, 2002, for an increase of $3.0 million or 196%. The increase in
nonaccrual loans was comprised of increases in commercial loans of $2.9 million
and real estate loans of $143 thousand, partially offset by a decrease in
consumer loans of $10 thousand. The increase in nonaccrual commercial loans was
due primarily to the transfer to nonaccrual status of two commercial lending
relationships at Quad City Bank & Trust with an outstanding balance of $2.7
million. Nonaccrual loans at December 31, 2002 represented approximately one
percent of the Company's loan portfolio. All of the Company's nonperforming
assets were located in the loan portfolio at Quad City Bank & Trust.
As of December 31, 2003, December 31, 2002, and June 30, 2002, past due loans of
30 days or more amounted to $6.9 million, $9.6 million, and $4.3 million,
respectively. Past due loans as a percentage of gross loans receivable were 1.3%
at December 31, 2003, 2.1% at December 31, 2002 and 1.1% at June 30, 2002.
Other Assets. Premises and equipment increased by $2.8 million or 30% to $12.0
million at December 31, 2003 from $9.2 million at December 31, 2002. This
increase resulted primarily from Quad City Bank & Trust's purchases of the
northern segment of its Brady Street facility and the land for its fifth
location, in combination with Company purchases of additional furniture,
fixtures and equipment offset by depreciation expense. Premises and equipment
increased by $18 thousand, or less than 1%, to remain at $9.2 million at
December 31, 2002 as at June 30, 2002. This increase resulted from the purchase
of additional furniture, fixtures and equipment offset by depreciation expense.
Additional information regarding the composition of this account and related
accumulated depreciation is described in Note 5 to the consolidated financial
statements.
Accrued interest receivable on loans, securities, and interest-bearing deposits
at financial institutions increased by $425 thousand or 13% to $3.6 million at
December 31, 2003 from $3.2 million at December 31, 2002. Accrued interest
receivable on loans, securities, and interest-bearing deposits at financial
institutions increased by $95 thousand or 3% to $3.2 million at December 31,
2002 from $3.1 million at June 30, 2002. Increases were primarily due to greater
average outstanding balances in interest-bearing assets.
Other assets decreased by $965 thousand or 7% to $12.8 million at December 31,
2003 from $13.8 million at December 31, 2002. The three largest components of
other assets at December 31, 2003 were $5.5 million in Federal Reserve Bank and
Federal Home Loan Bank stocks, $3.1 million in cash surrender value of life
insurance contracts and $752 thousand in prepaid trust preferred offering
expense. Other assets increased by $2.3 million or 19% to $13.8 million at
December 31, 2002 from $11.5 million at June 30, 2002. The three largest
components of other assets at December 31, 2002 were $4.3 million in Federal
Reserve Bank and Federal Home Loan Bank stocks, $2.8 million in cash surrender
value of life insurance contracts, and $3.3 million in prepaid Visa/Mastercard
processing fees. At both December 31, 2003 and 2002, other assets also included
accrued trust department fees, other miscellaneous receivables, and various
prepaid expenses.
Deposits. Deposits increased by $77.0 million or 18% to $511.7 million at
December 31, 2003 from $434.7 million at December 31, 2002. The increase
resulted from a $75.0 million net increase in noninterest bearing, NOW, money
market and other savings accounts and a $2.0 million net increase in
certificates of deposit. Deposits increased by $58.4 million or 16% to $434.7
million at December 31, 2002 from $376.3 million at June 30, 2002. The increase
resulted from a $43.8 million net increase in noninterest bearing, NOW, money
market and other savings accounts and a $14.6 million net increase in
certificates of deposit.
22
Short-term Borrowings. Short-term borrowings increased by $18.7 million or 57%
from $32.9 million as of December 31, 2002 to $51.6 million as of December 31,
2003. Short-term borrowings decreased by $1.7 million or 5% from $34.6 million
as of June 30, 2002 to $32.9 million as of December 31, 2002. The subsidiary
banks offer short-term repurchase agreements to some of their significant
deposit customers. Also, on occasion, the subsidiary banks must purchase Federal
funds for short-term funding needs from the Federal Reserve Bank, or from a
correspondent bank. Short-term borrowings were comprised of customer repurchase
agreements of $34.7 million, $32.9 million, and $29.1 million at December 31,
2003, December 31, 2002, and June 30, 2002, respectively, as well as federal
funds purchased from correspondent banks of $16.9 million at December 31, 2003,
none at December 31, 2002, and $5.5 million at June 30, 2002.
FHLB Advances and Other Borrowings. FHLB advances increased $1.2 million or 2%
from $75.0 million as of December 31, 2002 to $76.2 million as of December 31,
2003. FHLB advances increased $22.6 million or 43% from $52.4 million as of June
30, 2002 to $75.0 million as of December 31, 2002. As of December 31, 2003, the
subsidiary banks held $4.3 million of FHLB stock in aggregate. As a result of
their memberships in the FHLB of Des Moines, the subsidiary banks have the
ability to borrow funds for short-term or long-term purposes under a variety of
programs. Both Quad City Bank & Trust and Cedar Rapids Bank & Trust utilized
FHLB advances for loan matching as a hedge against the possibility of rising
interest rates or when these advances provided a less costly source of funds
than customer deposits.
Other borrowings increased to $10.0 million at December 31, 2003 for an increase
of $5.0 million, or 100%, from December 31, 2002. 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. Other borrowings were $5.0 million
at December 31, 2002 and at June 30, 2002. In September 2001, the Company drew a
$5.0 million advance on a line of credit at its primary correspondent bank as
partial funding for the initial capitalization of Cedar Rapids Bank & Trust.
In June 1999, the Company issued 1,200,000 shares of trust preferred securities
through its newly formed Capital Trust I subsidiary. On the Company's financial
statements, these securities are listed as junior subordinated debentures and
were $12,000,000 at December 31, 2003 and 2002, and June 30, 2002. Previously,
these securities had been listed on financial statements as company obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
subordinated debentures, however upon adoption of Financial Accounting Standards
Board Interpretation (FIN) No. 46 on December 31, 2003, prior years' financial
statements were restated. Under current regulatory guidelines, these securities
are considered to be Tier 1 capital, with certain limitations that are
applicable to the Company. A detailed explanation of FIN No. 46 and its impact
on the Company is presented in the "Impact of New Accounting Standards" section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations. Additional information regarding the Company's adoption of FIN No.
46 is included in Note 1 to the consolidated financial statements.
In February 2004, the Company issued, in a private transaction, $8.0 million of
floating rate capital securities and $12.0 million of fixed rate capital
securities (together, the "Trust Preferred Securities") of QCR Holdings
Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust
III"), respectively. 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. Both Trust II and Trust III used the
proceeds from the sale of the Trust Preferred Securities to purchase junior
subordinated debentures of the Company.
Other liabilities decreased by $1.7 million or 20% to $6.7 million as of
December 31, 2003 from $8.4 million as of December 31, 2002. The decrease was
primarily the result of the payment during 2003 of income taxes and a large
portion of the accrued severance compensation related to Bancard's sale of its
ISO related merchant credit card operations in October 2002. Other liabilities
were comprised of unpaid amounts for various products and services, and accrued
but unpaid interest on deposits. At both December 31, 2003 and 2002, the largest
single component of other liabilities was interest payable at $1.2 million and
$1.8 million, respectively. Other liabilities increased by $2.5 million or 43%
to $8.4 million as of December 31, 2002 from $5.9 million as of June 30, 2002.
The increase was primarily the result of accrued severance compensation and
income taxes related to Bancard's sale of its ISO related merchant credit card
operations in October 2002. At both December 31, 2002 and June 31, 2002, the
largest single component of other liabilities was interest payable at $1.8
million and $1.9 million, respectively.
Stockholders' Equity. Common stock of $2.8 million as of December 31, 2002
increased by $41 thousand, or 1%, to $2.9 million at December 31, 2003. The
slight increase was the result of stock issued from the net exercise of stock
options and stock purchased under the employee stock purchase plan. Common stock
at December 31, 2002 was $2.8 million, which was unchanged from June 30, 2002. A
slight increase of $13 thousand was the result of proceeds received from the
exercise of stock options.
23
Additional paid-in capital increased to $17.1 million as of December 31, 2003
from $16.7 million at December 31, 2002. The increase of $382 thousand, or 2%,
resulted primarily from proceeds received in excess of the $1.00 per share par
value for the 40,929 shares of common stock issued as the result of the exercise
of stock options and purchases of stock under the employee stock purchase plan.
Additional paid-in capital totaled $16.8 million at December 31, 2002 compared
to $16.7 million at June 30, 2002. An increase of $76 thousand resulted
primarily from proceeds received in excess of the $1.00 per share par value for
the 13,468 shares of common stock issued as the result of the exercise of stock
options.
Retained earnings increased by $5.2 million, or 33%, to $20.9 million at
December 31, 2003 from $15.7 million at December 31, 2002. The increase
reflected net income for the fiscal year reduced by the $307 thousand in
dividends declared during 2003. The Company paid a cash dividend of $0.05 per
share on July 3, 2003. On October 23, 2003, the board of directors declared a
cash dividend of $0.06 per share payable on January 5, 2004, to stockholders of
record on December 15, 2003. Retained earnings increased by $3.0 million, or
24%, to $15.7 million at December 31, 2002 from $12.7 million at June 30, 2002.
The increase reflected net income for the six-month period reduced by the $138
thousand dividend declared in December. The Company also paid a cash dividend of
$0.05 per share on January 3, 2003.
Accumulated other comprehensive income was $1.8 million as of December 31, 2003
as compared to $2.1 million as of December 31, 2002. The decrease in the gains
was attributable to the decrease during the period in the fair value of the
securities identified as available for sale, primarily as a result of a slight
recovery in market interest rates. Accumulated other comprehensive income
consisting of net unrealized gains on securities available for sale, net of
related income taxes, was $2.1 million as of December 31, 2002 as compared to
$1.3 million as of June 30, 2002. The increase in the gains was attributable to
the increase during the period in the fair value of the securities identified as
available for sale, primarily as a result of a decline in market interest rates.
In April 2000, the Company announced that the board of directors approved a
stock repurchase program enabling the Company to repurchase approximately 60,000
shares of its common stock. This stock repurchase program was completed in the
fall of 2000 and at both December 31, 2003 and 2002 and at June 30, 2002 the
Company held in treasury 60,146 shares at a total cost of $855 thousand. The
weighted average cost was $14.21 per share.
Liquidity and Capital Resources
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'