U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 20002001
Commission file number: 0-22208
QUAD CITY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 42-1397595
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(State of incorporation) (I.R.S. Employer IdentificationIdentificationb No.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
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Common Stock,stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of the voting common stock held by non-affiliates as
of August 22, 200021, 2001 was approximately $29,500,000.$23,400,000. As of August 22, 2000,21, 2001, the
issuer had 2,274,0702,265,420 shares of Common Stock outstanding.
Documents incorporated by reference:
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Part III of Form 10-K - Proxy statement for annual meeting of
stockholders to be held in 2000.October 2001.
1
Part I
Item 1. Business
General. Quad City Holdings, Inc. ("Quad City") was formed in February 1993
under the laws of the state of Delaware for the purpose of becoming the bank
holding company of Quad City Bank and Trust Company (the "Bank"). At the annual
stockholders meeting to be held on October 24, 2001, management is seeking
stockholder approval to change the name of the company to QCR Holdings, Inc.
The Bank was capitalized on October 13, 1993 and commenced operations on January
7, 1994. The Bank is organized as an Iowa-chartered commercial bank that is a
member of the Federal Reserve System with depository accounts insured by the
Federal Deposit Insurance Corporation. The Bank provides full service commercial
and consumer banking, and trust and asset management services in the Quad City
areaand Cedar Rapids areas through its threefour offices that are located in Bettendorf
and Davenport, Iowa and in Moline, Illinois. AIllinois and its new office located in Cedar
Rapids, Iowa.
After focusing its operations in the Quad Cities area since its inception, Quad
City expanded its banking operations into the Cedar Rapids, Iowa market during
the fourth full service locationfiscal quarter of 2001. The Cedar Rapids operation is scheduledcurrently
functioning as a branch of Quad City Bank and Trust Company. Quad City has filed
the required regulatory applications to openobtain a separate bank charter in Davenportthe
Cedar Rapids market, to be named Cedar Rapids Bank and Trust Company.
Expectations are to convert the branch operations into this newly chartered bank
upon receiving regulatory approval, which is likely to occur in November 2000.the fall of
2001. Quad City is in the process of raising additional equity capital of
approximately $5 million through a private placement of its common stock to
assist with capitalization of the new bank.
Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a
Delaware corporation that provides merchant credit card processing services.
This operation had previously been a division of the Bank since July 1994.
Currently, approximately 10,00014,700 merchants process transactions with Bancard.
On March 29, 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), which generates merchant
credit card processing business. Bancard owns 100% of Allied.
Quad City Holdings Capital Trust I ("Capital Trust") was formed in April 1999
and capitalized in June 1999 in connection with the public offering of $12
million of 9.2% trust preferred capital securities due June 30, 2029.
Quad City owns 100% of the Bank and Bancard and 100% of the common securities of
Capital Trust, and in addition to such ownership invests its capital in stocks
of financial institutions and mutual funds, as well as participates in loans
with the Bank.
Quad City, operatesthe Bank, Bancard and Allied have a June 30th fiscal year end and
collectively employed 183 individuals at June 30, 2001. No one customer accounts
for more than 10% of revenues, loans or deposits.
Competition. Quad City currently has most of its operations in athe highly
competitive environment inof the Quad Cities area. The Cedar Rapids market is also
highly competitive with respect to financial services. Competitors include not
only other commercial banks, credit unions, savings banks, savings and loan
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 Quad City. Many of these unregulated
competitors compete across geographic boundaries and provide customers
increasing access to meaningful alternatives to banking services. These competitive trends are likely to continue. Additionally,
Quad City competes in a marketmarkets 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
March 11, 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 Quad City 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.
2
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") regulates Quad City and its subsidiaries. In addition, the Bank is
regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and
the Federal Deposit Insurance Corporation (the "FDIC").
Business. Quad City's principal business consists of attracting deposits from
the public and investing those deposits in loans and securities. The deposits of
the Bank are insured to the maximum amount allowable by the FDIC. Quad City's
results of operations are dependent primarily on net interest income, which is
the difference between the interest earned on its loans and securities and the
interest paid on deposits and borrowings. Its operating results are affected by
merchant credit card fees, trust fees, deposit service charge fees, fees from
the sales of residential real estate loans and other income. Operating expenses
include employee compensation and benefits, occupancy and equipment expense,
professional and data processing fees, advertising and marketing expenses and
other administrative expenses. Quad City's operating results are also affected
by economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
Lending. Quad City and its subsidiaries provide a broad range of commercial and
retail lending and investment services to corporations, partnerships,
individuals and government agencies. The Bank actively markets its 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 Bank has 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.
The Bank's current lending limit is approximately $5.0 million. Its loan
portfolio is comprised primarily of loans in the areas of commercial,
residential real estate and consumer lending. As of June 30, 2001, commercial
loans made up approximately 73% of the loan portfolio, while residential
mortgages comprised approximately 14% and consumer lending comprised 13%.
As part of the loan monitoring activity at the Bank, loan review personnel
interact with senior bank management weekly. The Bank's Loan Review Committee
meets on a monthly basis to review the loan portfolio. Quad City has also
instituted a separate loan review function to analyze credits of the Bank.
Management has attempted to identify problem loans at an early stage and to
aggressively seek a resolution of these situations.
As noted above, the Bank is an active commercial lender. The Bank's areas of
emphasis include, but are not limited to, loans to wholesalers, manufacturers,
building contractors, developers, business services companies and retailers. The
Bank provides a wide range of business loans, including lines of credit for
working capital and operational purposes and term loans for the acquisition of
equipment and other purposes. Collateral for these loans generally includes
accounts receivable, inventory, equipment and real estate. In addition, the Bank
often takes 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 Bank's commercial business loans have
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 the Bank as it continues
to build its real estate lending business. As a result of this focus, the Bank's
real estate loan portfolio has experienced rapid growth, increasing from
approximately $354 thousand at the end of the 1994 fiscal year, to approximately
$40.6 million at the end of fiscal 2001. The Bank currently has seven mortgage
originators.
The Bank sells a significant portion of its real estate loans in the secondary
market. The Bank typically sells virtually all of its fixed rate loans. During
fiscal 2001, the Bank originated $97.6 million of real estate loans and sold
$92.9 million types of these loans. Generally, the Bank's residential mortgage
loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to
allow the Bank to resell loans in the secondary market. The Bank structures most
loans that will not conform to those underwriting requirements as adjustable
rate mortgages that mature in one to three years. The Bank generally retains
these loans in its portfolio. Servicing rights are not presently retained on the
loans sold in the secondary market.
3
The Bank's consumer lending department provides all types of consumer loans
including motor vehicle, home improvement, home equity, signature loans and
small personal credit lines. The Bank has reduced its involvement in indirect
automobile loans, and intends to actively seek to increase its home equity
loans.
Appendices. The commercial banking business is a highly regulated business. See
Appendix A for a brief summary regarding federal and state statutes and
regulations, which are applicable to Quad City 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.
Quad City, the Bank, Bancard and Allied have a June 30th fiscal year
end and collectively employ 157 individuals. No one customer accounts for more
than 10% of revenues, loans or deposits.
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 Quad
City.
Item 2. Property
The main office of the Bank is in a 6,700 square foot facility, which was
completed in January 1994. In March 1994, the Bank acquired that facility, which
is located at 2118 Middle Road in Bettendorf.
Construction of a second full service banking facility was completed in July
1996 to provide for the convenience of customers and to expand its market
territory. The Bank also owns its portion of that facility which is located at
4500 Brady Street in Davenport. The two-story building is in two segments that
are separated by an atrium. The Bank owns the south half of the building, while
the northern portion is owned by the developer. Each floor is 6,000 square feet.
The Bank occupies its first floor and utilizes the basement for operational
functions, item processing and storage. The entireCurrently, approximately 1,500 square
feet on the second floor has beenis leased to twoa professional services firms; however, in the second fiscal quarter of
2001,firm and
approximately 4,500 square feet will become available.is vacant and leasable. In addition, the
residential real estate department of the Bank leases approximately 2,500 square
feet on the first floor in the north half of the building.
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 near the Rock
Island/Moline border. The building is owned by a third party limited liability
company and the Bank and Bancard are its major tenants. Quad City has purchased
a 20% interest in the company that owns the building. Bancard relocated its
operations to the lower level of the 30,000 square foot building in late 1997.
The Bank began its operations and Quad City relocated its corporate headquarters to the first floor of the building in February 1998. In
May 2000, Quad City relocated its corporate headquarters to the second floor1998
and occupies approximately 2,000 square feet. The business office of a medical
clinic is sub-leasing approximately 3,500 square feet on the firstsecond floor.
In March 1999, the Bank acquired a 3,000 square foot office building adjacent to
the Davenport. The office space is utilized for various operational and
administrative functions.
Construction of a fourth full service banking facility beganwas completed in early
summer ofOctober
2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City will leaseThe Bank leases approximately
6,000 square feet on the first floor and 2,200 square feet on the lower level of
the 24,000 square foot facility. The office opened in October 2000.
The start-up operations of the Cedar Rapids branch of the Bank are located in
Suite 250 of the Town Centre Building, 221 Third Avenue, S.E., Cedar Rapids.
When the branch operations are converted into the newly chartered Cedar Rapids
Bank and Trust Company, the location in Cedar Rapids will be moved to leased
space in the GreatAmerica Building, 625 First Street, S.E., Cedar Rapids. The
retail banking operations will consist of 1,500 square feet on the first floor
and the commercial banking and operations facility will consist of approximately
6,200 square feet on the second floor. The necessary tenant improvements are
currently being installed in both suites, and occupancy is expected to open
in November 2000.during
September 2001. The lease term is for an initial period of five years with two
five-year renewal options.
Management is of the opinionbelieves that the facilities are of sound construction, in good
operating condition, are appropriately insured and are adequately equipped for
carrying on the business of Quad City.
The Bank intends to limit its investment in premises to no more than 50% of Bank
capital. The Bank frequently invests in commercial real estate mortgages. The
Bank also invests in residential mortgages. The Bank has 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.
4
Item 3. Legal Proceedings
Bancard is the holder of an account receivable in the approximate amount of $1,500,000$1.7
million owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova
Corporation (trading symbol NIS on the New York Stock Exchange.)Exchange). This receivable
arises pursuant to Bancard's provision of electronic credit card sales
authorization and settlement services to PMT pursuant to a written contract that
includes PMT's obligation to indemnify Bancard for credit card chargeback losses
arising from those services. PMT has failed to timely pay Bancard for monthly
invoices, including service charges and substantial chargeback losses, for the
period ofbeginning May 2000 through September, 2000. Bancard intends to vigorously pursue collection of
this receivable. On September 25, 2000, PMT filed a lawsuit in federal court in
Los Angeles, California, against Bancard and Quad City. This lawsuit alleges
tortioustortuous acts and breaches of contract by Bancard, Quad City, and others and
seeks recovery from Bancard and Quad City of not less than $3,600,000 of alleged
actual damages, plus punitive damages. Bancard and Quad City first receivedfiled lawsuits in
federal and state courts in Davenport, Iowa against PMT. These lawsuits sought a
copy of the complaint on
September 27, 2000 and, accordingly, have not had an opportunitycourt order compelling PMT to fully
evaluate the allegations containedparticipate in arbitration in Bettendorf, Iowa, as
provided for in the complaint. However, based on a
preliminary evaluation ofpertinent contract documents, and to resolve the complaint,disputes
between PMT, Bancard and Quad City, including the unpaid account receivable. The
federal court in Iowa ruled that the arbitration issue should be determined by
the state court in Iowa. Subsequently, the Iowa District Court of Scott County
ruled that all claims, including the tort claims, must be arbitrated in Iowa.
Because of that ruling, the California lawsuit was dismissed, and arbitration is
pending. Bancard and Quad City continue to believe thethat PMT's allegations to beare
without merit and intend towill vigorously defendpursue the suit.collection of the receivable and
the defense of PMT's claims.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of Quad City for a vote
during the fourth quarter of the fiscal year ended June 30, 2000.2001.
5
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock, par value $1.00 per share ("Common Stock") of Quad City is traded on The Nasdaq
SmallCap Market under the symbol "QCHI". The stock began trading on October 6,
1993. As of June 30, 2000,2001, there were 2,283,9202,265,420 shares of Common Stockcommon stock
outstanding held by approximately 2,500 holders of record. The following table
sets forth the high and low sales prices of the Common Stock,common stock, as reported by The
Nasdaq SmallCap Market, for the periods indicatedindicated. No cash dividends were
declared during the periods indicated. At the annual stockholders meeting to be
held in October 2001, management is seeking stockholder approval to change the
name of the company to QCR Holdings, Inc. It is anticipated that Quad City's
trading symbol will be changed to "QCRH" at that time.
Fiscal 2001 Fiscal 2000 Fiscal 1999
sales price sales price
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High Low High Low
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First quarter .......... $ 17.250 $ 11.313 $ 20.000 $ 16.500
$ 21.750 $ 18.000
Second quarter ......... 12.250 9.938 17.500 13.500 25.500 17.333
Third quarter .......... 12.563 9.750 15.250 10.250 23.500 19.125
Fourth quarter ......... 10.813 9.250 17.000 11.125 20.500 16.125
Quad City expects that all earnings will be retained to finance the growth of
Quad City, the Bank and Bancard, and that no cash dividends will be paid in the
near future. If and when dividends are declared, Quad City will likely be
largely dependent upon dividends from the Bank and Bancard for funds to pay
dividends on the common stock.
Under Iowa law, the Bank will be restricted as to the maximum amount of
dividends it may pay on its common stock. The Iowa Banking Act provides that an
Iowa bank may not pay dividends in an amount greater than its undivided profits.
The Bank is a member of the Federal Reserve System. The total of all dividends
declared by the Bank in a calendar year may not exceed the total of its net
profits of that year combined with its 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 the Bank. In the case of Quad City, further restrictions on
dividends may be imposed by the Federal Reserve Board.
Item 6. Selected Financial Data
The "Selected Consolidated Financial Data" of Quad City set forth below is
derived in part from, and should be read in conjunction with our consolidated
financial statements and the accompanying notes thereto. See Item 8 "Financial
Statements and Supplementary Data." Results for past periods are not necessarily
indicative of results to be expected for any future period.
6
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended June 30,
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2001 2000 1999 1998 1997
1996
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(Dollars in thousands)----------------------------------------------------
Statement of Income Data: (Dollars in thousands)
Interest income ....................... $ 28,544 $ 24,079 $ 20,116 $ 15,077 $ 9,706
$ 6,529
Interest expense ...................... 16,612 13,289 11,027 8,342 4,994
3,486
Net interest income ................... 11,932 10,790 9,089 6,735 4,712 3,043
Provision for loan losses ............. 889 1,052 892 902 844
500
Noninterest income (1) ................ 6,313 6,154 5,561 6,148 2,807
1,716
Noninterest expenses .................. 13,800 11,467 9,679 7,910 5,291
3,576
Pre-tax net income .................... 3,556 4,425 4,079 4,071 1,384
683
Income tax expense .................... 1,160 1,680 1,614 1,678 165
--
Net income ............................ 2,396 2,745 2,465 2,393 1,219
683Per Common Share Data:
Net income-basic ...................... $ 1.06 $ 1.19 $ 0.98 $ 1.00 $ 0.54
Net income-diluted .................... 1.04 1.15 0.93 0.93 0.52
Balance Sheet:
Total assets .......................... $400,948 $367,622 $321,346 $250,151 $168,379
$111,475
Securities ............................ 56,710 56,129 50,258 33,276 29,589
32,831
Loans ................................. 287,865 241,853 197,977 162,975 108,365 56,810
Allowance for estimated losses on loans 4,248 3,617 2,895 2,350 1,633
853
Deposits .............................. 302,155 288,067 247,966 197,384 135,960
92,918
Stockholders' equity:
Common ........................... 23,817 20,071 18,473 16,602 13,613
11,669
Preferred ........................ -- -- -- 2,500 1,000 --
Key Ratios:
Return on average assets .............. 0.82 % 0.86 % 1.14 % 0.86 % 0.70 %0.62% 0.82% 0.86% 1.14% 0.86%
Return on average common equity ....... 10.95 14.17 13.69 16.40 9.85
5.82
Net interest margin ................... 3.35 3.53 3.42 3.55 3.74
3.47
Efficiency ratio (2) .................. 75.64 67.68 66.07 61.40 70.37 75.14
Nonperforming assets to total assets .. 0.44 0.20 0.51 0.51 0.27 0.28
Allowance for estimated losses on loans
to total loans ...................... 1.48 1.50 1.46 1.44 1.51 1.50
Net charge-offs to average loans ...... 0.10 0.16 0.26 0.13 0.08 0.27
Average common stockholders' equity
to average assets ................... 5.69 5.77 6.26 6.97 8.73 12.10
Average stockholders' equity
to average assets ................... 5.69 5.77 7.05 7.97 9.15
12.10
Earnings to fixed charges (3)
Excluding interest on deposits .... 1.90 x 2.29 x 2.81 x 3.78 x 3.17 x
5.71 x
Including interest on deposits .... 1.21 1.33 1.36 1.48 1.28 1.20
(1) Year ended June 30, 1998 noninterest income includes a pre-tax gain of
$2,168 from Bancard's restructuring of an agreement with an independent
sales organization (ISO). Year ended June 30, 1999 noninterest income
includes amortization of $732 from Bancard's restructuring of an ISO
agreement.
(2) Noninterest expenses divided by the sum of net interest income before
provision for loan losses and noninterest income.
(3) Dividends were not payable on Quad City's Series A Preferred Stock, and all
of the outstanding balance was redeemed in June 1999.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides additional information regarding our
operations for the fiscal years ended June 30, 2001, 2000 1999 and 1998,1999, and
financial condition for the fiscal years ended June 30, 20002001 and 1999.2000. 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
Quad City was formed in February 1993 for the purpose of organizing the Bank.
The Bank opened in January 1994 with $4.5 million in assets and grew to
$367.6reached the
milestone of $400 million in total assets as of June 30, 2000.2001. Management
expects continued opportunities for growth, even though the rate of growth will
probably be slower than that experienced to date.
Quad City reported earnings of $2.7$2.4 million or $1.19$1.06 basic earnings per share
for fiscal 20002001 as compared to $2.5$2.7 million and $1.08$1.19 per share for fiscal 19992000
and $2.4$2.5 million and $1.09$.98 per share for fiscal 1998.1999. The decrease in fiscal 2001
from fiscal 2000 was attributable to an increase in noninterest expenses
partially offset by an increase in noninterest income and net interest income.
The improvement in fiscal 2000 from fiscal 1999 was attributable to increased
net interest income and increased volumes of business for the Bank, reduced by
an increase in noninterest expenses.
The improvement in fiscal 1999 from fiscal 1998 was
attributable to increased net interest income and increased volumes of business
for the Bank, reduced by a decrease in noninterest income. The decrease in
noninterest income was primarily due to the one time gain in fiscal 1998
resulting from the restructuring of Bancard's merchant broker agreement.
Quad City's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on itsincome, principally from loans
and investment securities, and the interest paidexpense, 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. Quad City's average
yield on interest earning assets increased 0.13% for fiscal 2001 as compared to
fiscal 2000. With the same comparison, the average cost of interest-bearing
liabilities increased 0.42%, which resulted in a 0.29% decrease in the net
interest spread of 2.98% at June 30, 2000 to 2.69% at June 30, 2001. The
narrowing of the net interest spread created a decline in the net interest
margin. For fiscal 2001, net interest margin was 3.35% compared to 3.53% for
fiscal 2000. Management continues to closely monitor and manage net interest
margin.
Quad City's operating results are also affected by sources of noninterest
income, including merchant credit card fees, trust fees, deposit service charge
fees, fees from the sales of residential real estate loans and other income.
Operating expenses of Quad City include employee compensation and benefits,
occupancy and equipment expense and other administrative expenses. Quad City'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 Bank's loan portfolio is invested in
commercial loans. Deposits from commercial customers represent a significant
funding source as well.
The Bank 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 the Bank's
newest Davenport location opened in October 2000 and the new bank in Cedar
Rapids is expected to openmove to its initial permanent facility in November 2000. However,
the fall of
2001. The primary challenge for the Bank currently, from a profitability
standpoint, is to increase its net interest margin. Large commercial depositors
and certificate of deposit customers create a relatively high cost of funds and
this fact, along with a very competitive loan rate environment, have resulted in
the Bank's interest margin being below its national peer group. Management
is
addressingcontinues to address this issue with alternative funding sources and pricing
strategies.
8
During 1994, the Bank began to develop internally a merchant credit card
processing operation and in 1995 transferred this function to Bancard, a
separate subsidiary of Quad City. Bancard initially had an arrangement to
provide processing services exclusively to clients 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 $25,000 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 $732,000 being
recognized as an adjustment to the fixed processing fee during fiscal 1999.
Bancard terminated its processing for this ISO in May 2000. During fiscal 2000
and 2001, Bancard began processing for sevennine new ISOs. However,In spite of this, Bancard
expects its merchant credit card fee income to remain below previous levels
until such time as Bancard can develop relationships with additional ISOs,
increase volumes with existing ISOs or Allied can generate processing business
revenues comparable to those Bancard experienced prior to termination of
processing for the initial ISO. Bancard's average dollar volume of transactions
processed during fiscal 2000 was $90 million, and $58 million was attributable
to the ISO that terminated its relationship. TheDuring fiscal 2001, the average
dollar volume of transactions processed during June and July 2000 was $69per month by Bancard decreased 15% to
$76 million. This reduction in processing fees and cessation of the settlement
income at Bancard is expected to continue to adversely affect comparisons of consolidated net
income in fiscal 20012002 as compared with fiscal 2000.2001 and prior years.
During fiscal 1998, the Bank expanded its presence in the mortgage banking
market by hiring several experienced loan originators and an experienced
underwriter. The Bank originates mortgage loans on personal residences and sells
the majority of these loans into the secondary market to avoid the interest rate
risk associated with long-term fixed rate financing. The Bank realizes revenue
from this mortgage banking activity from a combination of loan origination fees
and gain on sale of the loans in the secondary market. During fiscal 2001, the
Bank originated $97.6 million of real estate loans and sold $92.9 million of
loans, which resulted in gains of $1.1 million. The decrease in interest rates
during that time caused a significant increase in the Bank's mortgage
origination volume. In fiscal 2000, the Bank originated $36.8 million of real
estate loans and sold $37.7 million, of
loans, which resulted in gains of $439,000. The increase in interest rates
during that time caused a significant reduction in the Bank's mortgage
origination volume. In fiscal 1999 and 1998, the Bank originated $85.0 million
and $57.2 million of real estate loans and sold $87.8 million and $53.3 million
of loans, which resulted in gains of $1.0 million and $713,000, respectively.
Trust department income continues to be a significant contributor to noninterest
income, growing from approximately $1.5 million in fiscal 1999 to $1.9 million in fiscal 2000.2000
and to $2.1 million in fiscal 2001. Income is generated primarily from fees
charged based on assets under management for corporate and personal trusts and
for custodial services. Assets under administration have grown from $506.8$586.4 at
June 30, 19992000 to $586.4$617.5 million at June 30, 2000.2001. Growth in the current fiscal
year resulted primarily from new trust relationships created during the year.
Quad City'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 the Bank, Quad City formed a statutory business trust,
which issued $12 million of capital securities to the public for cash on June 9,
1999. In conjunction with the establishment of the new bank in Cedar Rapids,
Quad City is in the process of selling approximately $5.0 million of its common
stock through a private placement offering, primarily to investors in the Cedar
Rapids area.
Results of Operations
Fiscal 2001 compared with fiscal 2000
Overview. Net income for fiscal 2001 was $2.4 million as compared to net income
of $2.7 million for the same period in 2000 for a decrease of $300,000 or 13%.
Basic earnings per share for fiscal 2001 were $1.06 as compared to $1.19 for
fiscal 2000. The decrease in net income was comprised of an increase in
noninterest expenses of $2.3 million partially offset by an increase in net
interest income after provision for loan losses of $1.3 million, an increase in
noninterest income of $200,000 and a decrease in federal and state income taxes
of $500,000. Several factors contributed to the reduction in net income. These
factors included the opening of Quad City's fourth full-service banking facility
on Utica Ridge Road in Davenport, a reduction in processing volumes and
profitability at Quad City Bancard and initial start-up expenses associated with
Quad City's expansion to the Cedar Rapids market.
9
Interest income. Interest income increased by $4.4 million, from $24.1 million
for fiscal 2000 to $28.5 million for fiscal 2001. The 19% rise in interest
income was basically attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable. Despite the Federal
Reserve's dramatic reduction in short-term interest rates by 2.75% since January
of 2001, the average yield on interest earning assets for fiscal 2001 was 8.01%
as compared to 7.88% for fiscal 2000.
Interest expense. Interest expense increased by $3.3 million, from $13.3 million
for fiscal 2000 to $16.6 million for fiscal 2001. The 25% increase in interest
expense was primarily attributable to greater average outstanding balances in
interest-bearing liabilities and higher interest rates. Despite the Federal
Reserve's reduction in short-term interest rates since January of 2001, the
average cost on interest bearing liabilities was 5.32% for fiscal 2001 as
compared to 4.90% for 2000.
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. Quad City had an allowance for
estimated losses on loans of approximately 1.48% of total loans at June 30, 2001
as compared to approximately 1.50% at June 30, 2000. The provision for loan
losses decreased by $200,000, from $1.1 million for fiscal 2000 to $900,000 for
fiscal 2001. During the year, management made monthly provisions for loan losses
based upon the increase in loans and a detailed analysis of the loan portfolio.
For fiscal 2001, commercial loans combined for total charge-offs of $87,000 and
total recoveries of $2,000. Consumer loan charge-offs and recoveries totaled
$214,000 and $39,000, respectively, for fiscal 2001. Indirect auto loans
accounted for a majority of the consumer loan charge-offs. Because asset quality
is a priority for Quad City and its subsidiaries, management made the decision
in the first quarter of fiscal 1999 to downscale indirect auto loan activity
based on charge-off history. The average balance in the indirect auto loan
portfolio for fiscal 2001 was $3.4 million compared to $8.2 million for fiscal
2000. This 59% decrease in the average portfolio brought with it a 56% decrease
in the net charge-offs of indirect auto loans. Net charge-offs for the indirect
auto loan portfolio were $46,000 for fiscal 2001 compared to $77,000 for fiscal
2000, for a decrease of $31,000. The ability to grow profitably is, in part,
dependent upon the ability to maintain asset quality.
Noninterest income. Noninterest income increased by $200,000, from $6.1 million
for fiscal 2000 to $6.3 million for fiscal 2001. Noninterest income for fiscal
2001 and 2000 consisted of income from the merchant credit card operation, the
trust department, depository service fees, gains on the sale of residential real
estate mortgage loans, and other miscellaneous fees. The 3% increase was
primarily due to an increase in gains on sales of loans, net, and increased
trust fees and deposit service fees received during the period, offset by the
decrease in merchant credit card fees.
During fiscal 2001, merchant credit card fees, net of processing costs,
decreased by $600,000 to $1.7 million, from $2.3 million for fiscal 2000. The
decrease was due to decreased volumes of credit card transactions processed
during fiscal 2001. As previously discussed, Bancard terminated processing for
its largest ISO in May 2000.
For fiscal 2001, trust department fees increased $200,000, or 10%, to $2.1
million from $1.9 million for fiscal 2000. The increase was primarily a
reflection of the development of additional trust relationships during the
period.
Gains on sales of loans, net, were $1.1 million for fiscal 2001, which reflected
an increase of 159%, or $700,000, from $400,000 for fiscal 2000. The increase
resulted from a decline in interest rates over recent months, which was driven
by corresponding cuts by the Federal Reserve during the first half of calendar
2001. This created significantly more home refinances and home purchases during
the fiscal year and the subsequent sale of the majority of these loans into the
secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 2001 were
$13.8 million as compared to $11.5 million for the same period in 2000, or an
increase of $2.3 million or 20%.
10
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 2001 and 2000.
Years Ended June 30,
----------------------------------------
2001 2000 % Change
----------------------------------------
Salaries and employee benefits ......................... $ 8,014,268 $ 6,878,213 17%
Professional and data processing fees .................. 1,159,929 860,216 35
Advertising and marketing .............................. 579,524 410,106 41
Occupancy and equipment expense ........................ 1,925,820 1,580,911 22
Stationery and supplies ................................ 352,441 324,219 9
Postage and telephone .................................. 409,626 361,623 13
Other .................................................. 1,358,345 1,052,173 29
----------------------------------------
Total noninterest expenses ............... $13,799,953 $11,467,461 20%
========================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2001, total salaries and benefits
increased to $8.0 million or $1.1 million over the fiscal 2000 total of $6.9
million. The change was primarily attributable to the addition of new Bank
employees during the period. Advertising and marketing increased $200,000 or
41%. The increase was the result of the development and start-up of the Bank's
new website (qcbt.com), the establishment of an online partnership with America
Online, Inc. creating local access to that website, and media expenses incurred
in support of marketing efforts for the Bank's Utica location and various Bank
products and departments. Professional and data processing fees increased
$300,000 or 35%. The increase was primarily attributable to legal fees resulting
from the legal proceedings in process between Bancard and PMT Services, Inc.,
combined with increased fees to outside consultants addressing compliance,
efficiency and profitability issues for the Bank. Other noninterest expense
increased $300,000 or 29% for the fiscal year. The increase was primarily the
result of increased service charges from upstream banks incurred by the Bank and
increased expenses related to Bancard's cardholder program.
Income tax expense. The provision for income taxes was $1.2 million for fiscal
2001 compared to $1.7 million for fiscal 2000, a decrease of $500,000 or 31%.
The decrease was primarily attributable to decreased net income generated in
fiscal 2001 compared to fiscal 2000, and a reduction in the effective tax rate
for fiscal 2001 of 32.6% versus 38.0% for fiscal 2000.
Fiscal 2000 compared with fiscal 1999
Overview. Net income for fiscal 2000 was $2.7 million as compared to net income
of $2.5 million for the same period in 1999 for an increase of $281,000 or 11%.
Basic earnings per share for fiscal 2000 were $1.19 as compared to $1.08$0.98 for
fiscal 1999. The increase in net income was comprised of an increase in net
interest income after provision for loan losses of $1.5 million and an increase
in noninterest income of $594,000 reduced by an increase in noninterest expenses
of $1.8 million. The increase in noninterest income occurred despite the fact
that fiscal 1999 included $732,000 of revenue, which was related to a one-time
gain recognized by Bancard. The recognition of this income ceased as of June 30,
1999.
Interest income. Interest income increased by $4.0 million, from $20.1 million
for fiscal 1999 to $24.1 million for fiscal 2000. The 20% rise in interest
income was basically attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable, and higher interest
rates.
Interest expense. Interest expense increased by $2.3 million, from $11.0 million
for fiscal 1999 to $13.3 million for fiscal 2000. The 20% increase in interest
expense was primarily attributable to greater average outstanding balances in
interest-bearing liabilities and higher interest rates.
Provision for loan losses. The provision for loan losses is established based on
factors such asincluding the local and national economy and the risk associated with
the loans in the portfolio. Quad City had an allowance for estimated losses on
loans of approximately 1.50% of total loans at June 30, 2000 as compared to
approximately 1.46% at June 30, 1999. The provision for loan losses increased by
$160,000, from $892,000 for fiscal 1999 to $1,052,000 for fiscal 2000. For
fiscal 2000, commercial and real estate loans combined for total charge-offs of
$50,000 and total recoveries of less than $1,000. Consumer loan charge-offs and
recoveries totaled $377,000 and $96,000, respectively, for fiscal 2000. Indirect
auto loans accounted for a majority of the consumer loan charge-offs. Because
asset quality is a priority for Quad City and its subsidiaries, management has
made
the decision to downscale indirect auto loan activity based on charge-off
history. The ability to grow profitably is, in part, dependent upon the ability
to maintain asset quality.
11
Noninterest income. Noninterest income increased by $594,000, from $5.6 million
for fiscal 1999 to $6.2 million for fiscal 2000. Noninterest income for fiscal
1999 consisted of the amortization of deferred income resulting from the
restructuring of a merchant broker agreement, income from the merchant credit
card operation, the trust department, depository service fees, gains on the sale
of residential real estate mortgage loans, and other miscellaneous fees.
Noninterest income for fiscal 2000 consisted of income from the merchant credit
card operation, the trust department, depository service fees, gains on the sale
of residential real estate mortgage loans, and other miscellaneous fees. The 11%
increase was primarily due to an increase in merchant credit card fees, and
increased trust fees received during the period, offset by the decrease in gains
on sales of loans, net and the amortization of deferred income resulting from
the restructuring of the merchant broker agreement.
During fiscal 2000, merchant credit card fees, net of processing costs,
increased by $1.0 million to $2.3 million, from $1.3 million for fiscal 1999.
The increase was due to increased volumes of credit card transactions processed
during fiscal 2000. As previously discussed, pursuant to the contract with its
largest ISO, Bancard terminated processing for it in May 2000.
Recently, VISA
has enacted new capital standards that may restrict the amount of transaction
volume that Bancard is allowed to process in the future. This may have resulted
in reduced volumes even if the large ISO relationship had been retained. Given
the volume restrictions imposed by VISA, Bancard will focus on processing
transactions only for the most profitable ISO relationships.
For fiscal 2000, trust department fees increased $364,000, or 24%, to
approximately $1.9 million from $1.5 million for fiscal 1999. The increase was
primarily a reflection of the development of additional trust relationships
during the period.
Gains on sales of loans, net, were $439,000 for fiscal 2000, which reflected a
decrease of 58%, or $605,000, from $1.0 million for fiscal 1999. The decrease
resulted from higher interest rates, which created fewer home refinances and
first-time home purchases during the fiscal year.
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 2000 were
$11.5 million as compared to $9.7 million for the same period in 1999, or an
increase of $1.8 million or 18.48%.
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 2000 and 1999.
Years Ended June 30,
-------------------------------------
2000 1999 % Change
-------------------------------------
Salaries and employee benefits ......... $ 6,878,213 $ 5,801,670 18.56%
Professional and data processing fees .. 860,216 598,457 43.74
Advertising and marketing .............. 410,106 359,571 14.05
Occupancy and equipment expense ........ 1,580,911 1,453,040 8.80
Stationery and supplies ................ 324,219 267,739 21.10
Postage and telephone .................. 361,623 298,208 21.27
Other .................................. 1,052,173 900,214 16.88
-------------------------
Total noninterest expenses ...... $11,467,461 $ 9,678,899 18.48%
=========================
Years Ended June 30,
----------------------------------------
2000 1999 % Change
----------------------------------------
Salaries and employee benefits ......................... $ 6,878,213 $ 5,801,670 19%
Professional and data processing fees .................. 860,216 598,457 44
Advertising and marketing .............................. 410,106 359,571 14
Occupancy and equipment expense ........................ 1,580,911 1,453,040 9
Stationery and supplies ................................ 324,219 267,739 21
Postage and telephone .................................. 361,623 298,208 21
Other .................................................. 1,052,173 900,214 17
----------------------------------------
Total noninterest expenses ............... $11,467,461 $ 9,678,899 18%
========================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2000, total salaries and benefits
increased to $6.9 million or $1.1 million over the fiscal 1999 total of $5.8
million. The change was primarily attributable to the addition of new Bank
employees during the period. Professional and data processing fees increased
$262,000 or 44%. The increase was primarily attributable to an increase in core
and ancillary data processing fees as a result of an increase in transaction
volumes and number of customer accounts. Additionally, the Bank incurred new
ongoing expenses related to loan collection software, cash management software
and two new automated teller machines. Stationary and supplies expense increased
$56,000 or 21% and postage and telephone expense increased $63,000 or 21%. The
increases were the result of the overall increase in business volume of the
Bank.
12
Beginning in 1997, Quad City addressed issues related to the Year 2000 and their
potential to adversely affect both Quad City's operations and ability to provide
prompt, reliable customer service. The estimated total cost of the Year 2000
project was $175,000. This included costs to upgrade equipment specifically for
the purpose of Year 2000 compliance and various administrative expenditures.
Quad City's cost for the Year 2000 project for fiscal 2000 was $27,000, as
compared to $122,000 for fiscal 1999.
Income tax expense. The provision for income taxes was $1.7 million for fiscal
2000 compared to $1.6 million for fiscal 1999, an increase of $66,000 or 4%. The
increase was attributable to greater net income generated in fiscal 2000
compared to fiscal 1999, partially offset by a reduction in the effective tax
rate for fiscal 2000 of 38.0% versus 39.6% for fiscal 1999.
Fiscal 1999 compared with fiscal 1998
Overview. Net income for fiscal 1999 was $2.5 million as compared to
net income of $2.4 million for the same period in 1998 for a slight increase of
$72,000 or 3%. Basic earnings per share for fiscal 1999 were $1.08 as compared
to $1.09 for fiscal 1998. The increase in net income was comprised of an
increase in net interest income after provision for loan losses of $2.4 million
reduced by a decrease in noninterest income of $588,000 and an increase in
noninterest expenses of $1.8 million. The decrease in noninterest income was
primarily due to the one time gain in fiscal 1998 resulting from the
restructuring of Bancard's merchant broker agreement.
Interest income. Interest income increased by $5.0 million, from $15.1
million for fiscal 1998 to $20.1 million for fiscal 1999. The 33% rise in
interest income was primarily attributable to greater average outstanding
balances in interest-earning assets, principally loans receivable.
Interest expense. Interest expense increased by $2.7 million, from $8.3
million for fiscal 1998 to $11.0 million for fiscal 1999. The 32% increase in
interest expense was primarily attributable to greater average outstanding
balances in interest-bearing liabilities.
Provision for loan losses. The provision for loan losses is established
based on factors such as the local and national economy and the risk associated
with the loans in the portfolio. Quad City had an allowance for estimated losses
on loans of approximately 1.46% of total loans at June 30, 1999 as compared to
approximately 1.44% at June 30, 1998. The provision for loan losses decreased
slightly by $10,000, from $902,000 for fiscal 1998 to $892,000 for fiscal 1999.
The primary loan growth for fiscal 1999 was in the commercial loan portfolio, as
opposed to the consumer loan portfolio, which has historically carried a greater
degree of risk, allowing a decrease in the provision necessary for the period.
For fiscal 1999, commercial and real estate loans combined for total charge-offs
of $130,000 and total recoveries of $53,000. Consumer loan charge-offs and
recoveries totaled $349,000 and $79,000, respectively, for fiscal 1999. Indirect
auto loans accounted for a majority of the consumer loan charge-offs. Because
asset quality is a priority for Quad City and its subsidiaries, management made
the decision during fiscal 1999 to downscale indirect auto loan activity based
on charge-off history. The ability to grow profitably is, in part, dependent
upon the ability to maintain asset quality.
Noninterest income. Noninterest income decreased by $588,000, from $6.1
million for fiscal 1998 to $5.6 million for fiscal 1999. Noninterest income for
fiscal 1998 consisted of the gain on the restructuring of a merchant broker
agreement, 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. Noninterest income for
fiscal 1999 consisted of the amortization of deferred income resulting from the
restructuring of a merchant broker agreement, 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 10% decrease was primarily due to the one time gain in fiscal 1998
resulting from the restructuring of Bancard's merchant broker agreement offset
by an increase in loan sales activity in the residential real estate department
of the Bank, increased trust fees received during the period and the recognition
of deferred income resulting from a gain on the restructuring of Bancard's
merchant broker agreement.
In June 1998, Quad City recognized $2.2 million of gross income as a
result of the amendment of the merchant broker agreement with its major ISO. The
amended agreement was for a minimum term of one year and revised a prior
agreement that was to expire in the year 2002. In consideration for the
reduction in term from four years to one year, Quad City received total
compensation of $2.9 million, of which $732,000 was deferred and recognized in
income during fiscal 1999. In the prior agreement, Quad City and the ISO had
shared both merchant servicing fees and related merchant credit risk. The
amended agreement exchanged a substantial reduction in merchant servicing income
for a like reduction in the related merchant credit risk. With the amended
agreement, Quad City receives a fixed, monthly fee of $25,000 for servicing the
merchants and was relieved of responsibility for any merchant credit risk. The
agreement terminated on May 1, 2000. In an effort to offset the reduced merchant
servicing income, Quad City has been actively pursuing other ISO relationships
and has begun processing for additional ISOs.
During fiscal 1999, merchant credit card fees, net of processing costs,
decreased by $73,000 to $1.3 million, from $1.4 million for fiscal 1998. The
reduction reflected terms of the amended merchant broker agreement. Also as a
result of the amended merchant broker agreement, Quad City recognized $732,000
of the deferred income and earned $300,000 of merchant servicing fees for fiscal
1999.
For fiscal 1999, trust department fees increased $382,000, or 34%, to
approximately $1.5 million from $1.1 million for fiscal 1998. The increase was
primarily a reflection of the development of additional trust relationships
during the period.
Gain on sales of loans, net, was $1.0 million for fiscal 1999, which
reflected an increase of 46%, or $331,000, from $713,000 for fiscal 1998. The
increase resulted from lower interest rates, which created large numbers of both
home refinances and first-time home purchases, 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 1999 were $9.7 million as compared to $7.9 million for the same period in
1998, or an increase of $1.8 million.
The following table sets forth the various categories of noninterest
expenses for the years ended June 30, 1999 and 1998.
Years Ended June 30,
-----------------------------------
1999 1998 % Change
-----------------------------------
Salaries and employee benefits ............ $5,801,670 $4,571,126 26.92%
Professional and data processing fees ..... 598,457 504,344 18.66
Advertising and marketing ................. 359,571 238,160 50.98
Occupancy and equipment expense ........... 1,453,040 1,045,349 39.00
Stationery and supplies ................... 267,739 219,523 21.96
Provision for merchant credit card losses . 21,777 105,910 (79.44)
Postage and telephone ..................... 298,208 231,049 29.07
Other ..................................... 878,437 994,354 (11.66)
-----------------------
Total noninterest expenses ........ $9,678,899 $7,909,815 22.37%
=======================
Salaries and benefits experienced the most significant dollar increase
of any noninterest expense component. For fiscal 1999, total salaries and
benefits increased to $5.8 million or $1.2 million over the fiscal 1998 total of
$4.6 million. The change was primarily attributable to the addition of new Bank
employees during the period and increased commission expense in the residential
real estate department proportionate to the large volume of residential mortgage
loan originations and subsequent loan sales. Advertising and marketing expense
increased $121,000 or 51% and postage and telephone expense increased $67,000 or
29%. The increases were the result of the overall increase in business volume of
the Bank. For fiscal 1999, occupancy and equipment expense increased $408,000 or
39% over fiscal 1998. The increase was largely due to rent expense for the new
Moline location. The provision for merchant credit card losses during fiscal
1999 decreased $84,000 or 79% from fiscal 1998, which reflected Bancard's
amended merchant broker agreement and the resulting reduction in Bancard's
responsibility for merchant credit risk.
Income tax expense. The provision for income taxes was $1.6 million for
fiscal 1999 compared to $1.7 million for fiscal 1998, a decrease of $64,000 or
4%. The decrease was attributable to an effective tax rate of 39.6% in fiscal
1999 compared to 41.2% in fiscal 1998.
Financial Condition
Total assets of Quad City increased by $46.3$33.3 million or 14%9% to $400.9 million at
June 30, 2001 from $367.6 million at June 30, 2000 from $321.3 million at June 30, 1999.2000. The growth primarily
resulted from an increase in the loan portfolio funded by deposits received from
customers and by proceeds from short-term borrowings.borrowings and Federal Home Loan Bank
advances.
Cash and Cash Equivalent Assets. Cash and due from banks increased by $6.6$5.1
million or 77%34% to $20.2 million at June 30, 2001 from $15.1 million at June 30,
2000 from $8.5 million at June
30, 1999.2000. Cash and due from banks represented both cash maintained at the Bank, as
well as funds that the Bank and Quad City had deposited in other banks in the
form of demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
decreased by $13.0$18.3 million or 33%70% to $7.8 million at June 30, 2001 from $26.1
million at June 30, 2000
from $39.1 million at June 30, 1999.2000. The decrease was attributable to Quad City's decreased
liquidity needs at the end of the fiscal year.
Quad City had
made the decision in fiscal 1999 to increase its liquidity position in case Bank
customers began to withdraw funds in anticipation of cash needs associated with
the Year 2000.
Certificates of deposit at financial institutions increaseddecreased by $241,000$2.3 million or
2%18% to $10.5 million at June 30, 2001 from $12.8 million at June 30, 2000 from $12.5 million at June 30,1999.2000. Due
to strong loan demand, the Bank has made the decision to limit its deposits in
other banks in the form of certificates of deposit.
Investments. Securities increased by $5.9$600,000 or 1% to $56.7 million or 12% toat June 30,
2001 from $56.1 million at June 30, 2000 from $50.2 million at June 30, 1999.2000. The net increase was the result of a
number of transactions in the securities portfolio. Quad City purchased
additional securities, classified as available for sale, in the amount of $24.7 million$17.0
and classified as held to maturity,recognized an increase in the amountunrealized gains on securities available for sale,
before applicable income tax of $50,000.$1.6 million. This was offset by the following: paydowns of
$1.4$1.5 million that were received on mortgage-backed securities, proceeds from the
sales of securities available for sale of $5.2$1.3 million, proceeds from calls and
maturities of $6.2$15.0 million, losses recognized on the sales of securities of
$28,000,$14,000, and amortization of premiums, net of the accretion of discounts, of
$63,000, and an increase in
unrealized losses on securities available for sale, before applicable income
tax, of $1.2 million
$60,000.
Certain investment securities of the Bank are purchased with the intent to hold
the securities until they mature. These held to maturity securities, comprised
of municipal securities and other bonds, were recorded at amortized cost at June
30, 20002001 and June 30, 1999.2000. The balance at June 30, 20002001 was $575,000, a decrease$576,000, an
increase of $149,000 or 21%,$1,000 from $724,000$575,000 at June 30, 1999.2000. Market values at June 30,
20002001 and June 30, 19992000 were $565,000$583,000 and $727,000,$565,000, respectively.
All of Quad City's and a portion of the Bank'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 $6.1$500,000, or 1%, to $56.1 million or 12%, toat June 30,
2001, from $55.6 million at June 30, 2000, from $49.5 million at June 30, 1999.2000. The amortized cost of such securities
at June 30, 20002001 and June 30, 19992000 was $57.2$55.3 million and $50.0$57.2 million,
respectively.
Quad City does not use any financial instruments referred to as derivatives to
manage interest rate risk and as of June 30, 20002001 there existed no security in
the investment portfolio (other than U.S. governmentGovernment and U.S. governmentGovernment agency
securities) that exceeded 10% of stockholders' equity at that date.
13
Loans. Loans receivable held for investment increased by $43.9$46.0 million or 22%19% to
$287.9 million at June 30, 2001 from $241.9 million at June 30, 2000 from $198.0 million at June 30, 1999.2000. The
increase was the result of the origination or purchase of $240.5$283.8 million of
commercial business, consumer and real estate loans, less loan charge-offs, net
of recoveries, of $330,000$260,000 and loan repayments or sales of loans of $196.3 million.$237.5
million.. The majority of residential real estate loans originated by the Bank
were sold on the secondary market to avoid the interest rate risk associated
with long-term fixed rate loans. As of June 30, 2000,2001, the Bank's legal lending
limit was $4.3approximately $5.0 million.
Allowance for Loan Losses. The allowance for estimated losses on loans was $4.2
million at June 30, 2001 compared to $3.6 million at June 30, 2000 compared to $2.9 million at June 30, 1999 for an
increase of $722,000$600,000 or 25%17%. 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
utilizing the percentage allocation method. In addition, beginning in December
2000, specific reviews were completed on all credits risk-rated less than "fair
quality" and carrying aggregate exposure in excess of $250,000. The adequacy of
the allowance for estimated losses on loans was monitored by the loan review
staff, and reported to management and the Board of Directors.
Net charge-offs for the years ended June 30, 2001 and 2000, were $260,000 and
1999, were
$330,000 and $346,000 respectively. One measure of the adequacy of the allowance for
estimated losses on loans is the ratio of the allowance to the total loan
portfolio. Provisions were made monthly to ensure that an adequate level was
maintained. The allowance for estimated losses on loans as a percentage of total
loans was 1.501.48 % at June 30, 20002001 and 1.46%1.50% at June 30, 1999.2000.
Although management believes that the allowance for estimated losses on loans at
June 30, 20002001 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 Quad City will not be required to make additional provisions for loan
losses in the future. Asset quality is a priority for Quad City and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality. Along with other financial institutions,
management shares a concern for the possible continued softening of the economy
in 2001. Should the economic climate continue to deteriorate, borrowers may
experience difficulty, and the level of non-performing loans, charge-offs and
delinquencies could rise and require further increases in the provision.
Nonperforming Assets. The policy of Quad City 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.
Nonaccrual loans were $1.2 million at June 30, 2001 compared to $383,000 at June
30, 2000 compared to $1.3
million at June 30, 1999 for a decreasean increase of $905,000$849,000 or 70%222%. The decreaseincrease in nonaccrual loans
was comprised of decreasesincreases in commercial loans of $833,000$248,000 and
consumer loans of $133,000 offset by an increase in real estate loans
of $61,000.$646,000 offset by a decrease in consumer loans of $45,000. The increase in
nonaccrual commercial loans was due entirely to the addition of a single loan.
The increase in nonaccrual real estate loans was due to the addition of seven
loans with outstanding balances ranging from $39,000 to $150,000. Nonaccrual
loans at June 30, 20002001 consisted primarily of loans that were well
collateralized and were not expected to result in material losses.
losses and
represented less than one half of one percent of the Bank's loan portfolio..
As of June 30, 20002001 and 1999,2000, past due loans of 30 days or more amounted to $3.3$3.2
million and $4.0$3.3 million, respectively. Past due loans as a percentage of gross
loans receivable was 1.4% and 2.0%decreased to 1.1% at June 30, 2000, and
1999, respectively.2001 from 1.4% at June 30, 2000.
Other Assets. Premises and equipment increased by $162,000$1 million or 2%12% to $8.7
million at June 30, 2001 from $7.7 million at June 30, 2000 from $7.6 million at June 30, 1999.2000. The increase
resulted from the purchase of additional furniture, fixtures and equipment
offset by depreciation expense. Additional information regarding the composition
of this account and related accumulated depreciation is described in footnote 5
to the consolidated financial statements.
14
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $627,000$300,000 or 31%9% to $2.9 million at June 30, 2001 from $2.6
million at June 30, 2000 from
$2.0 million at June 30, 1999.2000. The increase was primarily due to greater average
outstanding balances in interest-bearing assets.
Other assets increased by $2.6$1.7 million or 42%19% to $10.6 million at June 30, 2001
from $8.9 million at June 30, 2000 from $6.3 million at June 30, 1999.2000. The increase consisted primarilylargest component of the purchaseincrease was
the $1.3 million growth in receivables due Bancard from its terminated, primary
ISO. Bancard is vigorously pursuing the collection of this receivable through
legal avenues. Other assets also included life insurance contracts on two of
Quad City's executives, in the
amount of $2.0 million, as well as an increase in accrued trust department fees, other miscellaneous
receivables and various prepaid expenses associated with the growth of
Quad City.expenses.
Deposits. Deposits increased by $40.1$14.1 million or 16%5% to $302.2 million at June
30, 2001 from $288.1 million at June 30, 2000 from $248.0 million at June 30, 1999.2000. The increase resulted from a
$9.5$20.4 million net increase in noninterest-bearing, NOW, money market and other
savings accounts and a $30.6$6.3 million net increasedecrease in certificates of deposit. The increase was a result of periodic aggressive pricing programs for
deposits and increased marketing efforts.
Short-term Borrowings. Short-term borrowings increased $11.1$7.5 million or 114%36% from $9.7 million as of June 30, 1999 to
$20.8 million as of June 30, 2000.2000 to $28.3 million as of June 30, 2001. The Bank
offers short-term repurchase agreements to some of its significant deposit
customers. Also, on occasion, the Bank purchases Federal funds for short-term
funding needs from the Federal Reserve Bank, or from some of its correspondent
banks. Short-term borrowings were comprised of customer repurchase agreements of
$15.8$28.3 million and $9.6$15.8 million at June 30, 20002001 and 1999,2000, respectively, as well
as federal funds purchased from correspondent banks of $0 and $5.0 million and $140,000 at
June 30, 20002001 and 1999,2000, respectively.
FHLB Advances and Other Borrowings. FHLB advances decreased slightly toincreased $7.3 million or 33%
from $22.4 million as of June 30, 2000 from $24.6to $29.7 million atas of June 30, 1999.2001. As
of June 30, 2000,2001, the Bank held $1.2$1.5 million of FHLB stock. As a result of its
membership in the FHLB of Des Moines, the Bank has the ability to borrow funds
for short-term or long-term purposes under a variety of programs. The Bank
utilized FHLB advances for loan matching as a hedge against the possibility of
rising interest rates when these advances provided a less costly source of funds
than customer deposits.
In June 1999, Quad City issued 1,200,000 shares of trust preferred securities
through its newly formed Capital Trust subsidiary. On Quad City's financial
statements, these securities are listed as company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely subordinated
debentures and were $12,000,000 at both June 30, 20002001 and 1999.2000. Under current
regulatory guidelines, these securities are considered to be Tier 1 capital,
with certain limitations that are applicable to Quad City.
Other liabilities decreasedincreased by $4.3$600,000 or 15% to $4.9 million or 50% toas of June 30,
2001 from $4.3 million as of June 30, 2000 from $8.6 million as of June 30, 1999.2000. Other liabilities were comprised of
unpaid amounts for various products and services, and accrued but unpaid
interest on deposits. The decrease was primarily attributable to $3.8
million due to a broker for the purchase of securities available for sale atAt June 30, 1999.2001, the primary component of other
liabilities was $2.4 million of interest payable.
Stockholders' Equity. Common stock of $2.3 million as of June 30, 20002001 increased
by $29,000 or 1%. Exercisesslightly due to the exercise of stock warrants and options resulting in the issuance of 29,165150
additional shares of common stock created the increase.stock.
Additional paid-in capital also increased by $189,000 or 2%slightly to $12.1 million as of June
30, 2000 from $12.0 million as of June 30, 1999.2001. The increase was due to $108,000$1,000 received in excess of the $1.00 per
share par value for shares of common stock issued as the result of the exercise
of stock warrants and options,
as well as $81,000 for the tax benefit recorded on the stock option exercises.options.
Retained earnings increased by $2.7$2.4 million or 60%33% to $9.7 million as of June
30, 2001 from $7.3 million as of June 30, 2000 from $4.6 million as of June 30, 1999.2000. The increase reflected net
income for the year.
Accumulated other comprehensive income (loss), consisting of unrealized lossesgains
(losses) on securities available for sale, net of related income taxes, was $1.1 milliona
$500,000 gain as of June 30, 20002001 as compared to $332,000a $1.1 million loss as of June
30, 1999.2000. The increase in the lossgain was attributable to the decreaseincrease during the
period in the fair value of the securities identified as available for sale,
primarily as a result of an
increasea decline in market interest rates.
In April 2000, Quad City announced that the board of directors approved a stock
repurchase program enabling Quad City to repurchase up toapproximately 60,000 shares
of its common stock. AtThis stock repurchase program was completed in the fall of
2000 and at June 30, 2001 and 2000, Quad City had acquired 60,146 shares and
41,496 shares at a total cost of $599,480.$855,000 and $599,000, respectively. The
weighted average cost of the shares at June 30, 2001 was $14.45.$14.21 compared to
$14.45 at June 30, 2000. Liquidity
15
Liquidity
Liquidity measures the ability of Quad City to meet maturing obligations and its
existing commitments, to withstand fluctuations in deposit levels, to fund its
operations, and to provide for customers' credit needs. One source of liquidity
is cash and short-term assets, such as interest-bearing deposits in other banks
and federal funds sold, which totaled $38.5 million at June 30, 2001, compared
with $54.0 million at June 30, 2000, compared with $60.2 million at June 30, 1999.2000. The Bank has a variety of sources of
short-term liquidity available to it, including federal funds purchased from
correspondent banks, sales of securities available for sale, FHLB advances,
lines of credit and loan participations or sales. Quad City also generates
liquidity from the regular principal payments and prepayments made on its
portfolio of loans and mortgage-backed securities.
The liquidity of Quad City is comprised of three primary classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash used in operating activities was $1.7
million for fiscal 2001 compared to net cash provided by operating activities of
$4.2 million for fiscal 2000. Net cash used in investing activities, consisting
principally of loan funding and the purchase of securities, was $22.0 million
for fiscal 2001 and $46.1 million for fiscal 2000. Net cash provided by
financing activities, consisting primarily of deposit growth and proceeds from
short-term borrowings and Federal Home Loan Bank advances was $28.7 million for
fiscal 2001 compared to $48.5 million for fiscal 2000.
Net cash provided by operating activities was $4.2 million for fiscal 2000
compared to $3.7 million for fiscal 1999. Net cash used in investing activities,
consisting principally of loan funding and the purchase of securities, was $46.1
million for fiscal 2000 and $72.7 million for fiscal 1999. Net cash provided by
financing activities, consisting primarily of deposit growth and proceeds from
short-term borrowings, for fiscal 2000 was $48.5 million and for fiscal 1999 was
$66.0 million, consisting primarily of deposit growth, proceeds from the
issuance of preferred securities of the subsidiary trust, and proceeds from
short-term borrowings.
Net cash provided by operating activities was $3.7 millionQuad City has a variety of sources of short-term liquidity available to it,
including federal funds purchased from correspondent banks, sales of securities
available for fiscal
1999 compared to $4.4sale, FHLB advances, lines of credit and loan participations or
sales. At both June 30, 2001 and 2000, the Bank had six unused lines of credit
totaling $31.0 million of cash used, primarilywhich $8.0 million was secured and $23.0 million was
unsecured. At both June 30, 2001 and 2000, Quad City also had an unused line of
credit for loans originated for
sale, for fiscal 1998. Net cash used in investing activities, consisting
principally of loan funding and the purchase of securities,$3.0 million, which was $72.7 million
for fiscal 1999 and $70.3 million for fiscal 1998. Net cash provided by
financing activities, consisting primarily of deposit growth, proceeds from the
issuance of preferred securities of the subsidiary trust, and proceeds from
short-term borrowings, for fiscal 1999 was $66.0 million and for fiscal 1998 was
$79.3 million, consisting principally of deposit growth and proceeds from
Federal Home Loan Bank advances.secured.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Quad City's operations. Unlike industrial
companies, nearly all of the assets and liabilities of Quad City are monetary in
nature. As a result, interest rates have a greater impact on Quad City's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Impact of New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement 141,
"Business Combinations" and Statement 142, "Goodwill and Other Intangible
Assets". Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. For Quad City, the provisions of the Statements are
generally effective July 1, 2002. However, the Statements would allow for an
early application effective July 1, 2001, provided that the decision to early
implement is made prior to the release of the first quarter 10-Q. Implementation
of the standards is not expected to have a material effect on Quad City's
consolidated financial statements.
16
Forward Looking Statements
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Quad City intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe Quad City's future plans, strategies and expectations are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. Quad City's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on Quad City's
operations and future prospects include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in our market area, our
implementation of new technologies, Quad City's ability to develop and maintain
secure and reliable electronic systems and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning Quad City and its business, including
additional factors that could materially affect Quad City's financial results,
is included in Quad City's filings with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quad City, like other financial institutions, is subject to direct and indirect
market risk. Direct market risk exists from changes in interest rates. Quad
City's net income is dependent on its net interest income. Net interest income
is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors Quad City's interest rate risk. The Asset/Liability Committee meets
quarterly to review Quad City's interest rate risk position and profitability,
and to make or recommend adjustments for consideration by the Boardboard of
Directors.directors. Management also reviews the Bank's securities portfolio, formulates
investment strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board'sboard's objectives in the most
effective manner. Notwithstanding Quad City's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
In adjusting Quad City's asset/liability position, the Boardboard and management
attempt to manage Quad City's interest rate risk while maintaining or enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long-term and short-term interest rates, market
conditions and competitive factors, the Boardboard and management may determine to
increase Quad City's interest rate risk position somewhat in order to increase
its net interest margin. Quad City's results of operations and net portfolio
values remain vulnerable to increases in interest rates and to fluctuations in
the difference between long-term and short-term interest rates.
17
One approach used to quantify interest rate risk is the net portfolio value ("NPV")
analysis. In essence, this analysis calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance-sheet contracts. The following table sets forth, at June
30, 20002001 and June 30, 1999,2000, an analysis of Quad City's interest rate risk as
measured by the estimated changes in NPVthe net portfolio value resulting from
instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis
points).
Estimated Increase
Change in Estimated Increase (Decrease) in NPV
Interest Estimated ---------------------------------------------------------------------------------------------------------------------------
Rates NPV Amount Amount Percent
- - ------------------------------------------------------------------------------------------- ---------------------------- ---------------------------- -----------------------------
(Basis points) June 30, 2000 June 30, 19992001 June 30, 2000 June 30, 19992001 June 30, 2000 June 30, 19992001 June 30, 2000
- - ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 $24,705 $28,583 $29,554$ (4,282) $(2,290) $(1,709)(14.77)% (7.42)%
(5.47)%
--- 28,987 30,873
31,263
-200 27,572 31,128 31,710(1,415) 255 447 0.83% 1.43%( 4.88) .83
Quad City does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Boardboard of Directors,directors, Quad City does not intend
to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting Quad City.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of Quad City's business
activities.
18
Item 8. Financial Statements
QUAD CITY HOLDINGS, INC.
Index to Consolidated Financial Statements
INDEPENDENT AUDITOR'S REPORT 20
FINANCIAL STATEMENTS
Consolidated balance sheets as of June 30, 2001 and 2000 and 199921
Consolidated statements of income for the years ended June 30,
2001, 2000, and 1999 and 199822
Consolidated statements of changes in stockholders' equity for
the years ended 23
Consolidated statements of cash flows for the years ended June 30,
2001, 2000, and 1999 and 199824
Notes to consolidated financial statements 25 - 43
19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Quad City Holdings, Inc.
Moline, Illinois
We have audited the accompanying consolidated balance sheets of Quad City
Holdings, Inc. and subsidiaries as of June 30, 20002001 and 1999,2000, and the related
statements of income, changes in stockholders' equity, and cash flows for the
years ended June 30, 2001, 2000, 1999, and 1998.1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
auditing
standards.in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quad City Holdings,
Inc. and subsidiaries as of June 30, 20002001 and 1999,2000, and the results of their
operations and their cash flows for the years ended June 30, 2001, 2000, 1999, and
1998,1999, in conformity with accounting principles generally accepted accounting principles.in the United
States of America.
/s/ McGladrey & Pullen, LLP
- ---------------------------
Davenport, Iowa
August 1, 2000July 25, 2001
20
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 20002001 and 19992000
ASSETS 2001 2000
1999
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ........................................... $ 15,130,35720,217,219 $ 8,528,19515,130,357
Federal funds sold ................................................ 7,775,000 26,105,000 39,125,000
Certificates of deposit at financial institutions ................. 10,512,585 12,776,463 12,535,193
Securities held to maturity, at amortized cost (fair value
2001 $583,411; 2000 $565,237; 1999 $727,115)$565,237) (Note 3) .......................... 575,559 574,988 724,415
Securities available for sale, at fair value (Note 3) ............. 56,134,521 55,554,062
49,533,909
-----------------------------------------------------------
56,710,080 56,129,050
50,258,324
-----------------------------------------------------------
Loans receivable (Note 4) ......................................... 287,864,766 241,852,851 197,976,692
Less allowance for estimated losses on loans (Note 4) ........... 4,248,182 3,617,401
2,895,457
-----------------------------------------------------------
283,616,584 238,235,450
195,081,235
-----------------------------------------------------------
Premises and equipment, net (Note 5) .............................. 8,660,698 7,715,621 7,553,616
Accrued interest receivable ....................................... 2,863,178 2,633,120 2,006,503
Other assets ...................................................... 10,592,590 8,896,554
6,258,149
-----------------------------------------------------------
Total assets .............................................. $ 400,947,934 $ 367,621,615
$ 321,346,215
===========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
-
- ---------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ........................................... $ 44,043,93252,582,264 $ 35,833,09444,043,932
Interest-bearing .............................................. 249,572,960 244,022,824
212,132,785
----------------------------------------------------------
Total deposits (Note 6) ................................... 302,155,224 288,066,756 247,965,879
Short-term borrowings (Note 7) .................................... 28,342,542 20,771,724 9,685,877
Federal Home Loan Bank advances (Note 8) .......................... 29,712,759 22,425,398 24,605,890
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely subordinated debentures
(Note 9) ........................................................ 12,000,000 12,000,000
Other liabilities ................................................. 4,919,949 4,286,318
8,615,098
-----------------------------------------------------------
Total liabilities .......................................................................................... 377,130,474 347,550,196
302,872,744
-----------------------------------------------------------
Commitments and Contingencies (Note 18)
Stockholders' Equity (Note 16):
Common stock, $1 par value; shares authorized 5,000,000;
shares issued and outstanding 2001 - 2,325,566 and 2,265,420;
2000 - 2,325,416 and 2,283,920, respectively; 1999 - 2,296,251 .....................respectively .................. 2,325,566 2,325,416 2,296,251
Additional paid-in capital ...................................... 12,148,759 12,147,984 11,959,080
Retained earnings ............................................... 9,691,749 7,296,017 4,550,490
Accumulated other comprehensive income (loss) ............................................. 505,922 (1,098,518)
(332,350)
-----------------------------------------------------------
24,671,996 20,670,899 18,473,471
Less cost of common shares acquired for the treasury
2001 - 60,146; 2000 - 41,496 ................................................................................... 854,536 599,480 --
-----------------------------
Total stockholders' equity ................................ 23,817,460 20,071,419
18,473,471
----------------------------------------------------------
Total liabilities and stockholders' equity ................ $ 400,947,934 $ 367,621,615
$ 321,346,215
===========================================================
See Notes to Consolidated Financial Statements.
21
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2001, 2000, and 1999
and 1998
2001 2000 1999
1998
- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ........................................................................ $ 22,970,407 $ 18,364,812 $ 15,642,235 $ 12,083,990
Interest and dividends on securities:
Taxable .......................................................................................................... 3,067,722 3,214,722 2,229,178
1,891,019
Nontaxable .................................................................................................... 290,990 233,793 56,089 14,649
Interest on federal funds sold ................................................................ 1,267,062 1,488,267 1,492,173
645,929
Other interest ................................................................................................ 947,755 777,604 696,245
440,980
---------------------------------------------------------------------------------------
Total interest income ...................................................................... 28,543,936 24,079,198 20,115,920
15,076,567
---------------------------------------------------------------------------------------
Interest expense:
Interest on deposits .................................................................................... 13,022,210 10,125,235 9,009,724 6,971,153
Interest on company obligated mandatorily redeemable
preferred securities ................................................................................ 1,134,541 1,137,402 63,518 --
Interest on short-term and other borrowings ...................................... 2,454,998 2,025,956 1,953,444
1,370,868
---------------------------------------------------------------------------------------
Total interest expense .................................................................... 16,611,749 13,288,593 11,026,686
8,342,021
---------------------------------------------------------------------------------------
Net interest income .......................................................................... 11,932,187 10,790,605 9,089,234 6,734,546
Provision for loan losses (Note 4) ........................................................ 889,670 1,051,818 891,800
901,976
---------------------------------------------------------------------------------------
Net interest income after provision for loan losses .......... 11,042,517 9,738,787 8,197,434
5,832,570
---------------------------------------------------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ........................ 1,673,444 2,346,296 1,322,658 1,395,574
Trust department fees .................................................................................. 2,071,971 1,884,310 1,520,518 1,138,502
Deposit service fees .................................................................................... 816,489 600,219 433,056 290,721
Gains on sales of loans, net .................................................................... 1,136,572 438,799 1,043,763 713,121
Securities gains (losses), net ................................................................ (14,047) (28,221) 3,757 8,734
Amortization of deferred income resulting from
restructuring of merchant broker agreement (Note 11) .............................. -- -- 732,000
--
Gain on restructuring of merchant broker agreement (Note 11) . -- -- 2,168,000
Other .................................................................................................................. 628,639 913,013 504,699
433,765
--------------------------------------------------------------------------------------
Total noninterest income ................................................................ 6,313,068 6,154,416 5,560,451
6,148,417
--------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits ................................................................ 8,014,268 6,878,213 5,801,670 4,571,126
Professional and data processing fees .................................................. 1,159,929 860,216 598,457 504,344
Advertising and marketing .......................................................................... 579,524 410,106 359,571 238,160
Occupancy and equipment expense .............................................................. 1,925,820 1,580,911 1,453,040 1,045,349
Stationery and supplies .............................................................................. 352,441 324,219 267,739 219,523
Postage and telephone .................................................................................. 409,626 361,623 298,208
231,049
Other .................................................................................................................. 1,358,345 1,052,173 900,214
1,100,264
--------------------------------------------------------------------------------------
Total noninterest expenses ............................................................ 13,799,953 11,467,461 9,678,899
7,909,815
--------------------------------------------------------------------------------------
Income before income taxes ............................................................ 3,555,632 4,425,742 4,078,986 4,071,172
Federal and state income taxes (Note 12) ................................................ 1,159,900 1,680,215 1,614,165
1,677,900
--------------------------------------------------------------------------------------
Net income ............................................................................................ $ 2,395,732 $ 2,745,527 $ 2,464,821
$ 2,393,272
======================================================================================
Earnings per common share (Note 17):
Basic .................................................................................................................. $ 1.06 $ 1.19 $ 1.080.98
Diluted ........................................................ $ 1.09
Diluted ......................................................1.04 $ 1.15 $ 1.03 $ 1.020.93
Weighted average common shares outstanding ........................................ 2,268,465 2,309,453 2,285,500 2,196,297
Weighted average common and common equivalent shares outstanding ................................................2,314,334 2,385,840 2,398,525 2,353,932
See Notes to Consolidated Financial Statements.
22
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2001, 2000, 1999, and 19981999
Accumulated
Additional Other
Preferred Common Paid-In Retained Comprehensive Treasury
Stock Stock Capital Earnings Income (Loss) Stock Total
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, year ended June 30, 1997 ......1998 ....... $ 10 $1,462,824 $13,039,40625 $1,510,374 $15,014,884 $2,564,443 $ 171,171 $ (60,185)12,492 $ -- $14,613,226$19,102,218
-----------------------------------------------------------------------------------------
Comprehensive income:
Net income ........................... -- -- -- 2,393,272 -- -- 2,393,272
Other comprehensive income, net of
tax (Note 2) ....................... -- -- -- -- 72,677 -- 72,677
-----------
Comprehensive income ................... 2,465,949
-----------
Proceeds from sale of 15 shares of
preferred stock ..................... 15 -- 1,499,985 -- -- -- 1,500,000
Proceeds from issuance of 71,325 shares
of common stock as a result of
warrants and stock options exercised
(Note 14) .......................... -- 47,550 475,493 -- -- -- 523,043
-----------------------------------------------------------------------------------------
Balance, year ended June 30, 1998 .... 25 1,510,374 15,014,884 2,564,443 12,492 -- 19,102,218
-----------------------------------------------------------------------------------------
Comprehensive income:
Net income ......................... -- -- -- 2,464,821 -- -- 2,464,821
Other comprehensive (loss), net of
tax (Note 2) ........................................... -- -- -- -- (344,842) -- (344,842)
-----------------------
Comprehensive income ..................... 2,119,979
------------
Stock split (3 for 2) ................(3-for-2) ................... -- 760,262 (760,262) (890) -- -- (890)
Proceeds from issuance of 30,720 shares
of common stock as a result of warrants
and stock options exercised (Note 14) ................. -- 25,615 201,215 -- -- -- 226,830
Tax benefit of nonqualified stock options
exercised ............................................... -- -- 3,218 -- -- -- 3,218
Redemption of preferred stock (Note 15) . (25) -- (2,499,975) (477,884) -- -- (2,977,884)
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance, year ended June 30, 1999 ........... -- 2,296,251 11,959,080 4,550,490 (332,350) -- 18,473,471
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income ................................................... -- -- -- 2,745,527 -- -- 2,745,527
Other comprehensive (loss), net of
tax (Note 2) ........................................ -- -- -- -- (766,168) -- (766,168)
------------
Comprehensive income ............................. 1,979,359
------------
Proceeds from issuance of 29,16537,310 shares
of common stock, net of
simultaneous redemptions of 8,145
shares, as a result of
warrants and stock options exercised
(Note 14) ............................... -- 29,165 107,72637,310 219,544 -- -- -- 136,891256,854
Exchange of 8,145 shares of common stock
in connection with options exercised .. -- (8,145) (111,818) -- -- -- (119,963)
Tax benefit of nonqualified stock options
exercised ............................................... -- -- 81,178 -- -- -- 81,178
Purchase of 41,496 shares of common stock
for the treasury ................................... -- -- -- -- -- (599,480) (599,480)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance, year ended June 30, 2000 ........... -- 2,325,416 12,147,984 7,296,017 (1,098,518) (599,480) 20,071,419
-----------------------------------------------------------------------------------------
Comprehensive income:
Net income .......................... -- -- -- 2,395,732 -- -- 2,395,732
Other comprehensive gain, net of tax
(Note 2) ........................... -- -- -- -- 1,604,440 -- 1,604,440
------------
Comprehensive income ............ 4,000,172
------------
Proceeds from issuance of 150 shares of
common stock as a result of stock
options exercised (Note 14) ........... -- 150 775 -- -- -- 925
Purchase of 18,650 shares of common stock
for the treasury ...................... -- -- -- -- -- (255,056) (255,056)
-----------------------------------------------------------------------------------------
Balance, year ended June 30, 2001 ....... $ -- $2,325,416 $12,147,984 $7,296,017 $(1,098,518) $(599,480) $20,071,419
===========================================================================================$2,325,566 $12,148,759 $9,691,749 $ 505,922 $(854,536) $23,817,460
=========================================================================================
See Notes to Consolidated Financial Statements.
23
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2001, 2000, and 1999
2001 2000 1999 and 1998
2000 1999 1998
-
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ....................................................... $ 2,395,732 $ 2,745,527 $ 2,464,821 $ 2,393,272
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ................................................... 770,730 635,838 627,075 422,357
Provision for loan losses ...................................... 889,670 1,051,818 891,800 901,976
Deferred income taxes .......................................... (362,995) (398,971) 232,262 (553,283)
Amortization of offering costs on subordinated debentures ...... 29,506 29,453 1,436 --
Amortization of premiums (accretion of discounts) on securities, net .................................................................. 60,062 62,539 38,697 (16,742)
Investment securities (gains) losses, net ...................... 14,047 28,221 (3,757) (8,734)
Loans originated for sale ...................................... (97,605,425) (36,774,571) (85,027,675) (57,206,140)
Proceeds on sales of loans ..................................... 94,039,651 38,124,921 88,804,656 54,008,203
Net gains on sales of loans .................................... (1,136,572) (438,799) (1,043,763) (713,121)
Amortization of deferred income resulting from
restructuring of merchant broker agreement ................................. -- (732,000) --
Gain on restructuring of merchant broker agreement ................................ -- -- (2,168,000)(732,000)
Tax benefit of nonqualified stock options exercised ............ -- 81,178 3,218 --
Increase in accrued interest receivable ........................ (230,058) (626,617) (233,280) (398,916)
(Increase) decrease in other assets ............................ (1,166,767) 170,192 (2,405,245) (273,402)
Increase (decrease) in other liabilities ....................... 633,631 (528,780) 52,456
(766,623)
---------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ........ (1,668,788) 4,161,949 3,670,701
(4,379,153)
---------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold .................... 18,330,000 13,020,000 (16,165,000)
(13,770,000)
Net increase(increase) decrease in certificates of deposit at
financial institutions ......................................... 2,263,878 (241,270) (4,169,070) (3,006,999)
Purchase of securities available for sale ........................ (17,003,552) (23,659,480) (30,215,760) (16,444,294)
Purchase of securities held to maturity .......................... -- (50,000) -- (276,398)
Proceeds from calls and maturities of securities ................. 15,045,000 6,200,000 14,400,000 9,500,000
Proceeds from paydowns on securities ............................. 1,537,072 1,389,269 1,732,539 4,531,123
Proceeds from sales of securities available for sale ............. 1,262,841 5,191,661 280,786 14,020
Purchase of life insurance contracts ............................. -- (2,023,543) -- --
Increase in cash value of life insurance contracts ............... (87,840) (14,640) -- --
Proceeds from restructuring of merchant broker agreement ......... -- -- 2,900,000
Net loans originated ............................................. (41,568,458) (45,117,584) (38,080,955) (50,883,287)
Purchase of premises and equipment, net .......................... (1,715,807) (797,843) (520,423)
(2,833,936)
---------------------------------------------------------------------------------------
Net cash used in investing activities ...................... (21,936,866) (46,103,430) (72,737,883)
(70,269,771)
---------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ................................. 14,088,468 40,100,877 50,581,915 61,423,769
Net increase in short-term borrowings ............................ 7,570,818 11,085,847 7,685,877 2,000,000
Proceeds from Federal Home Loan Bank advances .................... 16,750,000 8,000,000 1,480,000 25,955,000
Payments on Federal Home Loan Bank advances ...................... (9,462,639) (10,180,492) (1,541,284) (12,065,538)
Net decrease in other borrowings ................................. -- -- (1,500,000) --
Proceeds from issuance of preferred securities of subsidiary trust -- -- 12,000,000 --
Redemption of preferred stock .................................... -- -- (2,977,884) --
Purchase of treasury stock ....................................... (255,056) (599,480) -- --
Proceeds from issuance of preferred stock ........................ -- -- 1,500,000
Proceeds from issuance of common stock net of simultaneous
redemptions ............................................................................... 925 136,891 225,940 523,043
--------------------------------------------
Net cash provided by financing activities .................. $ 28,692,516 $ 48,543,643 $ 65,954,564 $ 79,336,274
--------------------------------------------
Net increase (decrease) in cash and due
from banks ......................................................... $ 5,086,862 $ 6,602,162 $ (3,112,618) $ 4,687,350
Cash and due from banks:
Beginning ............................................................................................................... 15,130,357 8,528,195 11,640,813
6,953,463
--------------------------------------------
Ending ..................................................................................................................... $ 20,217,219 $ 15,130,357 $ 8,528,195
$ 11,640,813
============================================
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information,
cash payments for:
Interest ................................................................................................................. $ 16,069,527 $ 13,024,589 $ 10,735,683
$ 7,769,512
Income taxes ......................................................................................................... 1,480,894 2,001,216 1,527,171 1,974,000
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on securities available for sale, net ..................... 1,604,440 (766,168) (344,842) 72,677
Investment securities transferred from held to maturity portfolio
to available for sale portfolio, at fair value ................................. -- -- 1,030,743
--
Due (from broker) to broker for (call) purchase of
securities available for sale ....................................... (1,000,000) -- 3,800,000
Exchange of 8,145 shares of common stock in connection
with options exercised ........................................ -- (119,963) --
See Notes to Consolidated Financial Statements.
24
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Quad City Holdings, Inc. (Company) is a bank holding company providing bank
and bank related services through its subsidiaries, Quad City Bank and Trust
Company (Bank), Quad City Bancard, Inc. (Bancard), Allied Merchant Services,
Inc. (Allied), and Quad City Holdings Capital Trust I. The Bank is a
commercial bank that servicesserves the Quad Cities area,and Cedar Rapids areas, is
chartered and regulated by the state of Iowa, is insured and subject to
regulation by the Federal Deposit Insurance Corporation and is a member of
and regulated by the Federal Reserve System. Bancard is an entity formed in
April 1995 to conduct the Company's merchant credit card operation and is
regulated by the Federal Reserve System. Allied was formed in March 1999 by
Bancard as a captive independent sales organization that markets merchant
credit card processing services. Allied is a wholly-owned subsidiary of
Bancard. Quad City Holdings Capital Trust I was capitalized in June 1999 for
the purpose of issuing Company Obligated Mandatorily Redeemable Preferred
Securities.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The allowance for estimated losses on loans is inherently
subjective as it requires material estimates that are susceptible to
significant change. The fair value disclosure of financial instruments is an
estimate that can be computed within a range.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and
due from banks include cash on hand and amounts due from banks. Cash flows
from federal funds sold, certificates of deposit at financial institutions,
loans, deposits, short-term borrowings, and other borrowings are treated as
net increases or decreases.
Cash and due from banks: The Bank is required by federal banking regulations
to maintain certain cash and due from bank reserves. The reserve requirement
was approximately $3,641,000 and $2,753,000 and $1,476,000 atas of June 30, 20002001 and 1999,2000,
respectively.
Investment securities: Investment securities held to maturity are those debt
securities that the Company has the ability and intent to hold until maturity
regardless of changes in market conditions, liquidity needs, or changes in
general economic conditions. Such securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. If the ability or intent
to hold to maturity is not present for certain specified securities, such
securities are considered available for sale as the Company intends to hold
them for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based
on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations, and other similar
factors. Securities available for sale are carried at fair value. Unrealized
gains or losses are reported as increases or decreases in accumulated other
comprehensive income. Realized gains or losses, determined on the basis of
the cost of specific securities sold, are included in earnings.
Pursuant to SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company transferred at fair value $1,030,743 of investment
securities from held to maturity to available for sale on January 4, 1999.
Loans held for sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value
in the aggregate.
25
Loans and allowance for estimated losses on loans: Loans are stated at the
amount of unpaid principal, reduced by an allowance for estimated losses on
loans. The allowance for estimated losses on loans is maintained at the level
considered adequate by management of the Company and the Bank to provide for
losses that can be reasonably anticipated. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. In determining
the adequacy of the allowance, the Company and the Bank make continuous
evaluationsconsider the overall
composition of the loan portfolio, types of loans, past loss experience, loan
delinquencies, potential substandard and related off-balance-sheet commitments,
and consider currentdoubtful credits, economic
conditions, and other factors that may affect a
borrower's ability to repay.
In accordance with FASB Statement No. 114 "Accounting for Creditors for
Impairment of a Loan", loansin management's judgment deserve
evaluation.
Loans are considered impaired when, based on current information and events,
it is probable the Company and the Bank will not be able to collect all
amounts due. The portion of the allowance for loan losses applicable to an
impaired loan is computed based on the present value of the estimated future
cash flows of interest and principal discounted at the loan's effective
interest rate or on the fair value of the collateral for collateral dependent
loans. The entire change in present value of expected cash flows of impaired
loans is reported as bad debt expense in the same manner in which impairment
initially was recognized or as a reduction in the amount of bad debt expense
that otherwise would be reported. The Company and the Bank recognize interest
income on impaired loans on a cash basis.
Direct loan origination fees and costs are deferred and the net amounts
amortized as an adjustment of the related loan's yield.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit including commitments
under credit card arrangements and standby letters of
credit. Such financial instruments are recorded when they are funded.
Transfers of financial assets: In accordance with FASB Statement No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", transfers of financial assets are accounted
for as sales, only when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method over the estimated useful lives.
Income taxes: The Company files its tax return on a consolidated basis with
its subsidiaries. The entities follow the direct reimbursement method of
accounting for income taxes under which income taxes or credits which result
from the inclusion of the subsidiaries in the consolidated tax return are
paid to or received from the parent company.
Deferred income taxes are provided under the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
net operating loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax basis. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Trust assets: Trust assets held by the Bank in a fiduciary, agency, or
custodial capacity for its customers, other than cash on deposit at the Bank,
are not included in the accompanying consolidated financial statements since
such items are not assets of the Bank.
Earnings per common share: Basic earnings per share areis computed by dividing
net income by the weighted average number of common stock shares outstanding
for the respective period. Diluted earnings per share areis computed by dividing
net income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period.
Reclassification: Certain amounts in the prior year financial statements have
been reclassified, with no effect on net income or stockholders' equity, to
conform with current year presentation.
26
Note 2. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income,
which for the Company is comprised entirely of unrealized gains and losses on
securities available for sale.
Other comprehensive income (loss) is comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------
Year ended June 30, 2001:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during the year ........ $ 2,482,453 $ 887,041 $ 1,595,412
Less, reclassification adjustment for (losses)
included in net income ................................ (14,047) (5,019) (9,028)
-----------------------------------------
Other comprehensive income .......................... $ 2,496,500 $ 892,060 $ 1,604,440
=========================================
Year ended June 30, 2000:
Unrealized (losses) on securities available for sale:
Unrealized holding (losses) arising during the year ........ $(1,195,285) $ (410,590) $ (784,695)
Less, reclassification adjustment for (losses)
included in net income .............................................................. (28,221) (9,694) (18,527)
-----------------------------------------
Other comprehensive (loss) .................................................. $(1,167,064) $ (400,896) $ (766,168)
=========================================
Year ended June 30, 1999:
Unrealized gains (losses) on securities available for sale:
Unrealized holding (losses) arising during the year ........ $ (517,765) $ (175,407) $ (342,358)
Less, reclassification adjustment for gains
included in net income .............................................................. 3,757 1,273 2,484
-----------------------------------------
Other comprehensive (loss) .................................................. $ (521,522) $ (176,680) $ (344,842)
=========================================
Year ended June 30, 1998:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year ...... $ 114,505 $ 35,827 $ 78,678
Less, reclassification adjustment for gains
included in net income .............................. 8,734 2,733 6,001
-----------------------------------------
Other comprehensive income ........................ $ 105,771 $ 33,094 $ 72,677
=========================================
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of June 30, 20002001
and 19992000 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
June 30, 2001:
Securities held to maturity:
Municipal securities ..... $ 500,559 $ 4,638 $ -- $ 505,197
Other bonds .............. 75,000 3,214 -- 78,214
-----------------------------------------------------------
$ 575,559 $ 7,852 $ -- $ 583,411
===========================================================
Securities available for sale:
U.S. agency securities ..... $ 31,787,602 $ 626,091 $ (104) $ 32,413,589
Mortgage-backed securities . 5,509,433 17,646 (18,797) 5,508,282
Municipal securities ....... 11,892,825 144,098 (39,556) 11,997,367
Corporate securities ....... 4,577,918 31,014 (13,185) 4,595,747
Trust preferred securities . 1,148,488 94,897 (14,405) 1,228,980
Other securities ........... 393,211 19,075 (21,730) 390,556
-----------------------------------------------------------
$ 55,309,477 $ 932,821 $ (107,777) $ 56,134,521
===========================================================
June 30, 2000:
Securities held to maturity:
Municipal securities ............ $ 499,988 $ -- $ (8,769) $ 491,219
Other bonds .............................. 75,000 -- (982) 74,018
-----------------------------------------------------------
$ 574,988 $ -- $ (9,751) $ 565,237
===========================================================
Securities available for sale:
U.S. Treasury securities ........ $ 3,000,406 $ -- $ (11,607) $ 2,988,799
U.S. agency securities ............ 40,199,557 23,275 (1,018,786) 39,204,046
Mortgage-backed securities .... 7,006,906 -- (297,413) 6,709,493
Municipal securities ................ 5,821,229 -- (300,577) 5,520,652
Trust preferred securities .... 919,495 -- (49,780) 869,715
Other securities ........................ 277,925 1,474 (18,042) 261,357
-----------------------------------------------------------
$ 57,225,518 $ 24,749 $ (1,696,205) $ 55,554,062
===========================================================
June 30, 1999:
Securities held to maturity:
Municipal securities ....... $ 699,415 $ 2,115 $ -- $ 701,530
Other bonds ................ 25,000 585 -- 25,585
-----------------------------------------------------------
$ 724,41557,225,518 $ 2,70024,749 $ --(1,696,205) $ 727,115
===========================================================
Securities available for sale:
U.S. Treasury securities ..... $ 9,001,845 $ 47,862 $ (4,866) $ 9,044,841
U.S. agency securities ....... 29,267,483 1,267 (390,870) 28,877,880
Mortgage-backed securities ... 8,390,795 5,319 (183,867) 8,212,247
Municipal securities ......... 3,180,714 40,741 (12,139) 3,209,316
Other securities ............. 197,464 102 (7,941) 189,625
-----------------------------------------------------------
$ 50,038,301 $ 95,291 $ (599,683) $ 49,533,90955,554,062
===========================================================
27
All sales of securities during the years ended June 30, 2001, 2000, 1999, and 19981999
were from securities identified as available for sale. Information on proceeds
received, as well as the gains and losses from the sale of those securities is
as follows:
2001 2000 1999 1998
------------------------------------
Proceeds from sales of securities ....... $1,262,841 $5,191,661 $ 280,786
$ 14,020Gross gains from sales of securities .... 11,831 22,366 5,474
Gross losses from sales of securities ... 25,878 50,587 1,717 --
Gross gains from sales of securities .... 22,366 5,474 8,734
The amortized cost and fair value of securities as of June 30, 20002001 by
contractual maturity are shown below. Expected maturities of mortgage-backed
securities may differ from contractual maturities because the mortgages
underlying the mortgage-backed securities may be called or prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary. Other securities are excluded from the
maturity categories as there is no fixed maturity date.
Amortized
Cost Fair Value
---------------------------
Securities held to maturity, due aftermaturity:
Due in one year or less ...................... $ 249,903 $ 250,609
Due in one year through five years ............................. 325,656 332,802
---------------------------
$ 574,988575,559 $ 565,237583,411
===========================
Securities available for sale:
Due in one year or less ...................... $ 5,999,7082,011,645 $ 5,967,0502,025,228
Due after one year through five years ........ 33,325,941 32,440,98028,818,511 29,359,855
Due after five years ......................... 10,615,038 10,175,18218,576,677 18,850,800
---------------------------
49,940,687 48,583,21249,406,833 50,235,883
Mortgage-backed securities ................... 7,006,906 6,709,4935,509,433 5,508,282
Other securities ............................. 277,925 261,357393,211 390,556
---------------------------
$57,225,518 $55,554,062$55,309,477 $56,134,721
===========================
As of June 30, 20002001 and 1999,2000, investment securities with a carrying value of
$33,718,441$37,120,191 and $23,399,384,$33,718,441, respectively, were pledged on public deposits and
for other purposes as required or permitted by law.
The Company transferred securities with an amortized cost of $1,029,096 and an
unrealized gain of $1,647 from the held to maturity portfolio to the available
for sale portfolio on January 4, 1999, based on management's reassessment of
their previous designations of securities giving consideration to liquidity
needs, management of interest rate risk, and other factors.
Note 4. Loans Receivable
The composition of the loan portfolio as of June 30, 20002001 and 19992000 is presented
as follows:
2001 2000 1999
----------------------------
Commercial ..................................... $209,888,773 $167,682,652 $136,206,893
Real estate .................................... 38,018,551 36,301,379 27,591,886
Real estate - construction ..................... 2,568,140 3,463,682 3,367,458
Installment and other consumer ................. 37,389,302 34,405,138
30,810,455
----------------------------
287,864,766 241,852,851 197,976,692
Less allowance for estimated losses on loans ... 4,248,182 3,617,401
2,895,457
----------------------------
$283,616,584 $238,235,450 $195,081,235
============================
Real estate loans include loans held for sale with a carrying value of
$1,121,474$5,823,820 and $2,033,025$1,121,474 as of June 30, 20002001 and 1999,2000, respectively. The market
value of these loans exceeded its carrying value at those dates.
28
Loans on nonaccrual status amounted to $382,745$1,231,741 and $1,287,727$382,745 as of June 30,
20002001 and 1999,2000, respectively. Foregone interest income and cash interest
collected on nonaccrual loans was not material during the years ended June 30,
2001, 2000, 1999, and 1998.1999.
Changes in the allowance for estimated losses on loans for the years ended June
30, 2001, 2000, 1999, and 19981999 are presented as follows:
2001 2000 1999 1998
-----------------------------------------
Balance, beginning ................................................ $ 3,617,401 $ 2,895,457 $ 2,349,838 $ 1,632,500
Provisions charged to expense ............ 889,670 1,051,818 891,800 901,976
Loans charged off ........................ (300,463) (426,708) (478,515) (205,234)
Recoveries on loans previously charged off 41,574 96,834 132,334
20,596
---------------------------------------------------------------------------------
Balance, ending ...................................................... $ 4,248,182 $ 3,617,401 $ 2,895,457 $ 2,349,838
=========================================
Impaired loans were not material as of June 30, 20002001 and 1999.2000.
The loan portfolio included a concentration of loans in certain industries as of
June 30, 20002001 as follows:
Industry Balance
- - --------------------------------------------------------------------------------
Commercial banks $ 12,182,901
Real estate operators and lessors 11,364,772$ 20,236,373
Retail eating establishments 8,889,778
Hospitals 4,981,975
Automotive dealers 4,932,96714,425,551
Commercial banks 13,889,782
Plumbing, HVAC 7,739,577
Real estate developers 4,790,558
Fabricated metal products 4,439,7927,288,725
Physicians 4,045,4476,845,206
Hospitals 6,662,132
Hardware, wholesale 6,654,391
Generally these loans are collateralized by assets of the borrowers. The loans
are expected to be repaid from cash flows or from proceeds from the sale of
selected assets of the borrowers. Credit losses arising from lending
transactions with these entities compare favorably with the Bank's credit loss
experience on its loan portfolio as a whole.
Loans are made in the normal course of business to directors, officers, and
their related interests. The terms of these loans, including interest rates and
collateral, are similar to those prevailing for comparable transactions with
other persons. An analysis of the changes in the aggregate amount of these loans
during the years ended June 30, 20002001 and 19992000 was as follows:
2001 2000
1999
------------------------------------------------------------
Balance, beginning ................... $ 5,829,187 $ 4,831,491
Advances ............................. 1,968,717 3,188,483
Repayments ........................... (879,099) (2,190,787)
--------------------------------
Balance, ending ...................... $ 6,918,805 $ 5,829,187
================================Net increase due to change in related parties 11,439,009 --
Advances ..................................... 6,509,174 1,968,717
Repayments ................................... (5,483,496) (879,099)
----------------------------
Balance, ending ................................ $ 19,383,492 $ 6,918,805
============================
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of June 30,
2001 and 2000:
2001 2000
and 1999:
2000 1999
---------------------------------------------------------
Land ....................................... $ 630,699813,400 $ 630,699
Buildings .................................. 5,536,999 5,003,570 4,634,608
Furniture and equipment .................... 5,309,098 4,324,866
3,955,489
---------------------------------------------------------
11,659,497 9,959,135 9,220,796
Less accumulated depreciation .............. 2,998,799 2,243,514
1,667,180
----------------------------
$7,715,621 $7,553,616
============================-----------------------------
$ 8,660,698 $ 7,715,621
=============================
29
Certain facilities are leased under operating leases. Rental expense was
$615,058, $451,097, $429,932, and $176,057$429,932 for the years ended June 30, 2001, 2000, and
1999, and
1998, respectively.
Future minimum rental commitments under noncancelable leases on a fiscal year
basis were as follows as of June 30, 2000:2001:
Year ending June 30:
2001 ...............................................2002 $ 394,115
2002 ............................................... 427,042486,358
2003 ............................................... 441,745501,061
2004 ............................................... 415,526462,485
2005 ............................................... 413,860
2006 397,766
Thereafter ......................................... 1,042,253
----------
$3,134,541
==========636,255
-----------
$ 2,897,785
===========
Note 6. Deposits
The aggregate amount of certificates of deposit each with a minimum denomination
of $100,000, was $50,814,599$50,298,560 and $37,103,749$50,814,599 as of June 30, 20002001 and 1999,2000,
respectively.
As of June 30, 2000,2001, the scheduled maturities of certificates of deposit were as
follows:
Year ending June 30:
2001 ............................................... $ 140,054,716
2002 ............................................... 10,032,255$129,590,003
2003 ............................................... 4,113,16114,389,452
2004 ............................................... 1,718,7792,396,708
2005 ............................................... 339,244
-------------
$ 156,258,155
=============366,522
2006 1,207,137
Thereafter 2,000,000
------------
$149,949,822
============
Note 7. Short-Term Borrowings
As of June 30, 2001 short-term borrowings of $28,342,542 consisted of overnight
repurchase agreements. Short-term borrowings as of June 30, 2000 of $20,771,724
consisted of federal funds purchased of $5,000,000 and overnight repurchase
agreements with customers of $15,771,724.
As of June 30, 1999 short-term borrowings of $9,685,877
represented federal funds purchased of $140,000 and overnight repurchase
agreements with customers of $9,545,877.
Information concerning repurchase agreements is summarized as follows as of June
30, 2001 and 2000:
2001 2000
and 1999:
2000 1999
----------------------------------------------------
Average daily balance during the year ........................... $21,584,795 $12,823,612 $ 4,248,238
Average daily interest rate during the year ............... 4.40% 4.35% 4.14%
Maximum month-end balance during the year ................... 28,342,542 18,784,998 11,418,714
Weighted average rate as of June 30 ............................... 4.34% 4.63% 3.99%
Securities underlying the agreements as of June 30:
Carrying value ..................................................................... $28,947,957 $24,397,505 $11,934,561
Fair value ............................................................................. 28,947,957 24,397,505 11,934,561
The securities underlying the agreements as of June 30, 20002001 and 19992000 were under
the Company's control in safekeeping at third-party financial institutions.
30
Note 8. Federal Home Loan Bank Advances
The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As of
June 30, 20002001 and 1999,2000, the Bank held $1,487,000 and $1,299,100, respectively,
of FHLB stock. Maturity and interest rate information on advances from the FHLB
as of June 30, 20002001 and 19992000 is as follows:
June 30, 2000
-------------------------2001
--------------------------
Weighted
Average
Amount Due Interest Rate
---------------------------------------------------
Maturity:
Year ending June 30:
2002 ......................................... $ 1,995,266 6.97%
2003 ......................................... 7,894,786 6.35
2004 ......................................... 1,815,009 5.90
2005 ......................................... 750,000 5.90
2006 ......................................... 700,000 6.28
Thereafter ................................... 16,557,697 5.12
-----------
Total FHLB advances ...................... $29,712,758 5.67
===========
June 30, 2001
--------------------------
Weighted
Average
Amount Due Interest Rate
--------------------------
Maturity:
Year ending June 30:
2001 ................................................................................... $ 3,250,000 6.45%
2002 ................................................................................... 2,027,195 6.96
2003 ................................................................................... 5,822,799 6.33
2004 ................................................................................... 1,885,915 5.88
2005 ................................................................................... 750,000 5.90
Thereafter .................................... 8,689,489 6.03
-----------
Total FHLB advances ............................................ $22,425,398 6.24
============
June 30, 1999
-------------------------
Weighted
Average
Amount Due Interest Rate
-------------------------
Maturity:
Year ending June 30:
2000 .......................................... $ 3,500,000 5.76%
2001 .......................................... 3,250,000 5.69
2002 .......................................... 2,057,063 6.96
2003 .......................................... 6,989,575 6.19
2004 .......................................... 1,953,075 5.87
Thereafter ...................................... 6,856,177 5.92
-----------
Total FHLB advances ............................. $24,605,890 6.03
===========
Advances from the FHLB are collateralized by 1-to-4 unit residential, commercial
real estate, and business mortgages equal to 130%, 175%, and 250%, respectively,
of total outstanding notes. Additionally, securities with a carrying value of
approximately none and $4.4 million as of June 30, 2001 and 2000, and $6.3
million as of June 30, 1999respectively,
were pledged as collateral on these advances.
Note 9. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures
The Company issued all of the 1,200,000 authorized shares of Company Obligated
Mandatorily Redeemable (COMR) Preferred Securities of Quad City Holdings Capital
Trust I Holding Solely Subordinated Debentures. Distributions are paid
quarterly. Cumulative cash distributions are calculated at a 9.2% annual rate.
The Company may, at one or more times, defer interest payments on the capital
securities for up to 20 consecutive quarters, but not beyond June 30, 2029. At
the end of any deferral period, all accumulated and unpaid distributions will be
paid. The capital securities will be redeemed on June 30, 2029; however, the
Company has the option to shorten the maturity date to a date not earlier than
June 30, 2004. The redemption price is $10 per capital security plus any accrued
and unpaid distributions to the date of redemption.
Holders of the capital securities have no voting rights, are unsecured and rank
junior in priority of payment to all of the Company's indebtedness and senior to
the Company's capital stock.
The debentures are included on the balance sheetsheets as of June 30, 20002001 and 19992000
as liabilities. For regulatory purposes, approximately $8,000,000 and $7,000,000
of the capital securities are allowed in the calculation of Tier I capital as of
June 30, 2001 and 2000, respectively, with the remainder allowed as Tier II
capital.
The capital securities are traded on the American Stock Exchange under the
symbol "CQP.PR.A".
31
Note 10. Other Borrowings
The Company has a revolving credit note for $3,000,000, which is secured by all
the outstanding stock of the Bank. There was no outstanding balance on this note
as of June 30, 20002001 and 1999.2000. The revolving credit note expiresexpired on July 1, 2001.
The note was renewed and increased to $10,000,000, effective July 1, 2001 with a
maturity three years from the date of funding. Interest is payable quarterly at
the adjusted LIBOR rate, as defined in the credit note agreement, and varies by
borrowing. As of June 30, 20002001 the borrowing rates ranged from 8.6%5.3% to 8.9%5.4%
depending on the repricing interval selected.
The revolving credit note agreement contains certain covenants that place
restrictions on additional debt and stipulate minimum capital and various
operating ratios.
The Company complied with all of the covenants or they were
waived as of June 30, 2000 and 1999.
Note 11. Restructuring of Merchant Broker Agreement
In June 1998, the Company recognized $2,168,000 of income as a result of signing
a new merchant broker agreement with an ISO.independent sales organization. The term
of the new agreement was for a minimum one-year period, and replaced a prior
agreement that had an expiration date in the year 2002. In consideration for
reducing the term from four years to a minimum of one year, the Company received
total compensation of $2,900,000. The Company recognized $732,000 and $2,168,000
of the income during the years ended June 30, 1999 and 1998, respectively. In
addition, the Company received monthly fees of $25,000 for servicing the current
merchants during the remaining term of the agreement, which expired May 31,
2000. In future years, if
agreements with other ISOs are not established, there could be a reduction in
income. The Company has added several new ISOsMerchant credit card fees decreased during the past year and
continues to actively pursue relationships with other ISOs.ended June 30, 2001 as
a result of the termination of this agreement.
Note 12. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components
for the years ended June 30, 2001, 2000, 1999, and 1998:1999:
Year Ended June 30,
-----------------------------------------------------------------------------------------------------
2001 2000 1999
1998
-----------------------------------------------------------------------------------------------------
Current ............. $ 1,522,895 $ 2,079,186 $ 1,381,903
$ 2,231,183
Deferred ............ (362,995) (398,971) 232,262
(553,283)
-----------------------------------------------------------------------------------------------------
$ 1,159,900 $ 1,680,215 $ 1,614,165
$ 1,677,900
=====================================================================================================
A reconciliation of the expected federal income tax expense to the income tax
expense included in the consolidated statements of income was as follows for the
years ended June 30, 2001, 2000, 1999, and 1998:1999:
Year Ended June 30,
----------------------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998
------------------------ ------------------------ ------------------------------------------------ ----------------------- ----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------------------------------------------------------------------------------------------
Computed "expected"
tax expense ............... $ 1,244,471 35.0% $ 1,549,010 35.0% $ 1,427,645 35.0% $ 1,424,910 35.0%
Effect of graduated tax rates (35,556) (1.0) (44,257) (1.0) (40,790) (1.0) (40,712) (1.0)
Tax exempt income, net ...... (147,396) (4.1) (132,769) (3.0) (46,853) (1.1) (19,759) (0.5)
State income taxes, net of
federal benefit ........... 132,546 3.7 172,445 3.9 126,123 3.1
268,796 6.6
Other ....................... (34,165) (1.0) 135,786 3.1 148,040 3.6
44,665 1.1
----------------------------------------------------------------------------------------------------------------------------------------------------
$ 1,159,900 32.6% $ 1,680,215 38.0% $ 1,614,165 39.6%
$ 1,677,900 41.2%
====================================================================================================================================================
32
The net deferred tax assets included with other assets on the balance sheet
consisted of the following as of June 30, 2001 and 2000:
2001 2000
and 1999:
2000 1999
-------------------------------------------
Deferred tax assets:
Net unrealized losses on securities available for sale $ 572,938-- $ 172,042572,938
Deferred compensation ................................ 180,863 112,299 --
Loan and credit card losses .......................... 1,701,189 1,357,186 1,063,999
Other ................................................ 65,651 69,380
23,801
----------------------
1,947,703 2,111,803 1,259,842
----------------------
Deferred tax liabilities:
Net unrealized gains on securities available for sale 319,122 --
Premises and equipment ............................... 469,893 447,330 406,302
Investment securities accretion ...................... 35,500 29,185 27,282
Other ................................................ 51,938 34,973
25,810
----------------------
876,453 511,488 459,394
----------------------
Net deferred tax asset ......................... $1,071,250 $1,600,315 $ 800,448
======================
The change in deferred income taxes was reflected in the financial statements as
follows for the years ended June 30, 2001, 2000, and 1999:
2001 2000 1999
and 1998:
2000 1999 1998
-----------------------------------------------------------------------
Provision for income taxes .............. $(362,995) $(398,971) $ 232,262 $(553,283)
Statement of stockholders' equity-
accumulated other comprehensive
income, unrealized gains (losses)
on securities available for sale, net . 892,060 (400,896) (176,680)
33,094
-----------------------------------------------------------------------
$ 529,065 $(799,867) $ 55,582
$(520,189)
=======================================================================
Note 13. Employee Benefit Plans
The Company has a profit sharing plan which includes a provision designed to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended,
to allow for participant contributions. All employees are eligible to
participate in the plan. The Company matches 100% of the first 2%3% of employee
contributions, and 50% of the next 2% of employee contributions, and 25% of the next
2%3% of employee contributions, up to a maximum
amount of 3.5%4.5% of an employee's compensation. Additionally, at its discretion,
the Company may make additional contributions to the plan which are allocated to
the accounts of participants in the plan based on relative compensation. Company
contributions for the years ended June 30, 2001, 2000, 1999, and 19981999 were as follows:
2001 2000 1999 1998
------------------------------------
Matching contribution ................ $240,960 $155,237 $132,835 $100,164
Discretionary contribution ........... 41,500 50,000 45,000
45,000
------------------------------------
$282,460 $205,237 $177,835 $145,164
====================================
During the year ended June 30, 2000, the Company entered into deferred
compensation agreements with certain executive officers. Under the provisions of
the agreements the officers may defer compensation and the Company matches the
deferral up to certain maximums. The Company's matching contribution differs by
officer and is a maximum of either $15,000 or $20,000 annually. Interest is
computed at The Wall Street Journal prime rate, with a minimum of 8% and a
maximum of 10%. Upon retirement, the officer will receive the deferral balance
in 180 equal monthly installments. During the yearyears ended June 30, 2001 and
2000, the Company expensed $76,860$27,791 and $41,860, respectively, related to the
agreements. As of June 30, 2001 and 2000 the liability related to the agreements
totals $76,860.$139,651 and $76,860, respectively.
33
Note 14. Warrants and Stock Based Compensation
Warrants:
As part of the underwriting agreement for its initial public offering, the
Company issued warrants to the underwriters for the purchase of 37,500 shares
of common stock at $8 per share. The underwriters exercised all of the
warrants on May 6, 1997. The warrants became exercisable on October 13, 1994
(the date commencing one year from the date of the public offering) and would
have remained exercisable for a period of four years after such date.
Common stock of $75,000 as of June 30, 1993 represented 112,500 shares of the
Company's common stock issued in a private placement in 1993. Each
stockholder who purchased stock in the private placement received a unit (at
a price of $6.67 per unit) which consisted of one and one-half shares of the
Company's common stock and one and one-half warrants. Each warrant entitled
the holder to purchase an additional share of Company common stock for $7.33,
exercisable by October 13, 1999. During the years ended June 30, 2000 and
1999, 11,250 and 1998 11,250, 30,000, and 71,250, respectively, of the warrants were exercised leaving
none remaining as of June 30, 2000.
Stock option and incentive plans:
The Company's Board of Directors and its stockholders adopted in June 1993
the Quad City Holdings, Inc. Stock Option Plan (Stock Option Plan). Up to
150,000 shares of common stock may be issued to employees and directors of
the Company and its subsidiaries pursuant to the exercise of incentive stock
options or nonqualified stock options granted under the Stock Option Plan.
The Company's Board of Directors adopted in November 1996 the Quad City
Holdings, Inc. 1997 Stock Incentive Plan (Stock Incentive Plan). Up to
150,000 shares of common stock may be issued to employees and directors of
the Company and its subsidiaries pursuant to the exercise of nonqualified
stock options and restricted stock granted under the Stock Incentive Plan.
The Stock Option Plan and the Stock Incentive Plan are administered by the
compensation committee appointed by the Board of Directors (Committee).
The number and exercise price of options granted under the Stock Option Plan
and the Stock Incentive Plan is determined by the Committee at the time the
option is granted. In no event can the exercise price be less than the value
of the common stock at the date of the grant for incentive stock options. All
options have a 10-year life and will vest and become exercisable from 1-to-5
years after the date of the grant. Only nonqualified stock options have been
issued to date.
In the case of nonqualified stock options, the Stock Option Plan and the
Stock Incentive Plan provide for the granting of "Tax Benefit Rights" to
certain participants at the same time as these participants are awarded
nonqualified options. Each Tax Benefit Right entitles a participant to a cash
payment equal to the excess of the fair market value of a share of common
stock on the exercise date over the exercise price of the related option
multiplied by the difference between the rate of tax on ordinary income over
the rate of tax on capital gains (federal and state).
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been
recognized for grants made to date. Had compensation cost been determined
based on the fair value method prescribed in FASB Statement No. 123, reported
net income would not have changed by a material amount, and earnings per common share would not have changed by more than 2(cent), 2(cent), and 1(cent)been reduced to the
proforma amounts shown below for the years endedending June 30,30:
2001 2000 1999
and 1998, respectively.----------------------------------------
Net income:
As reported ..................... $2,395,732 $2,745,527 $2,464,821
Pro forma ....................... 2,325,404 2,690,807 2,421,462
Earnings per share:
Basic:
As reported ................... $ 1.06 $ 1.19 $ 0.98
Pro forma ..................... 1.03 1.17 0.96
Diluted:
As reported ................... 1.04 1.15 0.93
Pro forma ..................... 1.00 1.13 0.91
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date
with the following weighted-average assumptions for grants during the years
ended June 30, 2001, 2000, 1999, and 1998:1999: dividend rate of 0%: risk-free interest
rates based upon current rates at the date of grant (5.62%(5.21% to 6.68%6.81%);
expected lives of 10 years, and expected price volatility of 15.59%18.61% to
23.11%24.81%.
34
A summary of the stock option plans as of June 30, 2001, 2000, 1999, and 19981999 and
changes during the years ended on those dates is presented below:
2001 2000 1999 1998
----------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning ........ 189,005 $10.24 190,171 $ 9.36 190,887 $ 9.12
175,155 $ 7.89
Granted ..................... 50,200 10.52 25,900 14.83 8,500 18.03
19,062 20.92
Exercised ................... (150) 6.17 (26,060) 6.69 (720) 9.49
(75) 7.23
Forfeited ................... (2,618) 17.10 (1,006) 17.80 (8,496) 12.67 (3,255) 12.15
------- ------- -------
Outstanding, ending ........... 236,437 10.22 189,005 10.24 190,171 9.36 190,887 9.12
======= ======= =======
Exercisable, ending ........... 153,390 138,834 149,109 130,455
Weighted average fair value per
option of options granted
during the year ............. $ 5.17 $ 7.68 $ 8.88 $ 9.72
A further summary of options outstanding as of June 30, 20002001 is presented
below:
Options Outstanding
--------------------------------------------------------------------------
Options Exercisable
Weighted ----------------------------------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$6.00 to $6.83 110,320 3.5 years110,170 3.60 $ 6.68 110,320110,170 $ 6.68
$7.83 to $8.83 8,655 5.9 years8,640 4.92 8.75 7,0058,640 8.75
$10.00 to $11.67 750 6.8 years 11.67 45050,450 9.94 10.48 600 11.67
$12.69 to $13.25 11,000 9.6 years8.57 13.07 - -2,200 13.07
$13.33 to $13.67 21,735 7.0 years21,525 6.00 13.67 13,33517,430 13.66
$14.08 to $16.13 14,650 8.98 16.02 3,130 15.83
$17.75 to $21.33 36,545 9.0 years 18.42 7,724 20.3820,002 7.50 20.23 11,220 20.49
------- -------
189,005 138,834--------------
236,437 153,390
======= =====================
Stock appreciation rights:
Additionally, the Stock Incentive Plan allows the granting of stock
appreciation rights (SARs). SARs are rights entitling the grantee to receive
cash having a fair market value equal to the appreciation in the market value
of a stated number of shares from the date of grant. Like options, the number
and exercise price of SARs granted is determined by the Committee. The SARs
will vest 20% per year, and the term of the SAR may not exceed 10 years from
the date of the grant. As of June 30, 2001, 2000, and 1999 there were 90,850,
52,050, and 39,625 SARs, respectively, outstanding, with 28,200, 17,490, and
9,675, respectively, exercisable.
Note 15. Preferred Stock
In June 1999, the Company redeemed all 25 outstanding shares of Preferred Stock
for cash of $2,977,884. The stock was senior to common stock as to dividends,
liquidation, and redemption rights, and did not confer general voting rights.
The redemption amount was equal to the sum of (i) $100,000; plus (ii) a premium
in the amount of $9,750 multiplied by a fraction, the numerator of which was the
total number of calendar days the Preferred Stock being redeemed had been
outstanding and the denominator of which was 365.
35
Note 16. Regulatory Capital Requirements and Restrictions on Dividends
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions' assets and off-balance-sheet
items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to average total assets ratio (leverage ratio). In
addition, regulatory agencies consider the published capital levels as minimum
levels and may require a financial institution to maintain capital at higher
levels.
The actual amounts and capital ratios as of June 30, 20002001 and 19992000 with the
minimum requirements for the Company and Bank are presented below:below (amounts in
thousands of dollars):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------------------------
As of June 30, 2001:
Company:
Total risk based capital $39,351 12.2% $25,863 8.0% $32,329 10.0%
Tier 1 risk based capital 31,228 9.7 12,932 4.0 19,397 6.0
Leverage ratio .......... 31,228 7.8 16,044 4.0 20,055 5.0
Bank:
Total risk based capital $32,506 10.2% $25,464 8.0% $31,830 10.0%
Tier 1 risk based capital 28,524 9.0 12,732 4.0 19,098 6.0
Leverage ratio .......... 28,524 7.3 15,693 4.0 19,616 5.0
As of June 30, 2000:
Company:
Total risk based capital $ 36,522,000$36,522 13.5% $ 21,689,000 >$21,689 8.0% $ 27,112,000 >$27,112 10.0%
--- ---
Tier 1 risk based capital 28,173,00028,173 10.4 10,845,000 >10,845 4.0 16,267,000 >16,267 6.0
--- ---
Leverage ratio 28,173,000.......... 28,173 8.1 13,988,000 >13,988 4.0 17,485,000 >17,485 5.0
--- ---
Bank:
Total risk based capital $ 28,363,000$28,363 10.7% $ 21,165,000 >$21,165 8.0% $ 26,457,000 >$26,457 10.0%
--- ---
Tier 1 risk based capital 25,052,00025,052 9.5 10,583,000 >10,583 4.0 15,874,000 >15,874 6.0
--- ---
Leverage ratio 25,052,000.......... 25,052 7.4 13,481,000 >13,481 4.0 16,852,000 >16,852 5.0
--- ---
As of June 30, 1999:
Company:
Total risk based capital $ 33,695,000 13.8% $ 19,476,000 > 8.0% $ 24,345,000 > 10.0%
--- ---
Tier 1 risk based capital 25,060,000 10.3 9,738,000 > 4.0 14,607,000 > 6.0
--- ---
Leverage ratio 25,060,000 8.0 12,523,000 > 4.0 15,603,000 > 5.0
--- ---
Bank:
Total risk based capital $ 25,139,000 11.3% $ 17,875,000 > 8.0% $ 22,344,000 > 10.0%
--- ---
Tier 1 risk based capital 22,244,000 10.0 8,938,000 > 4.0 13,406,000 > 6.0
--- ---
Leverage ratio 22,244,000 7.2 12,374,000 > 4.0 15,467,000 > 5.0
--- ---
Federal Reserve Board policy provides that a bank holding company should not pay
dividends unless (i) the dividends can be fully funded out of net income from
the company's net earnings over the prior year and (ii) the prospective rate of
earnings retention appears consistent with the company's (and its subsidiaries')
capital needs, asset quality, and overall financial condition.
In addition, the Delaware General Corporation Law restricts the Company from
paying dividends except out of its surplus, or in the case there shall be no
such surplus, out of its net profits for the fiscal year in which the dividend
is declared and/or the preceding fiscal year.
The Iowa Banking Act provides that an Iowa bank may not pay dividends in an
amount greater than its undivided profits. In addition, the Bank, as a member of
the Federal Reserve System, will be prohibited from paying dividends to the
extent such dividends declared in any calendar year exceed the total of its net
profits of that year combined with its retained net profits of the preceding two
years, or are otherwise determined to be an "unsafe and unsound practice" by the
Federal Reserve Board.
36
Note 17. Earnings Per Common Share
The following information was used in the computation of basic and diluted
earnings per common share for the years ended June 30, 2001, 2000, 1999, and 1998:
2000 1999 1998
----------------------------------
Basic and diluted earnings, net income ..... $2,745,527 $2,464,821 $2,393,272
==================================
Weighted average common shares outstanding . 2,309,453 2,285,500 2,196,297
Weighted average common shares issuable upon
exercise of stock options and warrants ..... 76,387 113,025 157,635
----------------------------------
Weighted average common and common
equivalent shares outstanding .............. 2,385,840 2,398,525 2,353,932
==================================1999:
2001 2000 1999
------------------------------------
Basic and diluted earnings, net income ............. $2,395,732 $2,745,527 $2,464,821
Less accretion of preferred stock redemption premium -- -- 231,062
------------------------------------
Income available to common stockholders .... $2,395,732 $2,745,527 $2,233,759
====================================
Weighted average common shares outstanding ......... 2,268,465 2,309,453 2,285,500
Weighted average common shares issuable upon
exercise of stock options and warrants ........... 45,869 76,387 113,025
------------------------------------
Weighted average common and common
equivalent shares outstanding .................... 2,314,334 2,385,840 2,398,525
====================================
Note 18. Commitments and Contingencies
In the normal course of business, the Bank makes various commitments and incurs
certain contingent liabilities that are not presented in the accompanying
consolidated financial statements. The commitments and contingent liabilities
include various guarantees, commitments to extend credit, and standby letters of
credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based upon
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, marketable securities, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
As of June 30, 20002001 and 1999,2000, commitments to extend credit aggregated
$74,934,000$91,893,000 and $58,119,081,$74,934,000, respectively. As of June 30, 20002001 and 1999,2000, standby
letters of credit aggregated $957,000$1,686,000 and $551,500,$957,000, respectively. Management
does not expect that all of these commitments will be funded.
Bancard is subject to the risk of chargebacks from cardholders and the merchant
being incapable of refunding the amount charged back. Management attempts to
mitigate such risk by regular monitoring of merchant activity and in appropriate
cases, holding cash reserves deposited by the merchant.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed up by a performance bond in the amount of $1,000,000. As of June 30,
20002001 there were no significant pending liabilities.
37
Bancard is the holder of an account receivable in the approximate amount of
$1,700,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova
Corporation (trading symbol NIS on the New York Stock Exchange). This receivable
arises pursuant to Bancard's provision of electronic credit card sales
authorization and settlement services to PMT pursuant to a written contract that
includes PMT's obligation to indemnify Bancard for credit card chargeback losses
arising from those services. PMT has failed to timely pay Bancard for monthly
invoices, including service charges and substantial chargeback losses, for the
period beginning May 2000. Bancard intends to vigorously pursue collection of
this receivable. On September 25, 2000, PMT filed a lawsuit in federal court in
Los Angeles, California, against Bancard and the Company. This lawsuit alleges
tortuous acts and breaches of contract by Bancard, the Company, and others and
seeks recovery from Bancard and the Company of not less than $3,600,000 of
alleged actual damages, plus punitive damages. Bancard and the Company filed
lawsuits in federal and state courts in Davenport, Iowa against PMT. These
lawsuits sought a court order compelling PMT to participate in arbitration in
Bettendorf, Iowa, as provided for in the pertinent contract documents, and to
resolve the disputes between PMT, Bancard and the Company, including the unpaid
account receivable. The federal court in Iowa ruled that the arbitration issue
should be determined by the state court in Iowa. Subsequently, the Iowa District
Court of Scott County ruled that all claims, including the tort claims, must be
arbitrated in Iowa. Because of that ruling, the California lawsuit was
dismissed, and arbitration is pending. Bancard and the Company continue to
believe that PMT's allegations are without merit and will vigorously pursue the
collection of the receivable and the defense of PMT's claims.
Aside from cash on-hand and in-vault, the majority of the Company's cash is
maintained at upstream correspondent banks. The total amount of cash on deposit,
certificates of deposit, and federal funds sold exceeded federal insured limits
by $31,794,780$15,146,866 and $44,004,699$31,794,780 as of June 30, 20002001 and 1999,2000, respectively. In
the opinion of management, no material risk of loss exists due to the financial
condition of the upstream correspondent banks.
Note 19. Quarterly Results of Operations (Unaudited)
Year Ended June 30, 2000
-------------------------------------------------
September December March June
1999 1999 2000 2000
-------------------------------------------------
Total interest income ................ $5,800,637 $5,935,251 $5,952,519 $6,390,791
Total interest expense ............... 3,102,826 3,329,541 3,299,703 3,556,523
-------------------------------------------------
Net interest income .......... 2,697,811 2,605,710 2,652,816 2,834,268
Provision for loan losses ............ 274,700 296,800 85,600 394,718
Noninterest income ................... 1,372,113 1,623,759 1,624,409 1,534,135
Noninterest expenses ................. 2,773,541 2,727,889 2,960,061 3,005,970
-------------------------------------------------
Net income before income taxes 1,021,683 1,204,780 1,231,564 967,715
Federal and state income taxes ....... 389,035 461,860 471,890 357,430
-------------------------------------------------
Net income ................... $ 632,648 $ 742,920 $ 759,674 $ 610,285
=================================================
Earnings per common share:
Basic .............................. $ 0.28 $ 0.32 $ 0.33 $ 0.26
Diluted ............................ 0.26 0.31 0.32 0.26
Year Ended June 30, 1999
-------------------------------------------------
September December March June
1998 1998 1999 1999
-------------------------------------------------
Total interest income ................ $4,785,014 $4,949,961 $4,948,755 $5,432,190
Total interest expense ............... 2,692,979 2,718,434 2,673,931 2,941,342
-------------------------------------------------
Net interest income .......... 2,092,035 2,231,527 2,274,824 2,490,848
Provision for loan losses ............ 252,000 174,200 218,200 247,400
Noninterest income ................... 1,191,066 1,329,819 1,437,189 1,602,377
Noninterest expenses ................. 2,301,829 2,376,376 2,472,977 2,527,717
-------------------------------------------------
Net income before income taxes 729,272 1,010,770 1,020,836 1,318,108
Federal and state income taxes ....... 290,451 391,314 406,889 525,511
-------------------------------------------------
Net income ................... $ 438,821 $ 619,456 $ 613,947 $ 792,597
=================================================
Earnings per common share:
Basic .............................. $ 0.19 $ 0.27 $ 0.27 $ 0.35
Diluted ............................ 0.18 0.26 0.25 0.34
Year Ended June 30, 1998
-------------------------------------------------
September December March June
1997 1997 1998 1998
-------------------------------------------------
Total interest income ................ $3,305,107 $3,617,832 $3,797,383 $4,356,245
Total interest expense ............... 1,757,272 1,963,477 2,157,917 2,463,355
-------------------------------------------------
Net interest income .......... 1,547,835 1,654,355 1,639,466 1,892,890
Provision for loan losses ............ 304,355 215,643 233,260 148,718
Noninterest income ................... 922,495 872,117 1,134,103 3,219,702
Noninterest expenses ................. 1,606,833 1,706,098 2,048,517 2,548,367
-------------------------------------------------
Net income before income taxes 559,142 604,731 491,792 2,415,507
Federal and state income taxes ....... 218,200 237,075 191,425 1,031,200
-------------------------------------------------
Net income ................... $ 340,942 $ 367,656 $ 300,367 $1,384,307
=================================================
Earnings per common share:
Basic .............................. $ 0.15 $ 0.17 $ 0.14 $ 0.63
Diluted ............................ 0.14 0.15 0.13 0.60
Year Ended June 30, 2001
-------------------------------------------------
September December March June
2000 2000 2001 2001
-------------------------------------------------
Total interest income ........ $6,978,039 $7,264,701 $7,279,539 $7,021,657
Total interest expense ....... 4,119,175 4,323,023 4,313,369 3,856,182
-------------------------------------------------
Net interest income .. 2,858,864 2,941,678 2,966,170 3,165,475
Provision for loan losses .... 176,075 343,800 148,374 221,421
Noninterest income ........... 1,372,085 1,415,496 1,632,061 1,893,426
Noninterest expenses ......... 3,077,638 3,466,171 3,471,466 3,784,678
-------------------------------------------------
Net income before
income taxes ......... 977,236 547,203 978,391 1,052,802
Federal and state income taxes 316,987 203,258 355,520 284,135
-------------------------------------------------
Net income ........... $ 660,249 $ 343,945 $ 622,871 $ 768,667
=================================================
Earnings per common share:
Basic ...................... $ 0.29 $ 0.15 $ 0.28 $ 0.34
Diluted .................... 0.28 0.15 0.27 0.34
38
Year Ended June 30, 2000
-------------------------------------------------
September December March June
1999 1999 2000 2000
-------------------------------------------------
Total interest income ........ $5,800,637 $5,935,251 $5,952,519 $6,390,791
Total interest expense ....... 3,102,826 3,329,541 3,299,703 3,556,523
-------------------------------------------------
Net interest income .. 2,697,811 2,605,710 2,652,816 2,834,268
Provision for loan losses .... 274,700 296,800 85,600 394,718
Noninterest income ........... 1,372,113 1,623,759 1,624,409 1,534,135
Noninterest expenses ......... 2,773,541 2,727,889 2,960,061 3,005,970
-------------------------------------------------
Net income before
income taxes ......... 1,021,683 1,204,780 1,231,564 967,715
Federal and state income taxes 389,035 461,860 471,890 357,430
-------------------------------------------------
Net income ........... $ 632,648 $ 742,920 $ 759,674 $ 610,285
=================================================
Earnings per common share:
Basic ...................... $ 0.28 $ 0.32 $ 0.33 $ 0.26
Diluted .................... 0.26 0.31 0.32 0.26
Year Ended June 30, 1999
-------------------------------------------------
September December March June
1998 1998 1999 1999
-------------------------------------------------
Total interest income ........ $4,785,014 $4,949,961 $4,948,755 $5,432,190
Total interest expense ....... 2,692,979 2,718,434 2,673,931 2,941,342
-------------------------------------------------
Net interest income .. 2,092,035 2,231,527 2,274,824 2,490,848
Provision for loan losses .... 252,000 174,200 218,200 247,400
Noninterest income ........... 1,191,066 1,329,819 1,437,189 1,602,377
Noninterest expenses ......... 2,301,829 2,376,376 2,472,977 2,527,717
-------------------------------------------------
Net income before
income taxes ......... 729,272 1,010,770 1,020,836 1,318,108
Federal and state income taxes 290,451 391,314 406,889 525,511
-------------------------------------------------
Net income ........... $ 438,821 $ 619,456 $ 613,947 $ 792,597
=================================================
Earnings per common share:
Basic ...................... $ 0.17 $ 0.24 $ 0.24 $ 0.33
Diluted .................... 0.16 0.23 0.23 0.31
39
Note 20. Parent Company Only Financial Statements
The following is condensed financial information of Quad City Holdings, Inc.
(parent company only):
Condensed Balance Sheets
June 30,
----------------------------
ASSETS 2001 2000
1999
- - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks .......................................................... $ 1,803,841723,209 $ 4,911,3671,803,841
Securities available for sale, at fair value ................ 1,419,536 1,131,073 189,625
Investment in Quad City Bank and Trust Company ............ 28,986,909 23,992,847 21,916,436
Investment in Quad City Bancard, Inc. .............................. 3,296,760 2,529,026 1,432,802
Investment in Quad City Holdings Capital Trust I ........ 390,432 380,000390,432
Net loans receivable ................................................................ 145,106 532,443 --
Other assets ................................................................................ 1,517,166 1,895,581 1,984,519
----------------------------
Total assets ................................................................ $ 32,275,24336,479,118 $ 30,814,74932,275,243
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Liabilities:
COMR preferred securities of subsidiary trust .......... $ 12,000,000 $ 12,000,000
Other liabilities .................................................................. 661,658 203,824 341,278
----------------------------
Total liabilities ...................................................... 12,661,658 12,203,824 12,341,278
----------------------------
Stockholders' Equity:
Common stock ............................................................................ 2,325,566 2,325,416 2,296,251
Additional paid-in capital ................................................ 12,148,759 12,147,984 11,959,080
Retained earnings .................................................................. 9,691,749 7,296,017 4,550,490
Accumulated other comprehensive income (loss) ................. 505,922 (1,098,518) (332,350)
Less cost of common shares acquired for the treasury .......................................(854,536) (599,480) --
----------------------------
Total stockholders' equity .................................... 23,817,460 20,071,419 18,473,471
----------------------------
Total liabilities and stockholders' equity ............ $ 32,275,24336,479,118 $ 30,814,74932,275,243
============================
Condensed Statements of Income
Year Ended June 30,
----------------------------------------------------------------------------
2001 2000 1999
1998
- - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total interest income .................................... $ 170,319 $ 197,387 $ 78,763
$ 48,178
Investment securities gains (losses), net ......................................... (25,753) 21,983 5,474 8,734
Equity in net income of Quad City Bank and
Trust Company .......................................... 3,471,422 2,808,058 2,212,931 1,208,090
Equity in net income of Quad City Bancard, Inc. .......... 184,234 596,224 564,886 1,325,992
Equity in net income of Quad City Holdings Capital Trust I -- 10,432 -- --
Other .................................................... (7,745) 233,927 85,945
81,435
---------------------------------------------------------------------------
Total income ..................................... 3,792,477 3,868,011 2,947,999
2,672,429
----------------------------------------------------------------------------
Interest expense ......................................... 1,134,541 1,137,402 220,794
129,271
Other .................................................... 958,504 583,282 495,284
304,186
----------------------------------------------------------------------------
Total expenses ................................... 2,093,045 1,720,684 716,078
433,457
---------------------------------------------------------------------------
Income before income tax
benefit ........................................................... 1,699,432 2,147,327 2,231,921 2,238,972
Income tax benefit ....................................... 696,300 598,200 232,900
154,300
----------------------------------------------------------------------------
Net income ....................................... $2,745,527 $2,464,821 $2,393,272
====================================$ 2,395,732 $ 2,745,527 $ 2,464,821
========================================
40
Condensed Statements of Cash Flows
Year Ended June 30,
--------------------------------------------
2001 2000 1999
1998
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ....................................................................................... $ 2,395,732 $ 2,745,527 $ 2,464,821 $ 2,393,272
Adjustments to reconcile net income to net cash
provided by (used in)used in operating activities:
Distributions in excess of (less than) earnings of:
Quad City Bank and Trust Company ................................... (3,471,422) (2,808,058) (2,212,931) (1,208,090)
Quad City Bancard, Inc. ..................................................... 132,266 (596,224) (564,886) 574,008
Quad City Holdings Capital Trust I ............................... -- (10,432) --
--
Depreciation ............................................................................... 3,541 4,543 4,036 3,520
Provision for loan losses ..................................................... (3,790) 6,000 (7,500)
--
Investment securities gains,(gains) losses, net .............................. 25,753 (21,983) (5,474) (8,734)
Tax benefit of nonqualified stock options exercised ..-- 81,178 3,218 --
(Increase) decrease in accrued interest receivable ...(2,802) (20,140) 4,780 749
(Increase) decrease in other assets ................................. 317,712 130,943 (770,199) (605,877)
Increase (decrease) in other liabilities ....................... 457,834 (137,454) 220,129 (14,606)
--------------------------------------------
Net cash provided by (used in)used in operating activities ................................................ (145,176) (626,100) (864,006) 1,134,242
--------------------------------------------
Cash Flows from Investing Activities:
Purchase of securities available for sale ......................... (269,279) (1,228,400) (67,400) (5,958)
Proceeds from sale of securities available for sale ..... 99,247 250,426 32,865 14,020
Capital infusion, Quad City Bank and
Trust Company .......................................... -- -- (2,000,000) (3,200,000)
Capital infusion, Quad City Bancard, Inc. ......................... (900,000) (500,000) (500,000) --
Capital infusion, Quad City Holdings Capital Trust I ..-- -- (380,000) --
Net loans (originated) repaid ................................................. 391,127 (538,443) 510,344
(169,850)
(Purchase) disposalPurchase of premises and equipment ............................ (2,420) (2,420) 10,623(2,420)
--------------------------------------------
Net cash (used in)used in investing activities ................... (681,325) (2,018,837) (2,406,611) (3,351,165)
--------------------------------------------
Cash Flows from Financing Activities:
Net (decrease)decrease in other borrowings ......................................... -- -- (1,500,000) --
Proceeds from issuance of preferred securities of
subsidiary trust ....................................................................... -- -- 12,000,000 --
Redemption of preferred stock ................................................. -- -- (2,977,884) --
Purchase of treasury stock ....................................................... (255,056) (599,480) -- --
Proceeds from issuance of preferred stock .............. -- -- 1,500,000
Proceeds from issuance of common stock, net of
simultaneous redemptions ......................................................... 925 136,891 225,940 523,043
--------------------------------------------
Net cash provided by (used in) financing
activities .................................... (254,131) (462,589) 7,748,056 2,023,043
--------------------------------------------
Net increase (decrease) in cash and
due from banks ....................................... (1,080,632) (3,107,526) 4,477,439 (193,880)
Cash and due from banks:
Beginning ......................................................................................... 1,803,841 4,911,367 433,928
627,808
--------------------------------------------
Ending ............................................................................................... $ 723,209 $ 1,803,841 $ 4,911,367
$ 433,928
============================================
41
Note 21. Fair Value of Financial Instruments
FASB Statement No. 107 "Disclosures about Fair Value of Financial Instruments"
requires disclosures of fair value information about financial instruments for
which it is practicable to estimate that value. When quoted market prices are
not available, fair values are based on estimates using present value or other
techniques. Those techniques are significantly affected by the assumptions used,
including the discounted rates and estimates of future cash flows. In this
regard, fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
settlement. Some financial instruments and all nonfinancial instruments are
excluded from the disclosures. The aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of their financial instruments.
Cash and due from banks, federal funds sold, and certificates of deposit at
financial institutions: The carrying amounts reported in the balance sheets
for cash and due from banks, federal funds sold, and certificates of deposit
at financial institutions equal their fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: The fair values for variable rate loans equal their
carrying values. The fair values for all other types of loans are estimated
using discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers with similar credit
quality.
Accrued interest receivable and payable: The fair value of accrued interest
receivable and payable is equal to its carrying value.
Deposits: The fair values disclosed for demand deposits equal their carrying
amounts, which represents the amount payable on demand. Fair values for time
deposits are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on time deposits to a schedule of
aggregate expected monthly maturities on time deposits.
Short-term borrowings: The fair value for short-term borrowings is equal to
its carrying value.
Federal Home Loan Bank advances and Company obligated mandatorily redeemable
preferred securities: The fair value of the Company's Federal Home Loan Bank
advances and Company obligated mandatorily redeemable preferred securities is
estimated using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Commitments to extend credit: The fair value of these commitments is not
material.
The carrying values and estimated fair values of the Company's financial
instruments as of June 30, 20002001 and 19992000 are presented as follows:
2001 2000 1999
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------------------------------------------------
Cash and due from banks .......................... $ 15,130,35720,217,219 $ 20,217,219 $ 15,130,357 $ 8,528,195 $ 8,528,19515,130,357
Federal funds sold ............................... 7,775,000 7,775,000 26,105,000 26,105,000 39,125,000 39,125,000
Certificates of deposit at financial institutions 10,512,585 10,512,585 12,776,463 12,776,463 12,535,193 12,535,193
Investment securities:
Held to maturity ............................... 575,559 583,411 574,988 565,237 724,415 727,115
Available for sale ............................. 56,134,521 56,134,521 55,554,062 55,554,062 49,533,909 49,533,909
Loans receivable, net ............................ 283,616,584 289,206,000 238,235,450 237,441,000 195,081,235 196,217,000
Accrued interest receivable ...................... 2,863,178 2,863,178 2,633,120 2,633,120
2,006,503 2,006,503
Deposits ......................................... 302,155,224 302,813,000 288,066,756 287,771,000 247,965,879 248,312,000
Short-term borrowings ............................ 28,342,542 28,342,542 20,771,724 20,771,724 9,685,877 9,685,877
Federal Home Loan Bank advances .................. 29,712,759 29,977,000 22,425,398 22,287,000 24,605,890 24,742,000
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures ........................ 12,000,000 11,896,15412,206,596 12,000,000 12,000,00011,896,154
Accrued interest payable ......................... 1,852,2672,394,489 2,394,489 1,852,267 1,588,263 1,588,2631,852,267
42
Note 22. Business Segment Information
Selected financial information on the Company's business segments is presented
as follows for the years ended June 30, 2001, 2000, 1999, and 1998:1999:
Year Ended June 30,
--------------------------------------------------------------------------------------------
2001 2000 1999
1998
--------------------------------------------------------------------------------------------
Quad City Holdings, Inc.:Commercial banking:
Revenue ........................................... $ 265,204 $ 48,485 $ 114,347...................... 30,786,066 25,563,964 22,040,065
Net income (loss) ................................. (839,280) (312,996) (140,810)................... 2,818,311 2,446,654 1,881,433
Assets ............................................ 3,696,110 2,182,658 1,906,958....................... 394,223,857 361,927,225 317,059,752
Depreciation ...................................... 4,543 4,036 3,520................. 724,330 584,872 589,287
Capital expenditures .............................. 2,420 2,420 --
Quad City Bank and Trust Company, excluding
Trust Department:......... 1,702,763 751,653 451,535
Merchant credit card processing:
Revenue ........................................... 25,563,964 22,040,065 16,408,561...................... 1,883,540 2,520,136 2,067,303
Net income ........................................ 2,446,654 1,881,433 947,510................... 220,890 674,800 564,886
Assets ............................................ 361,927,225 317,059,752 247,441,852....................... 3,672,002 1,998,280 2,103,805
Depreciation ...................................... 584,872 589,287 389,177................. 42,859 46,423 33,752
Capital expenditures .............................. 751,653 451,535 2,870,009
Quad City Bancard, Inc.:......... 10,624 43,770 66,468
Trust management:
Revenue ........................................... 2,520,136 2,067,303 3,563,574...................... 2,071,971 1,884,310 1,520,518
Net income ........................................ 674,800 564,886 1,325,992
Assets ............................................ 1,998,280 2,103,805 802,179
Depreciation ...................................... 46,423 33,752 29,660
Capital expenditures .............................. 43,770 66,468 28,786
Trust Department, Quad City Bank and Trust Company:
Revenue ........................................... 1,884,310 1,520,518 1,138,502
Net income ........................................................... 523,670 463,353 331,498
260,580
Assets ................................................................... N/A N/A N/A
Depreciation ....................................................... N/A N/A N/A
Capital expenditures ....................................... N/A N/A N/A
N/AAll other:
Revenue ...................... $ 115,427 $ 265,204 $ 48,485
Net income (loss) ............ (1,167,139) (839,280) (312,996)
Assets ....................... 3,052,075 3,696,110 2,182,658
Depreciation ................. 3,541 4,543 4,036
Capital expenditures ......... 2,420 2,420 2,420
Note 23. Business Expansion
The Company is in the process of raising additional equity capital of
approximately $5,000,000 through a private placement of its common stock. In
April 2001, the Company announced plans to expand its banking operations to the
Cedar Rapids, Iowa market. The Cedar Rapids operation is currently functioning
as a branch of the Bank. The Company has filed the required regulatory
applications to obtain a separate bank charter in the Cedar Rapids market, to be
named Cedar Rapids Bank and Trust Company. Expectations are to convert the
branch operations into this newly chartered bank upon receiving regulatory
approval, which is likely to occur in the fall of 2001. The proceeds of the
private placement of common stock will be used to assist with capitalization of
the new bank. Cedar Rapids Bank and Trust Company will operate as a wholly-owned
subsidiary of the Company, with a Cedar Rapids based executive management team
and a predominantly local Board of Directors. Concurrent with the establishment
of Cedar Rapids Bank & Trust Company, the Company plans to change its name to
QCR Holdings, Inc.
43
Item 9. Changes Inin and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers Promoters and Control Persons of the Registrant
The information required by this item is set forth under the caption "Election
of Directors" in the Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under the caption "Executive
Compensation" in the Proxy Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners" in the Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the captions "Security
Ownership of Certain Beneficial Owners" and "Transactions with Management" in
the Proxy Statement, and is incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated Financial
Statements under Item 8.
(a) 2. Financial Statement Schedules
Financial Statement Schedules have beenstatement schedules are omitted, becauseas they are not required or
are not applicable, or the required information is shown in the
consolidated financial statements and the accompanying notes thereto.
44
(a) 3. Exhibits
The following exhibits are either filed as a part of this Annual Report
on Form 10-k or are incorporated herein by reference:
Exhibit Number. Exhibit Description
3.1 Certificate of Incorporation of Quad City Holdings, Inc., as amended (incorporated herein by
reference to Exhibit 3.1 of Registrant's Form SB-2, File No. 33-67028).
3.2 Bylaws of Quad City Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 of Registrant's
Form SB-2, File No. 33-67028).
4.1 Specimen Stock Certificate of Quad City Holdings, Inc (incorporated herein by reference to
Exhibit 4.1 of Registrant's Form SB-2, File No. 33-67028).
10.1 Employment Agreement between Quad City Holdings, Inc., Quad City Bank and Trust Company and
Michael A. Bauer dated July 1, 2000 (incorporated herein by reference to Exhibit 10.1 of Registrant's
Annual Report or Form 10-K for the year ended June 30, 2000).
10.2 Employment Agreement between Quad City Holdings, Inc., Quad City Bank and Trust Company and
Douglas M. Hultquist dated July 1, 2000 (incorporated herein by reference to Exhibit 10.2 of
Registrant's Annual Report on Form 10-K for the year ended June 30, 2000).
10.3 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Michael A.
Bauer dated June 28, 2000 (incorporated herein by reference to Exhibit 10.3 of Registrant's Annual
Report on Form 10-K for the year ended June 30, 2000).
10.4 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Douglas M.
Hultquist dated June 28, 2000 (incorporated herein by reference to Exhibit 10.4 of Registrant's
Annual Report on Form 10-K for the year ended June 30, 2000).
10.5 Lease Agreement between Quad City Bank and Trust Company and 56 Utica L.L.C. (incorporated herein by
reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the year ended June 30,
2000).
10.6 Employment Agreement between Quad City Bank and Trust Company and Larry J. Helling dated April 11,
2001 (exhibit is being filed herewith).
10.7 Lease Agreement between Quad City Bank and Trust Company and Ryan Companies (exhibit is being filed
herewith).
12.1 Statement re: Computation of Ratios (exhibit is being filed herewith).
21.1 Subsidiaries of Quad City Holdings, Inc. (exhibit is being filed herewith).
23.1 Consent of Independent Accountant - McGladrey and Pullen LLP (exhibit is being filed herewith).
(b) Reports on Form 8-K
Quad City filed a current report on Form 8-K dated April 5,
2000 with the Securities and
Exchange Commission on June 9,
2000.April 18, 2001 under Item 5 which reported
information on it's expansion into Cedar Rapids, Iowa in the format of
a press release.
(c) Exhibits
TheExhibits to the Form 10-K required by Item 601 of Regulation S-K are
attached or incorporated herein by reference as stated in the Index to
Exhibits appears at page xx of this report.Exhibits.
(d) Financial Statements Excluded from Annual Report to Shareholders
Pursuant to Rule 14a3(b)
Not applicable
45
AppendixAPPENDIX A
SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance of
Quad City Holdings, Inc. (the "Company") can be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statutes and regulations and the policies of
various governmental regulatory authorities, including the Iowa Superintendent
of Banking (the "Superintendent"), the Board of Governors of the Federal Reserve
System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the
"FDIC"), the Internal Revenue Service and state taxing authorities and the
Securities and Exchange Commission (the "SEC"). The effect of applicable
statutes, regulations and regulatory policies can be significant, and cannot be
predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to the Company and its subsidiaries
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply to the Company and
its subsidiaries, nor does it restate all of the requirements of the statutes,
regulations and regulatory policies that are described. As such, the following
is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
Recent Regulatory Developments
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November, 1999,
allows eligible bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Act, an eligible bank holding company that elects to
become a financial holding company may engage in any activity that the Federal
Reserve, in consultation with the Secretary of the Treasury, determines by
regulation or order is financial in nature, incidental to any such financial
activity, or complementary to any such financial activity and does not pose a
substantial risk to the safety or soundness of depository institutions or the
financial system generally. National banks are also authorized by the Act to
engage, through "financial subsidiaries," in certain activity that is
permissible for financial holding companies (as described above) and certain
activity that the Secretary of the Treasury, in consultation with the Federal
Reserve, determines is financial in nature or incidental to any such financial
activity.
Various bank regulatory agencies have begun issuing regulations as mandated by
the Act. During June 2000, all of the federal bank regulatory agencies jointly
issued regulations implementing the privacy provisions of the Act. In addition,
the Federal Reserve issued interim regulations establishing procedures for bank
holding companies to elect to become financial holding companies and listing the
financial activities permissible for financial holding companies, as well as
describing the extent to which financial holding companies may engage in
securities and merchant banking activities. The Federal Reserve has issued an
interim regulation regarding the parameters under which state member banks may
establish and maintain financial subsidiaries. At this time, it is not possible
to predict the impact the Act and its implementing regulations may have on the
Company. As of the date of this filing, the Company has not applied for or
received approval to operate as a financial holding company. In addition, the
Quad City Bank and Trust Company, a banking subsidiary of the Company (the
"Bank"), has not applied for or received approval to establish financial
subsidiaries.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company
Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve may require.
Investments and Activities. Under the BHCA, a bank holding company must obtain
Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating with another
bank holding company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United States
without regard to whether the acquisition is prohibited by the law of the state
in which the target bank is located. In approving interstate acquisitions,
however, the Federal Reserve is required to give effect to applicable state law
limitations on the aggregate amount of deposits that may be held by the
acquiring bank holding company and its insured depository institution affiliates
in the state in which the target bank is located (provided that those limits do
not discriminate against out-of-state depository institutions or their holding
companies) and state laws which require that the target bank have been in
existence for a minimum period of time (not to exceed five years) before being
acquired by an out-of-state bank holding company.
46
The BHCA also generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies that have not received
approval to operate as financial holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
Under current regulations of the Federal Reserve, this authority would permit
the Company and its non-bank
subsidiaries are permitted to engage in a variety of banking-related businesses, including the
operation of a thrift, sales and consumer finance, equipment leasing, the
operation of a computer service bureau (including software development), and
mortgage banking and brokerage. Eligible bank holding companies that elect to
operate as financial holding companies may engage in, or own shares in companies
engaged in, a wider range of nonbanking activities, including securities and
insurance activities and any other activity that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines by regulation or
order is financial in nature, incidental to any such financial activity or
complementary to any such financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally. The BHCA generally does not place territorial restrictions on
the domestic activities of non-bank subsidiaries of bank or financial holding
companies. As of the date of this filing, the Company has not applied for nor
received approval to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of a
bank or a bank holding company without prior notice to the appropriate federal
bank regulator. "Control" is defined in certain cases as the acquisition of 10%
of the outstanding shares of a bank or a bank holding company.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based
requirement expressed as a percentage of total risk-weighted assets,assets; and (ii) a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships).
Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments which do not qualify as Tier 1 capital and a portion of the
company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
As of June 30, 2000,2001, the Company had regulatory capital in excess of the Federal
Reserve's minimum requirements, with a risk-based capital ratio of 13.5%12.2% and a
leverage ratio of 8.1%7.8%.
47
Dividends. The Delaware General Corporation Law (the "DGCL") allows the Company
to pay dividends only out of its surplus (as defined and computed in accordance
with the provisions of the DGCL) or if the Company has no such surplus, out of
its net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Additionally, the Federal Reserve has issued a policy
statement with regard to the payment of cash dividends by bank holding
companies. The policy statement provides that a bank holding company should not
pay cash dividends which exceed its net income or which can only be funded in
ways that weaken the bank holding company's financial health, such as by
borrowing. The Federal Reserve also possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The Bank
General. The Bank is an Iowa-chartered bank, the deposit accounts of which are
insured by the FDIC's Bank Insurance Fund ("BIF"). The Bank is also a member of
the Federal Reserve System ("member bank"). As an Iowa-chartered, FDIC-insured
member bank, the Bank is subject to the examination, supervision, reporting and
enforcement requirements of the Superintendent, as the chartering authority for
Iowa banks, the Federal Reserve, as the primary federal regulator of member
banks, and the FDIC, as administrator of the BIF.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the semi-annual period ending June 30,year ended December 31, 2000, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period
beginning July 1, 2000,year ending December 31, 2001, BIF
assessment rates will continue to range from 0% of deposits to 0.27% of
deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices,practices; (ii) is in an unsafe
or unsound condition to continue operationsoperations; or (iii) has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Bank.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations. These FICO assessments are in addition to amounts assessed by the
FDIC for deposit insurance. Between January 1, 2000, and the final maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. During the
calendarfiscal year ended December 31, 1999, the FICO assessment rate for SAIF members
ranged between approximately 0.058% of deposits and approximately 0.061% of
deposits, whileJune 30, 2001, the FICO assessment rate for BIF and SAIF
members ranged betweenwas approximately 0.0116% of deposits and approximately 0.0122%0.02% of deposits.
During
the fiscal year ended June 30, 2000, the Bank paid FICO assessments totaling
$41,646.48
Supervisory Assessments. All Iowa banks are required to pay supervisory
assessments to the Superintendent to fund the operations of the Superintendent.
During the fiscal year ended June 30, 2000,2001, the Bank paid supervisory
assessments to the Superintendent totaling $73,910.$8,642.
Capital Requirements. The Federal Reserve has established the following minimum
capital standards for state-chartered Federal Reserve System member banks, such
as the Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with a minimum
requirement of at least 4% for all others,others; and (ii) a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consist of substantially the same components as Tier 1 capital and total capital
under the Federal Reserve's capital guidelines for bank holding companies (see
"--The Company--Capital Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
Federal Reserve provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.
During the fiscal year ended June 30, 2000,2001, the Bank was not required by the
Federal Reserve to increase its capital to an amount in excess of the minimum
regulatory requirement. As of June 30, 2000,2001, the Bank exceeded its minimum
regulatory capital requirements with a leverage ratio of 7.4%7.3% and a risk-based
capital ratio of 10.7%10.2%.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: (i) requiring the institution to submit a capital restoration
plan; (ii) limiting the institution's asset growth and restricting its
activities; (iii) requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; (iv) restricting
transactions between the institution and its affiliates; (v) restricting the
interest rate the institution may pay on deposits; (vi) ordering a new election
of directors of the institution; (vii) requiring that senior executive officers
or directors be dismissed; (viii) prohibiting the institution from accepting
deposits from correspondent banks; (ix) requiring the institution to divest
certain subsidiaries; (x) prohibiting the payment of principal or interest on
subordinated debt; and (xi) ultimately, appointing a receiver for the
institution. As of June 30, 2000,2001, the Bank was well capitalized, as defined by
Federal Reserve regulations.
Dividends. The Iowa Banking Act provides that an Iowa bank may not pay dividends
in an amount greater than its undivided profits. The Federal Reserve Act also
imposes limitations on the amount of dividends that may be paid by a state
member bank, such as the Bank. Generally, a member bank may pay dividends out of
its undivided profits, in such amounts and at such times as the bank's board of
directors deems prudent. Without prior Federal Reserve approval, however, a
state member bank may not pay dividends in any calendar year, which, in the
aggregate, exceed the bank's calendar year-to-date net income plus the bank's
retained net income for the two preceding calendar years.
49
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, the Bank exceeded
its minimum capital requirements under applicable guidelines as of June 30,
2000.2001. As of June 30, 2000,2001, approximately $1.9 million$676,000 was available to be paid as
dividends to the Company by the Bank. Notwithstanding the availability of funds
for dividends, however, the Federal Reserve may prohibit the payment of any
dividends by the Bank if the Federal Reserve determines such payment would
constitute an unsafe or unsound practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company and its subsidiaries, on
investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by the Bank to its
directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company, and to "related
interests" of such directors, officers and principal stockholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
stockholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines, thatwhich establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. Iowa law strictly regulates the establishment of bank
offices. Under the Iowa Banking Act,Until 2001, an Iowa state bank such as the Bank,
generally may notcould only establish a bank
office outside the boundaries of the counties contiguous to, or cornering upon,
the county in which the principal place of business of the bank iswas located.
Further, Iowa law prohibitsprohibited an Iowa bank from establishing de novo branches in
a municipality other than the municipality in which the bank's principal place
of business iswas located, if another bank already operatesoperated one or more offices in
the municipality in which the de novo branch iswas to be located. Under a recent
change to the Iowa Banking Act, until June 30, 2004, Iowa banks, such as the
Bank, have authority under Iowa law to establish up to three de novo branches at
any location in Iowa, subject to regulatory approval, in addition to any
branches established under the branching rules described above. Beginning July
1, 2004, Iowa banks may establish any number of branches at any location in
Iowa, still subject to regulatory approval.
50
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal"Riegle- Neal Act"), both state and national banks are allowed to establish
interstate branch networks through acquisitions of other banks, subject to
certain conditions, including certain limitations on the aggregate amount of
deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of new interstate branches
or the acquisition of individual branches of a bank in another state (rather
than the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The legislation
allowed individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting appropriate legislation prior to June 1, 1997. Iowa permits
interstate bank mergers, subject to certain restrictions, including a
prohibition against interstate mergers involving an Iowa bank that has been in
existence and continuous operation for fewer than five years. In 1997, the
Company formed a de novo Illinois bank that was merged into the Bank, resulting
in the Bank establishing a branch office in Illinois. Under Illinois law, the
Bank may continue to establish offices in Illinois to the same extent permitted
for an Illinois bank (subject to certain conditions, including certain
regulatory notice requirements).
State Bank Activities. Under federal law and FDIC regulations, FDIC insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. These restrictions have not had, and are not
currently expected to have, a material impact on the operations of the Bank.
Financial Subsidiaries. Eligible state and national banks are also authorized to
engage, through "financial subsidiaries," in certain activities that are
permissible for financial holding companies (as described above) and certain
activities that the Secretary of the Treasury, in consultation with the Federal
Reserve, determines is financial in nature or incidental to any such financial
activity. As of the date of this filing, the Bank has not applied for nor
received approval to establish any financial subsidiaries.
Federal Reserve System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $44.3$42.8 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $44.3$42.8 million, the reserve
requirement is $1.329$1.284 million plus 10% of the aggregate amount of total
transaction accounts in excess of $44.3$42.8 million. The first $5.0$5.5 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is in compliance with the foregoing requirements.
51
APPENDIXAppendix B
GUIDE 3 INFORMATION
The following tables and schedules show selected comparative financial
informationInformation required by the Securities and Exchange Commission Securities Act
Guide 3, regarding the business of the Quad City Holdings, Inc. ("the Company")
for the periods shown.
All average amounts in these tables and schedules were
determined by using month end data, which management believes provides a fair
representation of the daily operations of the Company.52
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential.
A and B. Consolidated Average Balance Sheets and Analysis of Net Interest
Earnings
Years Ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ---------------------------- ------------------------------------------------------------ ---------------------------
Interest Average Interest Average Interest Average
Average Earned Yield Oror Average Earned Yield Oror Average Earned Or Yield Oror
Balance Or Paid Cost Balance Or Paid Cost Balance Or Paid Cost
------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Interest earnings assets:
Federal funds sold .................................... $ 21,404 $ 1,267 5.92% $ 27,068 $ 1,488 5.50% $ 30,224 $ 1,492 4.94%
$ 11,005 $ 646 5.87%
Certificates of deposit atInterest bearing deposits with
other financial institutions ............... 12,453 763 6.13 12,444 778 6.25 11,814 696 5.89
7,173 441 6.15
Investment securities (1) ...................... 57,454 3,359 5.85 56,898 3,448 6.06 41,468 2,286 5.51
31,457 1,906 6.06
Net loans receivable (1)(2) ..................... 261,404 22,971 8.79 209,311 18,365 8.77 182,130 15,642 8.59
139,860 12,084 8.64
-------------------Other interest earning assets ........... 3,564 184 5.16 0 0 0.00 0 0 0.00
------------------ ------------------------------------- -----------------
Total Interest earning assets ......... 356,279 28,544 8.01 305,721 24,079 7.88 265,636 20,116 7.57 189,495 15,077 7.96
Noninterest-earning assets:
Cash and due from banks .......................... $ 15,085 $ 13,699 $ 9,431
$ 9,595
Premises and equipment ............................ 8,295 7,612 7,536
6,527
Other .............................................................. 5,231 8,822 5,157 3,756
-------- -------- --------
Total assets ............................................ $384,890 $335,854 $287,760 $209,373
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest-bearing demand deposits ............................ $ 86,639 2,918 3.37% $ 81,979 2,709 3.30% $ 75,530 2,559 3.39%
$ 56,612 2,053 3.63%
Savings deposits ...................................... 6,707 132 1.97 6,112 125 2.05 4,654 93 2.00
2,954 65 2.20
Time deposits ............................................ 159,822 9,972 6.24 134,245 7,291 5.43 113,752 6,358 5.59
83,790 4,853 5.79
Short-term borrowings ............................ 22,477 992 4.41 14,530 665 4.58 5,414 258 4.77
166 9 5.42
Federal Home Loan Bank advances ........ 24,324 1,463 6.01 22,048 1,361 6.17 25,393 1,539 6.06
20,220 1,234 6.10
COMR .............................................................. 12,000 1,135 9.46 12,000 1,137 9.48 1,000 63 6.30
Other borrowings ....................... 0 0 0.00
Other borrowings ............... 0 0 0.00 2,125 157 7.39
1,500 128 8.53------------------ ------------------- ------------------ ------------------------------------
Total Interest bearing liabilities ..................... 311,969 16,612 5.32 270,914 13,288 4.90 227,868 11,027 4.84
165,242 8,342 5.05
Noninterest-bearing demand .................... 45,902 40,072 33,619 23,545
Other noninterest-bearing liabilities ..................... 5,133 5,492 5,974
3,896
Total liabilities ............. 316,479..................... 363,004 316,478 267,461 192,683
Stockholders' equity ................................ 21,886 19,376 20,299 16,690
-------- -------- --------
Total liabilities and
stockholders' equity ............... $384,890 $335,854 $287,760 $209,373
======== ======== ========
Net interest income .................................. $ 11,932 $ 10,791 $ 9,089
$ 6,735
======== =============== =======
Net interest spread .................................. 2.69% 2.98% 2.73% 2.91%
===== ===== =====
Net interest margin .................................. 3.35% 3.53% 3.42% 3.55%
===== ===== =====
Ratio of average interest
earning assets to
average interest-
bearing liabilities ................ 114.20% 112.85% 116.57%
114.68%
========= ======== =============== ======= =======
(1) Interest earned and yields on nontaxable investment securities and loans are
stated at face rate.
(2) Loan fees are not material and are included in interest income from loans
receivable.
53
I. Interest Rates and Interest Differential.
C. Analysis of Changes of Interest Income/Interest Expense
For the years ended June 30, 2001, 2000 1999 and 1998.1999
Components
Inc./(Dec.) of Change (1)
from -----------------
Prior Year Rate Volume
----------------------------------------------------------
2001 vs. 2000
vs. 1999
----------------------------------------------------------
(Dollars in thousands)
INTEREST INCOME
Federal funds sold ............................................................................................... $ (221) $ 108 $ (329)
Interest bearing deposits with other financial institutions ...... (15) (16) 1
Investment securities (2) ........................................ (89) (123) 34
Net loans receivable (2)(3) ...................................... 4,606 28 4,578
Other interest earning assets .................................... 184 0 184
----------------------------
Total change in interest income .......................... $ 4,465 $ (3) $ 4,468
----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits ................................. $ 209 $ 53 $ 156
Savings deposits ................................................. 7 (5) 12
Time deposits .................................................... 2,681 1,176 1,505
Short-term borrowings ............................................ 327 (25) 352
Federal Home Loan Bank advances .................................. 102 (36) 138
COMR ............................................................. (2) (2) 0
Other borrowings ................................................. 0 0 0
----------------------------
Total change in interest expense ......................... $ 3,324 $ 1,161 $ 2,163
----------------------------
Total change in net interest income .............................. $ 1,141 $(1,164) $ 2,305
============================
Components
Inc./(Dec.) of Change (1)
from -----------------
Prior Year Rate Volume
----------------------------
2000 vs. 1999
----------------------------
(Dollars in thousands)
INTEREST INCOME
Federal funds sold ............................................... $ (4) $ 160 $ (164)
Certificates of deposit atInterest bearing deposits with other financial institutions ....................... 81 43 38
Investment securities (2) ................................................................................. 1,163 246 917
Net loans receivable (3) ................................................................................... 2,723 344 2,379
---------------------------------------------------------
Total change in interest income ..................................................... $ 3,963 $ 793 $ 3,170
---------------------------------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits ................................................................... $ 150 $ (64) $ 214
Savings deposits ................................................................................................... 32 2 30
Time deposits ......................................................................................................... 933 (185) 1,118
Short-term borrowings ......................................................................................... 407 (10) 417
Federal Home Loan Bank advances ..................................................................... (178) 28 (206)
COMR ........................................................................................................................... 1,074 0 1,074
Other borrowings ................................................................................................... (157) (79) (78)
---------------------------------------------------------
Total change in interest expense ................................................... 2,261 $ (308) $ 2,569
---------------------------------------------------------
Total change in net interest income ............................................................. $ 1,702 $ 1,101 $ 601
=============================
1999 vs 1998
-----------------------------
INTEREST INCOME
Federal funds sold ................................................ $ 846 $ (118) $ 964
Certificates of deposit at financial institutions ................. 255 (19) 274
Investment securities (2) ......................................... 380 (184) 564
Net loans receivable (3) .......................................... 3,558 (73) 3,631
-----------------------------
Total change in interest income ........................... $ 5,039 $ (394) $ 5,433
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................................. $ 506 $ (143) $ 649
Savings deposits .................................................. 28 (6) 34
Time deposits ..................................................... 1,505 (175) 1,680
Short-term borrowings ............................................. 249 (2) 251
Federal Home Loan Bank advances ................................... 305 (9) 314
COMR .............................................................. 63 0 63
Other borrowings .................................................. 29 (18) 47
-----------------------------
Total change in interest expense .......................... $ 2,685 $ (353) $3,038
-----------------------------
Total change in net interest income ............................... $ 2,354 $ (41) $ 2,395
=========================================================
(1) The column "increase/decrease from prior year" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities and loans
are stated at face rate.
(3) Loan fees are not material and are included in interest income from loans
receivable.
54
II. Investment Portfolio.
A. Investment Securities
The following table presents the amortized cost and fair value of investment
securities held on June 30, 2001, 2000 1999 and 1998.1999.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
June 30, 2001
- -------------
Securities held to maturity:
Municipal securities .................... $ 500,559 $ 4,638 $ 0 $ 505,197
Other bonds ............................. 75,000 3,214 0 78,214
------------------------------------------------------
Totals .............................. $ 575,559 $ 7,852 $ 0 $ 583,411
======================================================
Securities available for sale:
U.S. agency securities .................. $31,787,602 $ 626,091 $ (104) $32,413,589
Mortgage-backed securities .............. 5,509,433 17,646 (18,797) 5,508,282
Municipal securities .................... 11,892,825 144,098 (39,556) 11,997,367
Corporate securities .................... 4,577,918 31,014 (13,185) 4,595,747
Trust preferred securities .............. 1,148,488 94,897 (14,405) 1,228,980
Other securities ........................ 393,211 19,075 (21,730) 390,556
------------------------------------------------------
Totals .............................. $55,309,477 $ 932,821 $ (107,777) $56,134,521
======================================================
June 30, 2000
-
- -------------
Securities held to maturity:
Municipal securities .................... $ 499,988 $ 0 $ (8,769) $ 491,219
Other bonds ............................. 75,000 0 (982) 74,018
------------------------------------------------------
Totals .............................. $ 574,988 $ 0 $ (9,751) $ 565,237
======================================================
Securities available for sale:
U.S. treasury securities ................ $ 3,000,406 $ 0 $ (11,607) $ 2,988,799
U.S. agency securities .................. 40,199,557 23,275 (1,018,786) 39,204,046
Mortgage-backed securities .............. 7,006,906 0 (297,413) 6,709,493
Municipal securities .................... 5,821,229 0 (300,577) 5,520,652
Trust preferred securities .............. 919,495 0 (49,780) 869,715
Other securities ........................ 277,925 1,474 (18,042) 261,357
------------------------------------------------------
Totals .............................. $57,225,518 $ 24,749 $(1,696,205) $55,554,062
======================================================
June 30, 1999
- - -------------
Securities held to maturity:
Municipal securities .................... 699,415 2,115 0 701,530
Other bonds ............................. 25,000 585 0 25,585
------------------------------------------------------
Totals .............................. $ 724,415 $ 2,700 $ 0 $ 727,115
======================================================
Securities available for sale:
U.S. treasury securities ................ $ 9,001,845 $ 47,862 $ (4,866) $ 9,044,841
U.S. agency securities .................. 29,267,483 1,267 (390,870) 28,877,880
Mortgage-backed securities .............. 8,390,795 5,319 (183,867) 8,212,247
Municipal securities .................... 3,180,714 40,741 (12,139) 3,209,316
Other securities ........................ 197,464 102 (7,941) 189,625
------------------------------------------------------
Totals .............................. $50,038,301 $ 95,291 $ (599,683) $49,533,909
======================================================
June 30, 1998
- - -------------
Securities held to maturity:
Mortgage-backed securities .............. $ 1,506,569 $ 0 $ (5,534) $ 1,501,035
Municipal securities .................... 848,740 1,704 (13,557) 836,887
Other bonds ............................. 25,000 776 0 25,776
------------------------------------------------------
Totals .............................. $ 2,380,309 $ 2,480 $ (19,091) $ 2,363,698
======================================================
Securities available for sale:
U.S. treasury securities ................ $17,007,239 $ 54,8119,001,845 $ (3,867) $17,058,18347,862 $ (4,866) $ 9,044,841
U.S. agency securities .................. 11,247,822 4,020 (31,050) 11,220,79229,267,483 1,267 (390,870) 28,877,880
Mortgage-backed securities .............. 1,847,496 1,265 (346) 1,848,4158,390,795 5,319 (183,867) 8,212,247
Municipal securities .................... 617,752 0 (11,193) 606,5593,180,714 40,741 (12,139) 3,209,316
Other securities ........................ 1,500,806 6,733 (3,243) 1,504,296197,464 102 (7,941) 189,625
------------------------------------------------------
Totals .............................. $32,221,115$50,038,301 $ 66,82995,291 $ (49,699) $32,238,245(599,683) $49,533,909
======================================================
55
B. Investment Securities Maturities and Yields
The following table presents the maturity of securities held on June 30, 20002001
and the weighted average rates by range of maturity:
Average
Amount Yield
------------------------
U.S. treasury securities:
Within 1 year .................................. $ 3,000,406 5.40%
------------------------
Total ..................................... $ 3,000,406 5.40%
========================
U.S. agency securities:
Within 1 year .................................. $ 2,999,302 6.01%2,011,645 5.77%
After 1 but within 5 years ..................... 32,199,691 5.84%23,636,625 5.74%
After 5 but within 10 years .................... 5,000,564 7.20%6,139,332 6.74%
------------------------
Total ..................................... $40,199,557 6.03%$31,787,602 5.93%
========================
Mortgage-backed securities:
Within 1 year .................................. $ 370,136 5.57%259,084 6.12%
After 1 but within 5 years ..................... 853,882 6.34%917,869 6.00%
After 5 but within 10 years .................... 1,898,279 5.81%969,151 5.66%
After 10 years ................................. 3,884,6093,363,329 5.94%
------------------------
Total ..................................... $ 7,006,906 5.93%5,509,433 5.91%
========================
Municipal securities (1):securities:
Within 1 year .................................. $ 249,903 6.15%
After 1 but within 5 years ..................... 1,626,237 5.27%2,383,016 6.04%
After 5 but within 10 years .................... 1,374,037 4.80%4,304,658 6.34%
After 10 years ................................. 3,320,943 5.05%5,455,807 7.61%
------------------------
Total ..................................... $12,393,384 6.84%
========================
Corporate securities:
After 1 but within 5 years ..................... $ 3,049,526 6.50%
After 5 but within 10 years .................... 1,528,392 6.09%
------------------------
Total ..................................... $ 6,321,217 5.04%4,577,918 6.36%
========================
Trust preferred securities:
After 10 years ................................. $ 919,495 9.43%1,148,488 9.22%
========================
Other bonds:
After 1 but within 5 years ..................... $ 75,000 6.50%
========================
Other securities with no maturity or stated face rate ......................................... $ 277,925393,211
===========
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk.
(1) Average yields on nontaxable investment securities are stated at face rate.
C. Investment Concentrations
As ofAt June 30, 2000,2001, there existed no security in the investment portfolio above
(other than U.S. Government, and U.S. Government agencies)agencies, and corporations) that
exceeded 10% of stockholders' equity at that date.
III. Loan Portfolio.
A. Types of Loans
The composition of the loan portfolio at June 30, 2001, 2000, 1999, 1998, 1997, and
19961997 is presented as follows:
2001 2000 1999 1998 1997 1996
-
- ----------------------------------------------------------------------------------------------------------------
Commercial .................................... $ 209,888,773 $ 167,682,652 $ 136,206,893 $ 99,097,297 $ 68,634,556
$ 40,338,645
Real estate - construction .construction.... 2,568,140 3,463,682 3,367,458 1,798,257 1,778,310
750,462
Real estate .................................. 38,018,551 36,301,379 27,591,886 29,347,260 18,515,130
8,261,146
Installment and other consumer ................37,389,302 34,405,138 30,810,455 32,732,322 19,437,433
7,459,467
----------------------------------------------------------------------------------------------------------------------------------------------------------------
Total loans ........................ 287,864,766 241,852,851 197,976,692 162,975,136 108,365,429 56,809,720
Less allowance for
Estimated losses on loans (4,248,182) (3,617,401) (2,895,457) (2,349,838) (1,632,500)
(852,500)
----------------------------------------------------------------------------------------------------------------------------------------------------------------
Net loans ............................ $ 283,616,584 $ 238,235,450 $ 195,081,235 $ 160,625,298 $ 106,732,929
$ 55,957,220
================================================================================================================================================================
56
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents consolidated loan maturities by yearly ranges. Also
included for loans after one year are the amounts that have predetermined
interest rates and floating or adjustable rates.
Maturities After One Year
------------------------------
At June 30, 20002001 Due in one Due after one Due after Predetermined Adjustable
year or less through 5 years 5 years interest rates interest rates
---------------------------------------------------------------------------------------------------------------------------------------------------
Commercial ..................... $ 59,350,27479,190,937 $100,652,557 $ 81,101,84230,045,279 $102,406,782 $ 27,230,536 $ 83,097,337 $ 25,235,04128,291,054
Real estate - construction ..... 3,425,642 38,0402,487,148 80,992 0 38,04080,992 0
Real estate .................... 1,938,340 1,600,056 32,762,983 11,349,343 23,013,6961,362,323 1,695,584 34,960,644 14,789,289 21,866,939
Installment and other consumer .............. 8,411,942 24,289,347 1,703,849 23,130,431 2,862,765
-------------------------------------------------------------------------. 10,092,073 24,624,952 2,672,277 23,598,986 3,698,243
------------------------------------------------------------------------
Totals .................... $ 73,126,198 $107,029,28593,132,481 $127,054,085 $ 61,697,368 $117,615,15167,678,200 $140,876,049 $ 51,111,502
=========================================================================53,856,236
========================================================================
C. Risk Elements
1.The following table represents Nonaccrual, Past Due, Renegotiated Loans, and
Renegotiated Loans.other Real Estate owned at June 30, 2001, 2000, 1999, 1998, and 1997.
2001 2000 1999 1998 1997
1996
-----------------------------------------------------------------------------------------------------------------------------
Loans accounted for on
nonaccrual basis ..... $1,231,741 $ 382,745 $1,287,727 $1,025,761 $ 230,591 $ 0
Accruing loans past due
90 days or more .... 494,827 352,376 238,046 259,277 223,966
306,774
Other real estate owned 47,687 0 119,600 0 0 0
Troubled debt
restructurings ..... 0 0 0 0 0
--------------------------------------------------------------
Total ............ $1,774,255 $ 735,121 $1,645,373 $1,285,038 $ 454,557
$ 306,774
==============================================================
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.
2. Potential Problem Loans. To management's best knowledge, there are no such
significant loans that have not been disclosed in the above table.
3. Foreign Outstandings. None
4. Loan Concentrations. Loan concentrations are disclosed in the Notes to
Consolidated Financial Statements in Note 4.
D. Other Interest Bearing Assets
There are no other interest bearing assets required to be disclosed here.
57
IV. Summary of Loan Loss Experience.
A. Analysis of the Allowance for Estimated Losses on Loans
The following table summarizes activity in the allowance for estimated losses on
loans of the Company for the fiscal years ending June 30, 2001, 2000, 1999,
1998, 1997, and 1996:1997:
2001 2000 1999 1998 1997
1996
------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------
Average amount of loans outstanding,
before allowance for estimated
losses on loans ....................... $212,497,181 $184,756,698 $141,974,417..................... $ 81,251,090262,237,267 $ 44,749,454212,497,181 $ 184,756,698 $ 141,974,417 $ 81,251,090
Allowance for estimated losses on loans:
Balance, beginning of fiscal year .............. 3,617,401 $ 2,895,457 $ 2,349,838 $ 1,632,500 $ 852,500
$ 472,475
Charge-offs:
Commercial ................................................ (86,936) (43,295) (104,596) (62,763) (26,141)
(117,555)
Real estate .............................................. 0 (6,822) (25,142) 0 0 0
Installment and other consumer ........................... (213,527) (376,591) (348,777) (142,471) (38,772)
(2,817)
------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal charge-offs .............................. (300,463) (426,708) (478,515) (205,234) (64,913)
(120,372)
------------------------------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial .................................................. 2,100 762 53,314 13,146 266
0
Real estate .............................................. 0 0 0 0 0
Installment and other consumer ........ 39,474 96,072 79,020 7,450 256
0
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal recoveries ................................ 41,574 96,834 132,334 20,596 522
0
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs ........................................ (258,889) (329,874) (346,181) (184,638) (64,391)
(120,372)
Provision charged to expense ........................ 889,670 1,051,818 891,800 901,976 844,391
500,397
-----------------------------------------------------------------------------------------------------------------------------------------------------------
Balance, end of fiscal year .......................... $ 4,248,182 $ 3,617,401 $ 2,895,457 $ 2,349,838 $ 1,632,500
$ 852,500
===========================================================================================================================================================
Ratio of net charge-offs to
average loans outstanding ........................ 0.10% 0.16% 0.19% 0.13% 0.08% 0.27%
B. Allocation of the Allowance for Estimated Losses on Loans
The following table presents the allowance for estimated losses on loans by type
of loans and the percentage of loans in each category to total loans:loans for the
fiscal years ending June 30, 2001, 2000, 1999, 1998, and 1997:
% % %
Of Loans Of Loans Of Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
-------------------- --------------------- -------------------- --------------------
2001 2000 1999
1998--------------------- -------------------- --------------------- --------------------
Commercial ............................. $3,231,286 72.91% $2,863,319 69.33% $2,164,668 68.80% $1,213,439 60.81%
Real estate - construction ............. 0 0.89% 8,659 1.43% 8,419 1.70%
4,496 1.10%
Real estate ............................ 182,365 13.21% 121,530 15.01% 102,693 13.94%
74,702 18.01%
Installment and other ..................consumer ......... 834,531 12.99% 617,893 14.23% 578,937 15.56%
515,489 20.08%
consumer
Unallocated ............................ 0 0.00% 6,000 N/A 49,159 N/A 541,712 N/A
-------------------- --------------------- --------------------
Total ............................. $4,248,182 100.00% $3,617,401 100.00% $2,895,457 100.00%
$2,349,838 100.00%
==================== ===================== ====================
1998 1997 1996
-------------------- -------------------
Commercial ............................. $1,213,439 60.81% $ 799,566 63.34% $ 0 71.01%
Real estate - construction ............. 4,496 1.10% 4,446 1.64% 0 1.32%
Real estate ............................ 74,702 18.01% 62,296 17.09% 0 14.54%
Installment and other ..................consumer.......... 515,489 20.08% 387,096 17.93%
0 13.13%
Unallocated ............................ 379,096541,712 N/A 852,5003 79,096 N/A
--------------------- ----------------------------------------
Total ............................. $2,349,838 100.00% $1,632,500 100.00%
$ 852,500 100.00%
===================== =========================================
58
V. Deposits.
The average amount of and average rate paid for the categories of deposits for
the years 2001, 2000, 1999, and 19981999 are disclosed in the consolidated average balance
sheets and can be found on page 2 of Appendix B.
Included in interest bearing deposits at June 30, 2001, 2000, 1999, and 19981999 were
certificates of deposit totaling $50,298,560, $50,814,599, $37,103,749, and $31,937,377$37,103,749
respectively, that were $100,000 or greater. Maturities of these certificates
were as follows:
2001 2000 1999 1998
--------------------------------------
One to three months .................... $ 24,105,269$20,948,861 $24,105,269 $13,313,388 $ 8,633,273
Three to six months .................... 11,487,826 11,176,203 6,339,507 9,647,980
Six to twelve months ................... 12,972,591 11,781,428 9,901,595 10,997,407
Over twelve months ..................... 4,889,281 3,751,699 7,549,259 2,658,717
--------------------------------------
Total certificates of
deposit greater than $100,000 ... $50,298,560 $50,814,599 $37,103,749 $31,937,377
======================================
VI. Return on Equity and Assets.
The following table presents the return on assets and equity and the equity to
assets ratio of the Company for the years ended June 30, 2001, 2000, and 1999.
2001 2000 1999
and 1998.
2000 1999 1998
-------------------------------------------------------------------------------------------------
Average total assets ... $335,854,396 $287,760,434 $209,373,383$ 384,890,061 $ 335,854,396 $ 287,760,434
Average equity ......... 21,886,477 19,375,865 $ 20,299,371
$ 16,690,420
Net income ............. 2,395,732 2,745,527 $ 2,464,821 $ 2,393,272
Return on average assets .62% .82% .86% 1.14%
Return on average equity 10.95% 14.17% 12.14% 14.34%
Average equity to
average assets ratio 5.69% 5.77% 7.05% 7.97%
VII. Short Term Borrowings.
The information requested is disclosed in the Notes to Consolidated Financial
Statements in Note 7.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUAD CITY HOLDINGS, INC.
Dated: September 28, 2000August 29, 2001 By: /s/ Douglas M. Hultquist
------
-------------------------------------
Douglas M. Hultquist
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Michael A. Bauer Chairman of the Board of Directors September 28, 2000
- - ----------------------------
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive September 28, 2000
- - ---------------------------- and Financial Officer and Director
Douglas M. Hultquist
/s/ Richard R. Horst Director and Secretary September 28, 2000
- - ----------------------------
Richard R. Horst
/s/ James J. Brownson Director September 28, 2000
- - ----------------------------
James J. Brownson
/s/ Ronald G. Peterson Director September 28, 2000Signature Title Date
- --------------------------------------------------------------------------------
/s/ Michael A. Bauer Chairman of the Board of Directors August 29, 2001
- ------------------------
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive August 29, 2001
- ------------------------ and Financial Officer and Director
Douglas M. Hultquist
/s/ Richard R. Horst Director and Secretary August 29, 2001
- ------------------------
Richard R. Horst
/s/ James J. Brownson Director August 29, 2001
- ------------------------
James J. Brownson
/s/ Larry J. Helling Director August 29, 2001
- ------------------------
Larry J. Helling
/s/ John K. Lawson Director August 29, 2001
- ------------------------
John K. Lawson
/s/ Ronald G. Peterson Director August 29, 2001
- ------------------------
Ronald G. Peterson
/s/ John W. Schricker Director September 28, 2000
- - ---------------------------- John W. Schricker
INDEX TO EXHIBITS
Incorporated
Herein by in Filed Sequential
Exhibit No. Description Reference To Herewith Page No.
- - ---------------------------------------------------------------------------------------------
3.1 Certificate of Exhibit 3.1 to the
Incorporation of Quad Registration
City Holdings, Inc., as Statement of Quad
amended City Holdings, Inc.
on Form SB-2, File
No. 33-67028
3.2 Bylaws of Quad City Exhibit 3.2 to the
Holdings, Inc. Registration
Statement of Quad
City Holdings, Inc.
on Form SB-2, File
No. 33-67028
4.1 Specimen Stock Exhibit 4.1 to the
Certificate of Quad Registration
City Holdings, Inc.(See Statement of Quad
also Articles VIII, XII City Holdings, Inc.
and XIII of Exhibit 3.1 on Form SB-2, File
and Articles II, VI, IX No. 33-67028
and XII of Exhibit 3.2)
10.1 Employment Agreement
between Quad City
Holdings, Inc., Quad
City Bank and Trust
Company and Michael
A. Bauer dated July 1,
2000 X
10.2 Employment Agreement
between Quad City
Holdings, Inc., Quad
City Bank and Trust
Company and Douglas
M. Hultquist dated
July 1, 2000 X
10.3 Executive Deferred
Compensation Agreement
between Quad City Bank
and Trust Company and
Michael A. Bauer dated
June 28, 2000 X
10.4 Executive Deferred
Compensation Agreement
between Quad City Bank
and Trust Company and
Douglas M. Hultquist
dated June 28, 2000 X
10.5 Lease Agreement between
Quad City Bank and Trust
Company and 56 Utica
L.L.C. X
Incorporated
Herein by in Filed Sequential
Exhibit No. Description Reference To Herewith Page No.
- - ---------------------------------------------------------------------------------------------
12.1 Statement re: Computation
of Ratios X
21.1 Subsidiaries of Quad
City Holdings, Inc. X
23.1 Consent of McGladrey
and Pullen X
27.1 Financial Data Schedule X
Director August 29, 2001
- ------------------------
John W. Schricker
60