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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, 2000
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
- - ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
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Common Stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of the voting common stock held by non-affiliates as
of August 22, 2000 was approximately $29,500,000. As of August 22, 2000, the
issuer had 2,274,070 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.
Part I
Item 1. Business
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").
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 area through its three offices that are located in Bettendorf and
Davenport, Iowa and in Moline, Illinois. A fourth full service location is
scheduled to open in Davenport in November 2000.
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 10,000 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 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 operates in a highly competitive environment in the Quad
Cities area. 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 market with a number of much larger financial
institutions with substantially greater resources and larger lending limits. 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").
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.
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 entire second floor has been leased
to two professional services firms; however, in the second fiscal quarter of
2001, approximately 4,500 square feet will become available. 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 floor and
occupies approximately 2,000 square feet. The business office of a medical
clinic is sub-leasing approximately 3,500 square feet on the first 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 began in early
summer of 2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City will lease
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 is expected to open
in November 2000.
Management is of the opinion 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.
Item 3. Legal Proceedings
Bancard is the holder of an account receivable in the approximate
amount of $1,500,000 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 of 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 tortious 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 received a copy of the complaint on
September 27, 2000 and, accordingly, have not had an opportunity to fully
evaluate the allegations contained in the complaint. However, based on a
preliminary evaluation of the complaint, Bancard and Quad City believe the
allegations to be without merit and intend to vigorously defend the suit.
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.
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, there were 2,283,920
shares of Common Stock outstanding held by approximately 2,500 holders of
record. The following table sets forth the high and low sales prices of the
Common Stock, as reported by The Nasdaq SmallCap Market, for the periods
indicated No cash dividends were declared during the periods indicated.
Fiscal 2000 Fiscal 1999
sales price sales price
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High Low High Low
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First quarter .......... $ 20.000 $ 16.500 $ 21.750 $ 18.000
Second quarter ......... 17.500 13.500 25.500 17.333
Third quarter .......... 15.250 10.250 23.500 19.125
Fourth quarter ......... 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.
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended June 30,
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2000 1999 1998 1997 1996
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(Dollars in thousands)
Statement of Income Data:
Interest income ....................... $ 24,079 $ 20,116 $ 15,077 $ 9,706 $ 6,529
Interest expense ...................... 13,289 11,027 8,342 4,994 3,486
Net interest income ................... 10,790 9,089 6,735 4,712 3,043
Provision for loan losses ............. 1,052 892 902 844 500
Noninterest income (1) ................ 6,154 5,561 6,148 2,807 1,716
Noninterest expenses .................. 11,467 9,679 7,910 5,291 3,576
Pre-tax net income .................... 4,425 4,079 4,071 1,384 683
Income tax expense .................... 1,680 1,614 1,678 165 --
Net income ............................ 2,745 2,465 2,393 1,219 683
Balance Sheet:
Total assets .......................... $367,622 $321,346 $250,151 $168,379 $111,475
Securities ............................ 56,129 50,258 33,276 29,589 32,831
Loans ................................. 241,853 197,977 162,975 108,365 56,810
Allowance for estimated losses on loans 3,617 2,895 2,350 1,633 853
Deposits .............................. 288,067 247,966 197,384 135,960 92,918
Stockholders' equity:
Common ........................... 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 %
Return on average common equity ....... 14.17 13.69 16.40 9.85 5.82
Net interest margin ................... 3.53 3.42 3.55 3.74 3.47
Efficiency ratio (2) .................. 67.68 66.07 61.40 70.37 75.14
Nonperforming assets to total assets .. 0.20 0.51 0.51 0.27 0.28
Allowance for estimated losses on loans
to total loans ...................... 1.50 1.46 1.44 1.51 1.50
Net charge-offs to average loans ...... 0.16 0.26 0.13 0.08 0.27
Average common stockholders' equity
to average assets ................... 5.77 6.26 6.97 8.73 12.10
Average stockholders' equity
to average assets ................... 5.77 7.05 7.97 9.15 12.10
Earnings to fixed charges (3)
Excluding interest on deposits .... 2.29 x 2.81 x 3.78 x 3.17 x 5.71 x
Including interest on deposits .... 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.
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, 2000, 1999 and 1998, and
financial condition for the fiscal years ended June 30, 2000 and 1999. 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
$367.6 million as of June 30, 2000. 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 million or $1.19 basic earnings per
share for fiscal 2000 as compared to $2.5 million and $1.08 per share for fiscal
1999 and $2.4 million and $1.09 per share for fiscal 1998. 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 its
loans and securities and the interest paid on deposits and borrowings. 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 is expected to open in November 2000. However,
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
addressing this issue with alternative funding sources and pricing strategies.
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 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, Bancard began processing for seven new
ISOs. However, 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. The average dollar
volume of transactions processed during June and July 2000 was $69 million. This
reduction in processing fees and cessation of the settlement income at Bancard
is expected to adversely affect comparisons of consolidated net income in fiscal
2001 with fiscal 2000.
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 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. 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 at June
30, 1999 to $586.4 million at June 30, 2000. 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.
Results of Operations
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 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 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 1.50% 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.
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%
=========================
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.
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 million or 14% to $367.6
million at June 30, 2000 from $321.3 million at June 30, 1999. The growth
primarily resulted from an increase in the loan portfolio funded by deposits
received from customers and short-term borrowings.
Cash and Cash Equivalent Assets. Cash and due from banks increased by
$6.6 million or 77% to $15.1 million at June 30, 2000 from $8.5 million at June
30, 1999. 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 million or 33% to $26.1 million at June 30, 2000
from $39.1 million at June 30, 1999. 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 increased by $241,000
or 2% to $12.8 million at June 30, 2000 from $12.5 million at June 30,1999. 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 million or 12% to $56.1
million at June 30, 2000 from $50.2 million at June 30, 1999. 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 and classified as held to maturity, in the amount of
$50,000. This was offset by the following: paydowns of $1.4 million that were
received on mortgage-backed securities, proceeds from the sales of securities
available for sale of $5.2 million, proceeds from calls and maturities of $6.2
million, losses recognized on the sales of securities of $28,000, 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
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, 2000 and June 30, 1999. The balance at June 30, 2000 was
$575,000, a decrease of $149,000 or 21%, from $724,000 at June 30, 1999. Market
values at June 30, 2000 and June 30, 1999 were $565,000 and $727,000,
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 million, or 12%, to $55.6 million
at June 30, 2000, from $49.5 million at June 30, 1999. The amortized cost of
such securities at June 30, 2000 and June 30, 1999 was $57.2 million and $50.0
million, respectively.
Quad City does not use any financial instruments referred to as
derivatives to manage interest rate risk and as of June 30, 2000 there existed
no security in the investment portfolio (other than U.S. government and U.S.
government agency securities) that exceeded 10% of stockholders' equity at that
date.
Loans. Loans receivable increased by $43.9 million or 22% to $241.9
million at June 30, 2000 from $198.0 million at June 30, 1999. The increase was
the result of the origination or purchase of $240.5 million of commercial
business, consumer and real estate loans, less loan charge-offs, net of
recoveries, of $330,000 and loan repayments or sales of loans of $196.3 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, the Bank's legal lending limit
was $4.3 million.
Allowance for Loan Losses. The allowance for estimated losses on loans
was $3.6 million at June 30, 2000 compared to $2.9 million at June 30, 1999 for
an increase of $722,000 or 25%. 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, and other
factors that, in management's judgment, deserved evaluation in estimating loan
losses. 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, 2000 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 1.50 % at June 30, 2000 and 1.46% at June 30, 1999.
Although management believes that the allowance for estimated losses on
loans at June 30, 2000 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.
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 $383,000 at June 30, 2000 compared to $1.3
million at June 30, 1999 for a decrease of $905,000 or 70%. The decrease in
nonaccrual loans was comprised of decreases in commercial loans of $833,000 and
consumer loans of $133,000 offset by an increase in real estate loans of
$61,000. Nonaccrual loans at June 30, 2000 consisted primarily of loans that
were well collateralized and were not expected to result in material losses.
As of June 30, 2000 and 1999, past due loans of 30 days or more
amounted to $3.3 million and $4.0 million, respectively. Past due loans as a
percentage of gross loans receivable was 1.4% and 2.0% at June 30, 2000, and
1999, respectively.
Other Assets. Premises and equipment increased by $162,000 or 2% to
$7.7 million at June 30, 2000 from $7.6 million at June 30, 1999. The increase
resulted from the purchase of additional furniture, fixtures and equipment
offset by depreciation expense. Additional information regarding the composition
of this account and related accumulated depreciation is described in footnote 5
to the consolidated financial statements.
Accrued interest receivable on loans, securities and interest-bearing
cash accounts increased by $627,000 or 31% to $2.6 million at June 30, 2000 from
$2.0 million at June 30, 1999. The increase was primarily due to greater average
outstanding balances in interest-bearing assets.
Other assets increased by $2.6 million or 42% to $8.9 million at June
30, 2000 from $6.3 million at June 30, 1999. The increase consisted primarily of
the purchase of 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,
miscellaneous receivables and prepaid expenses associated with the growth of
Quad City.
Deposits. Deposits increased by $40.1 million or 16% to $288.1 million
at June 30, 2000 from $248.0 million at June 30, 1999. The increase resulted
from a $9.5 million net increase in noninterest-bearing, NOW, money market and
other savings accounts and a $30.6 million net increase 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 million or
114% from $9.7 million as of June 30, 1999 to $20.8 million as of June 30, 2000.
Short-term borrowings were comprised of customer repurchase agreements of $15.8
million and $9.6 million at June 30, 2000 and 1999, respectively, as well as
federal funds purchased from correspondent banks of $5.0 million and $140,000 at
June 30, 2000 and 1999, respectively.
FHLB Advances and Other Borrowings. FHLB advances decreased slightly to
$22.4 million as of June 30, 2000 from $24.6 million at June 30, 1999. As of
June 30, 2000, the Bank held $1.2 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.
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, 2000 and 1999.
Under current regulatory guidelines, these securities are considered to be Tier
1 capital, with certain limitations that are applicable to Quad City.
Other liabilities decreased by $4.3 million or 50% to $4.3 million as
of June 30, 2000 from $8.6 million as of June 30, 1999. 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 at
June 30, 1999.
Stockholders' Equity. Common stock of $2.3 million as of June 30, 2000
increased by $29,000 or 1%. Exercises of stock warrants and options resulting in
the issuance of 29,165 additional shares of common stock created the increase.
Additional paid-in capital increased by $189,000 or 2% to $12.1 million
as of June 30, 2000 from $12.0 million as of June 30, 1999. The increase was due
to $108,000 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.
Retained earnings increased by $2.7 million or 60% to $7.3 million as
of June 30, 2000 from $4.6 million as of June 30, 1999. The increase reflected
net income for the year.
Accumulated other comprehensive (loss), consisting of unrealized losses
on securities available for sale, net of related income taxes, was $1.1 million
as of June 30, 2000 as compared to $332,000 as of June 30, 1999. The increase in
the loss was attributable to the decrease during the period in fair value of the
securities identified as available for sale, primarily as a result of an
increase 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 to 60,000 shares
of its common stock. At June 30, 2000, Quad City had acquired 41,496 shares at a
total cost of $599,480. The weighted average cost of the shares was $14.45.
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 $54.0 million at
June 30, 2000, compared with $60.2 million at June 30, 1999. 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 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 million for fiscal
1999 compared to $4.4 million of cash used, primarily for loans originated for
sale, for fiscal 1998. Net cash used in investing activities, consisting
principally of loan funding and the purchase of securities, 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.
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.
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.
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
Board of 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'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 Board 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 Board 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.
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, 2000 and June 30, 1999, an analysis of Quad City's interest
rate risk as measured by the estimated changes in NPV resulting from
instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis
points).
Change in Estimated Increase (Decrease) in NPV
Interest Estimated ----------------------------------------------------------------
Rates NPV Amount Amount Percent
- - ----------------------------------------------------------------------------- -----------------------------
(Basis points) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
- - ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 $28,583 $29,554 $(2,290) $(1,709) (7.42)% (5.47)%
--- 30,873 31,263
-200 31,128 31,710 255 447 0.83% 1.43%
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 Board of 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.
Item 8. Financial Statements
QUAD CITY HOLDINGS, INC.
Index to Consolidated Financial Statements
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated balance sheets as of June 30, 2000 and 1999
Consolidated statements of income for the years ended June 30, 2000,
1999, and 1998
Consolidated statements of changes in stockholders' equity for the
years ended
Consolidated statements of cash flows for the years ended June 30,
2000, 1999, and 1998
Notes to consolidated financial statements
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, 2000 and 1999, and the related
statements of income, changes in stockholders' equity, and cash flows for the
years ended June 30, 2000, 1999, and 1998. 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 generally accepted auditing
standards. 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, 2000 and 1999, and the results of their
operations and their cash flows for the years ended June 30, 2000, 1999, and
1998, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
August 1, 2000
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
ASSETS 2000 1999
- - ----------------------------------------------------------------------------------------------------
Cash and due from banks ........................................... $ 15,130,357 $ 8,528,195
Federal funds sold ................................................ 26,105,000 39,125,000
Certificates of deposit at financial institutions ................. 12,776,463 12,535,193
Securities held to maturity, at amortized cost (fair value
2000 $565,237; 1999 $727,115) (Note 3) .......................... 574,988 724,415
Securities available for sale, at fair value (Note 3) ............. 55,554,062 49,533,909
------------------------------
56,129,050 50,258,324
------------------------------
Loans receivable (Note 4) ......................................... 241,852,851 197,976,692
Less allowance for estimated losses on loans (Note 4) ........... 3,617,401 2,895,457
------------------------------
238,235,450 195,081,235
------------------------------
Premises and equipment, net (Note 5) .............................. 7,715,621 7,553,616
Accrued interest receivable ....................................... 2,633,120 2,006,503
Other assets ...................................................... 8,896,554 6,258,149
------------------------------
Total assets .............................................. $ 367,621,615 $ 321,346,215
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ........................................... $ 44,043,932 $ 35,833,094
Interest-bearing .............................................. 244,022,824 212,132,785
------------------------------
Total deposits (Note 6) ................................... 288,066,756 247,965,879
Short-term borrowings (Note 7) .................................... 20,771,724 9,685,877
Federal Home Loan Bank advances (Note 8) .......................... 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 ................................................. 4,286,318 8,615,098
------------------------------
Total liabilities ................................................. 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 2000 - 2,325,416 and
2,283,920, respectively; 1999 - 2,296,251 ..................... 2,325,416 2,296,251
Additional paid-in capital ...................................... 12,147,984 11,959,080
Retained earnings ............................................... 7,296,017 4,550,490
Accumulated other comprehensive (loss) .......................... (1,098,518) (332,350)
------------------------------
20,670,899 18,473,471
Less cost of common shares acquired for the treasury
2000 - 41,496 ................................................. 599,480 --
-----------------------------
Total stockholders' equity ................................ 20,071,419 18,473,471
------------------------------
Total liabilities and stockholders' equity ................ $ 367,621,615 $ 321,346,215
==============================
See Notes to Consolidated Financial Statements.
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
- - --------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ................................... $ 18,364,812 $ 15,642,235 $ 12,083,990
Interest and dividends on securities:
Taxable .................................................... 3,214,722 2,229,178 1,891,019
Nontaxable ................................................. 233,793 56,089 14,649
Interest on federal funds sold ............................... 1,488,267 1,492,173 645,929
Other interest ............................................... 777,604 696,245 440,980
-------------------------------------------
Total interest income .................................. 24,079,198 20,115,920 15,076,567
-------------------------------------------
Interest expense:
Interest on deposits ......................................... 10,125,235 9,009,724 6,971,153
Interest on company obligated mandatorily redeemable
preferred securities ....................................... 1,137,402 63,518 --
Interest on short-term and other borrowings .................. 2,025,956 1,953,444 1,370,868
-------------------------------------------
Total interest expense ................................. 13,288,593 11,026,686 8,342,021
-------------------------------------------
Net interest income .................................... 10,790,605 9,089,234 6,734,546
Provision for loan losses (Note 4) ........................... 1,051,818 891,800 901,976
-------------------------------------------
Net interest income after provision for loan losses .... 9,738,787 8,197,434 5,832,570
-------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ........... 2,346,296 1,322,658 1,395,574
Trust department fees ........................................ 1,884,310 1,520,518 1,138,502
Deposit service fees ......................................... 600,219 433,056 290,721
Gains on sales of loans, net ................................. 438,799 1,043,763 713,121
Securities gains (losses), net ............................... (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 ........................................................ 913,013 504,699 433,765
------------------------------------------
Total noninterest income ............................... 6,154,416 5,560,451 6,148,417
------------------------------------------
Noninterest expenses:
Salaries and employee benefits ............................... 6,878,213 5,801,670 4,571,126
Professional and data processing fees ........................ 860,216 598,457 504,344
Advertising and marketing .................................... 410,106 359,571 238,160
Occupancy and equipment expense .............................. 1,580,911 1,453,040 1,045,349
Stationery and supplies ...................................... 324,219 267,739 219,523
Postage and telephone ........................................ 361,623 298,208 231,049
Other ........................................................ 1,052,173 900,214 1,100,264
------------------------------------------
Total noninterest expenses ............................. 11,467,461 9,678,899 7,909,815
------------------------------------------
Income before income taxes ............................. 4,425,742 4,078,986 4,071,172
Federal and state income taxes (Note 12) ....................... 1,680,215 1,614,165 1,677,900
------------------------------------------
Net income ............................................. $ 2,745,527 $ 2,464,821 $ 2,393,272
==========================================
Earnings per common share (Note 17):
Basic ........................................................ $ 1.19 $ 1.08 $ 1.09
Diluted ...................................................... $ 1.15 $ 1.03 $ 1.02
Weighted average common shares outstanding ................... 2,309,453 2,285,500 2,196,297
Weighted average common and common equivalent shares
outstanding ................................................ 2,385,840 2,398,525 2,353,932
See Notes to Consolidated Financial Statements.
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2000, 1999, and 1998
Accumulated
Additional Other
Preferred Common Paid-In Retained Comprehensive Treasury
Stock Stock Capital Earnings Income (Loss) Stock Total
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, year ended June 30, 1997 ...... $ 10 $1,462,824 $13,039,406 $ 171,171 $ (60,185) $ -- $14,613,226
-----------------------------------------------------------------------------------------
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) ................ -- 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 29,165
shares of common stock, net of
simultaneous redemptions of 8,145
shares, as a result of warrants and
stock options exercised (Note 14) .. -- 29,165 107,726 -- -- -- 136,891
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
===========================================================================================
See Notes to Consolidated Financial Statements.
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ....................................................... $ 2,745,527 $ 2,464,821 $ 2,393,272
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ................................................... 635,838 627,075 422,357
Provision for loan losses ...................................... 1,051,818 891,800 901,976
Deferred income taxes .......................................... (398,971) 232,262 (553,283)
Amortization of offering costs on subordinated debentures ...... 29,453 1,436 --
Amortization of premiums (accretion of discounts) on
securities, net .............................................. 62,539 38,697 (16,742)
Investment securities (gains) losses, net ...................... 28,221 (3,757) (8,734)
Loans originated for sale ...................................... (36,774,571) (85,027,675) (57,206,140)
Proceeds on sales of loans ..................................... 38,124,921 88,804,656 54,008,203
Net gains on sales of loans .................................... (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)
Tax benefit of nonqualified stock options exercised ............ 81,178 3,218 --
Increase in accrued interest receivable ........................ (626,617) (233,280) (398,916)
(Increase) decrease in other assets ............................ 170,192 (2,405,245) (273,402)
Increase (decrease) in other liabilities ....................... (528,780) 52,456 (766,623)
-------------------------------------------
Net cash provided by (used in) operating activities ........ 4,161,949 3,670,701 (4,379,153)
-------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold .................... 13,020,000 (16,165,000) (13,770,000)
Net increase in certificates of deposit at financial institutions (241,270) (4,169,070) (3,006,999)
Purchase of securities available for sale ........................ (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 ................. 6,200,000 14,400,000 9,500,000
Proceeds from paydowns on securities ............................. 1,389,269 1,732,539 4,531,123
Proceeds from sales of securities available for sale ............. 5,191,661 280,786 14,020
Purchase of life insurance contracts ............................. (2,023,543) -- --
Increase in cash value of life insurance contracts ............... (14,640) -- --
Proceeds from restructuring of merchant broker agreement ......... -- -- 2,900,000
Net loans originated ............................................. (45,117,584) (38,080,955) (50,883,287)
Purchase of premises and equipment, net .......................... (797,843) (520,423) (2,833,936)
-------------------------------------------
Net cash used in investing activities ...................... (46,103,430) (72,737,883) (70,269,771)
-------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ................................. 40,100,877 50,581,915 61,423,769
Net increase in short-term borrowings ............................ 11,085,847 7,685,877 2,000,000
Proceeds from Federal Home Loan Bank advances .................... 8,000,000 1,480,000 25,955,000
Payments on Federal Home Loan Bank advances ...................... (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 ....................................... (599,480) -- --
Proceeds from issuance of preferred stock ........................ -- -- 1,500,000
Proceeds from issuance of common stock, net of simultaneous
redemptions .................................................... 136,891 225,940 523,043
--------------------------------------------
Net cash provided by financing activities .................. $ 48,543,643 $ 65,954,564 $ 79,336,274
--------------------------------------------
Net increase (decrease) in cash and due from banks ......... $ 6,602,162 $ (3,112,618) $ 4,687,350
Cash and due from banks:
Beginning ........................................................ 8,528,195 11,640,813 6,953,463
--------------------------------------------
Ending ........................................................... $ 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 ......................................................... $ 13,024,589 $ 10,735,683 $ 7,769,512
Income taxes ..................................................... 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 ........... (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 to broker for purchase of securities available for sale ...... -- 3,800,000 --
See Notes to Consolidated Financial Statements.
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 services the Quad Cities area, 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 $2,753,000 and $1,476,000 at June 30, 2000 and 1999,
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.
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
evaluations of the loan portfolio and related off-balance-sheet commitments,
and consider current 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", 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.
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 are computed by dividing
net income by the weighted average number of common stock shares outstanding
for the respective period. Diluted earnings per share are 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.
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, 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, 2000
and 1999 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
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
-----------------------------------------------------------
$ 724,415 $ 2,700 $ -- $ 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) $ 49,533,909
===========================================================
All sales of securities during the years ended June 30, 2000, 1999, and 1998
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:
2000 1999 1998
------------------------------------
Proceeds from sales of securities ....... $5,191,661 $ 280,786 $ 14,020
Gross losses from sales of securities ... 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, 2000 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 after
one year through five years .................. $ 574,988 $ 565,237
===========================
Securities available for sale:
Due in one year or less ...................... $ 5,999,708 $ 5,967,050
Due after one year through five years ........ 33,325,941 32,440,980
Due after five years ......................... 10,615,038 10,175,182
---------------------------
49,940,687 48,583,212
Mortgage-backed securities ................... 7,006,906 6,709,493
Other securities ............................. 277,925 261,357
---------------------------
$57,225,518 $55,554,062
===========================
As of June 30, 2000 and 1999, investment securities with a carrying value of
$33,718,441 and $23,399,384, 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, 2000 and 1999 is presented
as follows:
2000 1999
----------------------------
Commercial ..................................... $167,682,652 $136,206,893
Real estate .................................... 36,301,379 27,591,886
Real estate - construction ..................... 3,463,682 3,367,458
Installment and other consumer ................. 34,405,138 30,810,455
----------------------------
241,852,851 197,976,692
Less allowance for estimated losses on loans ... 3,617,401 2,895,457
----------------------------
$238,235,450 $195,081,235
============================
Real estate loans include loans held for sale with a carrying value of
$1,121,474 and $2,033,025 as of June 30, 2000 and 1999, respectively. The market
value of these loans exceeded its carrying value at those dates.
Loans on nonaccrual status amounted to $382,745 and $1,287,727 as of June 30,
2000 and 1999, respectively. Foregone interest income and cash interest
collected on nonaccrual loans was not material during the years ended June 30,
2000, 1999, and 1998.
Changes in the allowance for estimated losses on loans for the years ended June
30, 2000, 1999, and 1998 are presented as follows:
2000 1999 1998
-----------------------------------------
Balance, beginning ....................... $ 2,895,457 $ 2,349,838 $ 1,632,500
Provisions charged to expense ............ 1,051,818 891,800 901,976
Loans charged off ........................ (426,708) (478,515) (205,234)
Recoveries on loans previously charged off 96,834 132,334 20,596
----------------------------------------
Balance, ending .......................... $ 3,617,401 $ 2,895,457 $ 2,349,838
=========================================
Impaired loans were not material as of June 30, 2000 and 1999.
The loan portfolio included a concentration of loans in certain industries as of
June 30, 2000 as follows:
Industry Balance
- - --------------------------------------------------------------------------------
Commercial banks $ 12,182,901
Real estate operators and lessors 11,364,772
Retail eating establishments 8,889,778
Hospitals 4,981,975
Automotive dealers 4,932,967
Real estate developers 4,790,558
Fabricated metal products 4,439,792
Physicians 4,045,447
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, 2000 and 1999 was as follows:
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
================================
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of June 30,
2000 and 1999:
2000 1999
----------------------------
Land ....................................... $ 630,699 $ 630,699
Buildings .................................. 5,003,570 4,634,608
Furniture and equipment .................... 4,324,866 3,955,489
----------------------------
9,959,135 9,220,796
Less accumulated depreciation .............. 2,243,514 1,667,180
----------------------