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, 2001
Commission file number: 0-22208
QUAD CITY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 42-1397595
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(State of incorporation) (I.R.S. Employer Identificationb No.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
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Common stock, $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 21, 2001 was approximately $23,400,000. As of August 21, 2001, the
issuer had 2,265,420 shares of Common Stock outstanding.
Documents incorporated by reference:
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Part III of Form 10-K - Proxy statement for annual meeting of
stockholders to be held in October 2001.
1
Part I
Item 1. Business
General. Quad City Holdings, Inc. ("Quad City") was formed in February 1993
under the laws of the state of Delaware for the purpose of becoming the bank
holding company of Quad City Bank and Trust Company (the "Bank"). At the annual
stockholders meeting to be held on October 24, 2001, management is seeking
stockholder approval to change the name of the company to QCR Holdings, Inc.
The Bank was capitalized on October 13, 1993 and commenced operations on January
7, 1994. The Bank is organized as an Iowa-chartered commercial bank that is a
member of the Federal Reserve System with depository accounts insured by the
Federal Deposit Insurance Corporation. The Bank provides full service commercial
and consumer banking, and trust and asset management services in the Quad City
and Cedar Rapids areas through its four offices that are located in Bettendorf
and Davenport, Iowa and in Moline, Illinois and its new office located in Cedar
Rapids, Iowa.
After focusing its operations in the Quad Cities area since its inception, Quad
City expanded its banking operations into the Cedar Rapids, Iowa market during
the fourth fiscal quarter of 2001. The Cedar Rapids operation is currently
functioning as a branch of Quad City Bank and Trust Company. Quad City has filed
the required regulatory applications to obtain a separate bank charter in the
Cedar Rapids market, to be named Cedar Rapids Bank and Trust Company.
Expectations are to convert the branch operations into this newly chartered bank
upon receiving regulatory approval, which is likely to occur in the fall of
2001. Quad City is in the process of raising additional equity capital of
approximately $5 million through a private placement of its common stock to
assist with capitalization of the new bank.
Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a
Delaware corporation that provides merchant credit card processing services.
This operation had previously been a division of the Bank since July 1994.
Currently, approximately 14,700 merchants process transactions with Bancard.
On March 29, 1999, Bancard formed its own independent sales organization ("ISO")
subsidiary, Allied Merchant Services, Inc. ("Allied"), which generates merchant
credit card processing business. Bancard owns 100% of Allied.
Quad City Holdings Capital Trust I ("Capital Trust") was formed in April 1999
and capitalized in June 1999 in connection with the public offering of $12
million of 9.2% trust preferred capital securities due June 30, 2029.
Quad City owns 100% of the Bank and Bancard and 100% of the common securities of
Capital Trust, and in addition to such ownership invests its capital in stocks
of financial institutions and mutual funds, as well as participates in loans
with the Bank.
Quad City, the Bank, Bancard and Allied have a June 30th fiscal year end and
collectively employed 183 individuals at June 30, 2001. No one customer accounts
for more than 10% of revenues, loans or deposits.
Competition. Quad City currently has most of its operations in the highly
competitive environment of the Quad Cities area. The Cedar Rapids market is also
highly competitive with respect to financial services. Competitors include not
only other commercial banks, credit unions, savings banks, savings and loan
institutions and mutual funds, but also, insurance companies, finance companies,
brokerage firms, investment banking companies, and a variety of other financial
services and advisory companies. Many of these competitors are not subject to
the same regulatory restrictions as Quad City. Many of these unregulated
competitors compete across geographic boundaries and provide customers
increasing access to meaningful alternatives to banking services. Additionally,
Quad City competes in markets with a number of much larger financial
institutions with substantially greater resources and larger lending limits.
These competitive trends are likely to continue and may increase as a result of
the continuing reduction on restrictions on the interstate operations of
financial institutions. Under the Gramm-Leach-Bliley Act of 1999, effective
March 11, 2000, securities firms and insurance companies that elect to become
financial holding companies may acquire banks and other financial institutions.
The Gramm-Leach-Bliley Act may significantly change the competitive environment
in which Quad City and its subsidiary banks conduct business. The financial
services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
2
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") regulates Quad City and its subsidiaries. In addition, the Bank is
regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and
the Federal Deposit Insurance Corporation (the "FDIC").
Business. Quad City's principal business consists of attracting deposits from
the public and investing those deposits in loans and securities. The deposits of
the Bank are insured to the maximum amount allowable by the FDIC. Quad City's
results of operations are dependent primarily on net interest income, which is
the difference between the interest earned on its loans and securities and the
interest paid on deposits and borrowings. Its operating results are affected by
merchant credit card fees, trust fees, deposit service charge fees, fees from
the sales of residential real estate loans and other income. Operating expenses
include employee compensation and benefits, occupancy and equipment expense,
professional and data processing fees, advertising and marketing expenses and
other administrative expenses. Quad City's operating results are also affected
by economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
Lending. Quad City and its subsidiaries provide a broad range of commercial and
retail lending and investment services to corporations, partnerships,
individuals and government agencies. The Bank actively markets its services to
qualified lending customers. Lending officers actively solicit the business of
new borrowers entering their market areas as well as long-standing members of
the local business community. The Bank has established lending policies, which
include a number of underwriting factors to be considered in making a loan,
including location, loan to value ratio, cash flow, interest rate and the credit
history of the borrower.
The Bank's current lending limit is approximately $5.0 million. Its loan
portfolio is comprised primarily of loans in the areas of commercial,
residential real estate and consumer lending. As of June 30, 2001, commercial
loans made up approximately 73% of the loan portfolio, while residential
mortgages comprised approximately 14% and consumer lending comprised 13%.
As part of the loan monitoring activity at the Bank, loan review personnel
interact with senior bank management weekly. The Bank's Loan Review Committee
meets on a monthly basis to review the loan portfolio. Quad City has also
instituted a separate loan review function to analyze credits of the Bank.
Management has attempted to identify problem loans at an early stage and to
aggressively seek a resolution of these situations.
As noted above, the Bank is an active commercial lender. The Bank's areas of
emphasis include, but are not limited to, loans to wholesalers, manufacturers,
building contractors, developers, business services companies and retailers. The
Bank provides a wide range of business loans, including lines of credit for
working capital and operational purposes and term loans for the acquisition of
equipment and other purposes. Collateral for these loans generally includes
accounts receivable, inventory, equipment and real estate. In addition, the Bank
often takes personal guarantees to help assure repayment. Loans may be made on
an unsecured basis if warranted by the overall financial condition of the
borrower. Terms of commercial business loans generally range from one to five
years. A significant portion of the Bank's commercial business loans have
floating interest rates or reprice within one year. Commercial real estate loans
are also made. Collateral for these loans generally includes the underlying real
estate and improvements, and may include additional assets of the borrower.
Residential mortgage lending has been a focal point of the Bank as it continues
to build its real estate lending business. As a result of this focus, the Bank's
real estate loan portfolio has experienced rapid growth, increasing from
approximately $354 thousand at the end of the 1994 fiscal year, to approximately
$40.6 million at the end of fiscal 2001. The Bank currently has seven mortgage
originators.
The Bank sells a significant portion of its real estate loans in the secondary
market. The Bank typically sells virtually all of its fixed rate loans. During
fiscal 2001, the Bank originated $97.6 million of real estate loans and sold
$92.9 million types of these loans. Generally, the Bank's residential mortgage
loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to
allow the Bank to resell loans in the secondary market. The Bank structures most
loans that will not conform to those underwriting requirements as adjustable
rate mortgages that mature in one to three years. The Bank generally retains
these loans in its portfolio. Servicing rights are not presently retained on the
loans sold in the secondary market.
3
The Bank's consumer lending department provides all types of consumer loans
including motor vehicle, home improvement, home equity, signature loans and
small personal credit lines. The Bank has reduced its involvement in indirect
automobile loans, and intends to actively seek to increase its home equity
loans.
Appendices. The commercial banking business is a highly regulated business. See
Appendix A for a brief summary regarding federal and state statutes and
regulations, which are applicable to Quad City and its subsidiaries.
Supervision, regulation and examination of banks and bank holding companies by
bank regulatory agencies are intended primarily for the protection of depositors
rather than stockholders of bank holding companies and banks.
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. Currently, approximately 1,500 square
feet on the second floor is leased to a professional services firm and
approximately 4,500 square feet is vacant and leasable. In addition, the
residential real estate department of the Bank leases approximately 2,500 square
feet on the first floor in the north half of the building.
Renovation of a third full service banking facility was completed in February
1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near
the intersection of 7th Street and John Deere Road in Moline near the Rock
Island/Moline border. The building is owned by a third party limited liability
company and the Bank and Bancard are its major tenants. Quad City has purchased
a 20% interest in the company that owns the building. Bancard relocated its
operations to the lower level of the 30,000 square foot building in late 1997.
Quad City relocated its corporate headquarters to the building in February 1998
and occupies approximately 2,000 square feet on the second 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 was completed in October
2000 at 5515 Utica Ridge Road in Davenport, Iowa. The Bank leases approximately
6,000 square feet on the first floor and 2,200 square feet on the lower level of
the 24,000 square foot facility. The office opened in October 2000.
The start-up operations of the Cedar Rapids branch of the Bank are located in
Suite 250 of the Town Centre Building, 221 Third Avenue, S.E., Cedar Rapids.
When the branch operations are converted into the newly chartered Cedar Rapids
Bank and Trust Company, the location in Cedar Rapids will be moved to leased
space in the GreatAmerica Building, 625 First Street, S.E., Cedar Rapids. The
retail banking operations will consist of 1,500 square feet on the first floor
and the commercial banking and operations facility will consist of approximately
6,200 square feet on the second floor. The necessary tenant improvements are
currently being installed in both suites, and occupancy is expected during
September 2001. The lease term is for an initial period of five years with two
five-year renewal options.
Management believes that the facilities are of sound construction, in good
operating condition, are appropriately insured and are adequately equipped for
carrying on the business of Quad City.
The Bank intends to limit its investment in premises to no more than 50% of Bank
capital. The Bank frequently invests in commercial real estate mortgages. The
Bank also invests in residential mortgages. The Bank has established lending
policies which include a number of underwriting factors to be considered in
making a loan including, location, loan to value ratio, cash flow, interest rate
and credit worthiness of the borrower.
No individual real estate property or mortgage amounts to 10% or more of
consolidated assets.
4
Item 3. Legal Proceedings
Bancard is the holder of an account receivable in the approximate amount of $1.7
million owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova
Corporation (trading symbol NIS on the New York Stock Exchange). This receivable
arises pursuant to Bancard's provision of electronic credit card sales
authorization and settlement services to PMT pursuant to a written contract that
includes PMT's obligation to indemnify Bancard for credit card chargeback losses
arising from those services. PMT has failed to timely pay Bancard for monthly
invoices, including service charges and substantial chargeback losses, for the
period beginning May 2000. Bancard intends to vigorously pursue collection of
this receivable. On September 25, 2000, PMT filed a lawsuit in federal court in
Los Angeles, California, against Bancard and Quad City. This lawsuit alleges
tortuous 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 filed lawsuits in
federal and state courts in Davenport, Iowa against PMT. These lawsuits sought a
court order compelling PMT to participate in arbitration in Bettendorf, Iowa, as
provided for in the pertinent contract documents, and to resolve the disputes
between PMT, Bancard and Quad City, including the unpaid account receivable. The
federal court in Iowa ruled that the arbitration issue should be determined by
the state court in Iowa. Subsequently, the Iowa District Court of Scott County
ruled that all claims, including the tort claims, must be arbitrated in Iowa.
Because of that ruling, the California lawsuit was dismissed, and arbitration is
pending. Bancard and Quad City continue to believe that PMT's allegations are
without merit and will vigorously pursue the collection of the receivable and
the defense of PMT's claims.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of Quad City for a vote
during the fourth quarter of the fiscal year ended June 30, 2001.
5
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock, par value $1.00 per share 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, 2001, there were 2,265,420 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. At the annual stockholders meeting to be
held in October 2001, management is seeking stockholder approval to change the
name of the company to QCR Holdings, Inc. It is anticipated that Quad City's
trading symbol will be changed to "QCRH" at that time.
Fiscal 2001 Fiscal 2000
sales price sales price
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High Low High Low
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First quarter .......... $ 17.250 $ 11.313 $ 20.000 $ 16.500
Second quarter ......... 12.250 9.938 17.500 13.500
Third quarter .......... 12.563 9.750 15.250 10.250
Fourth quarter ......... 10.813 9.250 17.000 11.125
Quad City expects that all earnings will be retained to finance the growth of
Quad City, the Bank and Bancard, and that no cash dividends will be paid in the
near future. If and when dividends are declared, Quad City will likely be
largely dependent upon dividends from the Bank and Bancard for funds to pay
dividends on the common stock.
Under Iowa law, the Bank will be restricted as to the maximum amount of
dividends it may pay on its common stock. The Iowa Banking Act provides that an
Iowa bank may not pay dividends in an amount greater than its undivided profits.
The Bank is a member of the Federal Reserve System. The total of all dividends
declared by the Bank in a calendar year may not exceed the total of its net
profits of that year combined with its retained net profits of the preceding two
years. In addition, the Federal Reserve Board, the Iowa Superintendent and the
FDIC are authorized under certain circumstances to prohibit the payment of
dividends by the Bank. In the case of Quad City, further restrictions on
dividends may be imposed by the Federal Reserve Board.
Item 6. Selected Financial Data
The "Selected Consolidated Financial Data" of Quad City set forth below is
derived in part from, and should be read in conjunction with our consolidated
financial statements and the accompanying notes thereto. See Item 8 "Financial
Statements and Supplementary Data." Results for past periods are not necessarily
indicative of results to be expected for any future period.
6
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended June 30,
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2001 2000 1999 1998 1997
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Statement of Income Data: (Dollars in thousands)
Interest income ....................... $ 28,544 $ 24,079 $ 20,116 $ 15,077 $ 9,706
Interest expense ...................... 16,612 13,289 11,027 8,342 4,994
Net interest income ................... 11,932 10,790 9,089 6,735 4,712
Provision for loan losses ............. 889 1,052 892 902 844
Noninterest income (1) ................ 6,313 6,154 5,561 6,148 2,807
Noninterest expenses .................. 13,800 11,467 9,679 7,910 5,291
Pre-tax net income .................... 3,556 4,425 4,079 4,071 1,384
Income tax expense .................... 1,160 1,680 1,614 1,678 165
Net income ............................ 2,396 2,745 2,465 2,393 1,219
Per Common Share Data:
Net income-basic ...................... $ 1.06 $ 1.19 $ 0.98 $ 1.00 $ 0.54
Net income-diluted .................... 1.04 1.15 0.93 0.93 0.52
Balance Sheet:
Total assets .......................... $400,948 $367,622 $321,346 $250,151 $168,379
Securities ............................ 56,710 56,129 50,258 33,276 29,589
Loans ................................. 287,865 241,853 197,977 162,975 108,365
Allowance for estimated losses on loans 4,248 3,617 2,895 2,350 1,633
Deposits .............................. 302,155 288,067 247,966 197,384 135,960
Stockholders' equity:
Common ........................... 23,817 20,071 18,473 16,602 13,613
Preferred ........................ -- -- -- 2,500 1,000
Key Ratios:
Return on average assets .............. 0.62% 0.82% 0.86% 1.14% 0.86%
Return on average common equity ....... 10.95 14.17 13.69 16.40 9.85
Net interest margin ................... 3.35 3.53 3.42 3.55 3.74
Efficiency ratio (2) .................. 75.64 67.68 66.07 61.40 70.37
Nonperforming assets to total assets .. 0.44 0.20 0.51 0.51 0.27
Allowance for estimated losses on loans
to total loans ...................... 1.48 1.50 1.46 1.44 1.51
Net charge-offs to average loans ...... 0.10 0.16 0.26 0.13 0.08
Average common stockholders' equity
to average assets ................... 5.69 5.77 6.26 6.97 8.73
Average stockholders' equity
to average assets ................... 5.69 5.77 7.05 7.97 9.15
Earnings to fixed charges
Excluding interest on deposits .... 1.90 x 2.29 x 2.81 x 3.78 x 3.17 x
Including interest on deposits .... 1.21 1.33 1.36 1.48 1.28
(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.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides additional information regarding our
operations for the fiscal years ended June 30, 2001, 2000 and 1999, and
financial condition for the fiscal years ended June 30, 2001 and 2000. This
discussion should be read in conjunction with "Selected Consolidated Financial
Data" and our consolidated financial statements and the accompanying notes
thereto included or incorporated by reference elsewhere in this document.
Overview
Quad City was formed in February 1993 for the purpose of organizing the Bank.
The Bank opened in January 1994 with $4.5 million in assets and reached the
milestone of $400 million in total assets as of June 30, 2001. Management
expects continued opportunities for growth, even though the rate of growth will
probably be slower than that experienced to date.
Quad City reported earnings of $2.4 million or $1.06 basic earnings per share
for fiscal 2001 as compared to $2.7 million and $1.19 per share for fiscal 2000
and $2.5 million and $.98 per share for fiscal 1999. The decrease in fiscal 2001
from fiscal 2000 was attributable to an increase in noninterest expenses
partially offset by an increase in noninterest income and net interest income.
The improvement in fiscal 2000 from fiscal 1999 was attributable to increased
net interest income and increased volumes of business for the Bank, reduced by
an increase in noninterest expenses.
Quad City's results of operations are dependent primarily on net interest
income, which is the difference between interest income, principally from loans
and investment securities, and interest expense, principally on customer
deposits and borrowings. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar level of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to the net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities. Quad City's average
yield on interest earning assets increased 0.13% for fiscal 2001 as compared to
fiscal 2000. With the same comparison, the average cost of interest-bearing
liabilities increased 0.42%, which resulted in a 0.29% decrease in the net
interest spread of 2.98% at June 30, 2000 to 2.69% at June 30, 2001. The
narrowing of the net interest spread created a decline in the net interest
margin. For fiscal 2001, net interest margin was 3.35% compared to 3.53% for
fiscal 2000. Management continues to closely monitor and manage net interest
margin.
Quad City's operating results are also affected by sources of noninterest
income, including merchant credit card fees, trust fees, deposit service charge
fees, fees from the sales of residential real estate loans and other income.
Operating expenses of Quad City include employee compensation and benefits,
occupancy and equipment expense and other administrative expenses. Quad City's
operating results are also affected by economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. The majority of the Bank's loan portfolio is invested in
commercial loans. Deposits from commercial customers represent a significant
funding source as well.
The Bank has added facilities and employees to accommodate both its historical
growth and anticipated future growth. As such, overhead expenses have had a
significant impact on earnings. This trend is likely to continue as the Bank's
newest Davenport location opened in October 2000 and the new bank in Cedar
Rapids is expected to move to its initial permanent facility in the fall of
2001. The primary challenge for the Bank currently, from a profitability
standpoint, is to increase its net interest margin. Large commercial depositors
and certificate of deposit customers create a relatively high cost of funds and
this fact, along with a very competitive loan rate environment, have resulted in
the Bank's interest margin being below its national peer group. Management
continues to address this issue with alternative funding sources and pricing
strategies.
8
During 1994, the Bank began to develop internally a merchant credit card
processing operation and in 1995 transferred this function to Bancard, a
separate subsidiary of Quad City. Bancard initially had an arrangement to
provide processing services exclusively to clients of a single independent sales
organization or ISO. This ISO was sold in 1998, and the purchaser requested a
reduction in the term of the contract. Bancard agreed to amend the contract to
reduce the term and accept a fixed monthly processing fee of $25,000 for
merchants existing at the time the agreement was signed and a lower transaction
fee for new merchants in exchange for a payment of $2.9 million, the ability to
transact business with other ISOs and the assumption of the credit risk by the
ISO. Approximately two thirds of the income from this settlement, or $2.2
million, was reported in fiscal 1998, with the remainder of $732,000 being
recognized as an adjustment to the fixed processing fee during fiscal 1999.
Bancard terminated its processing for this ISO in May 2000. During fiscal 2000
and 2001, Bancard began processing for nine new ISOs. In spite of this, Bancard
expects its merchant credit card fee income to remain below previous levels
until such time as Bancard can develop relationships with additional ISOs,
increase volumes with existing ISOs or Allied can generate processing business
revenues comparable to those Bancard experienced prior to termination of
processing for the initial ISO. Bancard's average dollar volume of transactions
processed during fiscal 2000 was $90 million, and $58 million was attributable
to the ISO that terminated its relationship. During fiscal 2001, the average
dollar volume of transactions processed per month by Bancard decreased 15% to
$76 million. This reduction in processing fees and cessation of the settlement
income at Bancard is expected to continue to adversely affect consolidated net
income in fiscal 2002 as compared with fiscal 2001 and prior years.
During fiscal 1998, the Bank expanded its presence in the mortgage banking
market by hiring several experienced loan originators and an experienced
underwriter. The Bank originates mortgage loans on personal residences and sells
the majority of these loans into the secondary market to avoid the interest rate
risk associated with long-term fixed rate financing. The Bank realizes revenue
from this mortgage banking activity from a combination of loan origination fees
and gain on sale of the loans in the secondary market. During fiscal 2001, the
Bank originated $97.6 million of real estate loans and sold $92.9 million of
loans, which resulted in gains of $1.1 million. The decrease in interest rates
during that time caused a significant increase in the Bank's mortgage
origination volume. In fiscal 2000, the Bank originated $36.8 million of real
estate loans and sold $37.7 million, which resulted in gains of $439,000.
Trust department income continues to be a significant contributor to noninterest
income, growing from $1.5 million in fiscal 1999 to $1.9 million in fiscal 2000
and to $2.1 million in fiscal 2001. Income is generated primarily from fees
charged based on assets under management for corporate and personal trusts and
for custodial services. Assets under administration have grown from $586.4 at
June 30, 2000 to $617.5 million at June 30, 2001. Growth in the current fiscal
year resulted primarily from new trust relationships created during the year.
Quad City's initial public offering during the fourth calendar quarter of 1993
raised approximately $14 million. In order to provide additional capital to
support the growth of the Bank, Quad City formed a statutory business trust,
which issued $12 million of capital securities to the public for cash on June 9,
1999. In conjunction with the establishment of the new bank in Cedar Rapids,
Quad City is in the process of selling approximately $5.0 million of its common
stock through a private placement offering, primarily to investors in the Cedar
Rapids area.
Results of Operations
Fiscal 2001 compared with fiscal 2000
Overview. Net income for fiscal 2001 was $2.4 million as compared to net income
of $2.7 million for the same period in 2000 for a decrease of $300,000 or 13%.
Basic earnings per share for fiscal 2001 were $1.06 as compared to $1.19 for
fiscal 2000. The decrease in net income was comprised of an increase in
noninterest expenses of $2.3 million partially offset by an increase in net
interest income after provision for loan losses of $1.3 million, an increase in
noninterest income of $200,000 and a decrease in federal and state income taxes
of $500,000. Several factors contributed to the reduction in net income. These
factors included the opening of Quad City's fourth full-service banking facility
on Utica Ridge Road in Davenport, a reduction in processing volumes and
profitability at Quad City Bancard and initial start-up expenses associated with
Quad City's expansion to the Cedar Rapids market.
9
Interest income. Interest income increased by $4.4 million, from $24.1 million
for fiscal 2000 to $28.5 million for fiscal 2001. The 19% rise in interest
income was basically attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable. Despite the Federal
Reserve's dramatic reduction in short-term interest rates by 2.75% since January
of 2001, the average yield on interest earning assets for fiscal 2001 was 8.01%
as compared to 7.88% for fiscal 2000.
Interest expense. Interest expense increased by $3.3 million, from $13.3 million
for fiscal 2000 to $16.6 million for fiscal 2001. The 25% increase in interest
expense was primarily attributable to greater average outstanding balances in
interest-bearing liabilities and higher interest rates. Despite the Federal
Reserve's reduction in short-term interest rates since January of 2001, the
average cost on interest bearing liabilities was 5.32% for fiscal 2001 as
compared to 4.90% for 2000.
Provision for loan losses. The provision for loan losses is established based on
a number of factors, including the local and national economy and the risk
associated with the loans in the portfolio. Quad City had an allowance for
estimated losses on loans of approximately 1.48% of total loans at June 30, 2001
as compared to approximately 1.50% at June 30, 2000. The provision for loan
losses decreased by $200,000, from $1.1 million for fiscal 2000 to $900,000 for
fiscal 2001. During the year, management made monthly provisions for loan losses
based upon the increase in loans and a detailed analysis of the loan portfolio.
For fiscal 2001, commercial loans combined for total charge-offs of $87,000 and
total recoveries of $2,000. Consumer loan charge-offs and recoveries totaled
$214,000 and $39,000, respectively, for fiscal 2001. Indirect auto loans
accounted for a majority of the consumer loan charge-offs. Because asset quality
is a priority for Quad City and its subsidiaries, management made the decision
in the first quarter of fiscal 1999 to downscale indirect auto loan activity
based on charge-off history. The average balance in the indirect auto loan
portfolio for fiscal 2001 was $3.4 million compared to $8.2 million for fiscal
2000. This 59% decrease in the average portfolio brought with it a 56% decrease
in the net charge-offs of indirect auto loans. Net charge-offs for the indirect
auto loan portfolio were $46,000 for fiscal 2001 compared to $77,000 for fiscal
2000, for a decrease of $31,000. The ability to grow profitably is, in part,
dependent upon the ability to maintain asset quality.
Noninterest income. Noninterest income increased by $200,000, from $6.1 million
for fiscal 2000 to $6.3 million for fiscal 2001. Noninterest income for fiscal
2001 and 2000 consisted of income from the merchant credit card operation, the
trust department, depository service fees, gains on the sale of residential real
estate mortgage loans, and other miscellaneous fees. The 3% increase was
primarily due to an increase in gains on sales of loans, net, and increased
trust fees and deposit service fees received during the period, offset by the
decrease in merchant credit card fees.
During fiscal 2001, merchant credit card fees, net of processing costs,
decreased by $600,000 to $1.7 million, from $2.3 million for fiscal 2000. The
decrease was due to decreased volumes of credit card transactions processed
during fiscal 2001. As previously discussed, Bancard terminated processing for
its largest ISO in May 2000.
For fiscal 2001, trust department fees increased $200,000, or 10%, to $2.1
million from $1.9 million for fiscal 2000. The increase was primarily a
reflection of the development of additional trust relationships during the
period.
Gains on sales of loans, net, were $1.1 million for fiscal 2001, which reflected
an increase of 159%, or $700,000, from $400,000 for fiscal 2000. The increase
resulted from a decline in interest rates over recent months, which was driven
by corresponding cuts by the Federal Reserve during the first half of calendar
2001. This created significantly more home refinances and home purchases during
the fiscal year and the subsequent sale of the majority of these loans into the
secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 2001 were
$13.8 million as compared to $11.5 million for the same period in 2000, or an
increase of $2.3 million or 20%.
10
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 2001 and 2000.
Years Ended June 30,
----------------------------------------
2001 2000 % Change
----------------------------------------
Salaries and employee benefits ......................... $ 8,014,268 $ 6,878,213 17%
Professional and data processing fees .................. 1,159,929 860,216 35
Advertising and marketing .............................. 579,524 410,106 41
Occupancy and equipment expense ........................ 1,925,820 1,580,911 22
Stationery and supplies ................................ 352,441 324,219 9
Postage and telephone .................................. 409,626 361,623 13
Other .................................................. 1,358,345 1,052,173 29
----------------------------------------
Total noninterest expenses ............... $13,799,953 $11,467,461 20%
========================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2001, total salaries and benefits
increased to $8.0 million or $1.1 million over the fiscal 2000 total of $6.9
million. The change was primarily attributable to the addition of new Bank
employees during the period. Advertising and marketing increased $200,000 or
41%. The increase was the result of the development and start-up of the Bank's
new website (qcbt.com), the establishment of an online partnership with America
Online, Inc. creating local access to that website, and media expenses incurred
in support of marketing efforts for the Bank's Utica location and various Bank
products and departments. Professional and data processing fees increased
$300,000 or 35%. The increase was primarily attributable to legal fees resulting
from the legal proceedings in process between Bancard and PMT Services, Inc.,
combined with increased fees to outside consultants addressing compliance,
efficiency and profitability issues for the Bank. Other noninterest expense
increased $300,000 or 29% for the fiscal year. The increase was primarily the
result of increased service charges from upstream banks incurred by the Bank and
increased expenses related to Bancard's cardholder program.
Income tax expense. The provision for income taxes was $1.2 million for fiscal
2001 compared to $1.7 million for fiscal 2000, a decrease of $500,000 or 31%.
The decrease was primarily attributable to decreased net income generated in
fiscal 2001 compared to fiscal 2000, and a reduction in the effective tax rate
for fiscal 2001 of 32.6% versus 38.0% for fiscal 2000.
Fiscal 2000 compared with fiscal 1999
Overview. Net income for fiscal 2000 was $2.7 million as compared to net income
of $2.5 million for the same period in 1999 for an increase of $281,000 or 11%.
Basic earnings per share for fiscal 2000 were $1.19 as compared to $0.98 for
fiscal 1999. The increase in net income was comprised of an increase in net
interest income after provision for loan losses of $1.5 million and an increase
in noninterest income of $594,000 reduced by an increase in noninterest expenses
of $1.8 million. The increase in noninterest income occurred despite the fact
that fiscal 1999 included $732,000 of revenue, which was related to a one-time
gain recognized by Bancard. The recognition of this income ceased as of June 30,
1999.
Interest income. Interest income increased by $4.0 million, from $20.1 million
for fiscal 1999 to $24.1 million for fiscal 2000. The 20% rise in interest
income was basically attributable to greater average outstanding balances in
interest-earning assets, principally loans receivable, and higher interest
rates.
Interest expense. Interest expense increased by $2.3 million, from $11.0 million
for fiscal 1999 to $13.3 million for fiscal 2000. The 20% increase in interest
expense was primarily attributable to greater average outstanding balances in
interest-bearing liabilities and higher interest rates.
Provision for loan losses. The provision for loan losses is established based on
factors including the local and national economy and the risk associated with
the loans in the portfolio. Quad City had an allowance for estimated losses on
loans of approximately 1.50% 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 made
the decision to downscale indirect auto loan activity based on charge-off
history. The ability to grow profitably is, in part, dependent upon the ability
to maintain asset quality.
11
Noninterest income. Noninterest income increased by $594,000, from $5.6 million
for fiscal 1999 to $6.2 million for fiscal 2000. Noninterest income for fiscal
1999 consisted of the amortization of deferred income resulting from the
restructuring of a merchant broker agreement, income from the merchant credit
card operation, the trust department, depository service fees, gains on the sale
of residential real estate mortgage loans, and other miscellaneous fees.
Noninterest income for fiscal 2000 consisted of income from the merchant credit
card operation, the trust department, depository service fees, gains on the sale
of residential real estate mortgage loans, and other miscellaneous fees. The 11%
increase was primarily due to an increase in merchant credit card fees, and
increased trust fees received during the period, offset by the decrease in gains
on sales of loans, net and the amortization of deferred income resulting from
the restructuring of the merchant broker agreement.
During fiscal 2000, merchant credit card fees, net of processing costs,
increased by $1.0 million to $2.3 million, from $1.3 million for fiscal 1999.
The increase was due to increased volumes of credit card transactions processed
during fiscal 2000. As previously discussed, pursuant to the contract with its
largest ISO, Bancard terminated processing for it in May 2000.
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 19%
Professional and data processing fees .................. 860,216 598,457 44
Advertising and marketing .............................. 410,106 359,571 14
Occupancy and equipment expense ........................ 1,580,911 1,453,040 9
Stationery and supplies ................................ 324,219 267,739 21
Postage and telephone .................................. 361,623 298,208 21
Other .................................................. 1,052,173 900,214 17
----------------------------------------
Total noninterest expenses ............... $11,467,461 $ 9,678,899 18%
========================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 2000, total salaries and benefits
increased to $6.9 million or $1.1 million over the fiscal 1999 total of $5.8
million. The change was primarily attributable to the addition of new Bank
employees during the period. Professional and data processing fees increased
$262,000 or 44%. The increase was primarily attributable to an increase in core
and ancillary data processing fees as a result of an increase in transaction
volumes and number of customer accounts. Additionally, the Bank incurred new
ongoing expenses related to loan collection software, cash management software
and two new automated teller machines. Stationary and supplies expense increased
$56,000 or 21% and postage and telephone expense increased $63,000 or 21%. The
increases were the result of the overall increase in business volume of the
Bank.
12
Beginning in 1997, Quad City addressed issues related to the Year 2000 and their
potential to adversely affect both Quad City's operations and ability to provide
prompt, reliable customer service. The estimated total cost of the Year 2000
project was $175,000. This included costs to upgrade equipment specifically for
the purpose of Year 2000 compliance and various administrative expenditures.
Quad City's cost for the Year 2000 project for fiscal 2000 was $27,000, as
compared to $122,000 for fiscal 1999.
Income tax expense. The provision for income taxes was $1.7 million for fiscal
2000 compared to $1.6 million for fiscal 1999, an increase of $66,000 or 4%. The
increase was attributable to greater net income generated in fiscal 2000
compared to fiscal 1999, partially offset by a reduction in the effective tax
rate for fiscal 2000 of 38.0% versus 39.6% for fiscal 1999.
Financial Condition
Total assets of Quad City increased by $33.3 million or 9% to $400.9 million at
June 30, 2001 from $367.6 million at June 30, 2000. The growth primarily
resulted from an increase in the loan portfolio funded by deposits received from
customers and by proceeds from short-term borrowings and Federal Home Loan Bank
advances.
Cash and Cash Equivalent Assets. Cash and due from banks increased by $5.1
million or 34% to $20.2 million at June 30, 2001 from $15.1 million at June 30,
2000. Cash and due from banks represented both cash maintained at the Bank, as
well as funds that the Bank and Quad City had deposited in other banks in the
form of demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold
decreased by $18.3 million or 70% to $7.8 million at June 30, 2001 from $26.1
million at June 30, 2000. The decrease was attributable to Quad City's decreased
liquidity needs at the end of the fiscal year.
Certificates of deposit at financial institutions decreased by $2.3 million or
18% to $10.5 million at June 30, 2001 from $12.8 million at June 30, 2000. Due
to strong loan demand, the Bank has made the decision to limit its deposits in
other banks in the form of certificates of deposit.
Investments. Securities increased by $600,000 or 1% to $56.7 million at June 30,
2001 from $56.1 million at June 30, 2000. The net increase was the result of a
number of transactions in the securities portfolio. Quad City purchased
additional securities, classified as available for sale, in the amount of $17.0
and recognized an increase in unrealized gains on securities available for sale,
before applicable income tax of $1.6 million. This was offset by paydowns of
$1.5 million that were received on mortgage-backed securities, proceeds from the
sales of securities available for sale of $1.3 million, proceeds from calls and
maturities of $15.0 million, losses recognized on the sales of securities of
$14,000, and amortization of premiums, net of the accretion of discounts, of
$60,000.
Certain investment securities of the Bank are purchased with the intent to hold
the securities until they mature. These held to maturity securities, comprised
of municipal securities and other bonds, were recorded at amortized cost at June
30, 2001 and June 30, 2000. The balance at June 30, 2001 was $576,000, an
increase of $1,000 from $575,000 at June 30, 2000. Market values at June 30,
2001 and June 30, 2000 were $583,000 and $565,000, respectively.
All of Quad City's and a portion of the Bank's securities are placed in the
available for sale category as the securities may be liquidated to provide cash
for operating, investing or financing purposes. These securities were reported
at fair value and increased by $500,000, or 1%, to $56.1 million at June 30,
2001, from $55.6 million at June 30, 2000. The amortized cost of such securities
at June 30, 2001 and June 30, 2000 was $55.3 million and $57.2 million,
respectively.
Quad City does not use any financial instruments referred to as derivatives to
manage interest rate risk and as of June 30, 2001 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.
13
Loans. Loans receivable held for investment increased by $46.0 million or 19% to
$287.9 million at June 30, 2001 from $241.9 million at June 30, 2000. The
increase was the result of the origination or purchase of $283.8 million of
commercial business, consumer and real estate loans, less loan charge-offs, net
of recoveries, of $260,000 and loan repayments or sales of loans of $237.5
million.. The majority of residential real estate loans originated by the Bank
were sold on the secondary market to avoid the interest rate risk associated
with long-term fixed rate loans. As of June 30, 2001, the Bank's legal lending
limit was approximately $5.0 million.
Allowance for Loan Losses. The allowance for estimated losses on loans was $4.2
million at June 30, 2001 compared to $3.6 million at June 30, 2000 for an
increase of $600,000 or 17%. The adequacy of the allowance for estimated losses
on loans was determined by management based on factors that included the overall
composition of the loan portfolio, types of loans, past loss experience, loan
delinquencies, potential substandard and doubtful credits, economic conditions
and other factors that, in management's judgment, deserved evaluation in
estimating loan losses. To ensure that an adequate allowance was maintained,
provisions were made based on the increase in loans and a detailed analysis of
the loan portfolio. The loan portfolio was reviewed and analyzed monthly
utilizing the percentage allocation method. In addition, beginning in December
2000, specific reviews were completed on all credits risk-rated less than "fair
quality" and carrying aggregate exposure in excess of $250,000. The adequacy of
the allowance for estimated losses on loans was monitored by the loan review
staff, and reported to management and the Board of Directors.
Net charge-offs for the years ended June 30, 2001 and 2000, were $260,000 and
$330,000 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 1.48 % at June 30, 2001 and 1.50% at June 30, 2000.
Although management believes that the allowance for estimated losses on loans at
June 30, 2001 was at a level adequate to absorb losses on existing loans, there
can be no assurance that such losses will not exceed the estimated amounts or
that Quad City will not be required to make additional provisions for loan
losses in the future. Asset quality is a priority for Quad City and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality. Along with other financial institutions,
management shares a concern for the possible continued softening of the economy
in 2001. Should the economic climate continue to deteriorate, borrowers may
experience difficulty, and the level of non-performing loans, charge-offs and
delinquencies could rise and require further increases in the provision.
Nonperforming Assets. The policy of Quad City is to place a loan on nonaccrual
status if: (a) payment in full of interest or principal is not expected or (b)
principal or interest has been in default for a period of 90 days or more unless
the obligation is both in the process of collection and well secured. Well
secured is defined as collateral with sufficient market value to repay principal
and all accrued interest. A debt is in the process of collection if collection
of the debt is proceeding in due course either through legal action, including
judgment enforcement procedures, or in appropriate circumstances, through
collection efforts not involving legal action which are reasonably expected to
result in repayment of the debt or in its restoration to current status.
Nonaccrual loans were $1.2 million at June 30, 2001 compared to $383,000 at June
30, 2000 for an increase of $849,000 or 222%. The increase in nonaccrual loans
was comprised of increases in commercial loans of $248,000 and real estate loans
of $646,000 offset by a decrease in consumer loans of $45,000. The increase in
nonaccrual commercial loans was due entirely to the addition of a single loan.
The increase in nonaccrual real estate loans was due to the addition of seven
loans with outstanding balances ranging from $39,000 to $150,000. Nonaccrual
loans at June 30, 2001 consisted primarily of loans that were well
collateralized and were not expected to result in material losses and
represented less than one half of one percent of the Bank's loan portfolio..
As of June 30, 2001 and 2000, past due loans of 30 days or more amounted to $3.2
million and $3.3 million, respectively. Past due loans as a percentage of gross
loans receivable decreased to 1.1% at June 30, 2001 from 1.4% at June 30, 2000.
Other Assets. Premises and equipment increased by $1 million or 12% to $8.7
million at June 30, 2001 from $7.7 million at June 30, 2000. The increase
resulted from the purchase of additional furniture, fixtures and equipment
offset by depreciation expense. Additional information regarding the composition
of this account and related accumulated depreciation is described in footnote 5
to the consolidated financial statements.
14
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $300,000 or 9% to $2.9 million at June 30, 2001 from $2.6
million at June 30, 2000. The increase was primarily due to greater average
outstanding balances in interest-bearing assets.
Other assets increased by $1.7 million or 19% to $10.6 million at June 30, 2001
from $8.9 million at June 30, 2000. The largest component of the increase was
the $1.3 million growth in receivables due Bancard from its terminated, primary
ISO. Bancard is vigorously pursuing the collection of this receivable through
legal avenues. Other assets also included life insurance contracts on two of
Quad City's executives, accrued trust department fees, other miscellaneous
receivables and various prepaid expenses.
Deposits. Deposits increased by $14.1 million or 5% to $302.2 million at June
30, 2001 from $288.1 million at June 30, 2000. The increase resulted from a
$20.4 million net increase in noninterest-bearing, NOW, money market and other
savings accounts and a $6.3 million net decrease in certificates of deposit.
Short-term Borrowings. Short-term borrowings increased $7.5 million or 36% from
$20.8 million as of June 30, 2000 to $28.3 million as of June 30, 2001. The Bank
offers short-term repurchase agreements to some of its significant deposit
customers. Also, on occasion, the Bank purchases Federal funds for short-term
funding needs from the Federal Reserve Bank, or from some of its correspondent
banks. Short-term borrowings were comprised of customer repurchase agreements of
$28.3 million and $15.8 million at June 30, 2001 and 2000, respectively, as well
as federal funds purchased from correspondent banks of $0 and $5.0 million at
June 30, 2001 and 2000, respectively.
FHLB Advances and Other Borrowings. FHLB advances increased $7.3 million or 33%
from $22.4 million as of June 30, 2000 to $29.7 million as of June 30, 2001. As
of June 30, 2001, the Bank held $1.5 million of FHLB stock. As a result of its
membership in the FHLB of Des Moines, the Bank has the ability to borrow funds
for short-term or long-term purposes under a variety of programs. The Bank
utilized FHLB advances for loan matching as a hedge against the possibility of
rising interest rates when these advances provided a less costly source of funds
than customer deposits.
In June 1999, Quad City issued 1,200,000 shares of trust preferred securities
through its newly formed Capital Trust subsidiary. On Quad City's financial
statements, these securities are listed as company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely subordinated
debentures and were $12,000,000 at both June 30, 2001 and 2000. Under current
regulatory guidelines, these securities are considered to be Tier 1 capital,
with certain limitations that are applicable to Quad City.
Other liabilities increased by $600,000 or 15% to $4.9 million as of June 30,
2001 from $4.3 million as of June 30, 2000. Other liabilities were comprised of
unpaid amounts for various products and services, and accrued but unpaid
interest on deposits. At June 30, 2001, the primary component of other
liabilities was $2.4 million of interest payable.
Stockholders' Equity. Common stock of $2.3 million as of June 30, 2001 increased
slightly due to the exercise of stock options resulting in the issuance of 150
additional shares of common stock.
Additional paid-in capital also increased slightly to $12.1 million as of June
30, 2001. The increase was due to $1,000 received in excess of the $1.00 per
share par value for shares of common stock issued as the result of the exercise
of stock options.
Retained earnings increased by $2.4 million or 33% to $9.7 million as of June
30, 2001 from $7.3 million as of June 30, 2000. The increase reflected net
income for the year.
Accumulated other comprehensive income (loss), consisting of unrealized gains
(losses) on securities available for sale, net of related income taxes, was a
$500,000 gain as of June 30, 2001 as compared to a $1.1 million loss as of June
30, 2000. The increase in the gain was attributable to the increase during the
period in the fair value of the securities identified as available for sale,
primarily as a result of a decline in market interest rates.
In April 2000, Quad City announced that the board of directors approved a stock
repurchase program enabling Quad City to repurchase approximately 60,000 shares
of its common stock. This stock repurchase program was completed in the fall of
2000 and at June 30, 2001 and 2000, Quad City had acquired 60,146 shares and
41,496 shares at a total cost of $855,000 and $599,000, respectively. The
weighted average cost of the shares at June 30, 2001 was $14.21 compared to
$14.45 at June 30, 2000. Liquidity
15
Liquidity
Liquidity measures the ability of Quad City to meet maturing obligations and its
existing commitments, to withstand fluctuations in deposit levels, to fund its
operations, and to provide for customers' credit needs. One source of liquidity
is cash and short-term assets, such as interest-bearing deposits in other banks
and federal funds sold, which totaled $38.5 million at June 30, 2001, compared
with $54.0 million at June 30, 2000. The Bank has a variety of sources of
short-term liquidity available to it, including federal funds purchased from
correspondent banks, sales of securities available for sale, FHLB advances,
lines of credit and loan participations or sales. Quad City also generates
liquidity from the regular principal payments and prepayments made on its
portfolio of loans and mortgage-backed securities.
The liquidity of Quad City is comprised of three primary classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash used in operating activities was $1.7
million for fiscal 2001 compared to net cash provided by operating activities of
$4.2 million for fiscal 2000. Net cash used in investing activities, consisting
principally of loan funding and the purchase of securities, was $22.0 million
for fiscal 2001 and $46.1 million for fiscal 2000. Net cash provided by
financing activities, consisting primarily of deposit growth and proceeds from
short-term borrowings and Federal Home Loan Bank advances was $28.7 million for
fiscal 2001 compared to $48.5 million for fiscal 2000.
Net cash provided by operating activities was $4.2 million for fiscal 2000
compared to $3.7 million for fiscal 1999. Net cash used in investing activities,
consisting principally of loan funding and the purchase of securities, was $46.1
million for fiscal 2000 and $72.7 million for fiscal 1999. Net cash provided by
financing activities, consisting primarily of deposit growth and proceeds from
short-term borrowings, for fiscal 2000 was $48.5 million and for fiscal 1999 was
$66.0 million, consisting primarily of deposit growth, proceeds from the
issuance of preferred securities of the subsidiary trust, and proceeds from
short-term borrowings.
Quad City has a variety of sources of short-term liquidity available to it,
including federal funds purchased from correspondent banks, sales of securities
available for sale, FHLB advances, lines of credit and loan participations or
sales. At both June 30, 2001 and 2000, the Bank had six unused lines of credit
totaling $31.0 million of which $8.0 million was secured and $23.0 million was
unsecured. At both June 30, 2001 and 2000, Quad City also had an unused line of
credit for $3.0 million, which was secured.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have been
prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Quad City's operations. Unlike industrial
companies, nearly all of the assets and liabilities of Quad City are monetary in
nature. As a result, interest rates have a greater impact on Quad City's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Impact of New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement 141,
"Business Combinations" and Statement 142, "Goodwill and Other Intangible
Assets". Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. For Quad City, the provisions of the Statements are
generally effective July 1, 2002. However, the Statements would allow for an
early application effective July 1, 2001, provided that the decision to early
implement is made prior to the release of the first quarter 10-Q. Implementation
of the standards is not expected to have a material effect on Quad City's
consolidated financial statements.
16
Forward Looking Statements
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Quad City intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe Quad City's future plans, strategies and expectations are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. Quad City's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on Quad City's
operations and future prospects include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in our market area, our
implementation of new technologies, Quad City's ability to develop and maintain
secure and reliable electronic systems and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning Quad City and its business, including
additional factors that could materially affect Quad City's financial results,
is included in Quad City's filings with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quad City, like other financial institutions, is subject to direct and indirect
market risk. Direct market risk exists from changes in interest rates. Quad
City's net income is dependent on its net interest income. Net interest income
is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors Quad City's interest rate risk. The Asset/Liability Committee meets
quarterly to review Quad City's interest rate risk position and profitability,
and to make or recommend adjustments for consideration by the 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.
17
One approach used to quantify interest rate risk is the net portfolio value
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, 2001 and June 30, 2000, an analysis of Quad City's interest rate risk as
measured by the estimated changes in the net portfolio value resulting from
instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis
points).
Estimated Increase
Change in (Decrease) in NPV
Interest Estimated -----------------------------------------------------------
Rates NPV Amount Amount Percent
- -------------- ---------------------------- ---------------------------- -----------------------------
(Basis points) June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 $24,705 $28,583 $ (4,282) $(2,290) (14.77)% (7.42)%
--- 28,987 30,873
-200 27,572 31,128 (1,415) 255 ( 4.88) .83
Quad City does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the 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.
18
Item 8. Financial Statements
QUAD CITY HOLDINGS, INC.
Index to Consolidated Financial Statements
INDEPENDENT AUDITOR'S REPORT 20
FINANCIAL STATEMENTS
Consolidated balance sheets as of June 30, 2001 and 2000 21
Consolidated statements of income for the years ended June 30,
2001, 2000, and 1999 22
Consolidated statements of changes in stockholders' equity for
the years ended 23
Consolidated statements of cash flows for the years ended June 30,
2001, 2000, and 1999 24
Notes to consolidated financial statements 25 - 43
19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Quad City Holdings, Inc.
Moline, Illinois
We have audited the accompanying consolidated balance sheets of Quad City
Holdings, Inc. and subsidiaries as of June 30, 2001 and 2000, and the related
statements of income, changes in stockholders' equity, and cash flows for the
years ended June 30, 2001, 2000, and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quad City Holdings,
Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for the years ended June 30, 2001, 2000, and
1999, in conformity with accounting principles generally accepted in the United
States of America.
/s/ McGladrey & Pullen, LLP
- ---------------------------
Davenport, Iowa
July 25, 2001
20
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and 2000
ASSETS 2001 2000
- ---------------------------------------------------------------------------------------------------
Cash and due from banks ........................................... $ 20,217,219 $ 15,130,357
Federal funds sold ................................................ 7,775,000 26,105,000
Certificates of deposit at financial institutions ................. 10,512,585 12,776,463
Securities held to maturity, at amortized cost (fair value
2001 $583,411; 2000 $565,237) (Note 3) .......................... 575,559 574,988
Securities available for sale, at fair value (Note 3) ............. 56,134,521 55,554,062
-----------------------------
56,710,080 56,129,050
-----------------------------
Loans receivable (Note 4) ......................................... 287,864,766 241,852,851
Less allowance for estimated losses on loans (Note 4) ........... 4,248,182 3,617,401
-----------------------------
283,616,584 238,235,450
-----------------------------
Premises and equipment, net (Note 5) .............................. 8,660,698 7,715,621
Accrued interest receivable ....................................... 2,863,178 2,633,120
Other assets ...................................................... 10,592,590 8,896,554
-----------------------------
Total assets .............................................. $ 400,947,934 $ 367,621,615
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ........................................... $ 52,582,264 $ 44,043,932
Interest-bearing .............................................. 249,572,960 244,022,824
----------------------------
Total deposits (Note 6) ................................... 302,155,224 288,066,756
Short-term borrowings (Note 7) .................................... 28,342,542 20,771,724
Federal Home Loan Bank advances (Note 8) .......................... 29,712,759 22,425,398
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely subordinated debentures
(Note 9) ........................................................ 12,000,000 12,000,000
Other liabilities ................................................. 4,919,949 4,286,318
-----------------------------
Total liabilities ......................................... 377,130,474 347,550,196
-----------------------------
Commitments and Contingencies (Note 18)
Stockholders' Equity (Note 16):
Common stock, $1 par value; shares authorized 5,000,000;
shares issued and outstanding 2001 - 2,325,566 and 2,265,420;
2000 - 2,325,416 and 2,283,920, respectively .................. 2,325,566 2,325,416
Additional paid-in capital ...................................... 12,148,759 12,147,984
Retained earnings ............................................... 9,691,749 7,296,017
Accumulated other comprehensive income (loss) ................... 505,922 (1,098,518)
-----------------------------
24,671,996 20,670,899
Less cost of common shares acquired for the treasury
2001 - 60,146; 2000 - 41,496 .................................. 854,536 599,480
-----------------------------
Total stockholders' equity ................................ 23,817,460 20,071,419
----------------------------
Total liabilities and stockholders' equity ................ $ 400,947,934 $ 367,621,615
=============================
See Notes to Consolidated Financial Statements.
21
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2001, 2000, and 1999
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ..................................... $ 22,970,407 $ 18,364,812 $ 15,642,235
Interest and dividends on securities:
Taxable ...................................................... 3,067,722 3,214,722 2,229,178
Nontaxable ................................................... 290,990 233,793 56,089
Interest on federal funds sold ................................. 1,267,062 1,488,267 1,492,173
Other interest ................................................. 947,755 777,604 696,245
--------------------------------------------
Total interest income .................................... 28,543,936 24,079,198 20,115,920
--------------------------------------------
Interest expense:
Interest on deposits ........................................... 13,022,210 10,125,235 9,009,724
Interest on company obligated mandatorily redeemable
preferred securities ......................................... 1,134,541 1,137,402 63,518
Interest on short-term and other borrowings .................... 2,454,998 2,025,956 1,953,444
--------------------------------------------
Total interest expense ................................... 16,611,749 13,288,593 11,026,686
--------------------------------------------
Net interest income ...................................... 11,932,187 10,790,605 9,089,234
Provision for loan losses (Note 4) ............................. 889,670 1,051,818 891,800
--------------------------------------------
Net interest income after provision for loan losses ...... 11,042,517 9,738,787 8,197,434
--------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ............. 1,673,444 2,346,296 1,322,658
Trust department fees .......................................... 2,071,971 1,884,310 1,520,518
Deposit service fees ........................................... 816,489 600,219 433,056
Gains on sales of loans, net ................................... 1,136,572 438,799 1,043,763
Securities gains (losses), net ................................. (14,047) (28,221) 3,757
Amortization of deferred income resulting from
restructuring of merchant broker agreement (Note 11) ......... -- -- 732,000
Other .......................................................... 628,639 913,013 504,699
--------------------------------------------
Total noninterest income ................................. 6,313,068 6,154,416 5,560,451
--------------------------------------------
Noninterest expenses:
Salaries and employee benefits ................................. 8,014,268 6,878,213 5,801,670
Professional and data processing fees .......................... 1,159,929 860,216 598,457
Advertising and marketing ...................................... 579,524 410,106 359,571
Occupancy and equipment expense ................................ 1,925,820 1,580,911 1,453,040
Stationery and supplies ........................................ 352,441 324,219 267,739
Postage and telephone .......................................... 409,626 361,623 298,208
Other .......................................................... 1,358,345 1,052,173 900,214
--------------------------------------------
Total noninterest expenses ............................... 13,799,953 11,467,461 9,678,899
--------------------------------------------
Income before income taxes ............................... 3,555,632 4,425,742 4,078,986
Federal and state income taxes (Note 12) ......................... 1,159,900 1,680,215 1,614,165
--------------------------------------------
Net income ............................................... $ 2,395,732 $ 2,745,527 $ 2,464,821
============================================
Earnings per common share (Note 17):
Basic .......................................................... $ 1.06 $ 1.19 $ 0.98
Diluted ........................................................ $ 1.04 $ 1.15 $ 0.93
Weighted average common shares outstanding ..................... 2,268,465 2,309,453 2,285,500
Weighted average common and common equivalent shares outstanding 2,314,334 2,385,840 2,398,525
See Notes to Consolidated Financial Statements.
22
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2001, 2000, and 1999
Accumulated
Additional Other
Preferred Common Paid-In Retained Comprehensive Treasury
Stock Stock Capital Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
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 37,310 shares
of common stock, as a result of
warrants and stock options exercised
(Note 14) ............................. -- 37,310 219,544 -- -- -- 256,854
Exchange of 8,145 shares of common stock
in connection with options exercised .. -- (8,145) (111,818) -- -- -- (119,963)
Tax benefit of nonqualified stock options
exercised ............................. -- -- 81,178 -- -- -- 81,178
Purchase of 41,496 shares of common stock
for the treasury ...................... -- -- -- -- -- (599,480) (599,480)
-----------------------------------------------------------------------------------------
Balance, year ended June 30, 2000 ....... -- 2,325,416 12,147,984 7,296,017 (1,098,518) (599,480) 20,071,419
-----------------------------------------------------------------------------------------
Comprehensive income:
Net income .......................... -- -- -- 2,395,732 -- -- 2,395,732
Other comprehensive gain, net of tax
(Note 2) ........................... -- -- -- -- 1,604,440 -- 1,604,440
------------
Comprehensive income ............ 4,000,172
------------
Proceeds from issuance of 150 shares of
common stock as a result of stock
options exercised (Note 14) ........... -- 150 775 -- -- -- 925
Purchase of 18,650 shares of common stock
for the treasury ...................... -- -- -- -- -- (255,056) (255,056)
-----------------------------------------------------------------------------------------
Balance, year ended June 30, 2001 ....... $ -- $2,325,566 $12,148,759 $9,691,749 $ 505,922 $(854,536) $23,817,460
=========================================================================================
See Notes to Consolidated Financial Statements.
23
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2001, 2000, and 1999
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ....................................................... $ 2,395,732 $ 2,745,527 $ 2,464,821
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ................................................... 770,730 635,838 627,075
Provision for loan losses ...................................... 889,670 1,051,818 891,800
Deferred income taxes .......................................... (362,995) (398,971) 232,262
Amortization of offering costs on subordinated debentures ...... 29,506 29,453 1,436
Amortization of premiums on securities, net .................... 60,062 62,539 38,697
Investment securities (gains) losses, net ...................... 14,047 28,221 (3,757)
Loans originated for sale ...................................... (97,605,425) (36,774,571) (85,027,675)
Proceeds on sales of loans ..................................... 94,039,651 38,124,921 88,804,656
Net gains on sales of loans .................................... (1,136,572) (438,799) (1,043,763)
Amortization of deferred income resulting from
restructuring of merchant broker agreement ................... -- -- (732,000)
Tax benefit of nonqualified stock options exercised ............ -- 81,178 3,218
Increase in accrued interest receivable ........................ (230,058) (626,617) (233,280)
(Increase) decrease in other assets ............................ (1,166,767) 170,192 (2,405,245)
Increase (decrease) in other liabilities ....................... 633,631 (528,780) 52,456
--------------------------------------------
Net cash provided by (used in) operating activities ........ (1,668,788) 4,161,949 3,670,701
--------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold .................... 18,330,000 13,020,000 (16,165,000)
Net (increase) decrease in certificates of deposit at
financial institutions ......................................... 2,263,878 (241,270) (4,169,070)
Purchase of securities available for sale ........................ (17,003,552) (23,659,480) (30,215,760)
Purchase of securities held to maturity .......................... -- (50,000) --
Proceeds from calls and maturities of securities ................. 15,045,000 6,200,000 14,400,000
Proceeds from paydowns on securities ............................. 1,537,072 1,389,269 1,732,539
Proceeds from sales of securities available for sale ............. 1,262,841 5,191,661 280,786
Purchase of life insurance contracts ............................. -- (2,023,543) --
Increase in cash value of life insurance contracts ............... (87,840) (14,640) --
Net loans originated ............................................. (41,568,458) (45,117,584) (38,080,955)
Purchase of premises and equipment, net .......................... (1,715,807) (797,843) (520,423)
--------------------------------------------
Net cash used in investing activities ...................... (21,936,866) (46,103,430) (72,737,883)
--------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ................................. 14,088,468 40,100,877 50,581,915
Net increase in short-term borrowings ............................ 7,570,818 11,085,847 7,685,877
Proceeds from Federal Home Loan Bank advances .................... 16,750,000 8,000,000 1,480,000
Payments on Federal Home Loan Bank advances ...................... (9,462,639) (10,180,492) (1,541,284)
Net decrease in other borrowings ................................. -- -- (1,500,000)
Proceeds from issuance of preferred securities of subsidiary trust -- -- 12,000,000
Redemption of preferred stock .................................... -- -- (2,977,884)
Purchase of treasury stock ....................................... (255,056) (599,480) --
Proceeds from issuance of common stock ........................... 925 136,891 225,940
--------------------------------------------
Net cash provided by financing activities .................. $ 28,692,516 $ 48,543,643 $ 65,954,564
--------------------------------------------
Net increase (decrease) in cash and due
from banks ................................................ $ 5,086,862 $ 6,602,162 $ (3,112,618)
Cash and due from banks:
Beginning ....................................................... 15,130,357 8,528,195 11,640,813
--------------------------------------------
Ending .......................................................... $ 20,217,219 $ 15,130,357 $ 8,528,195
============================================
Supplemental Disclosures of Cash Flow Information,
cash payments for:
Interest ........................................................ $ 16,069,527 $ 13,024,589 $ 10,735,683
Income taxes .................................................... 1,480,894 2,001,216 1,527,171
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on securities available for sale, net .......... 1,604,440 (766,168) (344,842)
Investment securities transferred from held to maturity portfolio
to available for sale portfolio, at fair value ................ -- -- 1,030,743
Due (from broker) to broker for (call) purchase of
securities available for sale ................................. (1,000,000) -- 3,800,000
Exchange of 8,145 shares of common stock in connection
with options exercised ........................................ -- (119,963) --
See Notes to Consolidated Financial Statements.
24
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Quad City Holdings, Inc. (Company) is a bank holding company providing bank
and bank related services through its subsidiaries, Quad City Bank and Trust
Company (Bank), Quad City Bancard, Inc. (Bancard), Allied Merchant Services,
Inc. (Allied), and Quad City Holdings Capital Trust I. The Bank is a
commercial bank that serves the Quad Cities and Cedar Rapids areas, is
chartered and regulated by the state of Iowa, is insured and subject to
regulation by the Federal Deposit Insurance Corporation and is a member of
and regulated by the Federal Reserve System. Bancard is an entity formed in
April 1995 to conduct the Company's merchant credit card operation and is
regulated by the Federal Reserve System. Allied was formed in March 1999 by
Bancard as a captive independent sales organization that markets merchant
credit card processing services. Allied is a wholly-owned subsidiary of
Bancard. Quad City Holdings Capital Trust I was capitalized in June 1999 for
the purpose of issuing Company Obligated Mandatorily Redeemable Preferred
Securities.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The allowance for estimated losses on loans is inherently
subjective as it requires material estimates that are susceptible to
significant change. The fair value disclosure of financial instruments is an
estimate that can be computed within a range.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and
due from banks include cash on hand and amounts due from banks. Cash flows
from federal funds sold, certificates of deposit at financial institutions,
loans, deposits, short-term borrowings, and other borrowings are treated as
net increases or decreases.
Cash and due from banks: The Bank is required by federal banking regulations
to maintain certain cash and due from bank reserves. The reserve requirement
was approximately $3,641,000 and $2,753,000 as of June 30, 2001 and 2000,
respectively.
Investment securities: Investment securities held to maturity are those debt
securities that the Company has the ability and intent to hold until maturity
regardless of changes in market conditions, liquidity needs, or changes in
general economic conditions. Such securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. If the ability or intent
to hold to maturity is not present for certain specified securities, such
securities are considered available for sale as the Company intends to hold
them for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based
on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations, and other similar
factors. Securities available for sale are carried at fair value. Unrealized
gains or losses are reported as increases or decreases in accumulated other
comprehensive income. Realized gains or losses, determined on the basis of
the cost of specific securities sold, are included in earnings.
Pursuant to SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company transferred at fair value $1,030,743 of investment
securities from held to maturity to available for sale on January 4, 1999.
Loans held for sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value
in the aggregate.
25
Loans and allowance for estimated losses on loans: Loans are stated at the
amount of unpaid principal, reduced by an allowance for estimated losses on
loans. The allowance for estimated losses on loans is maintained at the level
considered adequate by management of the Company and the Bank to provide for
losses that can be reasonably anticipated. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. In determining
the adequacy of the allowance, the Company and the Bank consider the overall
composition of the loan portfolio, types of loans, past loss experience, loan
delinquencies, potential substandard and doubtful credits, economic
conditions, and other factors that in management's judgment deserve
evaluation.
Loans are considered impaired when, based on current information and events,
it is probable the Company and the Bank will not be able to collect all
amounts due. The portion of the allowance for loan losses applicable to an
impaired loan is computed based on the present value of the estimated future
cash flows of interest and principal discounted at the loan's effective
interest rate or on the fair value of the collateral for collateral dependent
loans. The entire change in present value of expected cash flows of impaired
loans is reported as bad debt expense in the same manner in which impairment
initially was recognized or as a reduction in the amount of bad debt expense
that otherwise would be reported. The Company and the Bank recognize interest
income on impaired loans on a cash basis.
Direct loan origination fees and costs are deferred and the net amounts
amortized as an adjustment of the related loan's yield.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit and standby letters of
credit. Such financial instruments are recorded when they are funded.
Transfers of financial assets: 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 is computed by dividing
net income by the weighted average number of common stock shares outstanding
for the respective period. Diluted earnings per share is computed by dividing
net income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period.
Reclassification: Certain amounts in the prior year financial statements have
been reclassified, with no effect on net income or stockholders' equity, to
conform with current year presentation.
26
Note 2. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income,
which for the Company is comprised entirely of unrealized gains and losses on
securities available for sale.
Other comprehensive income (loss) is comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------
Year ended June 30, 2001:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during the year ........ $ 2,482,453 $ 887,041 $ 1,595,412
Less, reclassification adjustment for (losses)
included in net income ................................ (14,047) (5,019) (9,028)
-----------------------------------------
Other comprehensive income .......................... $ 2,496,500 $ 892,060 $ 1,604,440
=========================================
Year ended June 30, 2000:
Unrealized (losses) on securities available for sale:
Unrealized holding (losses) arising during the year ..... $(1,195,285) $ (410,590) $ (784,695)
Less, reclassification adjustment for (losses)
included in net income ................................ (28,221) (9,694) (18,527)
-----------------------------------------
Other comprehensive (loss) .......................... $(1,167,064) $ (400,896) $ (766,168)
=========================================
Year ended June 30, 1999:
Unrealized gains (losses) on securities available for sale:
Unrealized holding (losses) arising during the year ..... $ (517,765) $ (175,407) $ (342,358)
Less, reclassification adjustment for gains
included in net income ................................ 3,757 1,273 2,484
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Other comprehensive (loss) .......................... $ (521,522) $ (176,680) $ (344,842)
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Note 3. Investment Securities
The amortized cost and fair value of investment securities as of June 30, 2001
and 2000 are summarized as follows:
Gro