-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJK3zi/gT/4XcUTYpPnrgtRG7XnarHeygbbCUX6VrIVh7Sf6KhDMI0GsdrffpidO 06rjDhWE7lt13pfoxKH6Zw== 0000743530-01-500038.txt : 20010516 0000743530-01-500038.hdr.sgml : 20010516 ACCESSION NUMBER: 0000743530-01-500038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAD CITY HOLDINGS INC CENTRAL INDEX KEY: 0000906465 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421397595 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22208 FILM NUMBER: 1637135 BUSINESS ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097363580 10-Q 1 qchold10q501.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-22208 QUAD CITY HOLDINGS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 42-1397595 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) ID Number) 3551 7th Street, Suite 100, Moline, Illinois 61265 -------------------------------------------------- (Address of principal executive offices) (309) 736-3580 ---------------------------------------------------- (Registrant's telephone number, including area code) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of May 1, 2001, the Registrant had outstanding 2,265,420 shares of common stock, $1.00 par value per share. QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES INDEX Page Number Part I FINANCIAL INFORMATION Item 1 Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets, March 31, 2001 and June 30, 2000 Consolidated Statements of Income, For the Three Months Ended March 31, 2001 and 2000 Consolidated Statements of Income, For the Nine Months Ended March 31, 2001 and 2000 Consolidated Statements of Cash Flows, For the Nine Months Ended March 31, 2001 and 2000 Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Part II OTHER INFORMATION Item 1 Legal Proceedings Item 2 Changes in Securities and Use of Proceeds Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Exhibits and Reports on Form 8-K Signatures QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, 2001 and June 30, 2000 March 31, June 30, 2001 2000 ------------------------------ ASSETS Cash and due from banks ........................................................ $ 20,463,814 $ 15,130,357 Federal funds sold ............................................................. 25,835,000 26,105,000 Certificates of deposit at financial institutions .............................. 10,910,085 12,776,463 Securities held to maturity, at amortized cost ................................. 575,417 574,988 Securities available for sale, at fair value ................................... 54,185,987 55,554,062 ------------------------------ 54,761,404 56,129,050 ----------------------------- Loans receivable ............................................................... 277,446,150 241,852,851 Less: Allowance for estimated losses on loans .................................. (4,084,375) (3,617,401) ----------------------------- 273,361,775 238,235,450 ----------------------------- Premises and equipment, net .................................................... 8,509,369 7,715,621 Accrued interest receivable .................................................... 3,176,679 2,633,120 Other assets ................................................................... 9,692,825 8,896,554 ----------------------------- Total assets ........................................................... $406,710,951 $ 367,621,615 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing ......................................................... $ 48,660,508 $ 44,043,932 Interest-bearing ............................................................ 260,403,544 244,022,824 ------------------------------ Total deposits ............................................................ 309,064,052 288,066,756 ------------------------------ Short-term borrowings .......................................................... 27,787,475 20,771,724 Federal Home Loan Bank advances ................................................ 29,293,857 22,425,398 Company obligated manditorily redeemable preferred securities of ............... 12,000,000 12,000,000 subsidiary trust holding solely subordinated debentures Other liabilities .............................................................. 5,486,512 4,286,318 ----------------------------- Total liabilities ...................................................... 383,631,896 347,550,196 ----------------------------- STOCKHOLDERS' EQUITY Common stock, $1 par value; shares authorized 5,000,000; ....................... 2,325,566 2,325,416 shares issued and outstanding March 2001 - 2,325,566 and 2,265,420; June 2000 - 2,325,416 and 2,283,920 respectively Additional paid-in capital ..................................................... 12,148,759 12,147,984 Retained earnings .............................................................. 8,923,082 7,296,017 Accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net ........................................... 536,184 (1,098,518) ------------------------------ 23,933,591 20,670,899 Less: Cost of common shares acquired for the treasury; March 2001 - 60,146; June 2000 - 41,496 ..................................... (854,536) (599,480) ------------------------------ Total stockholders' equity ............................................. 23,079,055 20,071,419 ------------------------------ Total liabilities and stockholders' equity ............................. $ 406,710,951 $367,621,615 ==============================
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended March 31 2001 2000 ----------------------- Interest income: Interest and fees on loans ............................. $5,781,051 $4,451,546 Interest and dividends on securities: Taxable .......................................... 776,055 830,407 Nontaxable ....................................... 74,455 61,004 Interest on federal funds sold ......................... 403,412 423,266 Other interest ......................................... 244,566 186,296 ----------------------- Total interest income ............................. 7,279,539 5,952,519 ----------------------- Interest expense: Interest on deposits .................................. 3,392,761 2,563,733 Interest on company obligated manditorily ............. 283,376 276,000 redeemable preferred securities Interest on short-term and other borrowings ........... 637,232 459,970 ----------------------- Total interest expense ............................ 4,313,369 3,299,703 ----------------------- Net interest income ............................... 2,966,170 2,652,816 Provision for loan losses .................................. 148,374 85,600 ----------------------- Net interest income after provision for loan losses 2,817,796 2,567,216 ----------------------- Noninterest income: Merchant credit card fees, net of processing costs ..... 401,946 652,510 Trust department fees .................................. 566,017 525,235 Deposit service fees ................................... 218,078 137,169 Gains on sales of loans, net ........................... 313,796 71,253 Securities gains, net .................................. 0 14,970 Other .................................................. 132,224 223,272 ----------------------- Total noninterest income .......................... 1,632,061 1,624,409 ----------------------- Noninterest expenses: Salaries and employee benefits ......................... 2,105,388 1,806,069 Professional and data processing fees .................. 267,494 230,558 Advertising and marketing .............................. 113,078 116,991 Occupancy and equipment expense ........................ 488,593 376,142 Stationery and supplies ................................ 82,959 82,649 Postage and telephone .................................. 98,173 83,811 Other .................................................. 315,781 263,841 ----------------------- Total noninterest expenses ........................ 3,471,466 2,960,061 ----------------------- Income before income taxes ........................ 978,391 1,231,564 Federal and state income taxes .............................. 355,520 471,890 ----------------------- Net income ........................................ $ 622,871 $ 759,674 ======================= Earnings per common share: Basic ............................................. $ 0.28 $ 0.33 Diluted ........................................... $ 0.27 $ 0.32 Weighted average common shares outstanding ........ 2,265,420 2,324,004 Weighted average common and common equivalent ..... 2,311,112 2,383,478 shares outstanding Comprehensive income ........................................ $1,262,374 $ 480,095
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Nine Months Ended March 31 2001 2000 ---------------------------- Interest income: Interest and fees on loans ............................. $ 17,173,270 $ 13,353,768 Interest and dividends on securities: Taxable .......................................... 2,333,765 2,341,513 Nontaxable ....................................... 204,818 170,515 Interest on federal funds sold ......................... 1,109,752 1,257,820 Other interest ......................................... 700,674 564,791 ---------------------------- Total interest income ............................. 21,522,279 17,688,407 ---------------------------- Interest expense: Interest on deposits .................................. 10,130,780 7,420,361 Interest on company obligated manditorily ............. 851,164 831,949 redeemable preferred securities Interest on short-term and other borrowings ........... 1,773,623 1,479,760 ---------------------------- Total interest expense ............................ 12,755,567 9,732,070 ---------------------------- Net interest income ............................... 8,766,712 7,956,337 Provision for loan losses .................................. 668,249 657,100 ---------------------------- Net interest income after provision for loan losses 8,098,463 7,299,237 ---------------------------- Noninterest income: Merchant credit card fees, net of processing costs ..... 1,202,429 1,836,006 Trust department fees .................................. 1,583,304 1,387,965 Deposit service fees ................................... 564,927 444,018 Gains on sales of loans, net ........................... 611,475 299,967 Securities gains (losses), net ......................... (22,730) 14,970 Other .................................................. 480,237 637,355 ---------------------------- Total noninterest income .......................... 4,419,642 4,620,281 ---------------------------- Noninterest expenses: Salaries and employee benefits ......................... 5,840,949 5,019,151 Professional and data processing fees .................. 859,753 655,487 Advertising and marketing .............................. 393,430 304,013 Occupancy and equipment expense ........................ 1,406,658 1,177,320 Stationery and supplies ................................ 253,449 243,895 Postage and telephone .................................. 292,141 265,589 Other .................................................. 968,895 796,036 ---------------------------- Total noninterest expenses ........................ 10,015,275 8,461,491 ---------------------------- Income before income taxes ........................ 2,502,830 3,458,027 Federal and state income taxes .............................. 875,765 1,322,785 ---------------------------- Net income ........................................ $ 1,627,065 $ 2,135,242 ============================ Earnings per common share: Basic ............................................. $ 0.72 $ 0.92 Diluted ........................................... $ 0.70 $ 0.90 Weighted average common shares outstanding ........ 2,269,476 2,311,313 Weighted average common and common equivalent ..... 2,316,811 2,377,011 shares outstanding Comprehensive income ........................................ $ 3,261,767 $ 1,456,643
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended March 31 2001 2000 ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income .................................................................. $ 1,627,065 $ 2,135,242 Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation .............................................................. 567,043 466,799 Provision for loan losses ................................................. 668,249 657,100 Amortization of offering costs on subordinated debentures ................. 22,129 22,832 Amortization of premiums on securities, net ............................... 40,311 48,781 Securities (gains) losses, net ............................................ 22,730 (14,970) Loans originated for sale ................................................. (53,699,958) (27,046,565) Proceeds on sales of loans ................................................ 47,959,757 28,104,418 Net gains on sales of loans ............................................... (611,475) (299,967) Tax benefit of nonqualified stock options exercised ....................... 0 69,165 Increase in accrued interest receivable ................................... (543,559) (581,474) Increase in other assets .................................................. (1,657,901) (187,706) Increase (decrease) in other liabilities ................................... 1,200,194 (4,642,397) ---------------------------- Net cash used in operating activities ................................. $ (4,405,415) (1,268,742) ---------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in federal funds sold .......................................... 270,000 4,780,000 Net (increase) decrease in certificates of deposits at financial 1,866,378ons (166,810) Purchase of securities available for sale ................................... (5,110,785) (17,314,898) Purchase of securities held to maturity ..................................... 0 (50,000) Proceeds from calls and maturities of securities ............................ 7,545,000 5,200,000 Proceeds from paydowns on securities ........................................ 1,156,226 1,133,620 Proceeds from sales of securities available for sale ........................ 254,247 43,413 Increase in cash value of life insurance contracts .......................... (65,880) (378,543) Net loans originated ........................................................ (29,442,898) (21,214,193) Purchase of premises and equipment, net ..................................... (1,360,791) (521,664) ---------------------------- Net cash used in investing activities ................................. $(24,888,503) $(28,489,075) ---------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit accounts ............................................ 20,997,296 29,464,887 Net increase in short-term borrowings ....................................... 7,015,751 6,112,282 Proceeds from Federal Home Loan Bank advances ............................... 16,250,000 2,500,000 Payments on Federal Home Loan Bank advances ................................. (9,381,541) (7,091,724) Purchase of treasury stock .................................................. (255,056) 0 Proceeds from issuance of common stock, net ................................. 925 67,726 --------------------------- Net cash provided by financing activities .............................. $ 34,627,375 $ 31,053,171 ---------------------------- Net increase in cash and due from banks ................................ 5,333,457 1,295,354 Cash and due from banks, beginning ............................................. 15,130,357 8,528,195 --------------------------- Cash and due from banks, ending ................................................ $ 20,463,814 $ 9,823,549 =========================== Supplemental disclosure of cash flow information, cash payments for: Interest ..................................................................... $ 11,616,540 $ 9,636,007 =========================== Income/franchise taxes ....................................................... $ 1,174,613 $ 1,551,321 =========================== Supplemental schedule of noncash investing activities: Change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net .............. $ 1,634,702 $ (678,599) ===========================
See Notes to Consolidated Financial Statements Part I Item 1 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2001 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include information or footnotes necessary for a fair presentation of financial position, results of operations and changes in financial condition in conformity with generally accepted accounting principles. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. Any differences appearing between numbers presented in financial statements and management's discussion and analysis are due to rounding. Results for the periods ended March 31, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2001. NOTE 2 - PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Quad City Holdings, Inc. (the "Company"), a Delaware corporation, and its wholly owned subsidiaries, Quad City Bank and Trust Company (the "Bank"), Quad City Bancard, Inc. ("Bancard"), Allied Merchant Services, Inc. ("Allied"), and Quad City Holdings Capital Trust I ("Capital Trust"). All significant intercompany accounts and transactions have been eliminated in consolidation. NOTE 3 - EARNINGS PER SHARE The following information was used in the computation of earnings per share on a basic and diluted basis. Three months ended Nine months ended March 31, March 31, ---------------------- ---------------------- 2001 2000 2001 2000 ---------------------------------------------- Net income, basic and diluted earnings ................. $ 622,871 $ 759,674 $1,627,065 $2,135,242 ============================================== Weighted average common shares outstanding .................. 2,265,420 2,324,004 2,269,476 2,311,313 Weighted average common shares issuable upon exercise of stock options and warrants ... 45,692 59,474 47,335 65,698 ---------------------------------------------- Weighted average common and common equivalent shares outstanding .................. 2,311,112 2,383,478 2,316,811 2,377,011 ============================================== NOTE 4 - BUSINESS SEGMENT INFORMATION Selected financial information on the Company's business segments is presented as follows for the three and nine months ended March 31, 2001 and 2000. Three months ended Nine months ended March 31, March 31, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------------------------------------------------------ Revenue: Quad City Holdings, Inc. .................. $ 58,507 $ 70,171 $ 95,721 $ 158,385 Quad City Bank and Trust Company .......... 7,823,729 6,293,625 22,893,415 18,813,070 Quad City Bancard, Inc. ................... 463,347 687,897 1,369,481 1,949,268 Trust Department, Quad City Bank and Trust Company ...................... 566,017 525,235 1,583,304 1,387,965 ------------------------------------------------------------ Total revenue ........................ $ 8,911,600 $ 7,576,928 $ 25,941,921 $ 22,308,688 ============================================================ Net income (loss): Quad City Holdings, Inc. .................. $ (213,465) $ (210,583) $ (685,823) $ (631,459) Quad City Bank and Trust Company .......... 640,705 634,013 1,806,618 1,902,374 Quad City Bancard, Inc. ................... 48,854 198,203 139,254 530,010 Trust Department, Quad City Bank and Trust Company ...................... 146,777 138,041 367,016 334,317 ------------------------------------------------------------ Total net income ..................... $ 622,871 $ 759,674 $ 1,627,065 $ 2,135,242 ============================================================
Part I Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Quad City Holdings, Inc. (the "Company") is the parent company of Quad City Bank and Trust Company (the "Bank"), which commenced operations in January 1994. The Bank is 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 to the Quad City area and adjacent communities through its four offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. Quad City Bancard, Inc. ("Bancard") provides merchant credit card processing services. Bancard has contracted with independent sales organizations ("ISOs") that market credit card services to merchants throughout the country. The Company's primary ISO contract expired in May 2000. In March 1999, Bancard formed its own subsidiary ISO, Allied Merchant Services, Inc., for the purpose of generating additional credit card processing business. At March 31, 2001, approximately 12,900 merchants were processing transactions with Bancard. In April 2001, the Company announced plans to expand its banking operations to the Cedar Rapids, Iowa market. Initially, the Cedar Rapids operation will function as a branch of Quad City Bank and Trust Company, subject to regulatory approvals that are expected in May 2001. The Company has filed the required regulatory applications to obtain a separate bank charter in the Cedar Rapids market, to be named Cedar Rapids Bank and Trust Company. Expectations are to convert the branch operations into this newly chartered bank upon receiving regulatory approval, which is likely to occur in the fall of 2001. The Company plans to raise additional equity capital of approximately $5 million through a private placement of its common stock during the summer of 2001 to assist with capitalization of the new bank. The Company has a fiscal year end of June 30. FINANCIAL CONDITION Total assets of the Company increased by $39.1 million or 11% to $406.7 million at March 31, 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 due from banks increased by $5.3 million or 35% to $20.4 million at March 31, 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 the Company had deposited in other banks in the form of demand deposits. Federal funds sold are inter-bank funds with daily liquidity. At March 31, 2001, the Bank had $25.8 million invested in such funds. This amount decreased by $270 thousand or 1% from $26.1 million at June 30, 2000. Certificates of deposit at financial institutions decreased by $1.9 million or 15% to $10.9 million at March 31, 2001 from $12.8 million at June 30, 2000. During the first nine months of fiscal 2001, the Bank's certificate of deposit portfolio had 29 maturities totaling $4.7 million and 28 purchases, which totaled $2.8 million. Securities decreased by $1.4 million or 2% to $54.7 million at March 31, 2001 from $56.1 million at June 30, 2000. The decrease was the result of a number of transactions in the securities portfolio. Paydowns of $1.2 million were received on mortgage-backed securities, and the amortization of premiums, net of the accretion of discounts, was $40 thousand. Maturities and calls of securities occurred in the amount of $7.5 million, and sales of securities totaled $277 thousand. These portfolio decreases were primarily offset by the purchase of an additional $5.1 million of securities and a $2.5 million increase in the fair value of securities, classified as available for sale. Total loans receivable increased by $35.6 million or 15% to $277.5 million at March 31, 2001 from $241.9 million at June 30, 2000. The increase was the result of the origination or purchase of $201.2 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $201 thousand, and loan repayments or sales of loans of $165.4 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. The allowance for estimated losses on loans was $4.1 million at March 31, 2001 compared to $3.6 million at June 30, 2000, an increase of $467 thousand or 13%. The adequacy of the allowance for estimated losses on loans was determined based on factors that included the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions, and other factors that, in management's judgement, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on the increase in loans and a detailed analysis of the loan portfolio. The loan portfolio was reviewed and analyzed monthly utilizing the percentage allocation method. In addition, specific reviews were completed on all credits risk-rated less than "fair quality" and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance for estimated losses on loans was monitored by the loan review staff, and reported to management and the board of directors. Although management believes that the allowance for estimated losses on loans at March 31, 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. Net charge-offs for the nine months ended March 31, were $201 thousand in 2001 and $250 thousand in 2000. One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the total loan portfolio. The allowance for estimated losses on loans as a percentage of total loans was 1.5% at both March 31, 2001 and June 30, 2000. At March 31, 2001, total nonperforming assets were $1.6 million compared to $737 thousand at June 30, 2000. The $868 thousand increase was the result of a $778 thousand increase in nonaccrual loans and an increase of $90 thousand in accruing loans past due 90 days or more. Nonaccrual loans were $1.2 million at March 31, 2001 compared to $383 thousand at June 30, 2000, an increase of $778 thousand. The increase in nonaccrual loans was comprised of increases in real estate loans of $546 thousand and commercial loans of $248 thousand, partially offset by a decrease in consumer loans of $16 thousand. The net increase in nonaccrual real estate loans was due to the addition of six loans with oustanding balances ranging from $39 thousand to $150 thousand. The net increase in nonaccrual commercial loans was due entirely to the addition of a single loan. In general, nonaccrual loans 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 at March 31, 2001. From June 30, 2000 to March 31, 2001, accruing loans past due 90 days or more increased from $353 thousand to $440 thousand, respectively. The balance at March 31 was primarily comprised of two well-collateralized construction loans that were not anticipated to produce any material losses. Premises and equipment showed an increase of $794 thousand or 10% to $8.5 million at March 31, 2001 from $7.7 million at June 30, 2000. The increase resulted from the purchase of additional furniture, fixtures and equipment and leasehold improvements of $1.4 million during the period offset by depreciation expense of $567 thousand. The opening of a fourth full service banking facility on October 30, 2000 accounted for $921 thousand, or 68%, of the premises and equipment expenditures during the first nine months of fiscal 2001. Accrued interest receivable on loans, securities and interest-bearing cash accounts increased by $544 thousand or 21% to $3.2 million at March 31, 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 $796 thousand or 9% to $9.7 million at March 31, 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 accrued trust department fees, other miscellaneous receivables, and various prepaid expenses. Deposits increased by $21.0 million or 7% to $309.1 million at March 31, 2001 from $288.1 million at June 30, 2000. The increase resulted from a $4.6 million net increase in non-interest bearing, NOW, money market and other savings accounts and a $16.4 million net increase in interest-bearing certificates of deposit. Management believes the increases were a result of periodic aggressive pricing programs for deposits and increased marketing efforts. Short-term borrowings increased $7.0 million or 34% from $20.8 million at June 30, 2000 to $27.8 million at March 31, 2001. The Bank offers short-term repurchase agreements to some of its major 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. As of March 31, 2001, short-term borrowings were comprised entirely of customer repurchase agreements with no Federal funds purchased. As of June 30, 2000, short-term borrowings represented customer repurchase agreements of $15.8 million and Federal funds purchased from the Federal Reserve Bank of $5.0 million. Federal Home Loan Bank advances increased by $6.9 million or 31% to $29.3 million at March 31, 2001 from $22.4 million at June 30, 2000. As a result of its membership in the FHLB of Des Moines, the Bank has the ability to borrow funds for short or long-term purposes under a variety of programs. The Bank utilizes FHLB advances for loan matching as a hedge against the possibility of rising interest rates, and when these advances provide a less costly source of funds than customer deposits. In June 1999, the Company issued 1,200,000 shares of trust preferred securities through a newly formed subsidiary, Quad City Holdings Capital Trust I. On the Company's balance sheet these securities are included with liabilities and are presented as "company obligated manditorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures", and were $12.0 million at both March 31, 2001 and June 30, 2000. Other liabilities increased by $1.2 million or 28% to $5.5 million at March 31, 2001 from $4.3 million at June 30, 2000. Other liabilities was comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At March 31, 2001, the primary component of other liabilities was $3.0 million of interest payable. Common stock at March 31, 2001 increased by less than 1% to remain unchanged at $2.3 million from June 30, 2000. The increase was the result of a single exercise of stock options resulting in the issuance of 150 additional shares of common stock. Additional paid-in capital totaled $12.1 million at both March 31, 2001 and June 30, 2000. An increase of less than 1% resulted from proceeds received in excess of the $1.00 per share par value for 150 shares of common stock issued as the result of an exercise of stock options. Retained earnings increased by $1.6 million or 22% to $8.9 million at March 31, 2001 from $7.3 million at June 30, 2000. The increase reflected net income for the nine-month period. Unrealized gains on securities available for sale, net of related income taxes, totaled $536 thousand at March 31, 2001 as compared to $1.1 million of unrealized losses at June 30, 2000. The reversal from losses to gains of $1.6 million was attributable to the increase during the period in fair value of the securities identified as available for sale, primarily the result of a decline in interest rates. On April 5, 2000, the Company announced that the board of directors approved a stock repurchase program enabling the Company to repurchase approximately 60,000 shares of its common stock. This stock repurchase program has been completed, and as of March 31, 2001, the Company had acquired 60,146 treasury shares at a total cost of $854 thousand. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company realizes income principally from the spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volumes and yields, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Additionally, because of the terms and conditions of many of the Bank's loan and deposit accounts, a change in interest rates could also affect the projected maturities in the loan portfolio and/or the deposit base, which could alter the Company's sensitivity to future changes in interest rates. Accordingly, management considers interest rate risk to be a significant market risk. Interest rate risk management focuses on maintaining consistent growth in net interest income within policy limits approved by the board of directors, while taking into consideration, among other factors, the Company's overall credit, operating income, operating cost, and capital profile. The Company's ALM/Investment Committee, which includes senior management representatives and members of the board of directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. One method used to quantify interest rate risk is the net portfolio value ("NPV") analysis. 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 most recent NPV analysis, as of December 31, 2000, projects that net portfolio value would decrease by approximately 9.79% if interest rates would rise 200 basis points over the next year. It projects a decrease in net portfolio value of approximately 3.04% if interest rates would drop 200 basis points. Both simulations are within board-established policy limits. RESULTS OF OPERATIONS OVERVIEW Net income for the nine-month period ended March 31, 2001 was $1.6 million as compared to net income of $2.1 million for the same period in 1999, a decrease of $508 thousand or 24%. Basic earnings per share for the first nine months decreased to $0.72 from $0.92 in 2000. The decrease in net income was comprised of an increase of $799 thousand in net interest income after provision for loan losses and a decrease in income tax expense of $447 thousand offset by a decrease in noninterest income of $201 thousand and an increase in noninterest expense of $1.5 million. The Company's net income is derived largely from net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on borrowings and customer deposits. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The Company's average yield on interest-earning assets increased 0.43% for the nine months ended March 31, 2001 when compared to the nine months ended March 31, 2000. With the same comparison, the average cost of interest-bearing liabilities increased 0.72% which resulted in a 0.29% decrease in the net interest spread of 2.92% at March 31, 2000 to 2.63% at March 31, 2001. The narrowing of the net interest spread created a decline in the net interest margin. For the nine months ended March 31, 2001, net interest margin was 3.33% compared to 3.48% for the same period in 2000. Management continues to closely monitor and manage net interest margin. For the nine months ended March 31, 2001, basic earnings per share declined $0.20 when compared to the same period in 2000. Several factors contributed to the 22% reduction. The reduced earnings were due to the increased overhead and one-time costs associated with the opening of the Bank's fourth full service banking facility, higher employee compensation costs resulting from the addition of four senior officer positions during calendar 2000, and a reduction in the earnings of Bancard resulting from the planned termination of its contract with a major independent sales organization. While the addition of the new banking facility and the senior officer positions negatively impacted earnings for the nine months ended March 31, 2001, management is confident that these additions will provide significant long-term benefits to the Company. THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Net income for the quarter ended March 31, 2001 was $623 thousand as compared to net income of $760 thousand for the same period in 2000, a decrease of $137 thousand or 18%. Basic earnings per share for the quarter decreased to $0.28 from $0.33 in 2000. The decrease in net income was comprised of an increase of $250 thousand in net interest income after provision for loan losses, an increase in noninterest income of $8 thousand, and a decrease in income tax expense of $116 thousand offset by an increase in noninterest expense of $511 thousand. Interest income increased by $1.3 million from $6.0 million for the three-month period ended March 31, 2000 to $7.3 million for the quarter ended March 31, 2001. The 22% rise in interest income was attributable to greater average, outstanding balances in interest earning assets, principally with respect to loans receivable, and higher interest rates. Interest expense increased by $1.0 million from $3.3 million for the three-month period ended March 31, 2000 to $4.3 million for the three-month period ended March 31, 2001. The 31% increase in interest expense was caused by greater average, outstanding balances in interest-bearing liabilities, principally with respect to customers' time deposits in and repurchase agreements with the subsidiary bank, and higher interest rates. At both March 31, 2001 and June 30, 2000, the Company had an allowance for estimated losses on loans of approximately 1.5% of total loans. The provision for loan losses increased by $63 thousand from $85 thousand for the three month period ended March 31, 2000 to $148 thousand for the three month period ended March 31, 2001. During the third quarter of fiscal 2001, management made monthly provisions for loan losses based upon the increase in loans and a detailed analysis of the loan portfolio. Both real estate and commercial loans had no charge-offs or recoveries for the three months ended March 31, 2001. Consumer loan charge-offs and recoveries totaled $43 thousand and $7 thousand, respectively, during the quarter. Indirect auto and credit card loans accounted for a majority of the consumer loan charge-offs. The ability to grow profitably is, in part, dependent upon the maintenance of asset quality. Because asset quality is a priority for Quad City and its subsidiaries, in the first quarter of fiscal 1999 management made the decision to downscale indirect auto loan activity based on charge-off history. The average, third quarter balance of the indirect auto loan portfolio for fiscal 2001 was $4.3 million compared to $7.5 million for fiscal 2000. This 43% decrease in the average portfolio brought with it a 90% decrease in the net charge-offs of indirect auto loans. Net charge-offs for the indirect auto loan portfolio were $5 thousand for the third quarter of fiscal 2001 compared to $48 thousand for the same period in fiscal 2000 for a decrease of $43 thousand. Noninterest income of $1.6 million for the three-month period ended March 31, 2001 was unchanged from $1.6 million for the three-month period ended March 31, 2000. Noninterest income during each of the quarters in comparison consisted primarily 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. Third quarter fiscal 2001, when compared to the same quarter in fiscal 2000, posted a $251 thousand decrease in fees earned by the merchant credit card operation of Bancard. This 38% reduction in merchant credit card fees was anticipated as a result of Bancard's largest ISO terminating its processing relationship in May 2000. Additional reductions in noninterest income consisted of a $15 thousand decrease in gains realized on investment securities and a $91 thousand decrease in other noninterest income, resulting from both a decrease in the rental income of the Bank and losses experienced on two investments in unconsolidated subsidiaries of the Company. In previous periods, investments in unconsolidated subsidiaries have had no significant impact on Company earnings. The various decreases in noninterest income were offset by an 8% increase in fees earned by the trust department of the Bank, a 340% increase in gains on sales of loans and a 59% increase in deposit service fees. In November 1999, Bancard's largest ISO notified Bancard that it intended to terminate its processing relationship in May 2000 and start processing its own transactions, as per a previous agreement. Processing for this ISO ceased in May 2000 as anticipated. Bancard has begun processing for nine additional ISOs. In spite of this, Bancard's net merchant credit card fee income will remain below previous levels until additional ISO relationships can be developed, processing volumes with existing ISOs increase, or Allied can generate processing volumes comparable to those experienced by Bancard prior to the termination of processing with the original ISO. Bancard's average dollar volume of transactions processed per month during the first nine months of fiscal 2000 was $95 million, and of that, $61 million was attributable to the ISO that terminated its relationship. During the first nine months of fiscal 2001, the average dollar volume of transactions processed per month by Bancard decreased 16% to $80 million. It is expected that because of this reduction in processing fees and the cessation of a related monthly service fee to Bancard, that income contributed to the Company by Bancard will continue to be lower than that contributed in earlier periods. For the quarter ended March 31, 2001, trust department fees increased $41 thousand, or 8%, to $566 thousand from $525 thousand for the same quarter in 2000. The increase was primarily a reflection of the growth of existing trust relationships and the addition of new trust customers. Deposit service fees increased $81 thousand, or 59%, to $218 thousand from $137 thousand for the three-month periods ended March 31, 2001 and March 31, 2000. This increase was primarily a result of the new deposit accounts fee structure that was implemented beginning February 1, 2001. Service charges and NSF (non-sufficient funds) charges related to demand deposit accounts were the main components of deposit service fees. Gains on sales of loans, net, was $314 thousand for the three months ended March 31, 2001, which reflected an increase of 340%, or $243 thousand, from $71 thousand for the three months ended March 31, 2000. The increase resulted from larger numbers of both home refinances and home purchases, and the subsequent sale of the majority of these loans into the secondary market. The decline in interest rates over recent months accelerated the activity within this area of the Bank. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees, for both quarters. Noninterest expenses for the three months ended March 31, 2001 were $3.5 million as compared to $3.0 million for the same period in 2000, for an increase of $511 thousand or 17%. The following table sets forth the various categories of noninterest expenses for the three months ended March 31, 2001 and 2000. Noninterest Expenses Three months ended March 31, ----------------------- 2001 2000 % change ---------------------------------- Salaries and employee benefits ............ $2,105,388 $1,806,069 16.6% Professional and data processing fees ..... 267,494 230,558 16.0% Advertising and marketing ................. 113,078 116,991 -3.3% Occupancy and equipment expense ........... 488,593 376,142 29.9% Stationery and supplies ................... 82,959 82,649 0.4% Postage and telephone ..................... 98,173 83,811 17.1% Other ..................................... 315,781 263,841 19.7% ---------------------------------- Total noninterest expenses .......... $3,471,466 2,960,061 17.3% ================================== Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For the quarter ended March 31, 2001, total salaries and benefits increased to $2.1 million or $299 thousand over the previous year's quarter total of $1.8 million. The change was primarily attributable to the increase from March 2000 to March 2001 in the number of Bank employees and increased incentive compensation to real estate officers proportionate to the increased volumes of gains on sales of loans. Professional and data processing fees increased from $230 thousand for the three months ended March 31, 2000 to $267 thousand for the same three month period in 2001. The $37 thousand increase was predominately due to legal fees resulting from the legal proceedings in process between Bancard and PMT Services, Inc., discussed further in Part II, Item 1. Advertising and marketing decreased 3% or $4 thousand for the quarter. The initial costs for the development and start-up of the Bank's website (qcbt.com ) were incurred in the third quarter of fiscal 2000. Occupancy and equipment expense increased $112 thousand or 30% for the quarter. The increase was predominately due to the addition of a fourth full service banking facility and the resulting increased levels of rent, utilities, depreciation, maintenance, and other occupancy expenses. Other noninterest expense increased $52 thousand or 20% for the quarter. The increase was primarily the result of increased service charges from upstream banks incurred by the subsidiary bank and increased expenses related to Bancard's cardholder program. The provision for income taxes was $356 thousand for the three-month period ended March 31, 2001 compared to $472 thousand for the three-month period ended March 31, 2000 for a decrease of $116 thousand or 25%. The decrease was the result of a decrease in income before income taxes of $253 thousand or 21% for the fiscal 2001 quarter when compared to the fiscal 2000 quarter, as well as a reduction in the Company's effective tax rate. NINE MONTHS ENDED MARCH 31, 2001 AND 2000 Interest income increased by $3.8 million from $17.7 million for the nine-month period ended March 31, 2000 to $21.5 million for the quarter ended March 31, 2001. The 22% rise in interest income was attributable to greater average, outstanding balances in interest earning assets, principally with respect to loans receivable, and higher interest rates. Interest expense increased by $3.0 million from $9.7 million for the nine-month period ended March 31, 2000 to $12.7 million for the nine-month period ended March 31, 2001. The 31% increase in interest expense was caused by greater average, outstanding balances in interest-bearing liabilities, principally with respect to customers' time deposits in and repurchase agreements with the subsidiary bank, and higher interest rates. At both March 31, 2001 and June 30, 2000, the Company had an allowance for estimated losses on loans of approximately 1.5% of total loans. The provision for loan losses increased by $11 thousand from $657 thousand for the nine-month period ended March 31, 2000 to $668 thousand for the nine-month period ended March 31, 2001. During the both nine month periods, management made monthly provisions for loan losses based upon the increase in loans and a detailed analysis of the loan portfolio. Real estate loans had no charge-offs or recoveries for the nine months ended March 31, 2001. For the same nine-month period, commercial loans had $87 thousand in charge-offs, and recoveries totaled $2 thousand. Consumer loan charge-offs and recoveries totaled $146 thousand and $30 thousand during the nine months. Primarily, indirect auto and credit card loans accounted for the consumer loan charge-offs. The ability to grow profitably is, in part, dependent upon the maintenance of asset quality. Because asset quality is a priority for Quad City and its subsidiaries, in the first quarter of fiscal 1999 management made the decision to downscale indirect auto loan activity based on charge-off history. The average balance of the indirect auto loan portfolio for the first nine months of fiscal 2001 was $5.0 million compared to $8.2 million for fiscal 2000. This 39% 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 $18 thousand for the nine-month period ended March 31, 2001 compared to $41 thousand for the same period in fiscal 2000 for a decrease of $23 thousand. Noninterest income was down $200 thousand, or 4%, to $4.4 million for the nine-month period ended March 31, 2001 from $4.6 million for the same period ended March 31, 2000. Noninterest income during each of the periods in comparison consisted primarily 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 decrease was primarily due to a $634 thousand decrease in fees earned by the merchant credit card operation of Bancard. This 35% reduction in merchant credit card fees was anticipated as a result of Bancard's largest ISO terminating its processing relationship in May 2000. Additional reductions in noninterest income consisted of a $23 thousand loss realized on investment securities and a $157 thousand decrease in other noninterest income, resulting primarily from a decrease in the rental income of the Bank and from decreased earnings experienced on two investments in unconsolidated subsidiaries of the Company. In previous periods, investments in unconsolidated subsidiaries have had no significant impact on Company earnings. The various decreases in noninterest income were partially offset by an 14% increase in fees earned by the trust department of the Bank, a 104% increase in gains on sales of loans and a 27% increase in deposit service fees. For the nine months ended March 31, 2001, trust department fees increased $195 thousand, or 14%, to $1.6 million from $1.4 million for the same period in 2000. The increase was a reflection of the revision of the trust department fee structure effective January 1, 2000, in combination with the growth of existing trust relationships and the addition of new trust customers. Deposit service fees increased $121 thousand, or 27%, to $565 thousand from $444 thousand for the nine-month periods ended March 31, 2001 and March 31, 2000. This increase was primarily the result of a new deposit account fee structure that was implemented beginning February 1, 2001. Service charges and NSF (non-sufficient funds) charges related to demand deposit accounts were the main components of deposit service fees. Gains on sales of loans, net was $611 thousand for the nine months ended March 31, 2001, which reflected an increase of 104%, or $311 thousand, from $300 thousand for the nine months ended March 31, 2000. The increase resulted from larger numbers of both home refinances and home purchases, and the subsequent sale of the majority of these loans into the secondary market. The decline in interest rates over recent months has accelerated the activity within this area of the Bank. 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 the nine months ended March 31, 2001 were $10.0 million as compared to $8.5 million for the same period in 2000, for an increase of $1.5 million or 18%. The following table sets forth the various categories of noninterest expenses for the nine months ended March 31, 2001 and 2000. Noninterest Expenses Nine months ended March 31, ------------------------- 2001 2000 % change ------------------------------------- Salaries and employee benefits ......... $ 5,840,949 $ 5,019,151 16.4% Professional and data processing fees .. 859,753 655,487 31.2% Advertising and marketing .............. 393,430 304,013 29.4% Occupancy and equipment expense ........ 1,406,658 1,177,320 19.5% Stationery and supplies ................ 253,449 243,895 3.9% Postage and telephone .................. 292,141 265,589 10.0% Other .................................. 968,895 796,036 21.7% ------------------------------------- Total noninterest expenses ..... $10,015,275 8,461,491 18.4% ===================================== Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For the nine months ended March 31, 2001, total salaries and benefits increased to $5.8 million or $822 thousand over the first three quarters of 2000 total of $5.0 million. The change was primarily attributable to the increase from March 2000 to March 2001 in the number of Bank employees and increased incentive compensation to real estate officers proportionate to the increased volumes of gains on sales of loans. Professional and data processing fees increased from $655 thousand for the nine months ended March 31, 2000 to $859 thousand for the same nine-month period in 2001. The $204 thousand increase was predominately due to legal fees resulting from the legal proceedings in process between Bancard and PMT Services, Inc.,discussed further in Part II, Item I, combined with increased fees to outside consultants addressing compliance, efficiency, and profitability issues of the subsidiary bank. Advertising and marketing increased 29% or $89 thousand for the period. 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. Occupancy and equipment expense increased $229 thousand or 19% for the period. The increase was predominately due to the addition of a fourth full service banking facility and the resulting increased levels of rent, utilities, depreciation, maintenance, and other occupancy expenses. Other noninterest expense increased $173 thousand or 22% for the period. The increase was primarily the result of increased service charges from upstream banks incurred by the subsidiary bank and increased expenses related to Bancard's cardholder program. The provision for income taxes was $876 thousand for the nine-month period ended March 31, 2001 compared to $1.3 million for the nine-month period ended March 31, 2000 for a decrease of $447 thousand or 34%. The decrease was the result of a decrease in income before income taxes of $955 thousand or 28% for the fiscal 2001 period when compared to the fiscal 2000 period, as well as a reduction in the Company's effective tax rate. LIQUIDITY Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The liquidity of the Company primarily depends upon cash flows from operating, investing, and financing activities. Net cash used in operating activities, consisting primarily of the funding of loans for sale, was $4.4 million for the nine months ended March 31, 2001 compared to $1.3 million for the same period in 2000. Net cash used in investing activities, consisting principally of loan originations, was $24.9 million for the nine months ended March 31, 2001 and $28.5 million for the nine months ended March 31, 2000. Net cash provided by financing activities, consisting primarily of deposit growth, and net proceeds from short-term borrowings and Federal Home Loan Bank advances, for the nine months ended March 31, 2001 was $34.6 million and for same period in 2000 was $31.1 million. The Company has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. At both March 31, 2001 and June 30, 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 March 31, 2001 and June 30, 2000, the Company also had an unused line of credit for $3.0 million, which was secured. OTHER DEVELOPMENTS In addition to the main office in Bettendorf, IA, the Bank has two full service banking locations in Davenport, IA, and a full-service banking location in the Velie Plantation Mansion in Moline, IL. The Company also maintains two locations that are utilized for various operational and administrative functions. In March 1999, the Bank acquired and improved a 3,000 square foot office building adjacent to the Davenport facility for utilization by its technology and credit administration departments. Beginning May 1, 2000, the Company leases approximately 2,000 square feet on the second floor of the Velie facility in Moline. The space was renovated and serves as the corporate headquarters of the Company. Construction of the fourth full service banking facility was completed in October, 2000 at 5515 Utica Ridge Road in Davenport. The Bank leases approximately 6,000 square feet on the first floor and 2,200 square feet in the lower level of the 24,000 square foot facility. The office was opened for business on October 30, 2000. In April 2001, the Company announced plans to expand its banking operations to the Cedar Rapids, Iowa market. Initially, the Cedar Rapids operation will function as a branch of Quad City Bank and Trust Company, subject to regulatory approvals that are expected in May 2001. The Company has filed the required regulatory applications to obtain a separate bank charter in the Cedar Rapids market, to be named Cedar Rapids Bank and Trust Company. Expectations are to convert the branch operations into this newly chartered bank upon receiving regulatory approval, which is likely to occur in the fall of 2001. The Company plans to raise additional equity capital of approximately $5 million through a private placement of its common stock during the summer of 2001 to assist with capitalization of the new bank. 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. The Company 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 future plans, strategies and expectations of the Company, are generally identifiable by use of the words, "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and its subsidiaries 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 the Company's market area, our implementation of new technologies, our 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 the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. RECENT ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board (FASB) has issued Statement No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement replaces FASB Statement No. 125 in its entirety. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of Statement 125's provisions without reconsideration. This Statement is effective for transfers and servicing of financial assets and distinguishments of liabilities occurring after March 31, 2001. The Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management believes that adoption of this Statement will not have a significant effect on the Company's consolidated financial statements. Part II QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1 Legal Proceedings Bancard is the holder of an account receivable in the approximate amount of $1,700,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova Corporation (trading symbol NIS on the New York Stock Exchange). This receivable arises pursuant to Bancard's provision of electronic credit card sales authorization and settlement services to PMT pursuant to a written contract that includes PMT's obligation to indemnify Bancard for credit card chargeback losses arising from those services. PMT has failed to timely pay Bancard for monthly invoices, including service charges and substantial chargeback losses, for the period beginning May, 2000. Bancard intends to vigorously pursue collection of this receivable. On September 25, 2000, PMT filed a lawsuit in federal court in Los Angeles, California, against Bancard and the Company. This lawsuit alleges tortious acts and breaches of contract by Bancard, the Company, and others and seeks recovery from Bancard and the Company of not less than $3,600,000 of alleged actual damages, plus punitive damages. Bancard and the Company filed lawsuits in federal and state courts in Davenport, Iowa against PMT. These lawsuits sought a court order compelling PMT to participate in arbitration in Bettendorf, Iowa, as provided for in the pertinent contract documents, and to resolve the disputes between PMT, Bancard and the Company, including the unpaid account receivable. The federal court in Iowa ruled that the arbitration issue should be determined by the state court in Iowa. Subsequently, the Iowa District Court of Scott County ruled that all claims, including the tort claims, must be arbitrated in Iowa. Because of that ruling, the California lawsuit was dismissed, and arbitration is pending. Bancard and the Company continue to believe that PMT's allegations are without merit and will vigorously pursue the collection of the receivable and the defense of PMT's claims. Item 2 Changes in Securities and Use of Proceeds - None Item 3 Defaults Upon Senior Securities - None Item 4 Submission of Matters to a Vote of Security Holders - None Item 5 Other Information - None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Press release dated May 15, 2001 announcing earnings for the third quarter ended March 31, 2001 and related financial information 99.2 Shareholder letter dated May 2001 discussing earnings for the third quarter ended March 31, 2001 and related financial information (b) Reports on Form 8-K None SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QUAD CITY HOLDINGS, INC. (Registrant) Date May 15, 2001 /s/ Michael A. Bauer ------------ --------------------------------------------- Michael A. Bauer, Chairman Date May 15, 2001 /s/ Douglas M. Hultquist ------------ --------------------------------------------- Douglas M. Hultquist, President Principal Executive Officer Date May 15, 2001 /s/ Todd A. Gipple ------------ --------------------------------------------- Todd A. Gipple, Executive Vice President Chief Financial Officer EX-99 2 qcholdprrlse.txt PRESS RELEASE Contact: Todd A. Gipple Executive Vice President Chief Financial Officer (309) 736-3580 - Work (319) 381-3731 - Home FOR IMMEDIATE RELEASE May 15, 2001 Quad City Holdings, Inc. Announces Third Quarter Earnings Quad City Holdings, Inc. (Nasdaq SmallCap: QCHI) today announced earnings for the third fiscal quarter ended March 31, 2001 of $623,000 or basic and diluted earnings per share of $.28 and $.27, respectively. For the March 31, 2000 quarter, the Company reported earnings of $760,000 or basic and diluted earnings per share of $.33 and $.32, respectively. Earnings for the nine months ended March 31, 2001 were $1.6 million, or basic and diluted earnings per share of $.72 and $.70, respectively, as compared to $2.1 million or basic and diluted earnings per share of $.92 and $.90, respectively, for the same period one year ago. The reduction in earnings for both the quarter and nine months ended March 31, 2001, as compared to the same periods one year ago, was the result of several factors. These factors included the opening of the Company's fourth full-service banking facility on Utica Ridge Road in Davenport and a reduction in processing volumes and profitability at Quad City Bancard. The Company's total assets increased by $39.1 million or 11% to $406.7 million at March 31, 2001 from $367.6 million at June 30, 2000. During the same period, gross loans increased by $35.6 million or 15% to $277.5 million from $241.9 million at June 30, 2000. Total deposits increased 7% to $309.1 million at March 31, 2001 from $288.1 million at June 30, 2000. Stockholders' equity was $23.1 million at March 31, 2001 as compared to $20.1 million at June 30, 2000. Net interest income for the three and nine months ended March 31, 2001 was $3.0 million and $8.8 million as compared to $2.7 million and $8.0 million, respectively, for the same periods one year ago. For the three and nine month periods ended March 31, 2001, net interest margin was 3.29% and 3.33%, respectively, as compared to 3.45% and 3.48%, respectively, for the same periods in 2000. In April 2001, the Company announced plans to expand its banking operations to the Cedar Rapids, Iowa market. Initially, the Cedar Rapids operation will function as a branch of Quad City Bank & Trust Company subject to regulatory approvals that are expected in May 2001. The Company has filed regulatory applications to establish a separately chartered bank in the Cedar Rapids market, to be called Cedar Rapids Bank and Trust Company. The Company expects to transfer the branch operations into this new charter upon receiving regulatory approval, likely in the fall of 2001. The Company plans to raise additional equity capital in the amount of approximately $5 million, through a private placement of common stock, during the summer of 2001 to help capitalize the new bank. "Clearly, Cedar Rapids is one of the strongest business markets in the State of Iowa, yet the community currently lacks a locally managed community oriented bank with a focus on commercial banking. With the talented group of local bankers who will manage Cedar Rapids Bank and Trust Company, and their local board of directors, we have the winning combination to capitalize on the opportunity to fill this niche in Cedar Rapids." said Doug Hultquist, President and Chief Executive Officer. Todd Gipple, Executive Vice President and Chief Financial Officer added, "Cedar Rapids Bank and Trust Company will utilize many of our established administrative and support functions. This existing infrastructure will enable us to efficiently provide support services and allow the Cedar Rapids team to focus on rapid growth and providing the highest levels of customer service in their market." "In addition, leveraging these existing administrative and support resources over the expanded banking operations should allow Cedar Rapids Bank and Trust Company to become profitable much more quickly than the typical de novo bank. Historically, de novo banks achieve profitability by the end of their third year of operations. Quad City Bank and Trust Company became profitable on a monthly basis in its sixteenth month of operations. We hope to meet or exceed these results with the Cedar Rapids charter." Quad City Holdings, Inc., headquartered in Moline, Illinois, is a bank holding company which serves the Quad City area via its wholly owned subsidiary, Quad City Bank and Trust Company, based in Bettendorf, Iowa. Quad City Bank and Trust Company, which commenced operations in 1994, provides full-service commercial and consumer banking, and trust and asset management services. The company also engages in merchant credit card processing through its wholly owned subsidiary, Quad City Bancard, Inc., based in Moline, Illinois. This release may contain forward-looking statements. Forward looking statements are identifiable by the inclusion of such qualifications as expects, intends, believes, may, likely or other indications that the particular statements are not based upon facts but are rather based upon the Company's beliefs as of the date of this release. Actual events and results may differ significantly from those described in such forward looking statements, due to changes in the economy, interest rates or other factors. For additional information about these factors, please review our filings with the Securities and Exchange Commission. As of March 31, June 30, March 31, 2001 2000 2000 ----------------------------------------- (dollars in thousands, except share data) SELECTED BALANCE SHEET DATA Total assets ...................... $ 406,711 $ 367,622 $ 349,352 Securities ........................ 54,761 56,129 61,593 Total loans ....................... 277,446 241,853 218,183 Allowance for loan losses ......... 4,084 3,617 3,303 Total deposits .................... 309,064 288,067 277,431 Total stockholders' equity ........ 23,079 20,071 20,136 Common shares outstanding ......... 2,265,420 2,283,920 2,325,416 Book value per common share ....... $ 10.19 $ 8.79 $ 8.66 Full time equivalent employees .... 166 157 146 CAPITAL RATIOS Tier 1 leverage ................... 7.54% 8.06% 8.13% Tier 1 risk-based capital ......... 9.78% 10.39% 11.40% Total risk-based capital .......... 12.44% 13.47% 14.66% For The Quarter Ended March 31, June 30, March 31, 2001 2000 2000 -------------------------------- (dollars in thousands) ANALYSIS OF LOAN DATA Net charge-offs ............................ $ 36 $ 80 $ 124 As of March 31, June 30, March 31, 2001 2000 2000 -------------------------------- Nonaccrual loans ........................... $ 1,161 $ 383 $ 1,216 Accruing loans past due 90 days or more .... 440 353 729 Total nonperforming assets ................. 1,601 736 1,945 Loan mix: Commercial ................................. 195,071 167,683 147,842 Real estate ................................ 45,146 39,765 38,040 Installment and other consumer ............. 37,229 34,405 32,301 Total loans ................................ 277,446 241,853 218,183 For the Quarter For the Nine Months Ended March 31, Ended March 31, 2001 2000 2001 2000 -------------------------------------------- (dollars in thousands, except per share data) SELECTED INCOME STATEMENT DATA Interest income ............................ $ 7,279 $ 5,953 $ 21,522 $ 17,688 Interest expense ........................... 4,313 3,300 12,756 9,732 Net interest income ........................ 2,966 2,653 8,766 7,956 Provision for loan losses .................. 148 85 668 657 Noninterest income ......................... 1,632 1,624 4,420 4,620 Noninterest expense ........................ 3,471 2,960 10,015 8,461 Income tax expense ......................... 356 472 876 1,323 Net income ................................. 623 760 1,627 2,135 Earnings per common share (basic) .......... $ 0.28 $ 0.33 $ 0.72 $ 0.92 Earnings per common share (diluted) ........ $ 0.27 $ 0.32 $ 0.70 $ 0.90 AVERAGE BALANCES Assets ..................................... $400,379 $343,650 $384,571 $337,733 Deposits ................................... 309,251 274,599 299,233 259,410 Loans ...................................... 271,702 208,291 260,465 207,953 Stockholders' equity ....................... 22,444 19,726 21,433 19,241 KEY RATIOS Return on average assets (annualized) ...... 0.62% 0.88% 0.56% 0.84% Return on average common equity (annualized) 11.10% 15.41% 10.12% 14.79% Net interest margin ........................ 3.29% 3.45% 3.33% 3.48% Efficiency ratio ........................... 75.47% 68.92% 75.80% 66.98%
For the Quarter Ended For the Nine Months Ended March 31, March 31, 2001 2000 2001 2000 ----------------------------------------------------- (dollars in thousands, except share data) ANALYSIS OF NONINTEREST INCOME Merchant credit card fees, net of processing costs $ 402 $ 653 $ 1,203 $ 1,836 Trust department fees ............................ 566 525 1,583 1,388 Deposit service fees ............................. 218 137 565 444 Gain on sales of loans, net ...................... 314 71 612 300 Securities gains (losses), net ................... -- 15 (23) 15 Other ............................................ 132 223 480 637 Total noninterest income ...................... 1,632 1,624 4,420 4,620 ANALYSIS OF NONINTEREST EXPENSE Salaries and employee benefits ................... $ 2,105 $ 1,806 $ 5,841 $ 5,019 Professional and data processing fees ............ 267 230 860 655 Advertising and marketing ........................ 113 117 393 304 Occupancy and equipment expense .................. 489 376 1,407 1,177 Stationery and supplies .......................... 83 83 253 244 Postage and telephone ............................ 98 84 292 266 Other ............................................ 316 264 969 796 Total noninterest expenses .................... 3,471 2,960 10,015 8,461 WEIGHTED AVERAGE SHARES Common shares outstanding (a) .................... 2,265,420 2,324,004 2,269,476 2,311,313 Incremental shares from assumed conversion: Options ...................................... 45,692 59,474 47,335 65,698 Adjusted weighted average shares (b) ............. 2,311,112 2,383,478 2,316,811 2,377,011 (a) Denominator for Basic Earnings Per Share (b) Denominator for Diluted Earnings Per Share
EX-99 3 qcshareletter.txt May, 2001 To: Our Stockholders As many of you have read recently in our local newspapers, we are excited to announce our expansion to the Cedar Rapids, Iowa market. We have carefully studied the opportunities in this market in recent years and are quite pleased we were able to team up with this group of talented bankers. Larry Helling will lead the effort in Cedar Rapids and will be joined by Mitch McAlree, Dana Nichols and John Rodriguez. Each of these individuals has more than fifteen years in the financial industry, much of it in the Cedar Rapids market. Most of their initial efforts will be directed to the commercial banking market, which is consistent with our focus in the Quad Cities. The Cedar Rapids operation will function as a branch of Quad City Bank and Trust Company, initially, subject to regulatory approvals that are expected during the month of May. A charter application for Cedar Rapids has been filed as well and is likely to be acted on by the regulators by late fall of 2001. The name selected for the charter is Cedar Rapids Bank and Trust Company. Temporary office space has been procured in downtown Cedar Rapids and a permanent banking location is currently being negotiated, also in the downtown area. Additional capital is planned to be raised this summer, primarily in Cedar Rapids. A private placement will be conducted of common stock of Quad City Holdings, Inc. of approximately $5 million. Cedar Rapids is clearly one of the strongest business markets in the state of Iowa, yet it lacks a locally managed, community oriented bank with a focus on commercial banking. With the talented group of bankers and a local Board of Directors for Cedar Rapids Bank & Trust, we feel we have a winning combination to continue our growth in eastern Iowa and western Illinois. The Cedar Rapids operation will utilize many of our existing administrative and support functions. These resources can be used to more efficiently provide support services and allow the Cedar Rapids group to focus on growth and providing high service levels to their customers in that market. Growth continued in our existing operation as consolidated assets increased to $407 million at March 31, 2001, from $394 million at December 31, 2000. Consolidated assets were $368 million at our prior fiscal year end of June 30, 2000 and were $349 million at March 31, 2000. Much of the growth was again focused on the loan portfolio as net loans receivable increased from $262 million at December 31, 2000 to $273 million at March 31, 2001. Net loans receivable were $215 million at March 31, 2000. Deposit rates were reduced during the quarter, as The Federal Reserve dramatically lowered short-term interest rates, slowing our growth in this area. As a result, much of our loan growth was funded by borrowings from the Federal Home Loan Bank and repurchase agreements with customers. Stockholders' equity increased to $23 million at March 31, 2001 as compared to $22 million at December 31, 2000 and $ 20 million one year ago. The increase in equity was the result of both retained earnings for the quarter and an increase in the unrealized appreciation in our bond portfolio. Basic earnings per share increased from $.15 for the December 2000 quarter to $.28 this quarter while earnings for the March 31, 2000 quarter were $.33. For the nine months ended March 31, 2001, basic earnings per share were $.72 as compared to $.92 one year ago. The reduction in earnings this year is the result of several factors including the opening of our fourth full service facility on Utica Ridge Road in Davenport, a reduction in processing volumes at Quad City Bancard, and the legal fees incurred in defense of the PMT litigation. On a positive note, our residential mortgage department has seen significant growth as a result of lower interest rates. Gains on loan sales for the quarter were $314 thousand compared to just $71 thousand one year ago. It appears these volumes will continue through the end of our fiscal year, unless interest rates move upward. As you recall, we initiated action against PMT Services, Inc. in an effort to collect a large receivable of approximately $1.7 million. In response, PMT filed a lawsuit in California against Quad City Bancard, Inc. and Quad City Holdings, Inc. alleging wrongdoing on our part and seeking recovery of damages. We filed a petition to compel arbitration in Iowa District Court of Scott County and that court has now ruled that all claims, including tort claims, must be arbitrated in Iowa. We continue to believe that PMT's allegations are without merit and will vigorously pursue our right to recover the receivable and to defend against PMT's claims. We are pleased to announce that Charles A. Ruhl, Jr. has been added to the board of Quad City Bank and Trust Company. Chuck is the president of Ruhl and Ruhl Commercial Company and is a lifetime member of the Quad City community. Chuck's knowledge of the market will be a valuable addition to our board. Taking advantage of the opportunity in Cedar Rapids provides for the prospect of continued growth. However, with such growth will come initial start up losses in that operation. Historically, over the years, de novo banks typically achieve profitability by the end of their third year of operations. Quad City Bank and Trust Company was able to achieve profitability more quickly and we plan to do so in Cedar Rapids as well. Your board is very confident that this was the right long term decision for the Company and we hope that you as a shareholder can continue to take a long term view. We are approaching our eighth fiscal year end as a public company. Your support as a stakeholder in our organization has been much appreciated. Trust that we will continue to work toward good long-term decisions that will result in improved shareholder value. -----END PRIVACY-ENHANCED MESSAGE-----