U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ x ] Annual report under Section10-K
ANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange
Act ofOF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee required) For the fiscal year ended JuneFOR THE FISCAL YEAR ENDED JUNE 30, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from __________________ to _____________________1999
Commission file number: 0-22208
Quad City Holdings, Inc.
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(NameQUAD CITY HOLDINGS, INC.
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(Exact name of Small Business Issuerregistrant as specified in Its Charter)its charter)
Delaware 42-1397595
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(State or Other Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
Incorporation or Organization)
2118 Middle Road, Bettendorf, Iowa 52722
- ---------------------------------------- ----------3551 Seventh Street, Suite 100, Moline, Illinois 61265
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(Address of Principal Executive Offices) (Zip Code)
(319) 344-0600
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(Issuer s Telephone Number, Including Area Code)principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered underpursuant to Section 12(b) of the Exchange Act:
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None.
Securities registered underpursuant to Section 12(g) of the Exchange Act:
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Common Stock, $1 Par Value
CheckIndicate by check mark whether the Issuerregistrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the pastpreceding 12 months (or for such shorter period that the Issuerregistrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
CheckIndicate by check mark if there is no disclosure of delinquent filers in response to Item
405 of regulation S-BRegulation S-K is not contained in this form,herein, and no disclosure will not be contained, to the
best of Issuer sregistrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB10-K or any amendment to this
Form 10-KSB.10-K. [ x ]
The Issuer s revenues for its most recent fiscal year were $8,245,754.
The aggregate market value of the voting common stock held by non-affiliates of the
Issuer as
of August 23, 199625, 1999 was approximately $18,950,000.$38,202,000. As of said date,August 25, 1999, the
Issuerissuer had 1,437,8242,296,251 shares of Common Stock issued and outstanding.
Documents incorporated by reference:
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Part III of Form 10-KSB10-K - Proxy statement for annual meeting of
stockholders to be held in 1996.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ x ]1999.
Part I
Item 1. Description of the Business
Quad City Holdings, Inc. (the "Company"("Quad City") was formed in February of 1993 under the
laws of the state of Delaware for the purpose of becoming the bank holding
company of Quad City Bank and Trust Company (the "Bank").
The Bank was capitalized on October 13, 1993 and commenced operations on January
7, 1994. The Bank is organized as an Iowa-chartered commercial bank that is a
member of the Federal Reserve System with depository accounts insured by the
Federal Deposit Insurance Corporation. The Bank provides full-service commercial
and consumer banking, and trust and asset management services in the Quad City
area through its three offices that are located in Bettendorf and Davenport,
Iowa and adjacent
communities.in Moline, Illinois.
Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a
Delaware corporation whichthat provides merchant credit card processing services.
This operation had previously been a division of the Bank since July 1994.
Bancard has contracted with an independent
sales organization which markets credit card services to merchants
throughout the country. Currently, approximately 8,50015,000 merchants process transactions with Bancard.
The CompanyQuad 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.
The Bank competes withoperates in a highly competitive environment in the Quad Cities area.
Competitors include not only other commercial banks, credit unions, savings
banks, savings and loan institutions credit unions and mutual funds, but also, insurance
companies, finance companies, brokerage firms , investment banking companies,
and a variety of other financial service
organizationsservices and advisory companies. Many of these
competitors are not subject to the same regulatory restrictions as Quad City.
Many of these unregulated competitors compete across geographic boundaries and
provide customers increasing access to meaningful alternatives to banking
services. These competitive trends are likely to continue. Additionally, Quad
City competes in the Quad Cities market. Being established in 1994, the
Bank is onea market with a number of the smallermuch larger financial institutions
in its market.with substantially greater resources and larger lending limits. The
Bank, the Company and Bancard are regulated by 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").
The Company sQuad City's principal business consists of attracting deposits from the public
and investing those deposits in loans and securities. The deposits of the Bank s deposits
are insured to the maximum amount allowable by the FDIC. The
Company sQuad 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. The Company sdeposits and borrowings. It's operating results are affected by
merchant credit card fees, trust fees, deposit service charges,charge fees, fees from
the sales of residential real estate loans and other income. Operating expenses of
the Company
include employee compensation and benefits, occupancy and equipment expense,
professional and data processing fees, advertising and marketing expenses and
other administrative expenses. The Company sQuad City's operating results are also affected
by economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
The commercial banking business is a highly regulated business. See Appendix A
for a brief summary regarding federal and state statutes and regulations, which
are applicable to the CompanyQuad 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.
The Company,Quad City, the Bank and Bancard have a June 30th fiscal year end and employ 53140
individuals. No one customer accounts for more than 10% of revenues, loans or
deposits.
See Appendix B for the tables and schedules whichthat show selected comparative
statistical information required pursuant to the industry guides promulgated
under the Securities Act of 1993,1933 and 1934, relating to the business of the Company.Quad
City.
Item 2. Description of Property
The main officesoffice of the Company and the Bank areis in a 6,700 square foot facility, which was
completed in January of 1994. In March of 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 of
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 storytwo-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 storageoperational
functions, item processing and item
processing. Three thousand square feet of itsstorage. The entire second floor has been leased
to atwo professional services firm.firms. 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 of
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 remainingbuilding is owned by a third party limited liability
company and the Bank and Bancard are its major tenants. Quad City has purchased
a 20% interest in the company that owns the building. Bancard relocated its
operations to the lower level of the 30,000 square foot building in late 1997.
The Bank began its operations and Quad City relocated its corporate headquarters
to the first floor of the building on February 17, 1998. The business office of
a medical clinic is sub-leasing approximately 3,500 square feet on the first
floor.
In March, 1999, the Bank acquired a 3,000 square feetfoot office building adjacent
to the Davenport facility at a cost of $225,000. It is available for lease.
Bancard leasesexpected that
improvements will be made at a cost of approximately 1,700 square feet of$60,000. The office space
in
Bettendorf from an unrelated third party.will be utilized for various operational and administrative functions.
Management is of the opinion that the facilities are of sound construction, in
good operating condition, are appropriately insured and are adequately equipped
for carrying on the business of the
Company.Quad City.
The Bank has limitedintends to limit its investment in premises to approximatelyno more than 50% of Bank
capital. The Bank frequently invests in commercial real estate mortgages. The
Bank also invests in residential mortgages. The Bank has established lending
policies which include a number of underwriting factors to be considered in
making a loan including, location, loan to value ratio, cash flow, interest rate
and credit worthiness of the borrower.
No individual real estate property or mortgage amounts to 10% or more of
consolidated assets.
Item 3. Legal Proceedings
The CompanyQuad City is not aware of any legal proceedings against it the Bank
or Bancard.its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of the CompanyQuad City for a vote
during the fourth quarter of the fiscal year ended June 30, 1996.1999.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company s common stock, has beenpar value $1.00 per share ("Common Stock") of Quad City is
traded on The Nasdaq SmallCap Market sinceunder the symbol "QCHI". The stock began
trading on October 6, 1993. HighAs of June 30, 1999, there were 2,296,251 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. The prices
set forth below have been adjusted to reflect the three-for-two stock split
effected in the form of a stock dividend paid on Nasdaq for each
quarterly period during the two fiscal years ended JuneNovember 30, 1996 and 19951998. A total of
760,262 shares of Common Stock were as follows:
Fiscal 1996 Fiscal 1995
Sale Price Sale Price
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High Low High Low
------- ------- ------- -------
First quarter .......... $12 $ 9 3/4 $10 $ 9
Second quarter ......... 12 10 1/2 $10 9 1/4
Third quarter .......... 12 3/4 10 3/4 9 3/4 8 1/2
Fourth quarter ......... 13 3/4 12 10 1/2 8 3/4issued. No cash dividends were declared
during the past fiscal year. At June
30, 1996, there were estimated to be approximately 2,200 holders of
record of the Company s common stock.
The Companyperiods indicated.
Fiscal 1999 Fiscal 1998
sales price sales price
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High Low High Low
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First quarter .......... $21.750 $18.000 $14.750 $13.500
Second quarter ......... 25.500 17.333 19.333 14.167
Third quarter .......... 23.500 19.125 25.833 17.250
Fourth quarter ......... 20.500 16.125 22.000 19.333
Quad City expects that all earnings will be retained to finance the growth of
the Company,Quad City, the Bank and Bancard, and that no cash dividends will be paid forin the
foreseeablenear future. If and when dividends are declared, the CompanyQuad City will probably 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 the Company,Quad City, further restrictions on
dividends may be imposed by the Federal Reserve Board.
Item 6. Management sSelected Financial Data
The "Selected Consolidated Financial Data" of Quad City set forth below is
derived in part from, and should be read in conjunction with our consolidated
financial statements and the accompanying notes thereto. See Item 8 "Financial
Statements and Supplementary Data." Results for past periods are not necessarily
indicative of results to be expected for any future period.
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended June 30,
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1999 1998 1997 1996 1995
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(Dollars in thousands)
Statement of Income Data:
Interest income ....................... $ 20,116 $ 15,077 $ 9,706 $ 6,529 $ 3,550
Interest expense ...................... 11,027 8,342 4,994 3,486 1,896
Net interest income ................... 9,089 6,735 4,712 3,043 1,654
Provision for loan losses ............. 892 902 844 500 283
Noninterest income (1) ................ 5,561 6,148 2,807 1,716 548
Noninterest expenses .................. 9,679 7,910 5,291 3,576 2,293
Pre-tax net income (loss) ............. 4,079 4,071 1,384 683 (374)
Income tax expense .................... 1,614 1,678 165 0 0
Net income (loss) ..................... 2,465 2,393 1,219 683 (374)
Balance Sheet:
Total assets .......................... $321,346 250,151 $168,379 $111,475 $ 80,800
Securities ............................ 51,666 34,619 31,812 34,189 26,051
Loans ................................. 197,977 162,975 108,365 56,810 31,508
Allowance for estimated losses on loans 2,895 2,350 1,633 853 472
Deposits .............................. 247,966 197,384 135,960 92,918 61,098
Stockholders' equity:
Common ........................... 18,473 16,602 13,613 11,669 11,590
Preferred ........................ 0 2,500 1,000 0 0
Key Ratios:
Return on average assets .............. 0.86% 1.14% 0.86% 0.70% (0.65)%
Return on average common equity ....... 13.69 16.40 9.85 5.82 (3.26)
Net interest margin ................... 3.42 3.55 3.74 3.47 3.15
Efficiency ratio (2) .................. 66.07 61.40 70.37 75.14 104.13
Nonperforming assets to total assets .. 0.51 0.51 0.27 0.28 0.00
Allowance for estimated losses on loans
to total loans ...................... 1.46 1.44 1.51 1.50 1.50
Net charge-offs to average loans ...... 0.26 0.13 0.08 0.27 0.01
Average common stockholders' equity
to average assets ................... 6.26 6.97 8.73 12.10 19.89
Average stockholders' equity
to average assets ................... 7.05 7.97 9.15 12.10 19.89
Earnings to fixed charges (3)
Excluding interest on deposits (4) 2.81 x 3.78 x 3.17 x 5.71 x N/A
Including interest on deposits (4) 1.36 1.48 1.28 1.20 N/A
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(1) Year ended June 30, 1998 noninterest income includes a pre-tax gain of
$2,168 from Bancard's restructuring of an agreement with an independent
sales organization (ISO). Year ended June 30, 1999 noninterest income
includes amortization of $732 from Bancard's restructuring of an ISO
agreement.
(2) Noninterest expenses divided by the sum of net interest income before
provision for loan losses and noninterest income.
(3) Dividends were not payable on Quad City's Series A Preferred Stock, and all
the outstanding balance was redeemed in June 1999.
(4) Earnings were inadequate to cover fixed charges in the amount of $374 for
the year ended June 30, 1995.
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, 1999, 1998 and 1997, and
financial condition for the fiscal years ended June 30, 1999 and 1998. This
discussion should be read in conjunction with "Selected Consolidated Financial
Data" and our consolidated financial statements and the accompanying notes
thereto included or incorporated by reference elsewhere in this document.
Overview
Quad City was formed in February 1993 for the purpose of organizing the Bank.
The Bank opened in January 1994 with $4.5 million in assets and grew to
approximately $321.3 million as of June 30, 1999. 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 $2.5 million or $1.08 basic earnings per share
for fiscal 1999 as compared to $2.4 million and $1.09 per share for fiscal 1998
and $1.2 million and $0.56 per share for fiscal 1999. The slight improvement in
fiscal 1999 from fiscal 1998 was attributable to increased net interest income
and increased volumes of business for the Bank, reduced by a decrease in
noninterest income. The decrease in noninterest income was primarily due to the
one time gain in fiscal 1998 resulting from the restructuring of Bancard's
merchant broker agreement. The 95% improvement in fiscal 1998 from fiscal 1997
was also attributable to increase net interest income and increased volumes of
business for the Bank, as well as the one time gain resulting from the
restructuring of Bancard's merchant broker agreement.
Quad City's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loans and
securities and the interest paid on deposits and borrowings. Quad City's
operating results are also affected by sources of non-interest 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. The primary challenge for the Bank currently,
from a profitability standpoint, is to increase its net interest margin. Large
commercial depositors 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 peer group. Management is addressing this issue
with alternative funding sources and pricing strategies.
During 1994, the Bank began to develop internally a merchant credit card
processing operation and in 1995 transferred this activity to Bancard, a
separate subsidiary of Quad City. Bancard initially had an arrangement to
provide processing services exclusively to clients of a single ISO. This ISO was
sold in 1998 and the purchaser requested a reduction in the term of the
contract. Bancard agreed to amend the contract to reduce the term and accept a
fixed monthly processing fee of $25,000 for merchants existing at the time the
agreement was signed and a lower transaction fee for new merchants in exchange
for a payment of $2.9 million, the ability to transact business with other ISOs
and the assumption of the credit risk by the ISO. Approximately two thirds of
the income from this settlement, or $2.2 million, was reported in fiscal 1998,
with the remainder of $732,000 being recognized as an adjustment to the fixed
processing fee during fiscal 1999. Bancard's net income was $565,000 in fiscal
1999 compared to $1.3 million in fiscal 1998. Bancard expects its merchant
credit card fee income to remain below previous levels until such time as
Bancard can develop relationships with additional ISOs or Allied Merchant
Services, Inc., Bancard's newly formed independent sales organization, can
generate processing business revenues comparable to those Bancard experienced
prior to amendment of its ISO contract. This reduction in processing fees and
cessation of the settlement income at Bancard is expected to adversely affect
comparisons of consolidated net income in fiscal 2000 with fiscal 1999.
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 1999, the
Bank originated $85.0 million of real estate loans and sold $87.8 million of
loans, which resulted in gains of $1.0 million. In fiscal 1998 and 1997, the
Bank originated $57.2 million and $6.9 million of real estate loans and sold
$53.3 million and $6.0 million of loans, which resulted in gains of $713,000 and
$44,000, respectively. Mortgage banking operations have benefited from
significant refinancing activity as a result of the relatively low interest rate
environment in which it has been operating.
Trust department income has become a significant contributor to noninterest
income, growing from approximately $736,000 in fiscal 1997 to $1,521,000 in
fiscal 1999. 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 $213.5 at June 30, 1997 to $506.8
million at June 30, 1999. Growth in the current fiscal year resulted primarily
from the establishment of a custodial relationship with a large pension fund.
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 to
issue $12 million of capital securities to the public for cash. On June 9, 1999,
the Company received all the proceeds from the sale of the public offering.
Approximately $1.0 of the proceeds were used to pay expenses related to the
offering, approximately $2.5 million were used to repay the outstanding balance
on a revolving credit note and approximately $3.0 million was used to redeem all
outstanding preferred stock, including the redemption premium.
Results of Operations
Fiscal 1999 compared with fiscal 1998
Overview. Net income for the year ended June 30, 19961999 was $682,588,$2.5 million as
compared to net income of $2.4 million for the same period in 1998 for a slight
increase of $72,000 or 3%. Basic earnings per share for fiscal 1999 were $1.08
as compared to $1.09 for fiscal 1998. The increase in net lossincome was comprised
of $373,782an increase in net interest income after provision for loan losses of $2.4
million reduced by a decrease in noninterest income of $588,000 and an increase
in noninterest expenses of $1.8 million. The decrease in noninterest income was
primarily due to the one time gain in fiscal 1998 resulting from the
restructuring of Bancard's merchant broker agreement.
Interest income. Interest income increased by $5.0 million, from $15.1 million
for fiscal 1998 to $20.1 million for fiscal 1999. The 33% rise in interest
income was basically attributable to greater average outstanding balances in
interest earning assets, principally loans receivable.
Interest expense. Interest expense increased by $2.7 million, from $8.3 million
for fiscal 1998 to $11.0 million for fiscal 1999. The 32% increase in interest
expense was primarily attributable to greater average outstanding balances in
interest bearing liabilities.
Provision for loan losses. The provision for loan losses is established based on
factors such as the local and national economy and the risk associated with the
loans in the portfolio. Quad City had an allowance for estimated losses on loans
of approximately 1.46% of total loans at June 30, 1999 as compared to
approximately 1.44% at June 30, 1998. The provision for loan losses decreased
slightly by $10,000, from $902,000 for the year ended June 30, 1995.1998 to $892,000
for the year ended June 30, 1999. The primary loan growth for the year ended
June 30, 1999 was in the commercial loan portfolio, as opposed to our consumer
loan portfolio, which has historically carried a greater degree of risk,
allowing a decrease in the provision necessary for the period. For fiscal 1999,
commercial and real estate loans combined for total charge-offs of $130,000 and
total recoveries of $53,000. Consumer loan charge-offs and recoveries totaled
$349,000 and $79,000, respectively, for fiscal 1999. Indirect auto loans
accounted for a majority of the consumer loan charge-offs. Because asset quality
is a priority for Quad City and its subsidiaries, management has made the
decision to downscale indirect auto loan activity based on charge-off history.
The ability to grow profitably is, in part, dependent upon the ability to
maintain asset quality.
Noninterest income. Noninterest income decreased by $588,000, from $6.1 million
for fiscal 1998 to $5.6 million fiscal 1999. Noninterest income at June 30, 1998
consisted of the gain on 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 at June 30, 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. The 10% decrease was
primarily due to the one time gain in fiscal 1998 resulting from the
restructuring of Bancard's merchant broker agreement offset by an increase in
loan sales activity in the residential real estate department of the Bank,
increased trust relationships received during the period and the recognition of
deferred income resulting from a gain on the restructuring of Bancard's merchant
broker agreement.
In June 1998, Quad City recognized $2.2 million of gross income as a result of
the amendment of the merchant broker agreement with its current, major ISO. The
amended agreement is for a minimum term of one year and revised a prior
agreement that was to expire in the year 2002. In consideration for the
reduction in term from four years to one year, Quad City received total
compensation of $2.9 million, of which $732,000 was deferred and recognized in
income during fiscal 1999. In the prior agreement, Quad City and the ISO had
shared both merchant-servicing fees and related merchant credit risk. The
amended agreement exchanges a substantial reduction in merchant servicing income
for a like reduction in the related merchant credit risk. With the amended
agreement, Quad City receives a fixed, monthly fee of $25,000 for servicing the
current merchants and is relieved of responsibility for any merchant credit
risk. In an effort to offset the reduced merchant servicing income, Quad City
has been actively pursuing other ISO relationships and has recently begun
processing for additional ISOs.
During fiscal 1999, merchant credit card fees, net of processing costs,
decreased by $73,000 to $1.3 million, from $1.4 million for fiscal 1998. The
reduction reflected terms of the amended merchant broker agreement. Also as a
result of the amended merchant broker agreement, Quad City recognized $732,000
of the deferred income and earned $300,000 of merchant servicing fees for fiscal
1999.
For fiscal 1999, trust department fees increased $382,000, or 34%, to
approximately $1.5 million from $1.1 million for fiscal 1998. The increase was
primarily a reflection of the development of additional trust relationships
during the period.
Gain on sales of loans, net, was $1.0 million for fiscal 1999, which reflected
an increase of 46%, or $331,000, from $713,000 for fiscal 1998. The increase
resulted from low interest rates, which created large numbers of both home
refinances and first-time home purchases, and the subsequent sale of the
majority of these loans into the secondary market.
Noninterest expenses. The main components of noninterest expenses were primarily
salaries and benefits, occupancy and equipment expenses, and professional and
data processing fees for both periods. Noninterest expenses for fiscal 1999 were
$9.7 million as compared to $7.9 million for the same period in 1998, or an
increase of $1.8 million.
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 1999 and 1998.
Years Ended June 30,
-----------------------------------
1999 1998 % Change
-----------------------------------
Salaries and employee benefits ......................... $5,801,670 $4,571,126 26.92%
Professional and data processing fees .................. 598,457 504,344 18.66
Advertising and marketing .............................. 359,571 238,160 50.98
Occupancy and equipment expense ........................ 1,453,040 1,045,349 39.00
Stationery and supplies ................................ 267,739 219,523 21.96
Provision for merchant credit card losses .............. 21,777 105,910 (79.44)
Postage and telephone .................................. 298,208 231,049 29.07
Other .................................................. 878,437 994,354 (11.66)
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Total noninterest expenses ............................. $9,678,899 $7,909,815 22.37
==================================
Salaries and benefits experienced the most significant dollar increase of any
noninterest expense component. For fiscal 1999, total salaries and benefits
increased to $5.8 million or $1.2 million over the fiscal 1998 total of $4.6
million. The change was primarily attributable to the addition of new Bank
employees during the period and increased commission expense in the residential
real estate department proportionate to the large volume of residential mortgage
loan originations and subsequent loan sales. Advertising and marketing expense
increased $121,000 or 51% and postage and telephone expense increased $67,000 or
29%. The increases were the result of the overall increase in business volume of
the Bank. For fiscal 1999, occupancy and equipment expense increased $408,000 or
39% over fiscal 1998. The increase was largely due to rent expense for the new
Moline location. The provision for merchant credit card losses during fiscal
1999 decreased $84,000 or 79% from fiscal 1998, which reflected Bancard's
amended merchant broker agreement and the resulting reduction in Bancard's
responsibility for merchant credit risk.
Income tax expense. The provision for income taxes was $1.6 million for fiscal
1999 compared to $1.7 million for fiscal 1998, a decrease of $64,000 or 4%. The
decrease was attributable to an effective tax rate of 39.6% in fiscal 1999
compared to 41.2% in fiscal 1998.
Fiscal 1998 compared with fiscal 1997
Overview. Net income for the year ended June 30, 1998 was $2.4 million, compared
to $1.2 million for the year ended June 30, 1997, for an increase of 96%.
Results improved primarily because of a $1,224,743$2.0 million increase in net interest
income after provision for loan losses, and a $1,114,590$3.3 million increase in
other income.noninterest income, of which $2.2 million related to a one-time gain on the
restructuring of a merchant broker agreement. These increases were offset by a
$1,282,963$2.6 million increase in other expenses due primarily to the increased number of
employees and higher operating costs related to the increased volume of
business. A loss was reported
for the period ended June 30, 1994business, as well as an increase in income taxes of $1,122,402. Because the Company
was a start-up venture, there were expected losses during the
pre-opening period and for the first several years of operations.$1.5 million.
Interest income. Interest income increased to $6,583,467$15.1 million in fiscal 19961998 from
$3,550,122$9.7 million in fiscal 1995, a rise1997, an increase of $3,033,345.$5.4 million. The 55% rise was
primarily due to greater average outstanding balances in interest bearing
assets. Interest income is comprised primarily of interest income on loans
(including loan fees), securities, federal funds sold and the Company sQuad City's own
deposits maintained at other financial institutions. Interest income should
continue to grow as the loan portfolio and other assets increase, and would also
increase as a result of a rise in interest rates.
Interest expense. Interest expense increased to $3,486,380$8.3 million in fiscal 19961998 from
$1,895,575$5.0 million in fiscal 1995,1997, an increase of $1,590,805,$3.3 million, or 67%, and
represented interest paid primarily to depositors, as well as interest paid on
federal funds
purchased, and Federal Home Loan Bank advances.advances and federal funds purchased. The increase in
interest expense was again primarily due to greater average outstanding balances
in interest bearing liabilities. Interest expense will continue to increase as
deposits and Federal Home Loan Bank advances and other borrowings grow and would
also increase as a result of a rise in interest rates.
Net interest income for the years ended June 30, 19961998 and June 30, 19951997 amounted
to $3,097,087$6.7 million and $1,654,547,$4.7 million, respectively, and represented the difference
between interest income earned on earning assets and interest expense paid on
interest bearing liabilities.
Provision for loan losses. The provision for loan losses is established based on
factors such as the local and national economy and the risk associated with the
loans in the portfolio. The Company sQuad City's provision for loan losses was $500,397$902,000 for
the year ended June 30, 1996,1998, compared to $282,600$844,000 for the year ended June 30,
1995.1997. The $217,797$58,000, or 7%, increase in the provision for loan losses was
primarily attributablein response to thegreater growth in the loan portfolio during fiscal
1996.1998.
Noninterest income. Noninterest income increased by $3.3 million, or 119%, to
$6.1 million in fiscal 1998 from $2.8 million in fiscal 1997. In June 1998, Quad
City recognized $2.2 million of income as a result of signing an amendment to a
merchant broker agreement with its principal ISO. The increase maintainedterm of the Company s allowanceamended
agreement is for estimated losses on loans at 1.5%a minimum one-year period, and revised a prior agreement that
had an expiration date in the year 2002. In consideration for reducing the term
from four years to one year, Quad City received total compensation of total loans at both June 30, 1996
and June 30, 1995.
Other$2.9
million. The remaining $732,000 was recognized in income of $1,662,287 and $547,697 during the fiscal year
ending June 30, 1999. Additionally, Quad City will receive a monthly fee of
$25,000 for servicing the current merchants during the remaining term of the
agreement. In future years, 1996if agreements with other ISOs are not established,
there could be a significant reduction in income. It is Quad City's intent, to
actively pursue relationships with additional ISOs.
Another component of noninterest income is gains on sales of loans, which
totaled $713,000 and 1995, respectively, consisted$44,000 in fiscal 1998 and 1997, respectively. The $669,000
increase experienced in fiscal 1998 reflected the increased volume of
merchant credit cardresidential mortgage loans originated for sale by the Bank to be sold on the
secondary market.
Trust income increased by 55% to $1.1 million in fiscal 1998 from $736,000 in
fiscal 1997. The $402,000 increase reflected the development of new trust
relationships and increased trust account balances, as well as strong stock and
bond markets.
Other noninterest income deposit service charges, the net of investment securities gains
and losses and miscellaneous income.increased $162,000 in fiscal 1998 to $434,000 from
$272,000 in fiscal 1997. The $1,114,59059% increase was primarily due to the additionfees
generated by the receipt of new customers and increased volumelease income on the second floor of the merchant credit card processing services at Bancard, the addition
of new clients in the trust department at the Bank, the increase in
demand deposit customers, andDavenport
building, the growth in the commission income generated by the investment center.
Operating expenses consisted primarily of salariescenter
and benefits; other
expense, including bank service charges and trust related expenses;
professional fees including datagenerated by the item processing fees; and marketing and
advertisingdepartment.
Noninterest expenses. Other operatingConcurrent with Quad City's growth, noninterest expenses
increased to $3,576,389$7.9 million in fiscal 19961998 from $2,293,426$5.3 million in fiscal 1995.1997. The
$1,282,963$2.6 million, or 50%, increase was primarily due to higher overhead expenses on
the increased volume of business attained during fiscal 1996. Management will continue to
attempt to contain overhead costs while maintaining optimal service
levels1998.
The following table sets forth the various categories of noninterest expenses
for the years ended June 30, 1998 and productivity.1997.
Years Ended June 30,
-----------------------
1998 1997 % Change
-----------------------------------
Salaries and employee benefits ......................... $4,571,126 $2,934,758 55.76%
Professional and data processing fees .................. 504,344 437,259 15.34
Advertising and marketing .............................. 238,160 126,061 88.92
Occupancy and equipment expense ........................ 1,045,349 654,010 59.84
Stationery and supplies ................................ 219,523 191,682 14.52
Provision for merchant credit card losses .............. 105,910 176,476 (39.99)
Postage and telephone .................................. 231,049 168,890 36.80
Other .................................................. 994,354 601,667 65.27
-----------------------
Total noninterest expenses ............................. $7,909,815 $5,290,803 49.50
=======================
In fiscal 1996,1998, salaries and employee benefits experienced the most significant
dollar increase of any noninterest expense component. For the twelve months
ended June 30, 1996,30,1998, total salaries and benefits increased to $1,973,682,$4.6 million or
$798,808$1.7 million over the June 30, 1995 total1997 amount of $1,174,874.$2.9 million. The change was
primarily attributable to the increase in the Company s
number of employees.staff for the new Moline location
and increased incentive compensation based on business volume.
In fiscal 1995,1998, advertising and marketing expense experienced the Bank s FDIC premiums were assessed atlargest single
percentage increase within the ratenoninterest expense category. For the twelve
months ended June 30, 1998, total advertising and marketing expense increased to
$238,000 or $112,000 over the June 30, 1997 total of .23%$126,000. The change was
primarily attributable to the promotional and marketing efforts of insured deposits. On November 14, 1995,Quad City's
expansion to the FDICnew Moline Velie Plantation location.
In fiscal 1998, the provision for merchant credit card losses decreased to
$106,000 or $70,000 from the June 30, 1997 amount of $176,000. As mentioned
above, the decrease was primarily due to Bancard restructuring its merchant
portfolio to focus on smaller merchants with less corresponding risk, and as a
result experienced reduced losses.
Income tax expense. Quad City's federal and state income tax expense totaled
$1.7 million and $165,000 in fiscal 1998 and 1997, respectively. The $1.5
million increase was the Bank s FDIC premiumresult of higher income before income taxes.
Additionally, during the year ended June 30, 1997, Quad City was able to 0%. However,reduce
its income tax expense in the Bank will continuefirst three fiscal quarters due to paypre-opening
expenses and initial loss carryforwards, therefore it was only during the $1,000 minimum semi-annual assessment required by federal statute.fiscal
fourth quarter of 1997 that income tax expense was recorded.
Financial Condition and Liquidity
Total assets of the Company grewQuad City increased by $30,674,895,$71.1 million or 37.96%,28% to $111,474,977$321.3 million at
June 30, 19961999 from $80,800,082$250.2 million at June 30, 1995.1998. The increasegrowth primarily
resulted from an increase in the loan portfolio funded by deposits received from
customers, FHLB advances and short-term borrowings. The largest increase in Quad
City's balance sheet as of June 30, 1999, was in deposits received from
customers. While asset growth is expectedThis was a result of an aggressive program to continue forattract deposits
through increased marketing efforts and the year
ended June 30, 1997, it is likelyhiring of new personnel to be atstaff a
lesser percentage rate
frombusiness development department to fund the increase during the past year.in loans. Cash and Cash
Equivalent Assets. Cash and due from banks increaseddecreased by $2,785,137,$3.1 million or 72.71%,27% to
$6,615,407$8.5 million at June 30, 19961999 from $3,830,270$11.6 million at June 30, 19951998. Cash and due
from banks represented both cash maintained at the Bank, andas well as funds that
the Bank and the CompanyQuad City had deposited in other banks in the form of demand
deposits.
Federal funds sold are inter-bank funds with daily liquidity. At June
30, 1996, the Bank had invested $2,728,000 in such funds. Such amount
decreasedFederal funds sold
increased by $10,222,000,$16.1 million or 78.93%, from $12,950,00070% to $39.1 million at June 30, 1995.
This decrease1999 from $23.0
million at June 30, 1998. The increase was attributable to Quad City's increased
liquidity needs at the reduction in funds received from
correspondent banking customers to be reinvested in overnight deposits
"as principal". In August 1995, the Company s correspondent banking
department implemented an "agent" federal funds program, whereby the
funds received from downstream correspondent banking customers merely
pass through the Company s financial statements to upstream
correspondent banks. The implementationend of the "agent" program resultedfiscal year. Quad City made the decision to
increase its liquidity position in a decreaseorder to assets (federalmeet anticipated loan demand, large
deposit maturities and to begin to increase liquidity in case Bank customers
begin to withdraw funds sold) and liabilities (federal
funds purchased). This department provides various services to other
financial institutions, including cash management services.in anticipation of problems associated with the Year
2000.
Certificates of deposit at financial institutions increased by $1,489,154,$4.1 million or
37.39%50% to $5,472,012$12.5 million at June 30, 19961999 from $3,982,858$8.4 million at June 30, 1995 and represented funds that the Company and its
subsidiaries had deposited30,1998. The
Bank continued to make new deposits in other banks in the form of certificates
of deposit.
Management elected
Investments. Securities increased by $17.1 million or 49% to invest$51.7 million at
June 30, 1999 from $34.6 million at June 30, 1998. The increase was the result
of a number of transactions in these deposits to earn a
yield that exceeded the yieldsecurities portfolio. Paydowns of U.S. treasury$1.7
million were received on mortgage-backed securities, at comparable
maturities.
Pursuant to a FASB Special Report, "A Guide to Implementationand the amortization of
Statement 115 on Accounting for Certain Investmentspremiums, net of the accretion of discounts, was $39,000. Maturities, calls, and
sales of securities occurred in Debt and Equity
Securities", the Company transferred securities with an amortized costamount of $7,992,513$14.7 million, and an increase in
unrealized gain of $12,030 from the held to
maturity portfolio to thelosses on securities available for sale, portfoliobefore applicable income
tax, of $345,000. These decreases were offset by the purchase of additional
securities, classified as available for sale, in December,
1995. This "one-time" transfer was made based on management s
reassessmentthe amount of their previous designations of securities giving
consideration to liquidity needs, the management of interest rate risk
and other factors.
A portion$34.0 million.
Portions of the Bank s investment securities of the Bank are purchased with the intent
to hold the securities until they mature. These held to maturity securities were
recorded at amortized cost at both June 30, 19961999 and June 30, 1995.1998. At June 30, 1996, mortgage-backed1999,
municipal securities and municipal securitiesother bonds made up the $3,156,601$724,000 balance. This was a
decrease of $7,861,542,$1.7 million, or 71.35%70%, from June 30, 1995,1998, when U.S.
treasury and agency securities, mortgage-backed
securities, and taxable
municipal securities and other bonds made up the $11,018,143$2.4 million
balance. Market values at June 30, 19961999 and June 30, 19951998 were $3,097,115$727,000 and $10,901,057,$2.4
million, respectively. The decrease was primarily attributable to the "one-time"
transfer described in the previous paragraph.
All of the Company sQuad City's and a portion of the Bank sBank's securities are placed in the
available for sale category as the securities may be liquidated to provide cash
for operating or financing purposes. These securities were reported at fair
value and increased by $15,999,757,$18.7 million, or 106.43%58%, to $31,032,652$50.9 million at June 30, 19961999,
from $15,032,895$32.2 million at June 30,1995.30, 1998. The amortized cost of such securities at
June 30, 19961999 and June 30, 19951998 was $31,518,121$51.4 million and $14,914,642,$32.2 million,
respectively.
The increase was
attributableQuad City does not use any financial instruments referred to the "one-time" transfer described above, as wellderivatives to
manage interest rate risk and as the
purchase of U.S. agency and other securities intoJune 30, 1999 there existed no security in
the investment portfolio.
The amortized costportfolio (other than U.S. government and the weighted average rate yields for the
categoriesU.S. government agency
securities) that exceeded 10% of securities are summarized below.
1996 1995
------------------------- ---------------------------
Amortized Average Amortized Average
Cost Yield Cost Yield
----------- ------------ ----------- --------------
Securities held to maturity:
U.S. treasury securities . $ 0 0.000 $ 8,000,218 4.640%
U.S. agency securities ... 0 0.000 500,000 7.100
Mortgage-backed securities 2,560,793 5.983 2,318,460 5.962
Municipal securities ..... 595,808 6.657 199,465 7.456
----------- -----------
Totals .............. $ 3,156,601 $11,018,143
=========== ===========
Securities available for sale:
U.S. treasury securities . $14,504,449 5.920 $ 6,016,543 7.032%
U.S. agency securities ... 12,612,166 6.222 5,477,243 7.407
Mortgage-backed securities 2,851,340 6.737 3,092,266 7.490
Other securities ......... 1,550,166 Variable 328,590 Variable
----------- -----------
Totals .............. $31,518,121 $14,914,642
=========== ===========
stockholders' equity at that date.
Loans. Loans receivable increased by $25,302,143,$35.0 million or 80.30%,21% to $56,809,720$198.0 million at
June 30, 19961999 from $31,507,577$163.0 million at June 30, 1995.1998. The totals representedincrease was the result
of the origination or purchase of $263.7 million of commercial business,
consumer and real estate loans, made by the
Bankless loan charge-offs, net of recoveries, of
$346,000, and also loan participations the Company had purchased from the Bank, onrepayments or sales of loans that exceeded the Bank s legal lending limit. As of June 30, 1996, the
Bank s legal lending limit was $1,725,000. The Company has received approval
from the Federal Reserve Board to grant loans and to participate in loans with
the Bank.$228.3 million. The majority
of residential real estate loans originated by the Bank were sold on the
secondary market to avoid the interest rate risk associated with long term fixed
rate loans. DuringAs of June 30, 1999, the fiscal year ended 1996, the Bank
originated $41,276,181 of loans and received repayments of $15,853,666.Bank's legal lending limit was $3.5
million.
Allowance for Loan Losses. The Company s allowance for estimated losses on loans was $852,500$2.9
million at June 30, 19961999 compared to $2.3 million at June 30, 1998 for an
increase of $546,000 or 1.5%23%. The adequacy of the allowance for estimated losses
on loans was determined by management based on factors that included the overall
composition of the loan portfolio, types of loans, past loss experience, loan
delinquencies, potential substandard and doubtful credits, and other factors
that, in management's judgment, deserved evaluation in estimating loan losses.
The adequacy of the allowance for estimated losses on loans was monitored by the
loan review staff, and reported to management and the Board of Directors.
Net charge-offs for the years ended June 30, 1999 and 1998, were $346,000 and
$185,000, respectively. The increase was primarily due to the losses resulting
from auto loans purchased from dealers. Quad City has since scaled back on this
type of lending. 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 compared to $472,475 or 1.5%was
1.46% at June 30, 1995.1999 and 1.44% at June 30, 1998.
Although management believes that the allowance for estimated losses on loans at
June 30, 19961999 was at a level that is adequate to absorb losses on existing loans, there
can be no assurance that such losses will not exceed the estimated amounts or
that the CompanyQuad City will not be required to make additional contributions to its provisionprovisions for loan
losses in the future. Asset quality is a priority for the CompanyQuad City and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality.
Nonperforming Assets. The policy of Quad City is to place a loan on nonaccrual
status if: (a) payment in full of interest or principal is not expected or (b)
principal or interest has been in default for a period of 90 days or more unless
the obligation is both in the process of collection and well secured. Well
secured is defined as collateral with sufficient market value to repay principal
and all accrued interest. A debt is in the process of collection if collection
of the debt is proceeding in due course either through legal action, including
judgment enforcement procedures, or in appropriate circumstances, through
collection efforts not involving legal action which are reasonably expected to
result in repayment of the debt or in its restoration to current status.
AtNonaccrual loans were $1.3 million at June 30, 1996,1999 compared to $1.0 million at
June 30, 1998 for an increase of $262,000 or 26%. The increase in nonaccrual
loans was comprised of increases in commercial loans of $254,000 and consumer
loans of $56,700 offset by a decrease in real estate loans of $48,700.
Nonaccrual loans at June 30, 1999 consisted primarily of loans that were well
collateralized and were not expected to result in material losses.
As of June 30, 1999 and 1998, past due loans of 30 days or more amounted to $864,368. At June
30, 1995, past due loans 30 days or more amounted to $87,574. Past due loans as
a percentage of gross loans receivable at June 30, 1996$4.0
million and June 30, 1995 was
1.52% and 0.28%,$2.3 million, respectively. The CompanyQuad City anticipated an increase in the
dollar amount of this category in fiscal 19961999 from the prior year. At June 30, 1995,years. In prior
years, much of the loan portfolio had been on the books for a relatively short
time, period, thus an increase in past due loans was likely as the portfolio matured.
Over one thirdPast due loans as a percentage of the past due totalgross loans receivable was 2.0% and 1.4% at
June 30, 1996, has subsequently been repaid1999, and the
remainder has been1998, respectively.
Other Assets. Premises and equipment decreased by $107,000 or is in the process of renegotiation. The Company intends1% to closely monitor these loans and does not anticipate any material losses.
The Company experienced charge-offs of $120,372 during the fiscal 1996 year
compared to $1,725 during the fiscal 1995 year. The fiscal 1996 charge-offs were
comprised primarily of a single $400,000 commercial loan that was not fully
realized upon liquidation of the borrower. The Company charged off all of the
uncollected balance$7.6 million
at June 30, 1996 and still holds stock in the parent company
of the borrower. The ultimate realization of this collateral is unknown,
therefore the Company has placed no value on the stock.
Premises and equipment increased by $2,729,199 to $4,531,0381999 from $7.7 million at June 30, 19961998. The decrease resulted from
$1,801,839 at June 30, 1995. The increase resulted primarily fromdepreciation expense offset by the Bank
paying the developer its accumulated construction costspurchase of the new Davenport
banking location.additional furniture, fixtures
and equipment. Additional information regarding the composition of this account
and related accumulated depreciation is described in footnote 45 to the
consolidated financial statements.
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $233,000 or 13% to $1,121,268$2.0 million at June 30, 19961999 from $685,880$1.8
million at June 30, 1995.1998. The increase was primarily due to greater average
outstanding balances in interest bearinginterest-bearing assets.
Other assets increased by $2.3 million or 93% to $4.8 million at June 30, 1996 and1999
from $2.5 million at June 30, 19951998. The increase consisted primarily of miscellaneous receivables, prepaid expenses andan
increase in accrued trust department income,fees, miscellaneous receivables and totaled $860,779 and $463,095, respectively. The increase was attributable
to the increased volume of business and the related prepaid
expenses associated with the pacegrowth of growth at the Bank and Bancard.Quad City.
Deposits. Deposits grewincreased by $50.6 million or 26% to $92,918,118$248.0 million at June
30, 19961999 from $61,097,686$197.4 million at June 30,1995,
for an increase of $31,820,432, or 52.08%.30, 1998. The increase consisted ofresulted from a
$20,746,932$29.4 million net increase in demand,noninterest bearing, NOW, money market and other
savings accounts and a $11,073,500$21.2 million net increase in time deposit accounts.
Federal funds purchased representing inter-bank funds receivedcertificates of deposit.
The increase was a result of periodic aggressive pricing programs for deposits,
increased marketing efforts and the hiring of new personnel to staff a business
development department. Management also believes the increases were a reaction
by customers to the acquisitions and mergers of local banks by transferring
their financial business to community banks.
Short-term Borrowings. Short-term borrowings increased $7.7 million from other banks
decreased by $6,021,072 to $1,190,000 at$2.0
million as of June 30, 1996 from $7,211,072 at1998 to $9.7 million as of June 30, 1995. This decrease was attributable to the reduction in funds received from
correspondent banking customers to be reinvested in overnight deposits "as
principal".
Federal Home Loan Bank ("FHLB") advances increased to $3,411,470 at June 30,
1996 from $0 at June 30, 1995. The Bank is a member of the FHLB of Des Moines.1999. As of June 30,
1996,1998 short-term borrowings represented federal funds purchased from
correspondent banks. In recent months, the Bank began offering short-term
repurchase agreements to some of its major customers. As of June 30, 1999
short-term borrowings were comprised of these customer repurchase agreements of
$9.6 million, as well as federal funds purchased from correspondent banks of
$140,000.
FHLB Advances and Other Borrowings. FHLB advances decreased slightly to $24.6
million as of June 30, 1999 from $24.7 million at June 30, 1998. As of June 30,
1999, the Bank held $1,249,700$1.2 million of FHLB stock. As a result of its membership in
the FHLB of Des Moines, the Bank has the ability to borrow funds for short-orshort or
long-term purposes under a variety of programs.
Other borrowings increased to $1,000,000In 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 June 30, 1996 from $0 at June 30,
1995.1999. Under current regulatory
guidelines, these securities are considered to be Tier 1 capital, with certain
limitations that are applicable to Quad City.
Other borrowings consistconsisted of the amount outstanding on a $1,500,000
revolving credit note
with a third party lender, which is secured by all the outstanding stock of the
Bank. On July 1, 1998, Quad City increased the amount available under the credit
note to $4.5 million and extended the expiration date to July 1, 2000. The
borrowed funds were utilized to provide additional capital to the Bank to
maintain a 7.5% aggregate capital ratio. On June 10, 1999, using the required 9% leverage ratio.proceeds
from the sale of the trust preferred securities, Quad City paid off the balance
of its outstanding line of credit, which was $2.5 million. After the outstanding
balance was paid off, the note was rewritten and decreased the amount available
under the credit note to $3.0 million while maintaining the July 1, 2000
expiration date.
Other liabilities grewincreased by $3.1 million or 57% to $1,286,783 at$8.6 million as of June
30, 19961999 from $901,584 at$5.5 million as of June 30, 1995 for an increase of $385,199 or 42.72%.1998. Other liabilities consisted
primarilywere
comprised of unpaid amounts for various products and services, and accrued but
unpaid interest payable on deposit accounts, accrued expenses and
accounts payable. The increase was primarily attributable to the greater average
outstanding balances in interest bearing liabilities.
Stockholders equity increased slightly to $11,668,606 atdeposits.
Stockholders' Equity. At June 30, 19961999, Quad City had no shares of perpetual,
nonvoting, Series A preferred stock, par value $1.00 per share, issued and
outstanding. On June 10, 1999, using the proceeds from $11,589,740 atthe sale of the trust
preferred securities, Quad City redeemed all the outstanding balance of
preferred stock, which was $2.5 million, plus a redemption premium of $478,000.
At June 30, 1995. Such increase was the combination1998, Quad City had 25 shares of the net
income offset by an increase in the unrealized losses on securities available
for sale.
CommonSeries A preferred stock of $1,437,824 at June 30, 1996issued and
June 30, 1995 represented
1,437,824 shares at $1.00 par value of the Company s common stock.
The accumulated deficit decreased by $682,588 to $1,048,165 at June 30, 1996
from $1,730,753 at June 30, 1995. The accumulated deficit was comprised of
pre-opening expenses, start-up expenses for the Bank, and prior net losses
incurred, offset by the current fiscal year net income. The Company expected to
experience start-up losses for the first several years of operation.outstanding. In anticipation of continued asset growth, the Company has decided to conduct aQuad City had privately
placed these 25 shares of preferred stock offering.with a limited number of institutional
investors at a price of $100,000 per share, for an aggregate of $2,500,000. The
Company desiresSeries A preferred stock paid no dividends, and carried a cumulative liquidation
and redemption value equal to raise at least $7.5 million.the original purchase price plus an annual premium
of 9.75%.
Common stock increased by $786,000 or 52% to $2.3 million as of June 30, 1999
from $1.5 million as of June 30, 1998. The increase was caused by (i) exercises
of stock warrants and options resulting in the issuance of 30,720 additional
shares of common stock, and (ii) a 3 for 2 stock split, effected in the form of
a stock dividend, effective November 30, 1998, which resulted in the issuance of
an additional 760,262 shares of common stock.
Additional paid-in capital decreased by $3.0 million or 20% to $12.0 million as
of June 30, 1999 from $15.0 million as of June 30, 1998. The decrease resulted
from the excess of the $1.00 per share par value for the 25 shares of Series A
preferred stock redeemed, and the transfer of $760,000 from additional paid-in
capital to common stock representing the issuance of additional common shares
from the 3 for 2 stock split. The decrease was offset by $197,000 received in
excess of the $1.00 per share par value for 30,720 shares of common stock issued
as the result of the exercise of stock warrants and options.
Retained earnings increased by $2.0 million or 77% to $4.6 million as of June
30, 1999 from $2.6 million as of June 30, 1998. The increase reflected net
income for the year offset by the redemption premium payment to preferred
stockholders of $478,000 plus the payment to common stockholders which
represented the cash value of fractional shares created by the 3 for 2 stock
split. Accumulated other comprehensive income (loss), consisting of unrealized
gains and losses on securities available for sale, net of related income taxes,
was a $332,000 loss as of June 30, 1999 as compared to a $12,000 gain as of June
30, 1998. The decrease was attributable to the decrease during the period in
fair value of the securities identified as available for sale mainly as a result
of an increase in interest rates.
Liquidity
For banks, liquidity representsLiquidity measures the ability of Quad City to meet both withdrawals from
depositsmaturing obligations and the funding of loans. The assets thatits
existing commitments, to withstand fluctuations in deposit levels, to fund its
operations, and to provide for customers' credit needs. One source of liquidity
areis cash and short-term assets, such as interest-bearing deposits in other banks
and federal funds sold, and short term loans and securities. Liquidity needs
are influenced by economic conditions, interest rates and competition.
Securities that arewhich totaled $60.2 million at June 30, 1999, compared
with $43.0 million at June 30, 1998. Another source of liquidity is borrowing
capability. 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, inFHLB advances and loan participations or sales.
Quad City also generates liquidity from the Company sregular principal payments and
prepayments made on its portfolio can be readily
converted toof loans and mortgage-backed securities.
The liquidity of Quad City is comprised of three primary classifications: cash
if necessary. Management believes that current liquidity
levels are sufficient to meet future demands. Net cash inflowsflows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided cash of $836,093by operating activities, was
$7.5 million for the year ended June 30, 1996 and1999 compared to $4.4 million of cash
used, cash of $185,902primarily for loans originated for sale, for the year ended June 30, 1995.1998.
Net cash used in investing activities, consisting principally of loan funding
and the purchase of securities, was $76.5 million for the year ended June 30,
1999 and $70.3 million for the year ended June 30, 1998. Net cash provided by
financing activities, consisting primarily of deposit growth, proceeds from the
issuance of preferred securities of the subsidiary trust, and proceeds from
short-term borrowings, for the year ended June 30, 1999 was $66.0 million and
for the year ended June 30, 1998 was $79.3 million, consisting principally of
deposit growth and proceeds from Federal Home Loan Bank advances.
Net outflows used in operating activities were $4.4 million for the year ended
June 30, 1998 compared to providing cash of $4.7 million for the year ended June
30, 1997. The improvement indecrease of cash flow during the year resulted primarily from improved earnings.an
increase in loans originated for sale, but not yet sold at the end of the fiscal
year. Net cash outflows from investing activities totaled $28,261,786$70.3 million for the
year ended June 30, 1996,1998, compared to cash outflows of $39,379,019$55.3 million for the
year ended June 30, 1995.1997. The net outflows of cash were largely associated with
the growth in the loan portfolio combined with the purchases of available for sale securities. Cashportfolio. Net cash inflows from financing activities
totaled $30,210,830$79.3 million for the year ended June 30, 1996,1998, compared to cash inflows
of $41,281,203$51.0 million for the year ended June 30, 1995.1997. The components of the net
cash inflows were primarily from the growth of deposit accounts as well as the
increase in FHLB advances and other borrowings and FHLB advances.borrowings.
Impact of Inflation and Changing Prices
Unlike most industries, essentially all of the assets and liabilities of a bank
are monetary in nature. As such, the level of prices has less of an effect than
do interest rates. Prices and interest rates do not always move in the same
direction. The Company sconsolidated financial statements and the accompanying notes are generallythereto
included have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollarsdollar 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
The Financial Accounting Standards Board hasIn June 1998, the FASB issued StatementSFAS No. 121133 "Accounting for Derivative
Instruments and Hedging Activities." This statement addresses the Impairmentaccounting for
derivative instruments and certain derivative instruments embedded in other
contracts, and hedging activities. The statement standardizes the accounting for
derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of Long-Lived Assetsfinancial position and for Long-Lived Assets to
be Disposed of" which becomesmeasure them at
fair value. This statement is effective for all fiscal years beginning after
DecemberJune 15, 1995. The Statement generally requires long-lived assets1999 and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset mayis not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment is recognized. Management
believes that adoption of this Statement will not have a material effect on Quad City's
consolidated financial position or results of operation.
Forward Looking Statements
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the Company sterms "anticipates", "plans", "expects", "believes", and
similar expressions as they relate to Quad City or its management are intended
to identify such forward looking statements. Quad City's actual results,
performance or achievements may materially differ from those expressed or
implied in the forward-looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial statements.services industry, changes in law, unforeseen
business risks related to Year 2000 computer systems issues, government policies
and regulations, and rapidly changing technology affecting financial services.
Year 2000
The Year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operational programs may be unable to distinguish
the Year 2000 from the Year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether. Financial
Accounting Standards Boardinstitutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems. In 1997, Quad City started the process of
identifying the hardware and software issues required to be addressed to assure
Year 2000 compliance. Quad City began by assessing the issues related to the
Year 2000 and the potential for those issues to adversely affect Quad City's
operations and those of its subsidiaries.
Since that time, Quad City has issued Statement No. 123
"Accounting for Stock Based Compensation" which becomes effective for years
beginning after December 15, 1995. This Statement establishesestablished a fair value based
method for stock-based compensation plans. Management believes that adoptionYear 2000 committee to deal with
this issue. The committee meets with and utilizes various representatives from
key areas throughout the organization to aid in analysis and testing. It is the
mission of this Statementcommittee to identify areas subject to complications related to
the Year 2000 and to initiate remedial measures designed to eliminate any
adverse effects on Quad City's operations. The committee has identified all
mission-critical software and hardware that may be adversely affected by the
Year 2000 and has requested vendors to represent that the systems and products
provided are or will be Year 2000 compliant.
Quad City licenses all software used in conducting its business from third party
vendors. None of Quad City's software has been internally developed. Quad City
has developed a comprehensive list of all software, all hardware and all service
providers used by Quad City. Every vendor has been contacted regarding the Year
2000 issue, and Quad City continues to closely track the progress each vendor is
making in resolving the problems associated with the issue. The vendor of the
primary software in use at Quad City released its Year 2000 compliant software
in May 1998. Testing standards were formulated and comprehensive testing is now
finalized. Quad City actively took part in a peer users group to aid the testing
process. Users of the primary software continue to meet regularly to discuss
Year 2000 testing issues and results. In addition, Quad City continues to
monitor all other major vendors of services to Quad City for Year 2000 issues in
order to avoid shortages of supplies and services in the coming months. Quad
City has not had any material delay regarding its information systems projects
as a result of the Year 2000 project.
There are four third party utilities with which Quad City has an important
relationship, Ameritech, McLeod and US West (phone service), and MidAmerican
Energy Corporation (electricity and natural gas). Quad City has not identified
any practical, long-term alternatives to relying on these companies for basic
utility services. In the event that the utilities significantly curtail or
interrupt their services to Quad City, it would have a significant adverse
effect on Quad City's ability to conduct business. Information received from
these utilities indicates that they have significantly completed remediation and
validation of their mission critical applications.
Quad City also has tested such things as vault doors, fax machines, security
systems, elevators, stand-alone personal computers, networks, etc. for Year 2000
functionality and is not aware of any significant problems with such systems.
Although Quad City does not believe that the failure of these systems would have
a material adverse effect on the Company s financial statements.condition of the company, it is
addressing deficiencies in these systems and expects compliance to be achieved
by September 30, 1999.
Quad City's cumulative costs of the Year 2000 project through fiscal 1999 were
$122,000. The estimated total cost of the Year 2000 project is $250,000. This
includes costs to upgrade equipment specifically for the purpose of Year 2000
compliance and certain administrative expenditures. At the present time, no
situations that will require material cost expenditures to become fully
compliant have been identified. However, the Year 2000 problem is pervasive and
complex and can potentially affect any computer process. Accordingly, no
assurance can be given that Year 2000 compliance can be achieved without
additional unanticipated expenditures and uncertainties that might affect future
financial results.
It is not possible at this time to quantify the estimated future costs due to
possible business disruption caused by vendors, suppliers, customers, or even
the possible loss of electric power or phone service; however, such costs could
be substantial.
Quad City is committed to a plan for achieving compliance, focusing not only on
its own data processing systems, but also on its loan and depository customers.
The Year 2000 committee has taken steps to educate and assist its customers with
identifying their Year 2000 compliance problems, if any. In addition, the
management committee has proposed policy and procedure changes to help identify
potential risks to Quad City and to gain an understanding of how customers are
managing the risks associated with the Year 2000. Quad City is assessing the
impact, if any, of the Year 2000 risk in its credit analysis. Quad City also
utilizes loan agreements and other legal documentation to ensure large corporate
borrowers acknowledge Year 2000 compliance requirements. In connection with
potential credit risk related to the Year 2000 issue, Quad City has contacted
its large commercial loan and depository customers regarding their level of
preparedness for the Year 2000. Through these questionnaires and resulting
assessments, Quad City believes that overall credit and liquidity risk to its
large corporate borrowers and depositors is not excessive.
Quad City has developed contingency plans for various Year 2000 problems in the
event that unforeseen events beyond its control adversely impact our ability to
provide financial services to our customers. In the event of such a failure,
these plans outline the steps that will be taken to minimize the effect on
customers and losses to Quad City. The plan will be continually updated as more
information becomes available based on testing results and vendor notifications.
The federal banking regulators issued guidelines establishing minimum safety and
soundness standards for achieving Year 2000 compliance. The guidelines, which
took effect October 15, 1998 and apply to all FDIC-insured depository
institutions, establish standards for developing and managing Year 2000 project
plans, testing remediation efforts and planning for contingencies. The
guidelines are based upon guidance previously issued by the agencies under the
auspices of the Federal Financial Accounting StandardsInstitutions Examination Council but are not
intended to replace or supplant the Federal Financial Institutions Examination
Council guidance which will continue to apply to all federally insured
depository institutions.
The guidelines were issued under Section 39 of the Federal Deposit Insurance
Act, which requires the federal banking regulators to establish standards for
the safe and sound operation of federally insured depository institutions. Under
Section 39 of the Federal Deposit Insurance Act, if an institution fails to meet
any of the standards established in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving
compliance. If an institution fails to submit an acceptable compliance plan, or
fails in any material respect to implement a compliance plan that has been
accepted by its primary federal regulator, the regulator is required to issue an
order directing the institution to cure the deficiency. Such an order is
enforceable in court in the same manner as a cease and desist order. Until the
deficiency cited in the regulator's order is cured, the regulator may restrict
the institution's rate of growth, require the institution to increase its
capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. In addition to the enforcement procedures established in Section
39 of the Federal Deposit Insurance Act, noncompliance with the standards
established by the guidelines may also be grounds for other enforcement action
by the federal banking regulators, including cease and desist orders and civil
money penalty assessments. Quad City's management believes its Year 2000
planning has been consistent with regulatory guidelines.
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.
Additionally, 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 has issued Statement No. 125
"Accountingof
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 Transferschanging 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 Servicingmanagement
attempt to manage Quad City's interest rate risk while maintaining or enhancing
net interest margins. At times, depending on the level of Financial Assetsgeneral interest
rates, the relationship between long- and Extinguishmentsshort-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 Liabilities" which becomes effective for transfersoperations and servicingnet portfolio
values remain vulnerable to increases in interest rates and to fluctuations in
the difference between long- and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio value
("NPV") analysis. In essence, this analysis calculates the difference between
the present value of financialliabilities and the present value of expected cash flows
from assets and extinguishmentsoff-balance-sheet contracts. The following table sets forth, at
June 30, 1999 and June 30, 1998, an analysis of liabilities occurring after December 31, 1996.
This Statement provides accountingQuad City's interest rate risk
as measured by the estimated changes in NPV resulting from instantaneous and
reporting standards for transferssustained parallel shifts in the yield curve (+ or - 200 basis points).
Change In Estimated Increase (Decrease) in NPV
Interest ----------------------------------------------------------
Rates Estimated NPV Amount Amount Percent
- -------------- ---------------------------- ---------------------------- ----------------------------
(Basis points) June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- -------------- ------------- ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
+200 $29,554 $22,717 $(1,709) $(349) (5.47)% (1.51)%
--- 31,263 23,066
-200 31,710 22,742 447 (324) 1.43% (1.40)%
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
servicingcommodity price risk, do not arise in the normal course of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. Management believes that
adoption of this Statement will not have a material effect on the Company s
financial statements.Quad City's business
activities.
Item 7.8. Financial statementsStatements and Supplementary Data
QUAD CITY HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's ReportReport........................................
Consolidated Balance Sheets at June 30, 19961999 and 19951998...............
Consolidated Statements of Income for the years ended June 30,
1996, 19951999, 1998 and 19941997 ..............................................
Consolidated Statements of StockholdersStockholders' Equity for the years
ended June 30, 1996, 19951999, 1998 and 19941997 ...............................
Consolidated Statements of Cash Flows for the years ended June 30,
1996, 19951999, 1998 and 19941997 ..............................................
Notes to Consolidated Financial StatementsStatements..........................
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
Independent Auditor sAuditor's Report
To the Board of Directors and Stockholders
Quad City Holdings, Inc.
Bettendorf, IowaMoline, Illinois
We have audited the accompanying consolidated balance sheets of Quad City
Holdings, Inc. and subsidiaries as of June 30, 19961999 and 1995,1998, and the related
consolidated statements of income, stockholderschanges in stockholders' equity and cash
flows for the years ended June 30, 1996, 19951999, 1998 and 1994.1997. These financial
statements are the responsibility of the Company sQuad City's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quad City Holdings,
Inc. and subsidiaries as of June 30, 19961999 and 1995,1998, and the results of their
operations and their cash flows for the years ended June 30, 1996, 19951999, 1998 and
1994,1997, in conformity with generally accepted accounting principles.
/s/ McGLADREYMcGladrey & PULLEN,Pullen, LLP
- ---------------------------
Davenport, Iowa
July 26, 199623, 1999
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNEQuad City Holdings, Inc.
and subsidiaries
Consolidated Balance Sheets
June 30, 1996 AND 19951999 and 1998
1996 1995
------------- -------------ASSETS 1999 1998
- --------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ................................................................................................................... $ 6,615,4078,528,195 $ 3,830,27011,640,813
Federal funds sold ....................................................................... 2,728,000 12,950,000...................................................... 39,125,000 22,960,000
Certificates of deposit at financial institutions ........................................ 5,472,012 3,982,858....................... 12,535,193 8,366,123
Securities held to maturity, at amortized cost (Note 2) .................................. 3,156,601 11,018,1433) ................. 724,415 2,380,309
Securities available for sale, at fair value (Note 2) .................................... 31,032,652 15,032,895
------------- -------------
Total securities .................................................................... 34,189,253 26,051,038
------------- -------------3) ................... 50,941,759 32,238,245
----------------------------
51,666,174 34,618,554
----------------------------
Loans receivable (Note 3) ................................................................ 56,809,720 31,507,577
Less: Allowance4) ............................................... 197,976,692 162,975,136
Less allowance for estimated losses on loans (Note 3) ................................... (852,500) (472,475)
------------- -------------
Net loans receivable ................................................................ 55,957,220 31,035,102
------------- -------------4) ................ 2,895,457 2,349,838
----------------------------
195,081,235 160,625,298
----------------------------
Premises and equipment, net (Note 4) ..................................................... 4,531,038 1,801,8395) .................................... 7,553,616 7,660,268
Accrued interest receivable .............................................................. 1,121,268 685,880............................................. 2,006,503 1,773,223
Other assets ............................................................................. 860,779 463,095
------------- -------------............................................................ 4,850,299 2,506,710
----------------------------
Total assets ..................................................................... $ 111,474,977 $ 80,800,082
============= =============.............................................. $321,346,215 $250,150,989
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES- --------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing .................................................................................................................. $ 15,730,26535,833,094 $ 5,628,52626,605,138
Interest-bearing ...................................................................... 77,187,853 55,469,160
------------- -------------.................................................. 212,132,785 170,778,826
----------------------------
Total deposits (Note 5) ............................................................. 92,918,118 61,097,686
------------- -------------
Federal funds purchased .................................................................. 1,190,000 7,211,0726) ................................... 247,965,879 197,383,964
Short-term borrowings (Note 7) ....................................... 9,685,877 2,000,000
Federal Home Loan Bank advances (Note 6) ................................................. 3,411,470 08) ............................. 24,605,890 24,667,174
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely subordinated debentures (Note 9) 12,000,000 - -
Other borrowings (Note 7) ................................................................ 1,000,000 010) ........................................... - - 1,500,000
Other liabilities ........................................................................ 1,286,783 901,584
------------- -------------.................................................... 8,615,098 5,497,633
----------------------------
Total liabilities ................................................................ 99,806,371 69,210,342
------------- -------------
COMMITMENTS AND CONTINGENCIES......................................... 302,872,744 231,048,771
----------------------------
Commitments and Contingencies (Note 12)
STOCKHOLDERS' EQUITY18)
Stockholders' Equity (Note 11)16):
Preferred stock, $1 par value; shares authorized
250,000; shares issued none ............. 0 0and outstanding
1999 - none; 1998 - 25 (Note 15) .................................. - - 25
Common stock, $1 par value; shares authorized
2,500,000;5,000,000; shares issued and outstanding
1,437,824 .............................................................. 1,437,824 1,437,8241999 - 2,296,251; 1998 - 2,265,561 (Note 1) ....................... 2,296,251 1,510,374
Additional paid-in capital ............................................................... 11,764,416 11,764,416........................................... 11,959,080 15,014,884
Retained earnings (deficit) .............................................................. (1,048,165) (1,730,753)
------------- -------------
12,154,075 11,471,487
Unrealized gains (losses) on securities available for sale, net .......................... (485,469) 118,253
------------- -------------.................................................... 4,550,490 2,564,443
Accumulated other comprehensive income (loss) ........................ (332,350) 12,492
----------------------------
Total stockholders' equity ....................................................... 11,668,606 11,589,740
------------- -------------................................ 18,473,471 19,102,218
----------------------------
Total liabilities and stockholders' equity ....................................... $ 111,474,977 $ 80,800,082
============= =============................ $321,346,215 $250,150,989
============================
See Notes to Consolidated Financial Statements.
Quad City Holdings, Inc.
and subsidiaries
Consolidated Statements
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEof Income
Years Ended June 30, 1996, 19951999, 1998, and 19941997
1996 1995 1994
----------- ----------- -----------1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ................................................................................. $15,642,235 $12,083,990 $ 3,972,856 $ 1,974,150 $ 213,0366,905,590
Interest and dividends on securities .................................. 1,868,976 1,052,557 408,255........................... 2,285,267 1,905,668 2,139,263
Interest on federal funds sold ........................................ 382,226 423,292 90,987................................. 1,492,173 645,929 286,264
Other interest ........................................................ 359,409 100,123 24,816
----------- ----------- -----------................................................. 696,245 440,980 374,527
-------------------------------------
Total interest income ............................................ 6,583,467 3,550,122 737,094
----------- ----------- -----------............................... 20,115,920 15,076,567 9,705,644
-------------------------------------
Interest expense:
Interest on deposits (Note 5) ........................................ 3,349,548 1,792,850 253,513........................................... 9,009,724 6,971,153 4,358,476
Interest on company obligated mandatorily redeemable
preferred securities ........................................ 63,518 - - - -
Interest on short-term and other borrowings ......................................... 136,832 102,725 0
----------- ----------- -----------.................... 1,953,444 1,370,868 635,392
-------------------------------------
Total interest expense ........................................... 3,486,380 1,895,575 253,513
----------- ----------- -----------.............................. 11,026,686 8,342,021 4,993,868
-------------------------------------
Net interest income .............................................. 3,097,087 1,654,547 483,581................................. 9,089,234 6,734,546 4,711,776
Provision for loan losses (Note 3) ........................................ 500,397 282,600 191,500
----------- ----------- -----------4) ................................ 891,800 901,976 844,391
-------------------------------------
Net interest income after provision for loan losses .............. 2,596,690 1,371,947 292,081
----------- ----------- -----------
Other income (loss):. 8,197,434 5,832,570 3,867,385
-------------------------------------
Noninterest income:
Merchant credit card fees, net of processing fees .......................... 1,007,830 306,051 0costs ............. 1,322,658 1,395,574 1,531,728
Trust department ...................................................... 355,360 149,218 26,918fees .......................................... 1,520,518 1,138,502 736,461
Deposit service fees .................................................. 147,678 73,016 8,784
Investment securities........................................... 433,056 290,721 201,163
Gains on sales of loans, net ................................... 1,043,763 713,121 44,441
Securities gains, (losses), net ............................. 22,272 (16,656) (70,532).......................................... 3,757 8,734 21,938
Amortization of deferred income resulting from
restructuring of merchant broker agreement (Note 11) ........ 732,000 - - - -
Gain on restructuring of merchant broker agreement (Note 11) ... - - 2,168,000 - -
Other ................................................................. 129,147 36,068 33,723
----------- ----------- -----------.......................................................... 504,699 433,765 272,023
-------------------------------------
Total othernoninterest income (loss) ........................................ 1,662,287 547,697 (1,107)
----------- ----------- -----------
Other............................ 5,560,451 6,148,417 2,807,754
-------------------------------------
Noninterest expenses:
Salaries and employee benefits ................................................. 1,973,682 1,174,874 723,099................................. 5,801,670 4,571,126 2,934,758
Professional and data processing fees ................................. 282,640 192,556 155,439.......................... 598,457 504,344 437,259
Advertising and marketing ............................................. 189,761 98,584 122,533...................................... 359,571 238,160 126,061
Occupancy and equipment expense ....................................... 289,230 209,468 100,500................................ 1,453,040 1,045,349 654,010
Stationery and supplies ............................................... 100,672 58,585 75,854........................................ 267,739 219,523 191,682
Provision for merchant credit card losses ............................. 126,805 126,831 0
Insurance ............................................................. 86,291 136,015 57,279...................... 21,777 105,910 176,476
Postage and telephone ................................................. 117,741 55,630 31,559
Unrealized loss on securities held for sale ........................... 0 0 150,693.......................................... 298,208 231,049 168,890
Other ................................................................. 409,567 240,883 147,113
----------- ----------- -----------.......................................................... 878,437 994,354 601,667
-------------------------------------
Total othernoninterest expenses ............................................. 3,576,389 2,293,426 1,564,069
----------- ----------- -----------.......................... 9,678,899 7,909,815 5,290,803
-------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle ................................................. 682,588 (373,782) (1,273,095)
Cumulative effect of a change in accounting principleincome taxes .......................... 4,078,986 4,071,172 1,384,336
Federal and state income taxes (Note 1) ............. 0 0 150,693
----------- ----------- -----------12) .......................... 1,614,165 1,677,900 165,000
-------------------------------------
Net income (loss) .......................................................................................... $ 682,5882,464,821 $ (373,782) $(1,122,402)
=========== =========== ===========
Before cumulative effect of a change
in accounting principle ................................................. 0.47 (0.26) (1.23)
Cumulative effect of a change in accounting principle ...................... 0.00 0.00 0.15
----------- ----------- -----------
Net income (loss) ................................................2,393,272 $ 0.471,219,336
=====================================
Earnings per common share (Notes 1 and 17):
Basic .......................................................... $ (0.26)1.08 $ (1.08)
=========== =========== ===========1.09 $ 0.56
Diluted ........................................................ $ 1.03 $ 1.02 $ 0.54
Weighted average common shares outstanding ..................... 2,285,500 2,196,297 2,162,490
Weighted average common and common equivalent shares outstanding 2,398,525 2,353,932 2,250,368
See Notes to Consolidated Financial Statements.
Quad City Holdings, Inc.
and subsidiaries
Consolidated Statements
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYof Changes in
Stockholders' Equity
Years Ended June 30, 1996, 19951999, 1998, and 1994 Securities1997
Unrealized
Gains (Losses)Accumulated
Additional Retained On SecuritiesOther
Preferred Common Paid-In Earnings Available ForComprehensive
Stock Stock Capital (Deficit) Sale, NetIncome (Loss) Total
----------- ----------- ----------- -------------- ------------- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993 $ 75,000 $ 630,313 $ (234,569) $ 0 $ 470,744
Proceeds from sale of 1,200,000
shares of common stock,
net of stock offering costs 1,200,000 9,803,851 0 0 0
Proceeds from sale of 162,824
shares of common stock,
net of stock offering costs 162,824 1,330,252 0 0 1,493,076
Unrealized (losses) on securities
available for sale, net 0 0 0 (150,693) (150,693)
Net (loss) 0 0 (1,122,402) 0 (1,122,402)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1994 $ 1,437,824 $11,764,416 $(1,356,971) $ (150,693) $11,694,576
Change in unrealized gains on
securities available for sale, net 0 0 0 268,946 268,946
Net (loss) 0 0 (373,782) 0 (373,782)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1995 $ 1,437,824 $11,764,416 $(1,730,753) $ 118,253 $11,589,740
Change in unrealized gains (losses)
on securities available for sale, net 0 0 0 (603,722) (603,722)
Net income 0 0 682,588 0 682,588
----------- ----------- ----------- ----------- -----------
Balance,year ended June 30, 1996 ................ $ 1,437,824- - $1,437,824 $11,764,416 $(1,048,165) $ (485,469) $11,668,606
=========== =========== =========== =========== ===========---------------------------------------------------------------------------
Comprehensive income:
Net income ................................. - - - - - - 1,219,336 - - 1,219,336
Other comprehensive income, net of tax
(Note 2) ................................. - - - - - - - - 425,284 425,284
-----------
Comprehensive income ............... 1,644,620
-----------
Proceeds from sale of 10 shares of preferred
stock........................................ 10 - - 999,990 - - - - 1,000,000
Proceeds from issuance of 37,500 shares of
common stock as a result of warrants
exercised (Notes 1 and 14) .................. - - 25,000 275,000 - - - - 300,000
---------------------------------------------------------------------------
Balance, year ended June 30, 1997 ................ 10 1,462,824 13,039,406 171,171 (60,185) 14,613,226
---------------------------------------------------------------------------
Comprehensive income:
Net income ................................. - - - - - - 2,393,272 - - 2,393,272
Other comprehensive income, net of tax
(Note 2) ................................. - - - - - - - - 72,677 72,677
-----------
Comprehensive income ............... 2,465,949
-----------
Proceeds from sale of 15 shares of preferred
stock ....................................... 15 - - 1,499,985 - - - - 1,500,000
Proceeds from issuance of 71,325 shares of
common stock as a result of warrants and
stock options exercised (Notes 1 and 14) .... - - 47,550 475,493 - - - - 523,043
---------------------------------------------------------------------------
Balance, year ended June 30, 1998 ................ 25 1,510,374 15,014,884 2,564,443 12,492 19,102,218
---------------------------------------------------------------------------
Comprehensive income:
Net income ................................. - - - - - - 2,464,821 - - 2,464,821
Other comprehensive (loss), net of tax
(Note 2) ................................. - - - - - - - - (344,842) (344,842)
-----------
Comprehensive income ............... 2,119,979
-----------
Stock split (3 for 2) (Note 1) ................ - - 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 (Notes 1 and 14) .... - - 25,615 201,215 - - - - 226,830
Tax benefit of nonqualified stock options
exercised ................................... - - - - 3,218 - - - - 3,218
Redemption of preferred stock ................. (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
===========================================================================
See Notes to Consolidated Financial Statements.
Quad City Holdings, Inc.
and subsidiaries
Consolidated Statements
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSof Cash Flows
Years Ended June 30, 1996, 19951999, 1998, and 19941997
1996 1995 1994
------------ ------------ ------------1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:Cash Flows from Operating Activities:
Net income (loss) ............................................................................................................... $ 682,5882,464,821 $ (373,782)2,393,272 $ (1,122,402)
Adjustments1,219,336
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................................... 143,173 107,313 41,973.................................................. 627,075 422,357 334,409
Provision for loan losses .............................................. 500,397 282,600 191,500..................................... 891,800 901,976 844,391
Provision for merchant credit card losses .............................. 126,805 126,831 0..................... 21,777 105,910 176,476
Amortization of premiums (accretion of discounts) on
securities, net ... (16,920) 8,108 42,351
Federal Home Loan Bank stock dividends ................................. (3,000) 0 0
Realized loss on............................................. 38,697 (16,742) 899
Investment securities heldgains, net .............................. (3,757) (8,734) (21,938)
Loans originated for sale .............................. 0 0 70,532
Realized (gains) losses..................................... (85,027,675) (57,206,140) (6,851,715)
Proceeds on securities available for sale ............... (22,272) 16,656 0
(Increase)sales of loans .................................... 88,804,656 54,008,203 6,040,971
Net gains on sales of loans ................................... (1,043,763) (713,121) (44,441)
Amortization of deferred income resulting from
restructuring of merchant broker agreement .................. (732,000) - - - -
Gain on restructuring of merchant broker agreement ............ - - (2,168,000) - -
Increase in accrued interest receivable .............................. (435,388) (450,468) (201,302)
(Increase)....................... (233,280) (398,916) (253,039)
Increase in other assets ............................................. (397,684) (437,544) (14,377)...................................... (2,171,547) (826,685) (847,702)
Increase (decrease) in other liabilities .......................................... 258,394 534,384 131,418
------------ ------------ ------------...................... 3,830,679 (872,533) 4,064,359
-----------------------------------------
Net cash provided by (used in) operating activities ................. $ 836,093 $ (185,902) $ (860,307)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:... 7,467,483 (4,379,153) 4,662,006
-----------------------------------------
Cash Flows from Investing Activities:
Net increase in federal funds sold ............................... (16,165,000) (13,770,000) (6,462,000)
Net (increase) decrease in federal funds sold ............................ 10,222,000 (8,250,000) (4,700,000)
Net (increase) in certificates of depositsdeposit at
financial institutions ..... (1,489,154) (2,128,005) (1,854,853)
Net loans originated ..................................................... (25,422,515) (18,741,741) (12,767,461)........................................ (4,169,070) (3,006,999) 112,888
Purchase of securities available for sale ........................ (34,015,760) (16,444,294) (5,926,816)
Purchase of securities held to maturity .................................. (2,873,782) (500,000) (10,677,625)
Purchase.......................... - - (276,398) - -
Proceeds from calls and maturities of securities ................. 14,400,000 9,500,000 2,250,000
Proceeds from paydowns on securities ............................. 1,732,539 4,531,123 1,250,667
Proceeds from sales of securities available for sale ................................ (18,947,247) (10,297,885) 0
Purchase of securities held for sale ..................................... 0 0 (8,121,736)............. 280,786 14,020 5,249,967
Proceeds from maturityrestructuring of securities ..................................... 4,000,000 0 0
Proceeds from calls/paydowns on securities ............................... 4,483,584 387,271 538,630
Proceeds from sale of securities available for sale ...................... 4,637,700 338,600 0
Proceeds from sale of securities held for sale ........................... 0 0 2,262,313merchant broker agreement ......... - - 2,900,000 - -
Net loans originated ............................................. (38,080,955) (50,883,287) (50,764,915)
Purchase of premises and equipment, ....................................... (2,872,372) (187,259) (1,763,866)
------------ ------------ ------------net .......................... (520,423) (2,833,936) (1,052,060)
------------------------------------------
Net cash (used in)used in investing activities ............................. $(28,261,786) $(39,379,019) $(37,084,598)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:................. (76,537,883) (70,269,771) (55,342,269)
------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ................................. 50,581,915 61,423,769 43,042,077
Net increase (decrease) in short-term borrowings ................. 7,685,877 2,000,000 (1,190,000)
Proceeds from Federal Home Loan Bank advances .................... 1,480,000 25,955,000 11,961,000
Payments on Federal Home Loan Bank advances ...................... (1,541,284) (12,065,538) (4,594,758)
Net increase (decrease) in other borrowings ...................... (1,500,000) - - 500,000
Proceeds from issuance of preferred securities of subsidiary trust 12,000,000 - - - -
Redemption of preferred stock .................................... (2,977,884) - - - -
Proceeds from issuance of preferred stock ........................ - - 1,500,000 1,000,000
Proceeds from issuance of common stock ................................... 0 0 12,496,927
Decrease in deferred registration costs .................................. 0 0 45,600
Net increase (decrease) in federal funds purchased ....................... (6,021,072) 7,211,072 0
Net increase in time certificates of deposit accounts .................... 11,073,500 19,370,853 15,156,786
Net increase in non-time deposit accounts ................................ 20,746,932 14,699,278 11,870,769
Net increase in other borrowings ......................................... 1,000,000 0 0
Net increase in Federal Home Loan Bank advances .......................... 3,411,470 0 0
------------ ------------ ------------........................... 229,158 523,043 300,000
-----------------------------------------
Net cash provided by financing activities ........................... $ 30,210,830 $ 41,281,203 $ 39,570,082
------------ ------------ ------------............. $65,957,782 $79,336,274 $51,018,319
-----------------------------------------
Net increase (decrease) in cash and due from banks ............................. 2,785,137 1,716,282 1,625,177.... $(3,112,618) $ 4,687,350 $ 338,056
Cash and due from banks, beginning .................................. 3,830,270 2,113,988 488,811
------------ ------------ ------------banks:
Beginning ....................................................... 11,640,813 6,953,463 6,615,407
-----------------------------------------
Ending .......................................................... $ 8,528,195 $11,640,813 $ 6,953,463
=========================================
Supplemental Disclosures of Cash and due from banks, ending ..................................... $ 6,615,407 $ 3,830,270 $ 2,113,988
============ ============ ============
Supplemental disclosure of cash flow information,Flow Information,
cash payments for:
Interest ......................................................................................................................... $10,735,683 $ 3,384,3537,769,512 $ 1,513,310 $ 143,760
============ ============ ============4,861,558
Income taxes .................................................... 1,527,171 1,974,000 249,000
Supplemental scheduleSchedule of noncash investing and financing activities:Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on securities available for sale, net $ (603,722) $ 268,946 $ (150,693)
============ ============ ============......... (344,842) 72,677 425,284
Investment securities transferred from held to maturity portfolio
to available for sale portfoilio,portfolio, at fair value ......................... $ 8,004,543 $ 0 $ 0
============ ============ ============1
See Notes to Consolidated Financial Statements............... 1,030,743 - - - -
See Notes to Consolidated Financial Statements.
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Quad City Holdings, Inc. (the "Company")(Company) is a bank holding company providing bank and
bank related services through its subsidiaries, Quad City Bank and Trust Company
(the "Bank") and(Bank), Quad City Bancard, Inc. ("Bancard").(Bancard), and Quad City Holdings Capital Trust
I. The Bank is a commercial bank that servesservices the Quad Cities area, is
chartered and regulated by the state of Iowa, is insured and subject to
regulation by the Federal Deposit Insurance Corporation and is a member of and
regulated by the Federal Reserve System. Bancard is an entity formed in April
1995 to conduct the Company sCompany's merchant credit card operation.operation and is regulated by
the Federal Reserve System. This activity was previously conducted by the Bank.
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.
PrincipalsThe allowance for estimated losses on loans is inherently subjective as it
requires material estimates that are susceptible to significant change.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, the Bank and Bancard.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 includeincludes cash on hand and amounts due from banks and interest-bearing balances with
other banks. Cash flows from
loans originated by the Bank, deposits, and
federal funds purchasedsold, certificates of deposit at financial institutions, loans,
deposits, short-term borrowings, and soldother borrowings are reported net.treated as net
increases or decreases.
Investment securities:
Effective June 30, 1994, the Company adopted FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS
115") and classified investments as held to maturity or available for
sale. There were no investments held for trading purposes at June 30,
1996, 1995 or 1994. 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 sCompany'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 stockholders
equity, net of the related deferred tax effect.accumulated other comprehensive income.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Note 1. Continued
The cumulative effect of implementing FAS 115 at June 30, 1994 , was to
report investment securities previously reported as held for sale to
available for sale, with unrealized losses of $150,693 at June 30, 1994
as a separate component of stockholders equity and as a cumulative
effect on the statement of income.
Pursuant to a FASB Special Report, "A Guide to Implementation of
Statement 115 on AccountingSFAS No. 133 "Accounting for Certain Investments in DebtDerivative Instruments and Equity
Securities",Hedging
Activities" the Company transferred at fair value $8,004,543$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 December 1995.the
secondary market are carried at the lower of cost or estimated market value in
the aggregate.
Loans and allowance for loan losses:estimated losses on loans: Loans are stated at the
amount of unpaid principal, reduced by an allowance for loan losses.estimated losses on
loans. The allowance for loanestimated losses on loans is maintained at the level
considered adequate by management of the Company and the Bank to provide for
losses that can be reasonably anticipated. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. In determining the
adequacy of the allowance, the Company and the Bank make continuous evaluations
of the loan portfolio and related off-balance sheet commitments, and consider
current economic conditions and other factors that may effectaffect a borrower sborrower's
ability to repay.
In accordance with FASB Statement No. 114 "Accounting byfor Creditors for
Impairment of a Loan,"Loan" loans are considered impaired when, based on current
information and events, it is probable the Company and the Bank will not be able
to collect all amounts due. The portion of the allowance for loan losses
applicable to an impaired loan is computed based on the present value of the
estimated future cash flows of interest and principal discounted at the loan sloan'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 an accruala cash basis.
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 on aunder 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 bases.basis.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion 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.
Note 1. Continued
Trust assets: Trust assets held by the Bank in a fiduciary, agency, or custody capacitiescustodial
capacity for its customers, other than cash on deposit at the Bank, are not
included in the accompanying consolidated balance sheetsfinancial statements since such items
are not assets of the Bank.
Per share data:
Earnings per common share: Basic earnings per share are determinedcomputed by dividing net
income by the weighted average number of common stock shares outstanding duringfor the
year.respective period. Diluted earnings per share are computed by dividing net
income by the weighted average number of common stock and common stock
equivalents outstanding for the respective period.
Common stock split: On November 30, 1998, the Company issued an additional
760,262 shares necessary to effect a 3 for 2 common stock split. All share and
per share data has been retroactively adjusted to reflect the split.
Note 2. Comprehensive Income
Effective July 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income". This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be disclosed in the financial statements.
Comprehensive income is defined as the change in equity during a period from
transactions and other events from nonowner sources. 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 is comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
------------------------------------
Year ended June 30, 1999:
Unrealized (losses) on securities available for sale:
Unrealized holding (losses) arising during the year . $(517,765) $(175,407) $(342,358)
Less, reclassification adjustment for gains
included in net income ............................ 3,757 1,273 2,484
------------------------------------
Other comprehensive (loss) .................. $(521,522) $(176,680) $(344,842)
====================================
Year ended June 30, 1998:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year .... $ 114,505 $ 35,827 $ 78,678
Less, reclassification adjustment for gains
included in net income ............................ 8,734 2,733 6,001
------------------------------------
Other comprehensive income .................. $ 105,771 $ 33,094 $ 72,677
====================================
Year ended June 30, 1997:
Unrealized gains (losses) on securities available
for sale:
Unrealized holding gains arising during
the year .......................................... $ 418,766 $ (21,592) $ 440,358
Less, reclassification adjustment for gains
included in net income ............................ 21,938 6,864 15,074
------------------------------------
Other comprehensive income .................. $ 396,828 $ (28,456) $ 425,284
====================================
Note 3. Investment Securities
The amortized cost and fair value of investment securities atas of June 30, 19961999
and 19951998 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ------------ --------------------------------------------------------------------
June 30, 19961999:
Securities held to maturity:
Mortgage-backed securities ................ $ 2,560,793 $ 2,513 $ (48,911) $ 2,514,395
Municipal securities ...................... 582,720 595,808 1,355 (14,443)
------------ ------------ ------------ ------------
Totals .............................................. $ 3,156,601699,415 $ 3,8682,115 $ (63,354)- - $ 3,097,115
============ ============ ============ ============701,530
Other bonds ........................ 25,000 585 - - 25,585
--------------------------------------------------------
$ 724,415 $ 2,700 $ - - $ 727,115
========================================================
Securities available for sale:
U.S. treasury securities ............................. $ 14,504,4499,001,845 $ 42,19147,862 $ (156,912)(4,866) $ 14,389,7289,044,841
U.S. agency securities .................... 12,612,166 8,759 (355,026) 12,265,899............. 29,267,483 1,267 (390,870) 28,877,880
Mortgage-backed securities ................ 2,851,340 12,930 (20,365) 2,843,905......... 8,390,795 5,319 (183,867) 8,212,247
Municipal securities ............... 3,180,714 40,741 (12,139) 3,209,316
Other securities .......................... 1,550,166 9,079 (26,125) 1,533,120
------------ ------------ ------------ ------------
Totals .................................................. 1,605,314 102 (7,941) 1,597,475
--------------------------------------------------------
$51,446,151 $ 31,518,12195,291 $ 72,959 $ (558,428) $ 31,032,652
============ ============ ============ ============(599,683) $50,941,759
========================================================
June 30, 19951998:
Securities held to maturity:
U.S. treasury securities ..................... $ 8,000,218 $ 0 $ (78,031) $ 7,922,187
U.S. agency securities ....................... 500,000 0 0 500,000
Mortgage-backed securities ................... 2,318,460 0 (44,810) 2,273,650
Taxable municipal......... $ 1,506,569 $ - - $ (5,534) $ 1,501,035
Municipal securities ................. 199,465 5,755 0 205,220
----------- ------------- ------------- ------------
Totals .................................. $11,018,143............... 848,740 1,704 (13,557) 836,887
Other bonds ........................ 25,000 776 - - 25,776
--------------------------------------------------------
$ 5,7552,380,309 $ (122,841)2,480 $ 10,901,057
=========== ============= ============= ============(19,091) $ 2,363,698
========================================================
Securities available for sale:
U.S. treasury securities ................................ $17,007,239 $ 6,016,54354,811 $ 124,114 $ (24,875) $ 6,115,782(3,867) $17,058,183
U.S. agency securities ....................... 5,477,243 53,225 0 5,530,468............. 11,247,822 4,020 (31,050) 11,220,792
Mortgage-backed securities ......... 1,847,496 1,265 (346) 1,848,415
Municipal securities ............... 617,752 (11,193) 606,559
Other securities ................... 3,092,266 10,889 (48,325) 3,054,830
Other securities.............................. 328,590 3,225 0 331,815
----------- ------------- ------------- ------------
Totals .................................. $14,914,6421,500,806 6,733 (3,243) 1,504,296
--------------------------------------------------------
$32,221,115 $ 191,45366,829 $ (73,200) $ 15,032,895
=========== ============= ============= ============(49,699) $32,238,245
========================================================
Note 2. Continued
All sales of securities during the years ended June 30, 1996, 19951999, 1998, and 19941997
were from securities identified as available for sale or held for sale. Information on proceeds
received, as well as the gains and losses from the salessale of those securities is
as follows:
1996 1995 1994
---------- ---------- ----------1999 1998 1997
--------------------------------
Proceeds from sales of securities ....... $4,637,700... $280,786 $ 338,600 $2,262,31314,020 $5,249,967
Gross losses from sales of securities ... 18,848 18,793 70,5321,717 - - 8,486
Gross gains from sales of securities .... 41,120 2,137 05,474 8,734 30,424
The amortized cost and fair value of securities atas of June 30, 19961999 by
contractual maturity are shown below. Expected maturities of mortgage-backed
securities may differ from contractual maturities because issuersthe mortgages
underlying the mortgage-backed securities may havebe called or prepaid without any
penalties. Therefore, these securities are not included in the right to call or prepay with or without
call or prepayment penalties.maturity
categories in the following summary. Other securities are excluded from the
maturity categories as there is no fixed maturity date.
Amortized
Cost Fair Value
----------- -----------------------------------
Securities held to maturitymaturity:
Due in one year or less ........................................... $ 250,284200,000 $ 246,953200,011
Due after one year through five years ...... 2,660,112 2,616,007......... 273,327 274,393
Due after five years ....................... 246,205 234,155
----------- -----------
Totals .......................................................... 251,088 252,711
------------------------
$ 3,156,601724,415 $ 3,097,115
=========== ===========727,115
========================
Securities available for salesale:
Due in one year or less ........................................... $ 3,182,4153,998,831 $ 3,157,7824,017,679
Due after one year through five years ...... 24,536,423 24,210,421......... 27,444,671 27,156,231
Due after five years ....................... 2,249,117 2,131,329
Marketable equity.......................... 10,006,540 9,958,127
------------------------
41,450,042 41,132,037
Mortgage-backed securities ............... 1,550,166 1,533,120
----------- -----------
Totals ................. $31,518,121 $31,032,652
=========== ===========
At.................... 8,390,795 8,212,247
Other securities .............................. 1,605,314 1,597,475
------------------------
$51,446,151 $50,941,759
========================
As of June 30, 19961999 and 1995,1998, investment securities with a carrying value of
$23,399,384 and a
fair value of $16,503,665 and $16,239,844, and $5,771,440 and $5,773,203,$19,024,656, respectively, were pledged on public deposits and
for other purposes as required or permitted by law.
The Company transferred securities with an amortized cost of $7,992,513$1,029,096 and an
unrealized gain of $12,030$1,647 from the held to maturity portfolio to the available
for sale portfolio in December, 1995,on January 4, 1999, based on management smanagement's reassessment of
their previous designations of securities giving consideration to liquidity
needs, management of interest rate risk, and other factors.
Note 3.4. Loans Receivable
The composition of the loan portfolio atas of June 30, 19961999 and 19951998 is presented
as follows:
1996 1995
------------ ------------1999 1998
--------------------------
Commercial ........................................................................ $136,206,893 $ 40,338,645 $ 24,748,65999,097,297
Real estate 9,011,608 2,879,530..................................... 30,959,344 31,145,517
Installment and other consumer 7,459,467 3,879,388
------------ ------------
Total loans
56,809,720 31,507,577.................. 30,810,455 32,732,322
--------------------------
197,976,692 162,975,136
Less allowance for estimated losses on loans (852,500) (472,475)
------------ ------------
Net.... 2,895,457 2,349,838
--------------------------
$195,081,235 $160,625,298
==========================
Real estate loans ............................. $ 55,957,220 $ 31,035,102
============ ============
There were noinclude loans held for sale with a carrying value of
$2,033,025 and $4,766,243 as of June 30, 1999 and 1998, respectively. The market
value of these loans exceeded its carrying value at those dates.
Loans on nonaccrual status amounted to $1,287,727 and $1,025,761 as of June 30,
1999 and 1998, respectively. Foregone interest income and cash interest
collected on nonaccrual loans atwas not material during the years ended June 30,
1996 or 1995.
Note 3. Continued1999, 1998, and 1997.
Changes in the allowance for estimated losses on loans for the years ended June
30, 1996, 19951999, 1998, and 19941997 are presented as follows:
1996 1995 1994
--------- --------- ---------
Balance, beginning .......................... $ 472,475 $ 191,500 $ 0
Provisions charged to expense ............ 500,397 282,600 191,500
Loans charged off ........................ (120,372) (1,725) 0
Recoveries on loans previously charged off 0 100 0
--------- --------- ---------
Balance, ending ............................. $ 852,500 $ 472,475 $ 191,500
========= ========= =========
1999 1998 1997
----------------------------------
Balance, beginning .......................... $2,349,838 $1,632,500 $ 852,500
Provisions charged to expense ............ 891,800 901,976 844,391
Loans charged off ........................ (478,515) (205,234) (64,913)
Recoveries on loans previously charged off 132,334 20,596 522
----------------------------------
Balance, ending ............................. $2,895,457 $2,349,838 $1,632,500
==================================
Impaired loans were not material atas of June 30, 1996.1999 and 1998.
The loan portfolio includes a concentration of loans in certain industries as of
June 30, 1999 as follows:
Industry Balance
---------------------------------------------------------------------
Commercial banks $10,015,866
Physicians 5,795,526
Real estate operators and lessors 8,624,661
Generally these loans are collateralized by assets of the borrowers. The loans
are expected to be repaid from cash flows or from proceeds from the sale of
selected assets of the borrowers. Credit losses arising from lending
transactions with these entities compare favorably with the Bank's credit loss
experience on its loan portfolio as a whole.
Loans are made in the normal course of business to directors, officers, and
their related interests. The terms of these loans, including interest rates and
collateral, are similar to those prevailing for comparable transactions with
other persons. An analysis of the changes in the aggregate amount of these loans
during the years endingended June 30, 19961999 and 1995 is1998 was as follows:
1996 1995
----------- -----------1999 1998
-----------------------
Balance, beginning ................... $ 859,020 $ 1,171,899...................... $4,831,491 $2,027,150
Advances .......................... 262,319 390,104............................. 3,188,483 4,016,294
Repayments ........................ (575,198) (235,250)
----------- -----------........................... (2,190,787) (1,211,953)
-----------------------
Balance, ending ..................... $ 1,013,874 $ 859,020
=========== ===========......................... $5,829,187 $4,831,491
=======================
Note 4.5. Premises and Equipment
The following summarizes the components of premises and equipment atas of June 30,
19961999 and 1995:
1996 1995
----------- -----------1998:
1999 1998
----------------------
Land ................................................................................. $ 200,000630,699 $ 200,000
Building and construction in progress ........ 3,456,818 1,031,608554,379
Buildings ................................... 4,634,608 4,476,425
Furniture & equipment......................... 1,165,137 719,517
----------- -----------
Total premises and equipment ............ 4,821,955 1,951,125..................... 3,955,489 3,669,569
----------------------
9,220,796 8,700,373
Less accumulated depreciation ................ (290,917) (149,286)
----------- -----------
Total premises............... 1,667,180 1,040,105
----------------------
$7,553,616 $7,660,268
======================
Certain facilities are leased under operating leases. Rental expense was
$429,932, $176,057, and equipment, net ....... $ 4,531,038 $ 1,801,839
=========== ===========
Note 5. Deposits
The following summarizes the components of deposits at June 30, 1996 and 1995:
1996 1995
----------- -----------
Demand accounts ........................ $15,730,265 $ 5,628,526
NOW accounts ........................... 9,724,779 6,668,486
Money market accounts .................. 19,882,850 13,113,801
Savings accounts ....................... 1,979,085 1,159,234
Time certificates ...................... 45,601,139 34,527,639
----------- -----------
Total deposits ................... $92,918,118 $61,097,686
=========== ===========
Note 5. Continued
Included in interest bearing deposits at June 30, 1996 and 1995 were
certificates of deposit totaling $13,720,210 and $9,824,217, respectively, that
were $100,000 or greater. Maturities of these certificates were as follows:
1996 1995
----------- -----------
One to three months ................................ $ 5,984,277 $ 1,914,336
Three to six months ................................ 1,931,085 1,797,359
Six to twelve months ............................... 3,494,877 3,511,243
Over twelve months ................................. 2,601,279 2,309,971
----------- -----------
Total certificates of deposit greater than
$100,000 $13,720,210 $ 9,824,217
=========== ===========
Interest expense on deposits$9,971 for the years ended June 30, 1996, 19951999, 1998, and
19941997, respectively.
Future minimum rental commitments under noncancelable leases on a fiscal year
basis were as follows as of June 30, 1999:
2000 $ 413,556
2001 413,556
2002 413,556
2003 402,701
2004 381,156
Thereafter 1,370,496
----------
$3,395,021
==========
Note 6. Deposits
The aggregate amount of certificates of deposit each with a minimum denomination
of $100,000 was $37,103,749 and $31,937,377 as of June 30, 1999 and 1998,
respectively.
As of June 30, 1999, the scheduled maturities of certificates of deposit were as
follows:
1996 1995 1994
---------- ---------- ----------
Interest-bearing demand accounts .................... $ 188,315 $ 117,596 $ 19,087
Money market accounts ............................... 758,555 317,897 47,923
Savings accounts .................................... 39,365 24,037 3,165
Time certificates greater than or equal to
672,668 399,249 82,376
Time certificates less than $100,000 ................ 1,690,645 934,071 100,962
---------- ---------- ----------
Total interest expense ......................... $3,349,548 $1,792,850 $ 253,513
========== ========== ==========
In one year or less $ 94,486,929
After one year through two years 18,535,480
After two years through three years 6,739,025
After three years through four years 3,690,224
After four years 2,195,386
------------
$125,647,044
============
Note 6.7. Short-Term Borrowings
Short-term borrowings as of June 30, 1999 of $9,685,877 consisted of federal
funds purchased of $140,000 and overnight repurchase agreements with customers
of $9,545,877. As of June 30, 1998 short-term borrowings of $2,000,000
represented federal funds purchased.
Information concerning repurchase agreements is summarized as follows as of June
30, 1999:
Average daily balance during the year ......................... $ 4,248,238
Average daily interest rate during the year ................... 4.14%
Maximum month-end balance during the year ..................... 11,418,714
Weighted average rate as of June 30, 1999 ..................... 3.99%
Securities underlying the agreements as of June 30, 1999:
Carrying value ............................................. $11,934,561
Fair value ................................................. 11,934,561
The securities underlying the agreements as of June 30, 1999 were under the
Company's control.
Note 8. Federal Home Loan Bank Advances
The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB")(FHLB). As of
June 30, 1996,1999 and 1998, the Bank held $1,249,700$1,299,100 and $1,234,600, respectively,
of FHLB stock. AdvancesMaturity and interest rate information on advances from the FHLB
as of June 30, 1996 bear interest1999 and are due1998 is as follows:
June 30, 1999
----------------------------------
Amount Due Interest Rate
---------- --------------
Due more than 5 years from----------------------------------
2000 ............................... $ 3,500,000 5.61% to 5.95%
2001 ............................... 3,250,000 5.43% to 6.02%
2002 ............................... 2,057,063 6.51% to 7.06%
2003 ............................... 6,989,575 5.33% to 6.57%
2004 and thereafter ................ 8,809,252 4.88% to 7.11%
-----------
Total FHLB advances ........... $24,605,890
===========
June 30, 1996 .......... $3,411,4701998
----------------------------------
Amount Due Interest Rate
----------------------------------
2000 .............................. $ 2,000,000 5.80% to 5.95%
2001 .............................. 5,750,000 5.43% to 7.08%
Securities6.02%
2002 .............................. 2,085,004 6.51% to 7.06%
2003 and thereafter ............... 14,832,170 4.88% to 7.11%
-----------
Total FHLB advances ........... $24,667,174
===========
Advances from the FHLB are collateralized by 1 to 4 unit residential mortgages
equal to 130% of total outstanding notes. Additionally, securities with a
carrying value of approximately $4,973,226$6.3 million as of June 30, 19961999 and $12.5
million as of June 30, 1998 were pledged as collateral on these advances.
Note 7.9. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures
The Company has issued all of the 1,200,000 authorized shares of Company
Obligated Mandatorily Redeemable (COMR) Preferred Securities of Quad City
Holdings Capital Trust I Holding Solely Subordinated Debentures. Distributions
will accumulate from June 10, 1999 and will be paid quarterly on March 31, June
30, September 30, and December 31 of each year beginning September 30, 1999.
Cumulative cash distributions are calculated at a 9.2% annual rate. The Company
may, at one or more times, defer interest payments on the capital securities for
up to 20 consecutive quarters, but not beyond June 30, 2029. At the end of any
deferral period, all accumulated and unpaid distributions will be paid. The
capital securities will be redeemed on June 30, 2029, however, the Company has
the option to shorten the maturity date to a date not earlier than June 30,
2004. The redemption price is $10 per capital security plus any accrued and
unpaid distributions to the date of redemption.
Holders of the capital securities will have no voting rights, and are unsecured
and rank junior in priority of payment to all of the Company's indebtedness and
senior to the Company's capital stock.
The debentures are included on the balance sheet as of June 30, 1999 as
liabilities. For regulatory purposes, a portion of the capital securities are
allowed in the calculation of Tier I capital.
The capital securities are traded on the American Stock Exchange under the
symbol "CQP.PR.A".
Note 10. Other Borrowings
The Company has a revolving credit note for $1,500,000,$3,000,000, which is secured by all
the outstanding stock of the Bank. There was no outstanding balance on this note
as of June 30, 1999 and as of June 30, 1998, the balance was $1,500,000. The
revolving credit note expires on July 1, 2000. Interest is payable quarterly at
the primeadjusted LIBOR rate. PrimeAdjusted LIBOR rate is defined as a rate of interest
equal to 2% per annum in excess of the per annum rate of interest at which U.S.
dollar deposits in an amount comparable to the amount of the relevant LIBOR Loan
are offered generally to the Bank in the London Interbank Eurodollar market at
11:00 a.m. (London time) two banking days prior to the commencement of each
interest period. The rate was 8.25% at7% as of June 30, 1996. At June 30, 1996, $1,000,000 was
outstanding on this note. The revolving credit note expires July 1, 1998.1999.
The revolving credit note agreement contains certain covenants whichthat place
restrictions on additional debt and stipulate minimum capital and various
operating ratios. The Company was in compliancecomplied with all of the covenants as of June 30,
1996.1999 and 1998.
Note 8.11. Restructuring of Merchant Broker Agreement
In June 1998, the Company recognized $2,168,000 of income as a result of signing
a new merchant broker agreement with an ISO. The term of the new agreement was
for a minimum one-year period, and replaced a prior agreement that had an
expiration date in the year 2002. In consideration for reducing the term from
four years to a minimum of one year, the Company received total compensation of
$2,900,000. The Company recognized $732,000 and $2,168,000 of the income during
the years ended June 30, 1999 and 1998, respectively. In addition, the Company
receives monthly fees of $25,000 for servicing the current merchants during the
remaining term of the agreement, which expires May 31, 2000. In future years, if
agreements with any other ISOs is not established, there could be a significant
reduction in income. The Company is actively pursuing relationships with other
ISOs.
Note 12. Federal and State Income Taxes
The Company incurred noFederal and state income tax expense or benefitwas comprised of the following components
for the years ended June 30, 1996, 19951999, 1998, and 1994. At1997:
Year Ended June 30,
1996,------------------------------------
1999 1998 1997
------------------------------------
Current ................................ $1,381,903 $2,231,183 $ 472,385
Deferred ............................... 232,262 (553,283) (307,385)
------------------------------------
$1,614,165 $1,677,900 $ 165,000
====================================
A reconciliation of the Company hadexpected federal income tax expense to the income tax
expense included in the statements of income was as follows for the years ended
June 30, 1999, 1998, and 1997:
Year Ended June 30,
----------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------
Computed "expected"
tax expense .............. $ 1,427,645 35.0% $ 1,424,910 35.0% $ 484,517 35.0%
Effect of graduated tax rates (40,790) (1.0) (40,712) (1.0) (13,843) (1.0)
Tax exempt income, net ...... (46,853) (1.1) (19,759) (0.5) (3,853) (0.3)
State income taxes, net of
federal benefit .......... 126,123 3.1 268,796 6.6 44,320 3.2
Change in valuation allowance - - - - - - - - (358,934) (25.9)
Other ....................... 148,040 3.6 44,665 1.1 12,793 0.9
----------------------------------------------------------------
$ 1,614,165 39.6% $ 1,677,900 41.2% $ 165,000 11.9%
================================================================
The net operatingdeferred tax assets included with other assets on the balance sheet
consisted of the following as of June 30, 1999 and 1998:
1999 1998
-----------------------
Deferred tax assets:
Organization and startup costs .................... $ - - $ 27,183
Net unrealized losses on securities available
for sale ........................................ 172,042 - -
Capital loss carryforwards ........................ 7,162 13,830
Deferred income ................................... - - 292,800
Loan and credit card losses ....................... 1,063,999 792,127
Other ............................................. 16,639 7,460
-----------------------
1,259,842 1,133,400
-----------------------
Deferred tax liabilities:
Accrual to cash conversion ........................ - - 58,818
Premises and equipment ............................ 406,302 199,035
Net unrealized gains on securities available
for sale ........................................ - - 4,638
Investment securities accretion ................... 27,282 13,692
Other ............................................. 25,810 1,187
-----------------------
459,394 277,370
-----------------------
Net deferred tax asset ................. $ 800,448 $ 856,030
=======================
The change in deferred income taxes was reflected in the financial statements as
follows for the years ended June 30, 1999, 1998, and 1997:
1999 1998 1997
--------------------------------
Provision for income tax purposestaxes ................. $232,262 $(553,283) $(307,385)
Statement of approximately $900,000, of which, if
not utilized to reduce taxablestockholders' equity-
accumulated other comprehensive
income, in future periods will expire in varying
amounts in 2009 and 2010. Deferred tax assets arose primarily due to theunrealized gains (losses)
on securities available for sale, net operating loss carryforwards, and have been reduced to zero through a valuation
allowance, as realization of the asset is uncertain.
... (176,680) 33,094 (28,456)
--------------------------------
$ 55,582 $(520,189) $(335,841)
================================
Note 9.13. Employee Benefit Plan
On February 1, 1994, theThe Company implementedhas a profit sharing plan which includes a provision designed to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended,
to allow for participant contributions. All employees are eligible to
participate in the plan. The Company matches 100% of the first 2% of employee
contributions, 50% of the next 2% of employee contributions, and 25% of the next
2% of employee contributions, up to a maximum amount of 3.5%. of an employee's
compensation. Additionally, at its discretion, the Company may at its discretion, make additional
contributions to the plan which are allocated to the accounts of participants in
the plan based on the basis of relative compensation. Company contributions for the years
ended June 30, 1996, 19951999, 1998, and 19941997 were as follows:
1996 1995 1994
------- ------- -------1999 1998 1997
------------------------------
Matching contribution ................ $47,233 $18,954................. $132,835 $100,164 $ 6,08064,535
Discretionary contribution ........... 20,000 10,000 6,000
------- ------- -------
Total contributions ............. $67,233 $28,954 $12,080
======= ======= =======............ 45,000 45,000 30,000
------------------------------
$177,835 $145,164 $ 94,535
==============================
Note 10.14. Warrants and Options
WarrantsStock Based Compensation
Warrants:
As part of the underwriting agreement for its initial public offering, the
Company issued warrants to the underwriters for the purchase of 25,00037,500 shares of
common stock at $12.00$8 per share. The underwriters exercised all of the warrants on
May 6, 1997. The warrants became exercisable on October 13, 1994 (the date
commencing one year from the date of the public offering) and remainwould have
remained exercisable for a period of four years after such date.
Private placement stockholders were issued warrants as described
below.
Common stock of $75,000 atas of June 30, 1993 represented 75,000112,500 shares of the
Company sCompany's common stock issued in a private placement in 1993. Each stockholder
who purchased stock in the private placement received a unit (at a price of
$10.00$6.67 per unit) which consisted of one shareand one half shares of the Company sCompany's
common stock and one and one half warrants. Each warrant entitled the holder to
purchase an additional share of Company common stock for $11.00,$7.33, exercisable during a five year period commencingby
October 13, 1994 (one year after completion1999. During the years ended June 30, 1999 and 1998, 30,000 and
71,250, respectively, of the public offering). Aswarrants were exercised leaving 11,250 remaining as
of June 30, 1996, none of the warrants had been exercised.1999.
Stock Option Planoption and incentive plans:
The Company sCompany's Board of Directors and its stockholders adopted in June 1993 the
Quad City Holdings, Inc. Stock Option Plan (the "Stock(Stock Option Plan")Plan). Up to 100,000150,000
shares of common stock may be issued to employees and directors of the Company
and its subsidiaries pursuant to the exercise of incentive stock options or
non-qualifiednonqualified stock options granted under the Stock Option Plan. The Company's
Board of Directors adopted in November 1996 the Quad City Holdings, Inc. 1997
Stock Incentive Plan (Stock Incentive Plan). Up to 150,000 shares of common
stock may be issued to employees and directors of the Company and its
subsidiaries pursuant to the exercise of nonqualified stock options and
restricted stock granted under the Stock Incentive Plan. The Stock Option Plan
isand the Stock Incentive Plan are administered by athe compensation committee
appointed by the Board of Directors (the "Committee")(Committee).
The number and exercise price of options granted under the Stock Option Plan and
the Stock Incentive Plan is determined by the Committee at the time the option
is granted. In no event can the exercise price be less than the value of the
common stock at the date of the grant for incentive stock options, or 85% of such fair
market value for non-qualified stock options. The stock
options will generally vest 20% per year. The term of the optionsan incentive stock option
may not exceed 10 years from the date of the grant.
In the case of non-qualifiednonqualified stock options, the Stock Option Plan providesand the Stock
Incentive Plan provide for the granting of "Tax Benefit Rights" to certain
participants at the same time as these participants are awarded non-qualifiednonqualified
options. Each Tax Benefit Right entitles a participant to a cash payment equalingequal
to the excess of the fair market value of a share of common stock on the
exercise date over the exercise price of the related option multiplied by the
difference between the rate of tax on ordinary income over the rate of tax on
capital gains (federal and state).
Note 10. Continued
CompanyAs permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method prescribed in FASB Statement No. 123, reported net income would not
have changed by a material amount and earnings per share would not have changed
by more than $0.02, $0.01, and $0.01 for the years ended June 30, 1996, 1995, 19941999, 1998,
and 1993 were1997, respectively.
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date with
the following weighted-average assumptions for grants during the years ended
June 30, 1999, 1998, and 1997: dividend rate of 0%: risk-free interest rates
based upon current rates at the date of grant (5.62% to 7.90%); expected lives
of 10 years, and expected price volatility of 13.37% to 20.65%.
A summary of the stock option plans as follows:
Number of Number of Number of Number of
Shares Shares Shares Shares
Date of Grant Granted Canceled Vested Unvested Option Price
- --------------------------------------- ---------- ---------- ---------- --------- -------------
June 30, 1993 ......................... 50,000 0 30,000 20,000 $10.00
March 31, 1994 ........................ 25,000 0 10,000 15,000 10.25
June 30, 1994 ......................... 8,000 1,600 2,800 3,600 9.00
October 19, 1994 ...................... 4,300 180 840 3,280 9.25
January 21, 1995 ...................... 500 0 100 400 9.25
June 30, 1995 ......................... 5,500 300 1,040 4,160 10.25
September 30, 1995 .................... 600 100 0 500 11.75
June 28, 1996 ......................... 6,300 0 0 6,300 13.25
------- ------- ------- -------
Totals ............................. 100,200 2,180 44,780 53,240
=======of June 30, 1999, 1998, and 1997 and
changes during the years ended on those dates is presented below:
1999 1998 1997
---------------- ----------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------- ----------------- -------------------
Outstanding, beginning 190,887 $ 9.12 175,155 $ 7.89 147,030 $ 6.79
Granted ........... 8,500 18.03 19,062 20.92 28,650 13.51
Exercised ......... (720) 9.49 (75) 7.23 - -
Forfeited ......... (8,496) 12.67 (3,255) 12.15 (525) 6.85
------- ------- -------
Outstanding, ending .. 190,171 9.36 190,887 9.12 175,155 7.89
======= ======= =======
NoneExercisable, ending .. 149,109 130,455 96,345
Weighted average fair
value per option of
options granted
during the year ... $ 8.88 $ 9.72 $ 6.69
A further summary of options outstanding as of June 30, 1999 is presented below:
Options Outstanding
-----------------------------------
Options Exercisable
Weighted -----------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
$6.00 to $6.83 132,720 5.6 years $ 6.67 130,410 $ 6.67
$7.83 to $8.83 8,805 6.9 years 8.76 5,430 8.75
$10.00 to $11.67 750 7.8 years 11.67 600 10.84
$13.33 to $13.67 23,190 8.0 years 13.66 9,480 13.66
$14.09 to $21.33 24,706 9.5 years 19.96 3,189 20.97
------- -------
190,171 149,109
======= =======
Stock appreciation rights:
Additionally, the Stock Incentive Plan allows the granting of stock appreciation
rights (SARs). SARs are rights entitling the grantee to receive cash having a
fair market value equal to the appreciation in the market value of a stated
number of shares from the date of grant. Like options, the number and exercise
price of SARs granted is determined by the Committee. The SARs will vest 20% per
year, and the term of the optionsSAR may not exceed 10 years from the date of the
grant. As of June 30, 1999 there were 39,625 SARs granted, with 9,675 currently
exercisable.
Note 15. Preferred Stock
In June 1999, the Company redeemed all 25 outstanding shares of Preferred Stock
for cash of $2,977,884. The stock was senior to common stock as to dividends,
liquidation, and redemption rights, and did not confer general voting rights.
The redemption amount was equal to the sum of (i) $100,000; plus (ii) a premium
in the amount of $9,750 multiplied by a fraction, the numerator of which was the
total number of calendar days the Preferred Stock being redeemed had been
exercised.
The Financial Accounting Standards Board has issued Statement No. 123
"Accounting for Stock Based Compensation"outstanding and the denominator of which becomes effective for years
beginning after December 15, 1995. The Company anticipates that it will
elect to continue to measure compensation cost using Opinion 25 and present
the proforma disclosures required by Statement No. 123. Accordingly,
adoption of this standard should have no effect on the Company s financial
statements.was 365.
Note 11.16. Regulatory Capital Requirements and Restrictions on Dividends
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutionsinstitutions' assets and off-balance sheet
items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to average total assets ratio (leverage ratio). In
addition, regulatory agencies consider the published capital levels as minimum
levels and may require a financial institution to maintain capital at higher
levels.
The actual amounts and capital ratios atas of June 30, 19961999 and 19951998 with the
minimum requirements for the Company and Bank are presented below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes:Purposes Action Provisions:
-------------------- ---------------------- -----------------------Provisions
---------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ------------ --------- ------------ -------------------------------------------------------------------------
As of June 30, 1996:1999:
Company:
Total Capital (to Risk Weighted
Assets) ....................... $11,455,003 16.9% $ 5,419,280risk based capital $33,695,000 13.8% $19,476,000 => 8.0% $ 6,774,100$24,345,000 => 10.0%
Tier 1 Capital (to Risk Weighted
Assets) ........................ 10,666,032 18.2% 2,349,346 4.0% 3,524,019 6.0%risk based capital 25,060,000 10.3 9,738,000 => 4.0 14,607,000 => 6.0
Leverage ratio .......... 25,060,000 8.0 12,523,000 => 4.0 15,603,000 => 5.0
Bank:
Total risk based capital $25,139,000 11.3% $17,875,000 => 8.0% $22,344,000 => 10.0%
Tier 1 Capital (to Average
Assets) ........................ 10,666,032 9.8% 4,357,929 4.0% 5,447,412 5.0%risk based capital 22,244,000 10.0 8,938,000 => 4.0 13,406,000 => 6.0
Leverage ratio .......... 22,244,000 7.2 12,374,000 => 4.0 15,467,000 => 5.0
As of June 30, 1995:1998:
Company:
Total Capital (to Risk Weighted
Assets ......................... 7,559,527 19.5% 3,096,580risk based capital $21,275,000 12.2% $13,979,000 => 8.0% 3,870,726$17,474,000 => 10.0%
Tier 1 Capital (to Risk Weighted
Assets) ........................ 7,112,852 20.8% 1,370,492 4.0% 2,055,738 6.0%risk based capital 19,089,000 10.9 6,990,000 => 4.0 10,484,000 => 6.0
Leverage ratio .......... 19,089,000 7.9 9,603,000 => 4.0 12,004,000 => 5.0
Bank:
Total risk based capital $20,167,000 11.8% $13,649,000 => 8.0% $17,062,000 => 10.0%
Tier 1 Capital(to Average Assets). 7,112,852 9.2% 3,085,836 4.0% 3,857,295 5.0%risk based capital 18,032,000 10.6 6,824,000 => 4.0 10,236,000 => 6.0
Leverage ratio .......... 18,032,000 7.6 9,453,000 => 4.0 11,817,000 => 5.0
Note 11. Continued
Federal Reserve Board policy provides that a bank holding company should not pay
dividends unless (i) the dividends can be fully funded out of net income from
the company scompany's net earnings over the prior year and (ii) the prospective rate of
earnings retention appears consistent with the company scompany's (and its subsidiaries subsidiaries')
capital needs, asset quality, and overall financial condition.
In addition, the Delaware General Corporation Law restricts the Company from
paying dividends except out of its surplus, or in the case there shall be no
such surplus, out of its net profits for the fiscal year in which the dividend
is declared and/or the preceding fiscal year.
The Iowa Banking Act provides that an Iowa bank may not pay dividends in an
amount greater than its undivided profits. In addition, the Bank, as a member of
the Federal Reserve System, will be prohibited from paying dividends to the
extent such dividends declared in any calendar year exceed the total of its net
profits of that year combined with its retained net profits of the preceding two
years, or are otherwise determined to be an "unsafe and unsound practice" by the
Federal Reserve Board.
Note 12.17. Earnings Per Common Share
The following information was used in the computation of basic and diluted
earnings per common share for the years ended June 30, 1999, 1998, and 1997.
1999 1998 1997
----------------------------------
Basic and diluted earnings, net income ..... $2,464,821 $2,393,272 $1,219,336
==================================
Weighted average common shares outstanding . 2,285,500 2,196,297 2,162,490
Weighted average common shares issuable upon
exercise of stock options and warrants .. 113,025 157,635 87,878
----------------------------------
Weighted average common and common
equivalent shares outstanding ........... 2,398,525 2,353,932 2,250,368
==================================
Note 18. Commitments and Contingencies
In the normal course of business, the Bank makes various commitments and incurs
certain contingent liabilities that are not presented in the accompanying
consolidated financial statements. The commitments and contingent liabilities
include various guarantees, commitments to extend credit, and standby letters of
credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer scustomer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based upon
management
smanagement's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party.third-party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
AtAs of June 30, 1996,1999 and 1998 commitments to extend credit aggregated $16,860,159$58,119,081
and $38,024,001, respectively. As of June 30, 1999 and 1998 standby letters of
credit aggregated $1,428,301. At June 30, 1995,$551,500 and $1,278,000, respectively. Management does not
expect that all of these commitments to extend credit aggregated $8,321,032 and standby letters of credit aggregated
$10,000.will be funded.
Bancard is subject to the risk of chargebacks from cardholders and the merchant
being incapable of refunding the amount charged back. Management attempts to
mitigate such risk by regular monitoring of merchant activity and in appropriate
cases, holding cash reserves deposited by the merchant.
The Company also has a guarantyguarantee to MasterCard International Incorporated, which
is backed up by a performance bond in the amount of $1,000,000. AtAs of June 30,
1996,1999 there were no significant pending liabilities.
Aside from cash on-hand and in-vault, the majority of the Company's cash is
maintained at upstream correspondent banks. The total amount of cash on deposit,
certificates of deposit, and federal funds sold exceeded federal insured limits
by $44,004,699 and $26,727,204 as of June 30, 1999 and 1998, respectively. In
the opinion of management, no material risk of loss exists due to the financial
condition of the upstream correspondent banks.
Note 13.19. Quarterly Results of Operations (Unaudited)
Fiscal year ended June 30, 1996
--------------------------------------------------------
Sept. 1995 Dec. 1995 Mar. 1996 June 1996
----------- ----------- ----------- -----------
Total interest income ......... $ 1,442,418 $ 1,534,274 $ 1,690,993 $ 1,915,782
Total interest expense 809,854 800,009 897,467 979,050
----------- ----------- ----------- -----------
Net interest income 632,564 734,265 793,526 936,732
Provision for loan losses ..... (100,800) (153,300) (113,835) (132,462)
Other income .................. 369,435 373,641 403,425 515,786
Other expense ................. (807,357) (789,828) (887,637) (1,091,567)
----------- ----------- ----------- -----------
Net income .................... $ 93,842 $ 164,778 $ 195,479 $ 228,489
=========== =========== =========== ===========
Net income per share .......... $ 0.06 $ 0.11Year Ended June 30, 1999
----------------------------------------------
September December March June
1998 1998 1999 1999
----------------------------------------------
Total interest income ........... $4,785,014 $4,949,961 $4,948,755 $5,432,190
Total interest expense .......... 2,692,979 2,718,434 2,673,931 2,941,342
----------------------------------------------
Net interest income 2,092,035 2,231,527 2,274,824 2,490,848
Provision for loan losses ....... 252,000 174,200 218,200 247,400
Noninterest income .............. 1,191,066 1,329,819 1,437,189 1,602,377
Noninterest expenses ............ 2,301,829 2,376,376 2,472,977 2,527,717
----------------------------------------------
Net income before
income taxes ...... 729,272 1,010,770 1,020,836 1,318,108
Federal and state income taxes .. 290,451 391,314 406,889 525,511
----------------------------------------------
Net income ........ $ 438,821 $ 619,456 $ 613,947 $ 792,597
==============================================
Earnings per common share:
Basic ........................ $ 0.19 $ 0.27 $ 0.27 $ 0.35
Diluted ...................... 0.18 0.26 0.25 0.34
Year Ended June 30, 1998
-----------------------------------------------
September December March June
1997 1997 1998 1998
-----------------------------------------------
Total interest income .......... $3,305,107 $3,617,832 $3,797,383 $4,356,245
Total interest expense ......... 1,757,272 1,963,477 2,157,917 2,463,355
----------------------------------------------
Net interest income .. 1,547,835 1,654,355 1,639,466 1,892,890
Provision for loan losses ...... (304,355) (215,643) (233,260) (148,718)
Noninterest income ............. 922,495 872,117 1,134,103 3,219,702
Noninterest expenses ........... (1,606,833) (1,706,098) (2,048,517) (2,548,367)
-----------------------------------------------
Net income before
income taxes ..... 559,142 604,731 491,792 2,415,507
Federal and state income taxes . 218,200 237,075 191,425 1,031,200
-----------------------------------------------
Net income ....... $ 340,942 $ 367,656 $ 300,367 $1,384,307
===============================================
Earnings per common share:
Basic ....................... $ 0.15 $ 0.17 $ 0.14 $ 0.63
Diluted ..................... 0.14 0.15 0.13 0.60
Year Ended June 30, 1997
-----------------------------------------------
September December March June
1996 1996 1997 1997
-----------------------------------------------
Total interest income ........ $2,014,237 $2,308,760 $2,499,725 $2,882,922
Total interest expense ....... 1,008,269 1,202,258 1,325,463 1,457,878
-----------------------------------------------
Net interest income .. 1,005,968 1,106,502 1,174,262 1,425,044
Provision for loan losses .... (157,400) (146,325) (222,775) (317,891)
Noninterest income ........... 519,208 599,095 790,345 899,106
Noninterest expenses ......... (1,108,592) (1,257,025) (1,392,010) (1,533,176)
----------------------------------------------
Net income before
income taxes ... 259,184 302,247 349,822 473,083
Federal and state income taxes - - - - - - 165,000
-----------------------------------------------
Net income ..... $ 259,184 $ 302,247 $ 349,822 $ 308,083
===============================================
Earnings per common share:
Basic ..................... $ 0.12 $ 0.14 $ 0.16 $ 0.14
Diluted ................... 0.12 0.13 0.15 0.14 $ 0.16
=========== =========== =========== ===========
Note 13. Continued
Fiscal year ended June 30, 1995
--------------------------------------------------------
Sept. 1994 Dec. 1994 Mar. 1994 June 1994
----------- ----------- ----------- -----------
Total interest income ......... $ 546,867 $ 745,118 $ 977,256 $ 1,280,881
Total interest expense ........ 259,397 376,530 515,171 744,477
----------- ----------- ------------ -----------
Net interest income ........... 287,470 368,588 462,085 536,404
Provision for loan losses ..... (78,000) (79,400) (79,200) (46,000)
Other income .................. 35,135 65,291 172,100 275,171
Other expense ................. (486,530) (459,287) (604,202) (743,407)
----------- ----------- ----------- -----------
Net income (loss) ............. $ (241,925) $ (104,808) $ (49,217) $ 22,168
=========== =========== =========== ===========
Net income (loss) per share ... $ (0.17) $ (0.07) $ (0.03) $ 0.01
=========== ============ =========== ===========
Note 14.20. Parent Company Only Financial Statements
The following is condensed financial information of Quad City Holdings, Inc.
(parent company only):
Condensed Balance Sheets
June
30,
----------------------------
1996 1995
------------ --------------------------------------
ASSETS 1999 1998
- -------------------------------------------------------------------------------------
Assets
Cash and due from banks .......................................................................... $ 343,1884,911,367 $ 482,549
Certificates of deposits with financial institutions ............. 0 420,035433,928
Securities available for sale, .................................... 174,671 1,283,644at fair value ........... 189,625 160,946
Investment in Quad City Bank and Trust Company ................... 10,197,609 7,326,184......... 21,916,436 18,040,231
Investment in Quad City Bancard, Inc. ............................ 785,605 389,511
Loans.................. 1,432,802 367,916
Investment in Quad City Holding Capital Trust .......... 380,000 - -
Net loans receivable net ............................................ 1,132,696 1,697,233................................... - - 502,844
Other assets ..................................................... 135,477 58,795
------------ ------------........................................... 1,984,519 1,217,502
--------------------------
Total assets .......................................................................... $30,814,749 $20,723,367
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------
Liabilities:
Other borrowings .................................... $ 12,769,246- - $ 11,657,951
============ ============
Liabilities and Stockholders' Equity1,500,000
COMR preferred securities of subsidiary trust ....... 12,000,000 - -
Other liabilities ................................................ $ 100,640 $ 68,211
Other borrowings ................................................. 1,000,000 0................................... 341,278 121,149
--------------------------
Total liabilities ........................ 12,341,278 1,621,149
--------------------------
Stockholders' equityEquity:
Preferred stock ..................................... - - 25
Common stock .................................................. 1,437,824 1,437,824........................................ 2,296,251 1,510,374
Additional paid-in capital .................................... 11,764,416 11,764,416.......................... 11,959,080 15,014,884
Retained earnings(deficit) .................................... (1,048,165) (1,730,753)
Unrealized gains (losses) on securities available for sale, net (485,469) 118,253
------------ ------------earnings ................................... 4,550,490 2,564,443
Accumulated other comprehensive income (loss) ....... (332,350) 12,492
--------------------------
Total stockholders' equity ............................... $ 11,668,606 $ 11,589,740
------------ ------------............... 18,473,471 19,102,218
--------------------------
Total liabilities and stockholders' equity ................ $ 12,769,246 $ 11,657,951
============ ============$30,814,749 $20,723,367
==========================
Condensed Statements of Income
Year
Years Ended June 30,
--------------------------------------------
1996 1995 1994
------------ ------------ ----------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------
NetTotal interest income ....................................................................... $ 178,78378,763 $ 339,26048,178 $ 229,168
Provision for loan losses ........................................ 8,300 (4,900) (20,900)84,431
Investment securities gains, (losses), net ........................ 26,345 2,137 (70,532)
Other ............................................................ 24,000 24,002 12,307
------------ ------------ ------------
Total income ............................................. 237,428 360,499 150,043
Expenses ......................................................... 251,606 280,824 714,323
------------ ------------ ------------
Income (loss) before equity in undistributed
loss of subsidiaries ............................................ (14,178) 79,675 (564,280).............. 5,474 8,734 23,437
Equity in undistributednet income (loss) of Quad City Bank and
Trust Company ................................ 300,672 (392,968) (707,372).............................. 2,212,931 1,208,090 844,915
Equity in undistributednet income (loss) of Quad City Bancard, Inc. 564,886 1,325,992 356,318
Other ......................................... 396,094 (60,489) 0
------------ ------------ ------------85,945 81,435 63,516
----------------------------------
Total income .................... 2,947,999 2,672,429 1,372,617
----------------------------------
Interest expense .............................. 220,794 129,271 122,885
Other ......................................... 495,284 304,186 342,396
----------------------------------
Total expenses .................. 716,078 433,457 465,281
----------------------------------
Income before cumulative effect of a change in
accounting principle ............................................ 682,588 (373,782) (1,271,652)
Cumulative effect of a change in accounting principle ............ 0 0 149,250
------------ ------------ ------------income tax
benefit ......................... 2,231,921 2,238,972 907,336
Income tax benefit ............................ 232,900 154,300 312,000
----------------------------------
Net income (loss) ........................................ $ 682,588 $ (373,782) $ (1,122,402)
============ ============ ============...................... $2,464,821 $2,393,272 $1,219,336
==================================
Condensed Statements of Cash Flows
Year
Years Ended June 30,
-----------------------------------------
1996 1995 1994
------------ ------------ ------------1999 1998 1997
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:Cash Flows from Operating Activities:
Net income (loss) ..................................................................................................... $ 682,5882,464,821 $ (373,782)2,393,272 $ (1,122,402)1,219,336
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
EquityDistributions in undistributed (income) lossexcess of (less than)
earnings of:
Quad City Bank and Trust Company .......................................... (300,672) 392,968 707,372.............. (2,212,931) (1,208,090) (844,915)
Quad City Bancard, Inc. ................................................... (396,094) 60,489 0....................... (564,886) 574,008 (356,318)
Depreciation and amortization .............................................. 2,524 758 1,567.................................... 4,036 3,520 2,647
Provision for loan losses .................................................. (8,300) 4,900 20,900
Amortization....................... (7,500) - - (10,000)
Accretion of premiums and accretion of discountsdiscount on securities, net ..... 3,079 33,853 34,958
Realized (gains) losses on........ - - - - (5,495)
Investment securities available for sale ................... (26,345) (2,137) 70,532
(Increase) decreasegains, net ................ (5,474) (8,734) (23,437)
Decrease in accrued interest receivable ......................... 20,746 6,763 (35,814)......... 4,780 749 2,676
(Increase) decrease in other assets ........................................ (30,731) (1,077) 36,996...................... (770,199) (605,877) (560,689
Increase (decrease) in other liabilities ................................... 32,429 59,325 (100,065)
------------ ------------ ------------........ 220,129 (14,606) 35,115
----------------------------------------
Net cash provided by (used in)
operating activities ..................... $ (20,776) $ 182,060 $ (385,956)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net loans (originated) or repaid ............................................. 572,837 (330,527) (1,392,506)
Purchase of securities held for sale ......................................... 0 0 (7,771,585)................... (867,224) 1,134,242 (541,080)
----------------------------------------
Cash Flows from Investing Activities:
Purchase of securities available for sale .................................... (117,167) (25,209) 0
Purchase.......... (67,400) (5,958) (49,515)
Proceeds from sale of stock in Quad City Bank and Trust Company ........................ 0 0 (4,500,000)securities available for sale 32,865 14,020 95,691
Proceeds from paydowns on securities ............... - - - - 5,496
Capital infusion, Quad City Bank and
Trust Company ........................... (2,099,000) (800,000) 0
Purchase of stock in................................... (2,000,000) (3,200,000) (2,100,000)
Capital infusion, Quad City Bancard, Inc. ................................. 0 (450,000) 0.......... (500,000) - - - -
Capital infusion, Quad City Holdings Capital Trust I (380,000) - - - -
Net (increase) decrease in certificate of deposits with financial institutions 420,035 486,818 (906,853)
Proceeds from sales of securities held for sale .............................. 0 0 2,262,313
Proceeds from sales of securities available for sale ......................... 145,512 489,789 0
Proceeds from calls on securities ............................................ 28,419 207,225 408,346
Purchaseloans (originated) repaid ...................... 510,344 (169,850) 809,702
(Purchase) disposal of premises and equipment ........................................... (69,221) (21,853) (851)
------------ ------------ ------------...... (2,420) 10,623 64,326
----------------------------------------
Net cash (used in) investing activities ................................. $ (1,118,585) $ (443,757) $(11,901,136)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:. (2,406,611) (3,351,165) (1,174,300)
----------------------------------------
Cash Flows from Financing Activities:
Net increase (decrease) in other borrowings ..................................................... (1,500,000) - - 500,000
Proceeds from issuance of preferred securities of
subsidiary trust ................................ 12,000,000 - - - -
Redemption of preferred stock ...................... (2,977,884) - - - -
Proceeds from issuance of preferred stock .......... - - 1,500,000 1,000,000
0 0
IssuanceProceeds from issuance of common stock ..................................................... 0 0 12,496,927
Decrease in deferred registration costs ...................................... 0 0 45,600
------------ ------------ ------------............. 229,158 523,043 300,000
Cash dividends received, Quad City Bancard, Inc .... - - - - 200,000
----------------------------------------
Net cash provided by financing
activities ............................... $ 1,000,000 $ 0 $ 12,542,527
------------ ------------ ------------.............................. 7,751,274 2,023,043 2,000,000
----------------------------------------
Net increase (decrease) in cash and
due from banks ...................... (139,361) (261,697) 255,435.......................... 4,477,439 (193,880) 284,620
Cash and due from banks, beginning ...................................... 482,549 744,246 488,811
------------ ------------ ------------
Cash and due from banks, ending .........................................banks:
Beginning .......................................... 433,928 627,808 343,188
----------------------------------------
Ending ............................................. $4,911,367 $ 343,188433,928 $ 482,549 $ 744,246
============ ============ ============627,808
========================================
Note 15.21. Fair Value of Financial Instruments
FASB Statement No. 107 "Disclosures about Fair Value of Financial Instruments,"Instruments"
requires disclosuredisclosures of fair value information about financial instruments for
which it is practicable to estimate that value. When quoted market prices are
not available, fair values are based on estimates using present value or other
techniques. Those techniques are significantly affected by the assumptions used,
including the discounted rates and estimates of future cash flows. In this
regard, fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
settlement. Some financial instruments and all nonfinancial instruments are
excluded from the disclosures. The aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of their financial instruments:instruments.
Cash and due from banks, federal funds sold, and certificates of deposit:deposit at
financial institutions: The carrying amounts reported in the balance sheets for
cash and due from banks, federal funds sold, and certificates of deposit approximateat
financial institutions equal their fair values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans receivable: The fair values for variable rate loans equal their carrying
values. The fair values for all other types of loans are estimated using
discounted cash flow analysis, using interest rates currently being offered for
loans with similar terms to borrowers with similar credit quality.
Accrued interest receivable:receivable and payable: The fair value of accrued interest
receivable and payable is consideredequal to approximate its carrying value.
Deposits: The fair values disclosed for demand deposits equal their carrying
amounts which represents the amount payable on demand. Fair values for time
deposits are estimated using a discount cash flow calculation that applies
interest rates currently being offered on time deposits to a schedule of
aggregatedaggregate expected monthly maturities on time deposits.
Federal funds purchased:Short-term borrowings: The carrying amount reported in the balance sheetsfair value for federal funds purchased approximatesshort-term borrowings is equal to its
faircarrying value.
Federal Home Loan Bank advances:advances and Company obligated mandatorily redeemable
preferred securities: The fair value of the Company sCompany's Federal Home Loan Bank
advances and Company obligated mandatorily redeemable preferred securities is
estimated using discounted cash flow analysis, based on the Company sCompany's current
incremental borrowing rates for similar types of borrowing arrangements.
Other borrowings: For variable rate debt, the carrying amount is a reasonable
estimate of fair value.
Accrued interest payable: The fair value of accrued interest payable is
considered to approximate its carrying value.
Commitments to extend credit: The majority of the Company's commitment
agreements contain variable interest rates, therefore, the carrying amount is a
reasonable estimate of fair value of these commitments is not
material.value.
The carrying values and estimated fair values of the Company sCompany's financial
instruments as of June 30, 19961999 and 1998 are presented as follows:
1999 1998
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------------------------------------------
Cash and due from banks .......................... $ 8,528,195 $ 8,528,195 $ 11,640,813 $ 11,640,813
Federal funds sold ............................... 39,125,000 39,125,000 22,960,000 22,960,000
Certificates of deposit at financial institutions 12,535,193 12,535,193 8,366,123 8,366,123
Investment securities:
Held to maturity .............................. 724,415 727,115 2,380,309 2,363,698
Available for sale ............................ 50,941,759 50,941,759 32,238,245 32,238,245
Loans receivable, net ............................ 195,081,235 196,217,000 160,625,298 162,770,000
Accrued interest receivable ...................... 2,006,503 2,006,503 1,773,223 1,773,223
Deposits ......................................... 247,965,879 248,312,000 197,383,964 197,378,000
Short-term borrowings ............................ 9,685,877 9,685,877 2,000,000 2,000,000
Federal Home Loan Bank advances .................. 24,605,890 24,742,000 24,667,174 25,334,000
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures ....................... 12,000,000 12,000,000 - - - -
Other borrowings ................................. - - - - 1,500,000 1,500,000
Accrued interest payable ......................... 1,588,263 1,588,263 1,297,260 1,297,260
Note 22. Business Segment Information
Selected financial information on the Company's business segments is presented
as follows Estimated
Carrying Value Fair Value
-------------- -----------
Cashfor the years ended June 30, 1999, 1998, and due from banks ............................ $6,615,407 $ 6,615,407
Federal funds sold ................................. 2,728,000 2,728,000
Certificates of deposit at financial institutions .. 5,472,012 5,472,012
Investment securities:
Held to maturity .............................. 3,156,601 3,097,115
Available for sale ............................ 31,032,652 31,032,652
Loans receivable, net .............................. 55,957,220 56,155,633
Accrued interest receivable ........................ 1,121,268 1,121,268
Deposits ........................................... 92,918,118 93,403,739
Federal funds purchased ............................ 1,190,000 1,190,000
Federal Home Loan Bank advances .................... 3,411,470 3,254,299
Other borrowings ................................... 1,000,000 1,000,000
Accrued interest payable ........................... 594,045 594,0451997:
Year Ended June 30,
------------------------------------------
1999 1998 1997
------------------------------------------
Quad City Holdings, Inc.:
Revenue ........................................ $ 48,485 $ 114,347 $ 147,384
Net income (loss) .............................. (312,996) (140,810) 18,103
Identifiable assets ............................ 5,059 6,675 20,818
Depreciation ................................... 4,036 3,520 2,647
Capital expenditures ........................... 2,420 - - - -
Quad City Bank and Trust Company:
Revenue ........................................ 22,040,065 16,408,561 10,081,155
Net income ..................................... 1,881,433 947,510 678,869
Identifiable assets ............................ 7,397,567 7,535,319 5,108,723
Depreciation ................................... 589,287 389,177 315,312
Capital expenditures ........................... 451,535 2,870,009 1,027,073
Quad City Bancard, Inc.:
Revenue ........................................ 2,067,303 3,563,574 1,548,397
Net income ..................................... 564,886 1,325,992 356,318
Identifiable assets ............................ 150,990 118,274 119,148
Depreciation ................................... 33,752 29,660 16,450
Capital expenditures ........................... 66,468 28,786 89,313
Trust Department, Quad City Bank and Trust Company:
Revenue ........................................ 1,520,518 1,138,502 736,462
Net income ..................................... 331,498 260,580 166,046
Identifiable assets ............................ N/A N/A N/A
Depreciation ................................... N/A N/A N/A
Capital expenditures ........................... N/A N/A N/A
Item 8.9. Changes inIn and Disagreements withWith Accountants on Accounting
and Financial Disclosure
None.
Part III
Item 9.10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a)Persons of
the Exchange Act
The Company will file with the securities and exchange commission a
definitive proxy statement no later than 120 days after the close of
its fiscal year ended June 30, 1996 (the "Proxy Statement").Registrant
The information required by this item is incorporated by reference fromset forth under the caption "Election
of Directors" in the Proxy Statement.Statement, and is incorporated herein by reference.
Item 10.11. Executive Compensation
The information required by this item is incorporated by reference fromset forth under the caption "Executive
Compensation" in the Proxy Statement.Statement, and is incorporated herein by reference.
Item 11.12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference fromset forth under the caption "Security
Ownership of Certain Beneficial Owners" in the Proxy Statement.Statement, and is
incorporated herein by reference.
Item 12.13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference fromset forth under the captions "Security
Ownership of Certain Beneficial Owners" and "Transactions with Management" in
the Proxy Statement.Statement, and is incorporated herein by reference.
Part IV
Item 13.14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated
Financial Statements under Item 8.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they
are not applicable or the required information is shown in the
consolidated financial statements and the accompanying notes
thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
The Index to Exhibits appears at page 3751 of this Report.
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, as amended, the
Issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
QUAD CITY HOLDINGS, INC.
Date: September 18, 1996 By: /s/ Douglas M. Hultquist
-------------------------------------
Douglas M. Hultquist
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Issuer and in the capacities and on the dates
indicated.
Signature Title Date
/s/ Michael A. Bauer Chairman of the Board September 18, 1996
- ------------------------- of Directors
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive September 18, 1996
- ------------------------- and Financial Officer and Director
Douglas M. Hultquist
/s/ Richard R. Horst Director and Secretary September 18, 1996
- -------------------------
Richard R. Horst
/s/ Ronald G. Peterson Director September 18, 1996
- -------------------------
Ronald G. Peterson
/s/ John W. Schricker Director September 18, 1996
- -------------------------
John W. Schricker
INDEX TO EXHIBITS
Incorporated
Herein by in Filed Sequential
Exhibit No. Description Reference To Herewith Page No.
- ----------- ------------------------ ------------------ -------- ----------
3.1 Certificate of Exhibit 3.1 to the
Incorporation of Quad Registration
City Holdings, Inc., as Statement of Quad
amended City Holdings, Inc.
on Form SB-2, File
No. 33-67028
3.2 Bylaws of Quad City Exhibit 3.2 to the
Holdings, Inc. Registration
Statement of Quad
City Holdings, Inc.
on Form SB-2, File
No. 33-67028
4.1 Specimen Stock Exhibit 4.1 to the
Certificate of Quad Registration
City Holdings, Inc.(See Statement of Quad
also Articles VIII, XII City Holdings, Inc.
and XIII of Exhibit 3.1 on Form SB-2, File
and Articles II, VI, IX No. 33-67028
and XII of Exhibit 3.2)
10.1 Quad City Holdings, Exhibit 10.1 to the
Inc. Stock Option Plan Registration
Statement of Quad
City Holdings, Inc.
on Form SB-2, File
No. 33-67028
10.2 Form of Stock Option Exhibit 10.2 to the
Agreement between Registration
Quad City Holdings, Inc. Statement of Quad
and each of Michael A. City Holdings, Inc.
Bauer, Douglas M. on Form SB-2, File
Hultquist and Victor J. No. 33-67028
Quinn
10.3 Employment Agreement Exhibit 10.3 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Michael A. Bauer dated City Holdings, Inc.
May 4, 1993 on Form SB-2, File
No. 33-67028
10.4 Employment Agreement Exhibit 10.4 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Michael A. Bauer dated City Holdings, Inc.
July 1, 1993 on Form SB-2, File
No. 33-67028
10.5 Employment Agreement Exhibit 10.5 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Douglas M. Hultquist City Holdings, Inc.
dated April 30, 1993 on Form SB-2, File
No. 33-67028
Incorporated
Herein by in Filed Sequential
Exhibit No. Description Reference To Herewith Page No.
- ----------- ------------------------ ------------------ -------- ----------
10.6 Employment Agreement Exhibit 10.6 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Douglas M. Hultquist City Holdings, Inc.
dated July 1, 1993 on Form SB-2, File
No. 33-67028
13.1 Quad City Holdings, Inc.
1996 Annual Report to
Stockholders is furnished
for the information of the
Commission and is not
deemed to be "filed" as a
part of this Form 10-KSB,
except for portions
incorporated by reference
herein.
22.1 Subsidiaries of Quad Exhibit 22.1 to the
City Holdings, Inc. Registration
Statement of Quad
City Holdings, Inc.
on Form SB-2, File
No. 33-67028
23.1 Consent of McGladrey
and Pullen X
27.1 Financial Data Schedule X
99.1 Quad City Holdings, Inc.
Proxy Statement for the
1996 Annual Meeting to
be held October 23, 1996 Xreport.
APPENDIX A
SUPERVISION AND REGULATION
Bank Holding Company Regulation
Banking is a highlyGeneral
Financial institutions and their holding companies are extensively
regulated industry. The following references to applicableunder federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions and
general economic conditions, but also by the requirements of applicable state
and federal statutes and regulations are brief summaries thereof which do
not purportand the policies of various governmental
regulatory authorities, including the Iowa Superintendent of Banking (the
"Superintendent"), the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the
Internal Revenue Service and state taxing authorities and the Securities and
Exchange Commission (the "SEC"). The effect of applicable statutes, regulations
and regulatory policies can be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to
be completefinancial institutions, such as the Company and are qualified inits subsidiaries, regulate,
among other things, the scope of business, investments, reserves against
deposits, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and its subsidiaries establishes a comprehensive framework for their entirety by reference to
such statutesrespective
operations and regulations. Supervision, regulation and examination of banks
and bank holding companies by bank regulatory agencies areis intended primarily for the protection of the FDIC's deposit
insurance funds and the depositors, rather than stockholdersthe shareholders, of financial
institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not describe
all of the statutes, regulations and regulatory policies that apply to the
Company and its subsidiaries, nor does it restate all of the requirements of the
statutes, regulations and regulatory policies that are described. As such, the
following is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
Recent Regulatory Developments
Pending Legislation. Legislation is pending in the Congress that would
allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and banks.
Asinsurance
activities. The expanded powers generally would be available to a bank holding
company only if the bank holding company and its bank subsidiaries remain
well-capitalized and well-managed. At this time, the Company is unable to
predict whether the proposed legislation will be enacted and, therefore, is
unable to predict the impact such legislation may have on the Company and the
Bank.
The Company
General. The Company, as the sole shareholder of the Bank, the Company is a bank
holding company. As a bank holding company, subject to the federal Bank Holding Company Act of 1956, as amended (the "Bank
Holding Company Act"),is registered with, and as such
is subject to supervision and regulation by, the Federal Reserve Board.under the Bank Holding Company
Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file an annual report with
the Federal Reserve Boardperiodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve Board may require pursuant torequire.
Investments and Activities. Under the Bank Holding Company Act. The Federal Reserve
Board may examineBHCA, a bank holding company and any of its subsidiaries and charge
the company for the cost of such examination.
Scope of Permissible Activities . The Bank Holding Company Act prohibits bank
holding companies, with certain limited exceptions, frommust
obtain Federal Reserve approval before: (i) acquiring, directly or retaining
direct or indirectindirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
voting shares of any company that is not a bank or a bank holding company, or from engaging
directly or indirectly in activitiesthe other than those of banking, managing or
controlling banks, or furnishing services to subsidiaries.
Capital Requirements . The Federal Reserve Board monitors the capital adequacy
of both banks and bank holding companies, using a combination of risk-based and
leverage capital ratios. These ratios are substantially the same as the ratios
which apply to banks. See "Supervision and Regulation -- Bank Regulation --
Capital Requirements." However, because they apply on a "bank only" (rather than
a consolidated) basis to any bank holding company having total assets of less
than $150 million, these standards do not presently apply to the Company on a
consolidated basis.
Acquisitions . The Bank Holding Company Act prohibits a bank holding company
from acquiring, in one or more transactions, direct or indirect ownership or
control of more than 5% of the voting shares of any bank or bank holding company without prior approval of(unless it already owns or
controls the Federal Reserve Board. The Attorney
General of the United States may, within 30 days after approval of an
acquisition by the Federal Reserve Board, bring an action challenging such
acquisition under the federal anti-trust laws, in which case the effectivenessmajority of such approval is stayed pending a final ruling by the courts.
Prior to September 29, 1995, the Bank Holding Company Act prohibited the Federal
Reserve Board from approving any direct or indirect acquisition by a bank
holding company of more than 5% of the voting shares, or ofshares); (ii) acquiring all or substantially all
of the assets of a bank located outside of the state in which the
operations of theanother bank; or (iii) merging or consolidating with another
bank holding company's banking subsidiaries are principally
located unlesscompany. Subject to certain conditions (including certain deposit
concentration limits established by the laws of the state in which the bank to be acquired is located
specifically authorized such an acquisition. Pursuant to amendments to the Bank
Holding Company Act which took effect September 29, 1995,BHCA), the Federal Reserve Board may now allow a
bank holding company to acquire banks located in any state of the United States
without regard to geographic restrictions or reciprocity
requirements imposedwhether the acquisition is prohibited by the law of the state
in which the target bank is located. In approving interstate acquisitions,
however, the Federal Reserve is required to give effect to applicable state law but subject to certain conditions, including
limitations on the aggregate amount of deposits that may be held by the
acquiring bank holding company and all of its insured depository institution affiliates.
Dividends .affiliates
in the state in which the target bank is located (provided that those limits do
not discriminate against out-of-state depository institutions or their holding
companies) and state laws which require that the target bank have been in
existence for a minimum period of time (not to exceed five years) before being
acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve Board policy provides thatto be "so closely related to banking ... as to be a proper
incident thereto." Under current regulations of the Federal Reserve, the Company
and its non-bank subsidiaries are permitted to engage in a variety of
banking-related businesses, including the operation of a thrift, sales and
consumer finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring
"control" of a bank or bank holding company without prior notice to the
appropriate federal bank regulator. "Control" is conclusively presumed to exist
upon the acquisition of 25% or more of the issued and outstanding shares of any
class of voting stock of a bank or bank holding company, although under certain
circumstances, a person or company may be found to have acquired control upon
the acquisition of 10% or more of the issued and outstanding shares of any class
of voting stock of a bank or bank holding company.
Capital Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, shouldamong other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%; at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships).
Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments which do not pay dividends unless (i) the dividends can be fully funded outqualify as Tier 1 capital and a portion of net
income from the
company's net earnings overallowance for loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
prior year and (ii) the
prospective rateparticular circumstances or risk profiles of earnings retention appears consistent with the company's
(and its subsidiaries') capital needs, asset quality and overall financial
condition. Further,individual banking organizations.
For example, the Federal Reserve BoardReserve's capital guidelines contemplate that
additional capital may prohibit a bank holding
company from payingbe required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any dividends ifbanking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the company's bank subsidiary is classified
as "undercapitalized" underminimum levels.
As of June 30, 1999, the Company had regulatory capital in excess of
the Federal Reserve Board's prompt corrective action
system. See "SupervisionReserve's minimum requirements, with a risk-based capital ratio of
13.8% and Regulation -- Bank Regulation -- Prompt Corrective
Action."
In addition, thea leverage ratio of 8.0%.
Dividends. The Delaware General Corporation Law restricts(the "DGCL") allows the
Company from
payingto pay dividends exceptonly out of its surplus (as defined and computed in
accordance with the provisions of the DGCL) or in the caseif the Company has no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Finally,Additionally, the Company'sFederal Reserve has
issued a policy statement with regard to the payment of cash dividends by bank
holding companies. The policy statement provides that a bank holding company
should not pay cash dividends which exceed its net income or which can only be
funded in ways that weaken the bank holding company's financial health, such as
by borrowing. The Federal Reserve also possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to pay
dividends is dependent onproscribe the amountpayment of
dividends paid by the Bank. See
"Supervisionbanks and Regulation -- Bank Regulation -- Dividends" for a discussion of
dividend payments by the Bank.
Imposition of Liability for Undercapitalized Subsidiaries.bank holding companies.
Federal law requires
bank regulators to take "prompt corrective action" to resolve problems
associated with undercapitalized insured depository institutions. In the event
an institution becomes "undercapitalized," it must submit a capital restoration
plan.Securities Regulation. The capital restoration plan will not be accepted by the regulators unless
each company "having control of" the undercapitalized institution "guarantees"
the subsidiary's complianceCompany's common stock is registered
with the capital restoration plan until it becomes
"adequately capitalized." For purposesSEC under the Securities Act of this statute,1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company
has control
of the Bank.
The aggregate liability of all companies controlling a particular institution is
limited to the lesser of 5% of the institution's assets at the time it became
"undercapitalized" or the amount necessary to bring the institution into
compliance with applicable capital standards as of the time the bank initially
fails to comply with its capital restoration plan. See "Supervision and
Regulation -- Bank Regulation -- Prompt Corrective Action." Federal law grants
greater powers to the bank regulators in situations where an institution becomes
"significantly" or "critically" undercapitalized or fails to submit a capital
restoration plan.
Bank holding companies are also subject to the "sourceinformation, proxy solicitation, insider trading and other
restrictions and requirements of strength doctrine"
adopted by the Federal Reserve Board.SEC under the Exchange Act.
The source of strength doctrine directs
bank holding companies to "serve as a source of financial and managerial
strength" to their subsidiary banks.
Bank
Regulation
General . AsGeneral. The Bank is an Iowa-chartered bank, the deposit accounts of
which are insured by the FDIC's Bank Insurance Fund ("BIF"). The Bank is subject to supervision and
examination by the Iowa Superintendent of Banking (the "Iowa Superintendent").
Asalso a
member of the Federal Reserve System the Bank is also subject to
supervision and examination by the Federal Reserve Board. The deposits of the
Bank are insured by the FDIC up to the maximum amount permitted by law, thereby
rendering the Bank subject to supervision and potential examination by the FDIC.
Pursuant to regulations adopted by the Iowa Superintendent, the Federal Reserve
Board and the FDIC,("member bank"). As an Iowa-chartered,
FDIC-insured member bank, the Bank is subject to extensive activity restrictionsthe examination, supervision,
reporting and supervisoryenforcement requirements and may be subject to enforcement action byof the Superintendent, as the chartering
authority for Iowa Superintendent,banks, the Federal Reserve, Board oras the primary federal regulator
of member banks, and the FDIC, for violating applicable
restrictions or supervisory requirements.
Federal and state law and regulations and the supervising policiesas administrator of the bank
regulatory agencies regulate various aspects of the banking business including,
among other things, permissible types and amounts of loans, investments and
other activities, capital adequacy, branching rights and restrictions and the
safety and soundness of banking practices.
Lending Limit . Under Iowa law, a state bank's lending limit is equal generally
to 15% of the bank's capital, surplus, undivided profits and reserves. As of
June 30, 1996, the Bank's capital surplus, undivided profits and reserves
totalled $11,500,000, resulting in a general lending limit of $1,725,000.
FDIC Insurance Premiums .BIF.
Deposit Insurance. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premium assessments to the FDIC. The amount each
institution pays for FDIC deposit insurance coverage is determined in accordance
withhas adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their levelrespective levels of capital and results of supervisory evaluation.evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Presently, BIF assessments ranged
from 0% of deposits to 0.27% of deposits. BIF-member institutions which qualify
for the 0% assessment category, however, still have to pay the $1000 minimum
semi-annual assessment required by federal statute. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the semiannual assessment periods ended December 31, 1998 and
June 30, 1999, BIF assessments ranged from 0% of deposits to 0.27% of deposits.
For the semi-annual assessment period beginning July 1, 1999, BIF assessment
rates continue to range from 0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any applicable
law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Bank.
FICO Assessments. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members
and BIF members became subject to assessments to cover the interest payments on
outstanding FICO obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO
assessments made against BIF members may not exceed 20% of the amount of the
FICO assessments made against SAIF members. Between January 1, 2000 and the
final maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. During the calendar year ended December 31, 1998, the FICO assessment
rate for SAIF members ranged between approximately 0.058% of deposits and
approximately 0.063% of deposits, while the FICO assessment rate for BIF members
ranged between approximately 0.012% of deposits and approximately 0.013% of
deposits. The FICO assessment rate for BIF members for the first and second
quarters of 1999 was approximately 0.012% of deposits. The FICO assessment rate
for SAIF members for the first and second quarters of 1999 was approximately
0.061% of deposits and 0.058% of deposits, respectively. During the fiscal year
ended June 30, 1999, the Bank paid FICO assessments totaling $24,114.
Capital Requirements .Requirements. The Federal Reserve Board has adoptedestablished the following
minimum capital standards for state-chartered Federal Reserve System member
banks, such as the Bank: a system usingleverage requirement consisting of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly-rated banks with a
minimum requirement of at least 4% for all others, and a risk-based capital
adequacy guidelines to evaluate the capital adequacyrequirement consisting of banks
and bank holding companies on a consolidated basis or, in the event total
consolidated bank holding company assets are less than $150 million, on a "bank
only" basis. Under the risk-based capital guidelines, different categories of
assets are assigned different risk weights, based generally on the perceived
credit risk of the asset. These risk weights are multiplied by corresponding
asset balances to determine a "risk-weighted" asset base. In addition, the
guidelines define the capital components. Total capital is defined as the sum of
"Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited to 100% of
"Tier 1." For bank holding companies and banks, "Tier 1" capital includes common
stockholders' equity, perpetual preferred stock (subject to certain conditions)
and minority interests in consolidated subsidiaries. "Tier 2" capital includes,
with certain limitations, certain forms of perpetual preferred stock that do not
qualify as Tier 1 Capital, as well as certain forms of maturing capital
instruments and the reserve for possible loan losses. The guidelines require a minimum ratio of total capital to total
risk-weighted assets of 8.0% (of which8%, at least halfone-half of which must be inTier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consist of substantially the formsame components as Tier 1 capital and total capital
under the Federal Reserve's capital guidelines for bank holding companies (see
"--The Company--Capital Requirements").
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of "Tier 1" capital elements).
In addition toindividual institutions. For example, the
risk-based capital requirements,regulations of the Federal Reserve Board
has adopted the useprovide that additional capital may be
required to take adequate account of, a leverage ratio as an additional tool to evaluate the
capital adequacy of banks and bank holding companies. The leverage ratio is
defined to be a company's "Tier 1" capital divided by its adjusted total assets.
The Bank will be subject to a 9.0% leverage ratio during its first three years
of operations as a condition of approval of its application for membership in
the Federal Reserve System.
Failure to meet applicable capital guidelines may result in institution by the
Federal Reserve Board of appropriate supervisory or enforcement actions,
including the issuance of a cease and desist order and/among other things, interest rate risk or
the assessmentrisks posed by concentrations of civil monetary penalties.credit, nontraditional activities or
securities trading activities.
During the fiscal year ended June 30, 1996,1999, the Bank was in compliance with all
applicable capital requirements.
On August 2, 1995, the Federal Reserve Board published amendments to its
risk-based capital standards, which are designed to take into account interest
rate risk exposure. The amendments provide that a bank's exposure to declines in
the economic value of its capital due to changes in interest rates will be among
the factors considerednot required
by the Federal Reserve Boardto increase its capital to an amount in evaluatingexcess of the
minimum regulatory requirement. As of June 30, 1999, the Bank exceeded its
minimum regulatory capital requirements with a bank's
capital adequacy. Management does not anticipate that this amendment will
adversely affect the Bank's ability to maintain compliance with applicable
capital requirements.
Prompt Corrective Action . Federal law requires the Federal Reserve Board to
implementleverage ratio of 7.2% and a system of prompt corrective action for depository institutions which
it regulates. Under the regulations adopted by the Federal Reserve Board, an
institution is deemed to be (i) "well capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or
more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject11.3%.
Federal law provides the federal banking regulators with broad power to
any Federal Reserve Board agreement, order or directive to meet and maintain a
specific capital level or capital measure; (ii) "adequately capitalized" if it
has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is
less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is
less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%.
In addition, federal law empowers the Federal Reserve Board to reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category if the institution
is in an unsafe or unsound condition or engaging in an unsafe or unsound
practice.
Thetake prompt corrective action regulations require a bank to file a written
capital restoration plan which meets specified requirements with the Federal
Reserve Board within 45 days of the date that the bank receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. The Federal Reserve Board
generally must provide the institution with written notice of approval or
disapproval within 60 days after receiving a capital restoration plan.
Immediately upon becoming undercapitalized, in addition to filing a capital
restoration plan, a bank will be (i) restricted in its ability to pay capital
distributions and management fees; (ii) subject to intensive supervision by the
Federal Reserve Board; (iii) subject to asset growth restrictions; and (iv)
required to obtain prior approval of certain expansion proposals. The Federal
Reserve Board may take a number of additional discretionary supervisory actions
if it determines that any of these actions is necessary to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a significantly undercapitalizedcapital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or critically undercapitalized bank atto be acquired; restricting transactions between the
least possible long-term costinstitution and its affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the deposit insurance fund, subject in certain
cases to specified procedures.
Duringpayment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
fiscal year endedinstitution. As of June 30, 1996,1999, the Bank qualifiedwas well capitalized, as a
"well-capitalized" institution under thedefined by
Federal Reserve Board's prompt
corrective action regulation.regulations.
Dividends. As a condition of the approval of its application to join the Federal
Reserve System, the Bank has agreed that it will not declare or pay any cash
dividends without prior Federal Reserve Board approval until the earlier of the
completion of three years of operations, or until the Bank has achieved two
consecutive "satisfactory" or better ratings after regulatory examinations. The Iowa Banking Act provides that an Iowa bank may not pay
dividends in an amount greater than its undivided profits. In addition,The Federal Reserve
Act also imposes limitations on the Bank,amount of dividends that may be paid by a
state member bank, such as the Bank. Generally, a member bank may pay dividends
out of its undivided profits, in such amounts and at such times as the bank's
board of directors deems prudent. Without prior Federal Reserve System, will be prohibited from payingapproval,
however, a state member bank may not pay dividends to the extent
such dividends declared in any calendar year which,
in the aggregate, exceed the total of itsbank's calendar year-to-date net profits
of that year combined with itsincome plus the
bank's retained net profitsincome for the two preceding calendar years.
The payment of dividends by any financial institution or its holding
company is affected by the preceding two years,
or are otherwise determinedrequirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be an "unsafe and unsound practice" byundercapitalized. As described above,
the Bank exceeded its minimum capital requirements under applicable guidelines
as of June 30, 1999. Notwithstanding the availability of funds for dividends,
however, the Federal Reserve Board. See also "Supervision and Regulation --may prohibit the payment of any dividends by the
Bank Regulation
- -- Prompt Corrective Action" which discussesif the Federal Reserve Board's
authoritydetermines such payment would constitute an unsafe
or unsound practice.
Insider Transactions. The Bank is subject to restrictcertain restrictions
imposed by federal law on extensions of credit to the abilityCompany and its
subsidiaries, on investments in the stock or other securities of the Company and
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
pay dividends ifits directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company, and to "related
interests" of such directors, officers and principal stockholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
stockholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have
adopted guidelines that establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In addition, in October 1998, the federal banking regulators issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
In general, the safety and soundness guidelines prescribe the goals to
be achieved in each area, and each institution is undercapitalized.responsible for establishing
its own procedures to achieve those goals. If an institution fails to comply
with any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority .Authority. Iowa law strictly regulates the establishment of
bank offices and thus may affect the Company's future plans to establish additional
offices of the Bank.offices. Under Iowa law, a state bank generally may not establish a bank
office outside the boundaries of the counties contiguous to or cornering upon
the county in which the principal place of business of the state bank is
located. The number of offices that a state bank may establish in a particular
municipality is also limited depending upon the municipality's population.
Effective June 1, 1997 (or earlier if expressly authorized by applicable state
law),Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") allows, both state and national banks are allowed to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novonew interstate branches
or the acquisition of individual branches of a bank in another state (rather
than the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The legislation
allowsallowed individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting appropriate legislation prior to June 1, 1997. Iowa has enacted
legislation permitting interstate bank mergers beginning on June 1, 1997, subject to
thecertain conditions, including a condition that anyprohibiting an Iowa bank to be acquired by an out-of-state institution havethat has been
in existence and continuous operation for at leastfewer than five years priorfrom merging
into an out-of-state bank. In 1997, the Company formed a de novo Illinois bank
that was merged into the Bank, resulting in the Bank establishing a branch
office in Illinois. Under Illinois law, the Bank may continue to establish
offices in Illinois to the merger.
Restrictions on Transactions With Affiliates same extent permitted for an Illinois bank (subject
to certain conditions, including certain regulatory notice requirements).
The Company
State Bank Activities. Under federal law and FDIC regulations, FDIC
insured state banks are prohibited, subject to certain exceptions, from making
or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a legal entity
separatemember. These restrictions have not had, and distinct fromare not
currently expected to have, a material impact on the Bank and any other subsidiaries. Federal law
restricts the abilityoperations of the BankBank.
Federal Reserve System. Federal Reserve regulations, as presently in
effect, require depository institutions to lendmaintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $46.5 million or
otherwise supply funds toless, the Company or any other subsidiaryreserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $46.5 million, the Company, by, among other things,
generally limiting such transactions with any one affiliate toreserve
requirement is $1.395 million plus 10% of the Bank's
capital and surplus and limiting all such transactions with all affiliates to
20% of the Bank's capital and surplus and requiring certain levels of collateral
for loans to affiliates. Such affiliate transactions also must be on terms and
conditions, including credit standards, that are consistent with safe and sound
banking practices and that are substantially the same or at least as favorable
to the Bank as those prevailing at the time for comparable transactions with
unaffiliated companies.
Additionally, the Bank is restricted in its ability to make loans to its (and
the Company's) officers, directors and principal stockholders. Among other
restrictions, the aggregate amount of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances are exempted from the Bank's loans to such insiders is
limited to the amount of its unimpaired capital and surplus. Insidersreserve requirements. These
reserve requirements are subject to enforcement actions for knowingly accepting loans in violation of
applicable restrictions.
Safety and Soundness Standards. The Federal Reserve Board has adopted guidelines
establishing operational and managerial standards to promote the safety and
soundness of the banks it regulates. The guidelines establish standards for
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings. In general, the
guidelines prescribe the goals to be achieved in each area, and each institution
will be responsible for establishing its own procedures to achieve those goals.
If an institution fails to comply with any of the standards set forth in the
guidelines, the Federal Reserve Board may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the Federal Reserve Board expect to require a compliance plan from
an institution whose failure to meet one or more of the standards is of such
severity that it could threaten the safe and sound operation of the institution.
Failure to submit an acceptable compliance plan, or failure to adhere to a
compliance plan that has been acceptedannual adjustment by the Federal Reserve Board, would
constitute grounds for further enforcement action.
Monetary Policy and Economic ConditionsReserve.
The earnings of bank holding companies and their subsidiary banks are affected
by general economic conditions and also byBank is in compliance with the fiscal and monetary policies of
federal regulatory agencies, including the Federal Reserve Board. Through open
market transactions, variations in the discount rate and the establishment of
reserve requirements, the Federal Reserve Board exerts considerable influence
over short and long term interest rates and thus the cost and availability of
funds obtainable for lending or investing. While the Bank could be severely
impacted by a significant increase in interest rates over a relatively short
period of time, the Bank intends to manage carefully its interest rate risk.
The above monetary and fiscal policies have affected the operating results of
all commercial banks in the past and are expected to do so in the future. The
Company cannot fully predict the nature or the extent of any effects which
fiscal or monetary policies may have on its or the Bank's business and earnings.foregoing requirements.
APPENDIX B
GUIDE 3 INFORMATION
The following tables and schedules show selected comparative financial
information required by the Securities and Exchange Commission Securities Act
Guide 3, regarding the business of the CompanyQuad City Holdings, Inc. ("the Company")
for the periods shown. All average amounts in these tables and schedules were
determined by using monthlymonth end data, which management believes provides a fair
representation of the daily operations of the Company.
I. Distribution of Assets, Liabilities and Stockholders' Equity
A.Equity;
Interest Rates and Interest Differential.
A and B. Consolidated Average Balance Sheets June 30, 1996 and 1995Analysis of Net Interest
Earnings
1996 1995
------------ ------------Years Ended June 30,
------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ------------------------------ ----------------------------
Interest Average Interest Average Interest Average
Average Earned Yield Or Average Earned Or Yield Or Average Earned Or Yield Or
Balance Or Paid Cost Balance Paid Cost Balance Paid Cost
-------- -------- -------- -------- --------- -------- ------- --------- --------
(Dollars in Thousands)
ASSETS
Cash and due from banks ....................................... $ 4,910,046 $ 2,824,241Interest earnings assets:
Federal funds sold ............................................ 6,867,750 7,794,250.................... $ 30,224 $ 1,492 4.94% $ 11,005 $ 646 5.87% $ 5,693 $ 286 5.02%
Certificates of deposit at
financial institutions ............ 11,814 696 5.89 7,173 441 6.15 5,649 375 6.64
Investment securities (1) ............. 5,453,878 1,992,132
Total securities .............................................. 31,201,706 19,565,815
Loans receivable .............................................. 44,749,454 23,451,527
Less: Allowance for estimated losses on loans ................. (685,151) (354,808)
------------ ------------41,468 2,286 5.51 31,457 1,906 6.06 34,574 2,139 6.19
Net loans receivable ..................................... 44,064,303 23,096,719
------------ ------------(2) .............. 182,130 15,642 8.59 139,860 12,084 8.64 80,033 6,906 8.63
------------------ ------------------- -------------------
Total Interest earning assets ..... 265,636 20,116 7.57 189,495 15,077 7.96 125,949 9,706 7.71
Noninterest-earning assets:
Cash and due from banks ............... $ 9,431 $ 9,595 $ 7,682
Premises and equipment net ................................... 2,634,978 1,743,021................ 7,536 6,527 5,114
Other assets .................................................. 1,839,122 705,858
------------ ------------................................. 5,157 3,756 3,053
-------- -------- --------
Total assets .......................................... $ 96,971,783 $ 57,722,036
============ ============........................ $287,760 $209,373 $141,798
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand ................................. $ 12,338,863 $ 5,262,609
Interest bearing liabilities:
Interest-bearing demand .................................... 27,172,011 12,892,724deposits ..... $ 75,530 2,559 3.39% $ 56,612 2,053 3.63% $ 41,184 1,381 3.35%
Savings .................................................... 1,515,687 797,101deposits ..................... 4,654 93 2.00 2,954 65 2.20 2,322 53 2.28
Time ....................................................... 40,511,816 24,385,175
------------ ------------
Total deposits ........................................... 81,538,377 43,337,609
------------ ------------
Federal funds purchased ....................................... 1,236,896 2,148,839........................ 113,752 6,358 5.59 83,790 4,853 5.79 52,511 2,925 5.57
Short-term borrowings ................ 5,414 258 4.77 166 9 5.42 517 28 5.42
Federal Home Loan Bank advances ............................... 1,248,101..... 25,393 1,539 6.06 20,220 1,234 6.10 7,718 484 6.27
COMR ................................. 1,000 63 6.30 0 0 0.00 0 0 0.00
Other borrowings .............................................. 83,333 0..................... 2,125 157 7.39 1,500 128 8.53 1,417 123 8.68
------------------ ------------------- -------------------
Total Interest bearing liabilities .. 227,868 11,027 4.84 165,242 8,342 5.05 105,669 4,994 4.73
Noninterest-bearing demand ............ 33,619 23,545 19,263
Other noninterest-bearing liabilities ............................................. 1,134,660 755,774
------------ ------------. 5,974 3,896 3,887
Total liabilities ..................................... 85,241,367 46,242,222
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock ............................................... -- --
Common stock .................................................. 1,437,824 1,437,824
Additional paid-in capital .................................... 11,764,416 11,764,416
Retained earnings (deficit) ................................... (1,534,097) (1,620,503)
------------ ------------
11,668,143 11,581,737
Unrealized gains (losses) on securities available for sale, net 62,273 (101,923)
------------ ------------
Total stockholders'................... 267,461 192,683 128,819
Stockholders' equity ............................ 11,730,416 11,479,814
------------ ------------.................. 20,299 16,690 12,979
-------- -------- --------
Total liabilities and
stockholders' equity .............. $287,760 $209,373 $141,798
======== ======== ========
Net interest income ................... $ 96,971,7839,089 $ 57,722,036
============ ============6,735 $ 4,712
======== ======== ========
Net interest spread ................... 2.73% 2.91% 2.98%
===== ===== =====
Net interest margin ................... 3.42% 3.55% 3.74%
===== ===== =====
Ratio of average interest
earning assets to average
interest-bearing
liabilities .............. 116.57% 114.68% 119.19%
======== ======== ========
Interest earned and yields on nontaxable investment securities are stated at
face rate.
Loan fees are not material and are included in interest income from loans
receivable.
I. Interest Rates and Interest Differential
B.Differential.
C. Analysis of NetChanges of Interest EarningsIncome/Interest Expense For the years ended
June 30, 19961999 and 19951998
Average Interest
Amount Income/ Average Yield/
Outstanding Expense CostComponents
Inc./(Dec.) of Funds
-------------------------------------------
1996
-------------------------------------------Change (1)
from ------------------
Prior Year Rate Volume
------------------------------
1999 vs. 1998
------------------------------
INTEREST EARNING ASSETS
Federal funds sold .............................................................................. $ 6,867,750846 $ 382,226 5.57%(118) $ 964
Certificates of deposit at financial institutions 5,453,878 359,409 6.59%................. 255 (19) 274
Total securities (1) ............................ 31,201,706 1,868,976 5.99%(2) .............................................. 380 (184) 564
Net loans receivable (3) ........................ 44,064,303 3,972,856 9.02%
----------- ----------- ------.......................................... 3,558 (73) 3,631
-----------------------------
Total interest earning assets ........... $87,587,637............................. $ 6,583,467 7.52%
=========== =========== ======5,039 $ (394) $ 5,433
-----------------------------
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits ................ $27,172,011.................................. $ 946,870 3.48%506 $ (143) $ 649
Savings deposits ................................ 1,515,687 39,365 2.60%.................................................. 28 (6) 34
Time deposits ................................... 40,511,816 2,363,313 5.83%
Federal funds purchased ......................... 1,236,896 64,909 5.25%..................................................... 1,505 (175) 1,680
Short-term borrowings ............................................. 249 (2) 251
Federal Home Loan Bank advances ................. 1,248,101 70,319 5.63%................................... 305 (9) 314
COMR .............................................................. 63 0 63
Other borrowings ................................ 83,333 1,604 1.92%
----------- ----------- ------.................................................. 29 (18) 47
-----------------------------
Total interest bearing liabilities ...... $71,767,844........................ 2,685 $ 3,486,380 4.86%
=========== =========== ======
Net interest margin .............................(353) $ 3,097,087 3.54%
=========== ======
1995
---------------------------------------3,038
-----------------------------
Total ............................................................. $ 2,354 $ (41) $ 2,395
=============================
1998 vs 1997
-----------------------------
INTEREST EARNING ASSETS
Federal funds sold .............................................................................. $ 7,794,250360 $ 423,292 5.43%55 $ 305
Certificates of deposit at financial institutions 1,992,132 100,123 5.03%
Total................. 66 (29) 95
Investment securities (2) ............................ 19,565,815 1,052,557 5.38%......................................... (233) (44) (189)
Net loans receivable (3) ........................ 23,096,719 1,974,150 8.55%
----------- ----------- ------.......................................... 5,178 9 5,169
-----------------------------
Total interest earning assets ........... $52,448,916............................. $ 3,550,122 6.77%
=========== =========== ======5,371 $ (9) $ 5,380
-----------------------------
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits ................ $12,892,724.................................. $ 435,493 3.38%672 $ 120 $ 552
Savings deposits ................................ 797,101 24,037 3.02%.................................................. 12 (2) 14
Time deposits ................................... 24,385,175 1,333,320 5.47%..................................................... 1,928 121 1,807
Federal funds purchased ......................... 2,148,839 102,725 4.78%
----------- ----------- ------
Total interest bearing liabilities ...... $40,223,839 $ 1,895,575 4.71%
=========== =========== ======
Net interest margin ............................. $ 1,654,547 3.15%
=========== =======
(1)Interest earned and yields on nontaxable investment securities are stated at
face rate.
(2)All such securities were subject to tax. The Company owned no non-taxable
securities at June 30, 1995.
(3)Loan fees are not material and are included in interest income from loans
receivable.
C. Analysis of Changes of Interest Income/Expense Items
June 30, 1996 and 1995
Inc./(Dec.) Components
From of Change(1)
Prior Year Rate Volume
----------- ----------- ----------
1996
----------------------------------------
INTEREST EARNING ASSETS
Federal funds sold .............................. $ (41,066) $ 10,284 $ (51,350)
Certificates of deposit at financial institutions 259,286 39,381 219,905
Total securities (2) ............................ 816,419 130,811 685,608
Net loans receivable (4) ........................ 1,998,706 113,859 1,884,847
----------- ----------- -----------
Total interest earning assets ........... $ 3,033,345 $ 294,335 $ 2,739,010
=========== =========== ===========
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits ................ $ 511,377 $ 14,207 $ 497,170
Savings deposits ................................ 15,328 (3,736) 19,064
Time deposits ................................... 1,029,993 94,645 935,348
Federal funds purchased ......................... (37,816) 9,242 (47,058)........................................... (19) 0 (19)
Federal Home Loan Bank advances ................. 70,319 0 70,319................................... 750 (13) 763
Other borrowings ................................ 1,604 0 1,604
----------- ----------- -----------.................................................. 5 (2) 7
-----------------------------
Total interest bearing liabilities .............................. $ 1,590,8053,348 $ 114,358224 $ 1,476,447
=========== =========== ===========
1995
-----------------------------------------
EARNING ASSETS
Federal funds sold ..............................3,124
-----------------------------
Total ............................................................. $ 332,3052,023 $ 117,524(233) $ 214,781
Certificates of deposit at financial institutions 75,307 19,064 56,243
Total securities (3) ............................ 644,302 85,206 559,096
Net loans receivable (4) ........................ 1,761,114 102,041 1,659,073
----------- ----------- -----------
Total interest earning assets ............ $ 2,813,028 $ 323,835 $ 2,489,193
=========== =========== ===========
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits ................ $ 368,483 $ 41,158 $ 327,325
Savings deposits ................................ 20,872 3,946 16,926
Time deposits ................................... 1,149,982 130,976 1,019,006
Federal funds purchased ......................... 102,725 0 102,725
----------- ----------- -----------
Total interest bearing liabilities ...... $ 1,642,062 $ 176,080 $ 1,465,982
=========== =========== ===========2,256
=============================
(1) The column "increase/decrease from prior year" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities are stated
at face rate.
(3) All such securities were subject to tax. The Company owned no non-taxable
securities at June 30, 1995.
(4) Loan fees are not material and are included in interest income from loans
receivable.
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
GAP ANALYSIS
JUNE 30, 1996
A methodology known as a "gap analysis" measures the difference between rate
sensitive assets and rate sensitive liabilities, which under the current
interest rate environment, management estimates will mature or reprice in the
same period.II. Investment Portfolio.
A. Investment Securities
The following table sets forth management's estimatepresents the amortized cost and fair value of the
projected maturities and/or repricing of the Company's assets and liabilities as
ofinvestment
securities held on June 30, 1996. In preparing the table, certificates of deposit have been
entered into the analysis based on contractual maturity. This table does not
necessarily indicate the impact of general interest rate movements on the
Company's net interest income because the repricing of certain assets1999, 1998 and liabilities is discretionary and is subject to competitive and other pressures.
As a result, assets and liabilities indicated as repricing within the same
period may in fact reprice at different times and at different rate levels.1997.
3 Months Over 3 Months Over 1 to
or Less to One Year 5 Years Over 5 Years Total
------------ ------------ ------------ ------------ ------------Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
INTEREST-EARNING ASSETS:
Commercial loans .................June 30, 1999
- -------------
Securities held to maturity:
Municipal securities .................... $ 22,995,471699,415 $ 1,988,678 $ 11,712,209 $ 3,642,287 $ 40,338,645
Real estate loans ................ 903,596 3,780,131 2,144,453 2,183,428 9,011,608
Installment & other consumer loans 1,931,627 926,460 4,416,294 185,086 7,459,467
Investment securities & other .... 5,827,016 4,386,909 27,842,826 4,817,983 42,874,734
------------ ------------ ------------ ------------ ------------
Total interest-earning
assets ......................... $ 31,657,710 $ 11,082,178 $ 46,115,782 $ 10,828,784 $ 99,684,454
INTEREST-BEARING LIABILITIES:
NOW accounts ..................... $ 9,724,7792,115 $ 0 $ 701,530
Other bonds ............................. 25,000 585 0 25,585
------------------------------------------------------
Totals .............................. $ 724,415 $ 2,700 $ 0 $ 9,724,779
Money market accounts ............ 19,882,850 0 0727,115
======================================================
Securities available for sale:
U.S. treasury securities ................ $ 9,001,845 $ 47,862 $ (4,866) $ 9,044,841
U.S. agency securities .................. 29,267,483 1,267 (390,870) 28,877,880
Mortgage-backed securities .............. 8,390,795 5,319 (183,867) 8,212,247
Municipal securities .................... 3,180,714 40,741 (12,139) 3,209,316
Other securities ........................ 1,605,314 102 (7,941) 1,597,475
------------------------------------------------------
Totals .............................. $51,446,151 $ 95,291 $ (599,683) $50,941,759
======================================================
June 30, 1998
- -------------
Securities held to maturity:
Mortgage-backed securities .............. $ 1,506,569 $ 0 $ 19,882,850
Savings .......................... 1,979,085(5,534) $ 1,501,035
Municipal securities .................... 848,740 1,704 (13,557) 836,887
Other bonds ............................. 25,000 776 0 25,776
------------------------------------------------------
Totals .............................. $ 2,380,309 $ 2,480 $ (19,091) $ 2,363,698
======================================================
Securities available for sale:
U.S. treasury securities ................ $17,007,239 $ 54,811 $ (3,867) $17,058,183
U.S. agency securities .................. 11,247,822 4,020 (31,050) 11,220,792
Mortgage-backed securities .............. 1,847,496 1,265 (346) 1,848,415
Municipal securities .................... 617,752 0 0(11,193) 606,559
Other securities ........................ 1,500,806 6,733 (3,243) 1,504,296
------------------------------------------------------
Totals .............................. $32,221,115 $ 1,979,085
Certificates ..................... 14,917,025 18,133,189 12,550,925 066,829 $ 45,601,139(49,699) $32,238,245
======================================================
June 30, 1997
- -------------
Securities held to maturity:
Mortgage-backed securities .............. $ 2,317,513 $ 673 $ (15,871) $ 2,302,315
Municipal securities .................... 596,616 1,581 (12,450) 585,747
------------------------------------------------------
Totals .............................. $ 2,914,129 $ 2,254 $ (28,321) $ 2,888,062
======================================================
Securities available for sale:
U.S. treasury securities ................ $14,496,366 $ 45,514 $ (20,226) $14,521,654
U.S. agency securities .................. 9,742,495 8,462 (120,306) 9,630,651
Mortgage-backed securities .............. 2,357,376 9,388 (6,526) 2,360,238
Other ............................ 1,190,000 0 1,000,000 3,411,470securities ........................ 2,390,033 8,971 (13,918) 2,385,086
------------------------------------------------------
Totals .............................. $28,986,270 $ 5,601,470
------------ ------------ ------------ ------------ ------------
Total Interest-Bearing
Liabilities ....................72,335 $ 47,693,739 $ 18,133,189 $ 13,550,925 $ 3,411,470 $ 82,789,323
============ ============ ============ ============ ============
Interest-Earning Assets Less
Interest-Bearing Liabilities ... ($16,036,029) ($ 7,051,011) $ 32,564,857 $ 7,417,314 $ 16,895,131
============ ============ ============ ============ ============
Cumulative Interest
Rate Sensitivity ............... ($16,036,029) ($23,087,040) $ 9,477,817 $ 16,895,131
============ ============ ============ ============ ============
Cumulative Interest Rate Gap
as a Percentage of Interest
Earning Assets ................. -16.09% -23.16% 9.51% 16.95%
============ ============ ============ ============
Cumulative Interest Rate
Sensitivity Ratio (1) .......... 0.66 0.65 1.12 1.20
============ ============ ============ ============
(1) Interest-earning assets divided by interest-bearing liabilities
(160,976) $28,897,629
======================================================
II. A. Investment Securities.
Total investments, by category, are disclosed in Footnote 2 to the
consolidated financial statements found on pages 18 and 19 of this
report.
B. Investment Securities Maturities and Yields.Yields
The following table presents the maturity of securities held on June 30, 1996,1999
and the weighted average rates by range of maturity:
Average
Amount Yield
------------------------
U.S. treasury securities:
Within 1 year ......................................................................... $ 2,003,468 5.24%3,998,831 5.79%
After 1 but within 5 years .......................... 12,500,981 6.03%
----------- ----..................... 5,003,014 5.61%
------------------------
Total .......................................... $14,504,449 5.92%
=========== ====..................................... $ 9,001,845 5.69%
========================
U.S. agency securities:
After 1 but within 5 years .......................... $10,363,049 6.25%..................... $22,221,657 5.52%
After 5 years ....................................... 2,249,117 6.11%
----------- ----
Total .......................................... $12,612,166 6.22%
=========== ====
Mortgage-backed securities:
Within 1 year ....................................... $ 1,429,231 6.15%
After 1 but within 510 years .......................... 3,982,902 6.46%
----------- ----.................... 6,045,826 6.02%
After 10 years ................................. 1,000,000 7.28%
------------------------
Total .......................................... $ 5,412,133 6.38%
=========== ====
Municipal..................................... $29,267,483 5.69%
========================
Mortgage-backed securities:
After 1 but within 5 years ............................................... $ 349,603 7.01%1,531,176 6.18%
After 5 but within 10 years ....................................... 246,205 6.17%
----------- ----.................... 2,512,532 5.87%
After 10 years ................................. 4,347,087 5.93%
------------------------
Total ............................................................................... $ 595,808 6.66%
=========== ====8,390,795 5.96%
========================
Municipal securities:
Within 1 year ................................... $ 200,000 7.45%
After 1 but within 5 years ..................... 468,327 6.08%
After 5 but within 10 years .................... 1,397,637 6.26%
After 10 years ................................. 1,814,165 7.43%
------------------------
Total ..................................... $ 3,880,129 6.85%
========================
Other bonds:
After 1 but within 5 years ..................... $ 25,000 6.30%
========================
Other securities with no maturity or stated
face rate ............................................. $ 1,550,1661,605,314
===========
The Company does not utilizeuse any financial instruments referred to as derivatives to
manage interest rate risk.
C. Investment Concentrations.Concentrations
As of June 30, 1996,1999, there existed no security in the investment portfolio above
(other than U.S. Government and U.S. Government agencies) that exceeded 10% of
stockholdersstockholders' equity at that date.
III. Loan Portfolio.
A. Types of Loans.
Total loans, by category, are disclosed in Footnote 3 toLoans
The composition of the consolidated financial statements found on pages 19loan portfolio at June 30, 1999, 1998, 1997, 1996 and
20 of this
report.1995 is presented as follows:
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
Commercial ......................... $ 136,206,893 $ 99,097,297 $ 68,634,556 $ 40,338,645 $ 24,748,659
Real estate ........................ 30,959,344 31,145,517 20,293,440 9,011,608 2,879,530
Installment and other
consumer ........................ 30,810,455 32,732,322 19,437,433 7,459,467 3,879,388
---------------------------------------------------------------------------------
Total loans ................... 197,976,692 162,975,136 108,365,429 56,809,720 31,507,577
Less allowance for
estimated losses on loans ....... (2,895,457) (2,349,838) (1,632,500) (472,475) (852,500)
---------------------------------------------------------------------------------
Net loans ..................... $ 195,081,235 $ 160,625,298 $ 106,732,929 $ 55,957,220 $ 31,035,102
=================================================================================
B. Loan Maturities and Sensitivities of Loans to Changes in Interest Rates.Rates
The following table presents consolidated loan maturities by yearly ranges. Also
included for loans after one year are the amounts whichthat have predetermined
interest rates and floating or adjustable rates.
As of June 30, 1996
Maturities After One Year
--------------------------------------------------------------
At June 30, 1999 Due within Afterin one but Pre-determinedDue after one Due after Predetermined Adjustable
one year withinor less through 5 years After 5 years Interest Rates Interest Rates
------------ -------------- ------------- -------------- --------------interest rates interest rates
--------------------------------------------------------------------------
Commercial ................................... $ 9,952,89948,049,184 $ 24,502,82960,083,833 $ 5,882,91728,073,876 $ 14,519,49776,401,243 $ 15,866,24911,756,466
Real estate ............. 1,425,533 1,058,731 6,527,344 3,242,159 4,343,916.................... 4,712,528 1,996,153 24,250,663 9,289,902 16,956,914
Installment and
other consumer ............. 2,152,851 5,074,066 232,550 4,590,463 716,153
------------ ------------- ------------ ------------- -------------.............. 5,404,120 23,584,309 1,822,026 23,168,321 2,238,014
-------------------------------------------------------------------------
Totals .................... $ 13,531,28358,165,832 $ 30,635,62685,664,295 $ 12,642,81154,146,565 $108,859,466 $ 22,352,119 $ 20,926,318
============ ============= ============ ============= =============30,951,394
=========================================================================
C. Risk Elements.Elements
1. Nonaccrual, past duePast Due and renegotiated loans.
1996 1995
-------- --------
Loans accounted for on nonaccrual basis .......... $ 0 $ 0
Accruing loans past due 90 days or more .......... 306,774 1,678
Troubled debt restructurings 0 0
-------- --------
Total ....................................... $306,774 $ 1,678
======== ========Renegotiated Loans.
1999 1998 1997 1996 1995
--------------------------------------------------------------
Loans accounted for on
nonaccrual basis .. $1,287,727 $1,025,761 $ 230,591 $ 0 $ 0
Accruing loans past due
90 days or more .... 238,046 259,277 223,966 306,774 1,678
Other real estate owned 119,600 0 0 0 0
Troubled debt
restructurings 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total ............ $1,645,373 $1,285,038 $ 454,557 $ 306,774 $ 1,678
========== ========== ========== ========== ==========
The policy of the Company is to place a loan on nonaccrual status if: (a)
payment in full of interest or principal is not expected, or (b) principal or
interest has been in default for a period of 90 days or more unless the
obligation is both in the process of collection and well secured. Well secured
is defined as collateral with sufficient market value to repay principal and all
accrued interest. A debt is in the process of collection if collection of the
debt is proceeding in due course either through legal action, including judgment
enforcement procedures, or in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in its restoration to current status.
2.Potential2. Potential Problem Loans. To management smanagement's best knowledge, there are no such
significant loans that have not been disclosed in the above table.
3. Foreign Outstandings. None
4. Loan Concentrations. No individual real estate property or
mortgage amountsLoan concentrations are disclosed in the Notes to
10% or more of consolidated assets.Consolidated Financial Statements in Note 4 on page 31.
D. Other Interest Earning Assets.Bearing Assets
There are no interest bearing assets required to be disclosed here.
IV. Summary of Loan Loss Experience.
A. Analysis of the Allowance for Estimated Losses on Loans
The following table summarizes activity in the allowance for estimated
losses on loans of the Company for the fiscal years ending June 30, 1999,
1998, 1997, 1996 and June 30, 1995:
1996 1995
------------ ------------
Average amount of loans outstanding, before
allowance for estimated losses on loans .....
1999 1998 1997 1996 1995
------------------------------------------------------------------------
Average amount of loans outstanding,
before allowance for estimated
losses on loans ........................... $184,756,698 $141,974,417 $ 81,251,090 $ 44,749,454 $ 23,451,527
Allowance for estimated losses on loans:
Balance, beginning of fiscal year ............ $ 2,349,838 $ 1,632,500 $ 852,500 $ 472,475 $ 191,500
Charge-offs:
Commercial .............................. (104,596) (62,763) (26,141) (117,555) 0
Real estate ............................ (25,142) 0 0 0 0
Installment and other
consumer ............................ (348,777) (142,471) (38,772) (2,817) (1,725)
------------------------------------------------------------------------
Subtotal charge-offs .................... (478,515) (205,234) (64,913) (120,372) (1,725)
------------------------------------------------------------------------
Recoveries:
Commercial .............................. 53,314 13,146 266 0 0
Real estate ............................ 0 0 0 0 0
Installment and other consumer ......... 79,020 7,450 256 0 100
------------------------------------------------------------------------
Subtotal recoveries ..................... 132,334 20,596 522 0 100
------------------------------------------------------------------------
Net charge-offs ......................... (346,181) (184,638) (64,391) (120,372) (1,625)
Provision charged to expense ................. 891,800 901,976 844,391 500,397 282,600
------------------------------------------------------------------------
Balance, end of fiscal year .................. $ 2,895,457 $ 2,349,838 $ 1,632,500 $ 852,500 $ 472,475
========================================================================
Ratio of net charge-offs to
average loans outstanding ................. 0.19% 0.13% 0.08% 0.27% 0.01%
B. Allocation of the Allowance for estimated lossesEstimated Losses on loans:
Balance, beginning of fiscal year ........... $ 472,475 $ 191,500
Loans charged off:
Commercial ............................. (117,555) 0
Real estate ............................ 0 0
Installment and other consumer ......... (2,817) (1,725)
Loan recoveries:
Commercial ............................. 0 0
Real estate ............................ 0 0
Installment and other consumer
0 100
------------ ------------
Net charge-offs ............................. (120,372) (1,625)
Provision charged to expense ................ 500,397 282,600
Balance, end of fiscal year ................. $ 852,500 $ 472,475
============ ============
Ratio of net charge-offs to average loans
outstanding ................................. 0.27% 0.01%
The following table presents the allowance for estimated losses on loans by type
of loans and the percentage of loans in each category to total loansloans:
1996 1995
---------------------- ----------------------
% of%
Of Loans Of Loans
to % of LoansTotal to Total
Amount Total Loans Amount Total Loans
-------- ------------- ------- --------------------------------- ---------------------
1999 1998
-------------------- ---------------------
Commercial ............................. $2,164,668 68.80% $1,213,439 60.81%
Real estate ............................ 102,693 15.64% 79,198 19.11%
Installment and industrial ..........................other .................. 578,937 15.56% 515,489 20.08%
consumer
Unallocated ............................ 49,159 N/A 541,712 N/A
-------------------- ---------------------
Total ............................. $2,895,457 100.00% $2,349,838 100.00%
==================== =====================
1997 1996
-------------------- --------------------
Commercial ............................. $ 799,566 63.34% $ 0 71.01%
Real estate ............................ 66,742 18.73% 0 15.86%
Installment and other .................. 387,096 17.93% 0 13.13%
consumer
Unallocated ............................ 379,096 N/A 852,500 N/A
-------------------- ---------------------
Total ............................. $1,632,500 100.00% $ 852,500 100.00%
==================== =====================
1995
--------------------
Commercial ............................. $ 0 78.55%
Real estate ........................................ 0 15.86%............................ 0 9.14%
Consumer ........................................... 0 13.13%Installment and other .................. 0 12.31%
consumer
Unallocated ........................................ 852,500 N/A............................ 472,475 N/A
- ---------------------------------------------------- -------- -------- -------- ----------------------------
Total ......................................... $852,500............................. $ 472,475 100.00%
$472,475 100.00%
======== ======== ======== ============================
V. DepositsDeposits.
The average amount of and average rate paid for the categories of deposits for
the fiscal years 19961999, 1998 and 19951997 are disclosed in the consolidated average balance
sheets and can be found on page 32 of Appendix B.
Included in interest bearing deposits at June 30, 1999, 1998 and 1997 were
certificates of deposit totaling $37,103,749, $31,937,377 and $22,978,123,
respectively, that were $100,000 or greater. Maturities of these certificates
were as follows:
1999 1998 1997
-------------------------------------
One to three months ..................... $13,313,388 $ 8,633,273 $10,745,903
Three to six months ..................... 6,339,507 9,647,980 4,324,058
Six to twelve months .................... 9,901,595 10,997,407 4,131,882
Over twelve months ...................... 7,549,259 2,658,717 3,776,280
------------------------------------
Total time deposits in amountscertificates of
deposit greater than $100,000 at June 30, 1996 by
maturity are disclosed in Footnote 5 to the consolidated financial statements
found on page 21 of this report..... $37,103,749 $31,937,377 $22,978,123
=====================================
VI. Return on Equity and AssetsAssets.
The following table presents the return on assets and equity and the equity to
assets ratio of the Company for the years ended June 30, 19961999, 1998 and 1995.
1996 1995
-------------- --------------1997.
1999 1998 1997
--------------------------------------------
Average total assets .................. $ 96,971,783 $ 57,722,036... $287,760,434 $209,373,383 $141,797,885
Average equity ................................. $ 11,730,41620,299,371 $ 11,479,81416,690,420 $ 12,978,982
Net income (loss) .................................. $ 682,5882,464,821 $ (373,782)
Net income (loss) per share ...........2,393,272 $ .47 $ (0.26)1,219,336
Return on average assets .............. 0.70% (0.65%).86% 1.14% 0.86%
Return on average equity .............. 5.82% (3.26%)12.14% 14.34% 9.39%
Average equity to assets
ratio ........ 12.10% 19.89%................ 7.05% 7.97% 9.15%
VII. Short Term Borrowings
No disclosureBorrowings.
The information requested is required asdisclosed in the average balanceNotes to Consolidated Financial
Statements in Note 7 on page 33.
SIGNATURES
Pursuant to the requirements of short term borrowings duringSection 13 or 15(d) of the period was less than 30%Securities Exchange
Act of stockholders equity at June 30, 19961934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUAD CITY HOLDINGS, INC.
Dated: September 14, 1999 By: /s/ Douglas M. Hultquist
---------------------------------------
Douglas M. Hultquist
President and 1995.Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Michael A. Bauer Chairman of the Board of Directors September 14, 1999
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive September 14, 1999
Douglas M. Hultquist and Financial Officer and Director
/s/ Richard R. Horst Director and Secretary September 14, 1999
Richard R. Horst
/s/ James J. Brownson Director September 14, 1999
James J. Brownson
/s/ Ronald G. Peterson Director September 14, 1999
Ronald G. Peterson
/s/ John W. Schricker Director September 14, 1999
John W. Schricker
/s/ Robert A. Van Vooren Director September 14, 1999
Robert A. Van Vooren
INDEX TO EXHIBITS
Incorporated
Herein by in Filed Sequential
Exhibit No. Description Reference To Herewith Page No.
- ---------------------------------------------------------------------------------------------
3.1 Certificate of Exhibit 3.1 to the
Incorporation of Quad Registration
City Holdings, Inc., as Statement of Quad
amended City Holdings, Inc.
on Form SB-2, File
No. 33-67028
3.2 Bylaws of Quad City Exhibit 3.2 to the
Holdings, Inc. Registration
Statement of Quad
City Holdings, Inc.
on Form SB-2, File
No. 33-67028
4.1 Specimen Stock Exhibit 4.1 to the
Certificate of Quad Registration
City Holdings, Inc.(See Statement of Quad
also Articles VIII, XII City Holdings, Inc.
and XIII of Exhibit 3.1 on Form SB-2, File
and Articles II, VI, IX No. 33-67028
and XII of Exhibit 3.2)
10.1 Quad City Holdings, Exhibit 10.1 to the
Inc. Stock Option Plan Registration
Statement of Quad
City Holdings, Inc.
on Form SB-2, File
No. 33-67028
10.2 Form of Stock Option Exhibit 10.2 to the
Agreement between Registration
Quad City Holdings, Inc. Statement of Quad
and each of Michael A. City Holdings, Inc.
Bauer, Douglas M. on Form SB-2, File
Hultquist and Victor J. No. 33-67028
Quinn
10.3 Employment Agreement Exhibit 10.3 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Michael A. Bauer dated City Holdings, Inc.
May 4, 1993 on Form SB-2, File
No. 33-67028
10.4 Employment Agreement Exhibit 10.4 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Michael A. Bauer dated City Holdings, Inc.
July 1, 1993 on Form SB-2, File
No. 33-67028
10.5 Employment Agreement Exhibit 10.5 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Douglas M. Hultquist City Holdings, Inc.
dated April 30, 1993 on Form SB-2, File
No. 33-67028
10.6 Employment Agreement Exhibit 10.6 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Douglas M. Hultquist City Holdings, Inc.
dated July 1, 1993 on Form SB-2, File
No. 33-67028
Incorporated
Herein by in Filed Sequential
Exhibit No. Description Reference To Herewith Page No.
- ---------------------------------------------------------------------------------------------
10.7 Development Agreement Exhibit 10.7 to the
between Quad City Registration
Holdings, Inc. and Statement of Quad
Kaizen, Inc. City Holdings, Inc.
on Form SB-2, File
No. 33-67028
10.8 Lease/Option Exhibit 10.8 to the
Agreement between Registration
Quad City Holdings, Inc. Statement of Quad
and Kaizen, Inc. City Holdings, Inc.
on Form SB-2, File
No. 33-67028
12.1 Statement re: Computation
of Ratios X 53
21.1 Subsidiaries of Quad
City Holdings, Inc. X 54
23.1 Consent of McGladrey
and Pullen X 55
27 Financial Data Schedule X