10-K 1 0001.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000 Commission file number: 0-22208 QUAD CITY HOLDINGS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 42-1397595 ------------------------ ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 3551 Seventh Street, Suite 204, Moline, Illinois 61265 ------------------------------------------------------ (Address of principal executive offices) (309) 736-3580 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: None. Securities registered pursuant to Section 12(g) of the Exchange Act: -------------------------------------------------------------------- Common Stock, $1 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] The aggregate market value of the voting common stock held by non-affiliates as of August 22, 2000 was approximately $29,500,000. As of August 22, 2000, the issuer had 2,274,070 shares of Common Stock outstanding. Documents incorporated by reference: ---------------------------------------------------------- Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be held in 2000. Part I Item 1. Business Quad City Holdings, Inc. ("Quad City") was formed in February 1993 under the laws of the state of Delaware for the purpose of becoming the bank holding company of Quad City Bank and Trust Company (the "Bank"). The Bank was capitalized on October 13, 1993 and commenced operations on January 7, 1994. The Bank is organized as an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank provides full service commercial and consumer banking, and trust and asset management services in the Quad City area through its three offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. A fourth full service location is scheduled to open in Davenport in November 2000. Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a Delaware corporation that provides merchant credit card processing services. This operation had previously been a division of the Bank since July 1994. Currently, approximately 10,000 merchants process transactions with Bancard. On March 29, 1999, Bancard formed its own independent sales organization ("ISO") subsidiary, Allied Merchant Services, Inc. ("Allied"), which generates credit card processing business. Bancard owns 100% of Allied. Quad City Holdings Capital Trust I ("Capital Trust") was formed in April 1999 and capitalized in June 1999 in connection with the public offering of $12 million of 9.2% trust preferred capital securities due June 30, 2029. Quad City owns 100% of the Bank and Bancard and 100% of the common securities of Capital Trust, and in addition to such ownership invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with the Bank. Quad City operates in a highly competitive environment in the Quad Cities area. Competitors include not only other commercial banks, credit unions, savings banks, savings and loan institutions and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as Quad City. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. These competitive trends are likely to continue. Additionally, Quad City competes in a market with a number of much larger financial institutions with substantially greater resources and larger lending limits. The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") regulates Quad City and its subsidiaries. In addition, the Bank is regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC"). Quad City's principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The deposits of the Bank are insured to the maximum amount allowable by the FDIC. Quad City's results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits and borrowings. Its operating results are affected by merchant credit card fees, trust fees, deposit service charge fees, fees from the sales of residential real estate loans and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses and other administrative expenses. Quad City's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The commercial banking business is a highly regulated business. See Appendix A for a brief summary regarding federal and state statutes and regulations, which are applicable to Quad City and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks. Quad City, the Bank, Bancard and Allied have a June 30th fiscal year end and collectively employ 157 individuals. No one customer accounts for more than 10% of revenues, loans or deposits. See Appendix B for tables and schedules that show selected comparative statistical information required pursuant to the industry guides promulgated under the Securities Act of 1933 and 1934, relating to the business of Quad City. Item 2. Property The main office of the Bank is in a 6,700 square foot facility, which was completed in January 1994. In March 1994, the Bank acquired that facility, which is located at 2118 Middle Road in Bettendorf. Construction of a second full service banking facility was completed in July 1996 to provide for the convenience of customers and to expand its market territory. The Bank also owns its portion of that facility which is located at 4500 Brady Street in Davenport. The two-story building is in two segments that are separated by an atrium. The Bank owns the south half of the building, while the northern portion is owned by the developer. Each floor is 6,000 square feet. The Bank occupies its first floor and utilizes the basement for operational functions, item processing and storage. The entire second floor has been leased to two professional services firms; however, in the second fiscal quarter of 2001, approximately 4,500 square feet will become available. In addition, the residential real estate department of the Bank leases approximately 2,500 square feet on the first floor in the north half of the building. Renovation of a third full service banking facility was completed in February 1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near the intersection of 7th Street and John Deere Road in Moline near the Rock Island/Moline border. The building is owned by a third party limited liability company and the Bank and Bancard are its major tenants. Quad City has purchased a 20% interest in the company that owns the building. Bancard relocated its operations to the lower level of the 30,000 square foot building in late 1997. The Bank began its operations and Quad City relocated its corporate headquarters to the first floor of the building in February 1998. In May 2000, Quad City relocated its corporate headquarters to the second floor and occupies approximately 2,000 square feet. The business office of a medical clinic is sub-leasing approximately 3,500 square feet on the first floor. In March 1999, the Bank acquired a 3,000 square foot office building adjacent to the Davenport. The office space is utilized for various operational and administrative functions. Construction of a fourth full service banking facility began in early summer of 2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City will lease approximately 6,000 square feet on the first floor and 2,200 square feet on the lower level of the 24,000 square foot facility. The office is expected to open in November 2000. Management is of the opinion that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of Quad City. The Bank intends to limit its investment in premises to no more than 50% of Bank capital. The Bank frequently invests in commercial real estate mortgages. The Bank also invests in residential mortgages. The Bank has established lending policies which include a number of underwriting factors to be considered in making a loan including, location, loan to value ratio, cash flow, interest rate and credit worthiness of the borrower. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. Item 3. Legal Proceedings Bancard is the holder of an account receivable in the approximate amount of $1,500,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova Corporation (trading symbol NIS on the New York Stock Exchange.) This receivable arises pursuant to Bancard's provision of electronic credit card sales authorization and settlement services to PMT pursuant to a written contract that includes PMT's obligation to indemnify Bancard for credit card chargeback losses arising from those services. PMT has failed to timely pay Bancard for monthly invoices, including service charges and substantial chargeback losses, for the period of May, 2000 through September, 2000. Bancard intends to vigorously pursue collection of this receivable. On September 25, 2000, PMT filed a lawsuit in federal court in Los Angeles, California, against Bancard and Quad City. This lawsuit alleges tortious acts and breaches of contract by Bancard, Quad City and others and seeks recovery from Bancard and Quad City of not less than $3,600,000 of alleged actual damages, plus punitive damages. Bancard and Quad City first received a copy of the complaint on September 27, 2000 and, accordingly, have not had an opportunity to fully evaluate the allegations contained in the complaint. However, based on a preliminary evaluation of the complaint, Bancard and Quad City believe the allegations to be without merit and intend to vigorously defend the suit. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the stockholders of Quad City for a vote during the fourth quarter of the fiscal year ended June 30, 2000. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The common stock, par value $1.00 per share ("Common Stock") of Quad City is traded on The Nasdaq SmallCap Market under the symbol "QCHI". The stock began trading on October 6, 1993. As of June 30, 2000, there were 2,283,920 shares of Common Stock outstanding held by approximately 2,500 holders of record. The following table sets forth the high and low sales prices of the Common Stock, as reported by The Nasdaq SmallCap Market, for the periods indicated No cash dividends were declared during the periods indicated. Fiscal 2000 Fiscal 1999 sales price sales price ------------------- ------------------- High Low High Low ----------------------------------------- First quarter .......... $ 20.000 $ 16.500 $ 21.750 $ 18.000 Second quarter ......... 17.500 13.500 25.500 17.333 Third quarter .......... 15.250 10.250 23.500 19.125 Fourth quarter ......... 17.000 11.125 20.500 16.125 Quad City expects that all earnings will be retained to finance the growth of Quad City, the Bank and Bancard, and that no cash dividends will be paid in the near future. If and when dividends are declared, Quad City will likely be largely dependent upon dividends from the Bank and Bancard for funds to pay dividends on the common stock. Under Iowa law, the Bank will be restricted as to the maximum amount of dividends it may pay on its common stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. The Bank is a member of the Federal Reserve System. The total of all dividends declared by the Bank in a calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, the Federal Reserve Board, the Iowa Superintendent and the FDIC are authorized under certain circumstances to prohibit the payment of dividends by the Bank. In the case of Quad City, further restrictions on dividends may be imposed by the Federal Reserve Board. Item 6. Selected Financial Data The "Selected Consolidated Financial Data" of Quad City set forth below is derived in part from, and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto. See Item 8 "Financial Statements and Supplementary Data." Results for past periods are not necessarily indicative of results to be expected for any future period. SELECTED CONSOLIDATED FINANCIAL DATA Years Ended June 30, ---------------------------------------------------- 2000 1999 1998 1997 1996 ----------------------------------------------------- (Dollars in thousands) Statement of Income Data: Interest income ....................... $ 24,079 $ 20,116 $ 15,077 $ 9,706 $ 6,529 Interest expense ...................... 13,289 11,027 8,342 4,994 3,486 Net interest income ................... 10,790 9,089 6,735 4,712 3,043 Provision for loan losses ............. 1,052 892 902 844 500 Noninterest income (1) ................ 6,154 5,561 6,148 2,807 1,716 Noninterest expenses .................. 11,467 9,679 7,910 5,291 3,576 Pre-tax net income .................... 4,425 4,079 4,071 1,384 683 Income tax expense .................... 1,680 1,614 1,678 165 -- Net income ............................ 2,745 2,465 2,393 1,219 683 Balance Sheet: Total assets .......................... $367,622 $321,346 $250,151 $168,379 $111,475 Securities ............................ 56,129 50,258 33,276 29,589 32,831 Loans ................................. 241,853 197,977 162,975 108,365 56,810 Allowance for estimated losses on loans 3,617 2,895 2,350 1,633 853 Deposits .............................. 288,067 247,966 197,384 135,960 92,918 Stockholders' equity: Common ........................... 20,071 18,473 16,602 13,613 11,669 Preferred ........................ -- -- 2,500 1,000 -- Key Ratios: Return on average assets .............. 0.82 % 0.86 % 1.14 % 0.86 % 0.70 % Return on average common equity ....... 14.17 13.69 16.40 9.85 5.82 Net interest margin ................... 3.53 3.42 3.55 3.74 3.47 Efficiency ratio (2) .................. 67.68 66.07 61.40 70.37 75.14 Nonperforming assets to total assets .. 0.20 0.51 0.51 0.27 0.28 Allowance for estimated losses on loans to total loans ...................... 1.50 1.46 1.44 1.51 1.50 Net charge-offs to average loans ...... 0.16 0.26 0.13 0.08 0.27 Average common stockholders' equity to average assets ................... 5.77 6.26 6.97 8.73 12.10 Average stockholders' equity to average assets ................... 5.77 7.05 7.97 9.15 12.10 Earnings to fixed charges (3) Excluding interest on deposits .... 2.29 x 2.81 x 3.78 x 3.17 x 5.71 x Including interest on deposits .... 1.33 1.36 1.48 1.28 1.20 (1) Year ended June 30, 1998 noninterest income includes a pre-tax gain of $2,168 from Bancard's restructuring of an agreement with an independent sales organization (ISO). Year ended June 30, 1999 noninterest income includes amortization of $732 from Bancard's restructuring of an ISO agreement. (2) Noninterest expenses divided by the sum of net interest income before provision for loan losses and noninterest income. (3) Dividends were not payable on Quad City's Series A Preferred Stock, and all of the outstanding balance was redeemed in June 1999.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion provides additional information regarding our operations for the fiscal years ended June 30, 2000, 1999 and 1998, and financial condition for the fiscal years ended June 30, 2000 and 1999. This discussion should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document. Overview Quad City was formed in February 1993 for the purpose of organizing the Bank. The Bank opened in January 1994 with $4.5 million in assets and grew to $367.6 million as of June 30, 2000. Management expects continued opportunities for growth, even though the rate of growth will probably be slower than that experienced to date. Quad City reported earnings of $2.7 million or $1.19 basic earnings per share for fiscal 2000 as compared to $2.5 million and $1.08 per share for fiscal 1999 and $2.4 million and $1.09 per share for fiscal 1998. The improvement in fiscal 2000 from fiscal 1999 was attributable to increased net interest income and increased volumes of business for the Bank, reduced by an increase in noninterest expenses. The improvement in fiscal 1999 from fiscal 1998 was attributable to increased net interest income and increased volumes of business for the Bank, reduced by a decrease in noninterest income. The decrease in noninterest income was primarily due to the one time gain in fiscal 1998 resulting from the restructuring of Bancard's merchant broker agreement. Quad City's results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits and borrowings. Quad City's operating results are also affected by sources of noninterest income, including merchant credit card fees, trust fees, deposit service charge fees, fees from the sales of residential real estate loans and other income. Operating expenses of Quad City include employee compensation and benefits, occupancy and equipment expense and other administrative expenses. Quad City's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The majority of the Bank's loan portfolio is invested in commercial loans. Deposits from commercial customers represent a significant funding source as well. The Bank has added facilities and employees to accommodate both its historical growth and anticipated future growth. As such, overhead expenses have had a significant impact on earnings. This trend is likely to continue as the Bank's newest Davenport location is expected to open in November 2000. However, the primary challenge for the Bank currently, from a profitability standpoint, is to increase its net interest margin. Large commercial depositors and certificate of deposit customers create a relatively high cost of funds and this fact, along with a very competitive loan rate environment, have resulted in the Bank's interest margin being below its national peer group. Management is addressing this issue with alternative funding sources and pricing strategies. During 1994, the Bank began to develop internally a merchant credit card processing operation and in 1995 transferred this function to Bancard, a separate subsidiary of Quad City. Bancard initially had an arrangement to provide processing services exclusively to clients of a single ISO. This ISO was sold in 1998, and the purchaser requested a reduction in the term of the contract. Bancard agreed to amend the contract to reduce the term and accept a fixed monthly processing fee of $25,000 for merchants existing at the time the agreement was signed and a lower transaction fee for new merchants in exchange for a payment of $2.9 million, the ability to transact business with other ISOs and the assumption of the credit risk by the ISO. Approximately two thirds of the income from this settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of $732,000 being recognized as an adjustment to the fixed processing fee during fiscal 1999. Bancard terminated its processing for this ISO in May 2000. During fiscal 2000, Bancard began processing for seven new ISOs. However, Bancard expects its merchant credit card fee income to remain below previous levels until such time as Bancard can develop relationships with additional ISOs, increase volumes with existing ISOs or Allied can generate processing business revenues comparable to those Bancard experienced prior to termination of processing for the initial ISO. Bancard's average dollar volume of transactions processed during fiscal 2000 was $90 million, and $58 million was attributable to the ISO that terminated its relationship. The average dollar volume of transactions processed during June and July 2000 was $69 million. This reduction in processing fees and cessation of the settlement income at Bancard is expected to adversely affect comparisons of consolidated net income in fiscal 2001 with fiscal 2000. During fiscal 1998, the Bank expanded its presence in the mortgage banking market by hiring several experienced loan originators and an experienced underwriter. The Bank originates mortgage loans on personal residences and sells the majority of these loans into the secondary market to avoid the interest rate risk associated with long-term fixed rate financing. The Bank realizes revenue from this mortgage banking activity from a combination of loan origination fees and gain on sale of the loans in the secondary market. During fiscal 2000, the Bank originated $36.8 million of real estate loans and sold $37.7 million of loans, which resulted in gains of $439,000. The increase in interest rates during that time caused a significant reduction in the Bank's mortgage origination volume. In fiscal 1999 and 1998, the Bank originated $85.0 million and $57.2 million of real estate loans and sold $87.8 million and $53.3 million of loans, which resulted in gains of $1.0 million and $713,000, respectively. Trust department income continues to be a significant contributor to noninterest income, growing from approximately $1.5 million in fiscal 1999 to $1.9 million in fiscal 2000. Income is generated primarily from fees charged based on assets under management for corporate and personal trusts and for custodial services. Assets under administration have grown from $506.8 at June 30, 1999 to $586.4 million at June 30, 2000. Growth in the current fiscal year resulted primarily from new trust relationships created during the year. Quad City's initial public offering during the fourth calendar quarter of 1993 raised approximately $14 million. In order to provide additional capital to support the growth of the Bank, Quad City formed a statutory business trust, which issued $12 million of capital securities to the public for cash on June 9, 1999. Results of Operations Fiscal 2000 compared with fiscal 1999 Overview. Net income for fiscal 2000 was $2.7 million as compared to net income of $2.5 million for the same period in 1999 for an increase of $281,000 or 11%. Basic earnings per share for fiscal 2000 were $1.19 as compared to $1.08 for fiscal 1999. The increase in net income was comprised of an increase in net interest income after provision for loan losses of $1.5 million and an increase in noninterest income of $594,000 reduced by an increase in noninterest expenses of $1.8 million. The increase in noninterest income occurred despite the fact that fiscal 1999 included $732,000 of revenue, which was related to a one-time gain recognized by Bancard. The recognition of this income ceased as of June 30, 1999. Interest income. Interest income increased by $4.0 million, from $20.1 million for fiscal 1999 to $24.1 million for fiscal 2000. The 20% rise in interest income was basically attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, and higher interest rates. Interest expense. Interest expense increased by $2.3 million, from $11.0 million for fiscal 1999 to $13.3 million for fiscal 2000. The 20% increase in interest expense was primarily attributable to greater average outstanding balances in interest-bearing liabilities and higher interest rates. Provision for loan losses. The provision for loan losses is established based on factors such as the local and national economy and the risk associated with the loans in the portfolio. Quad City had an allowance for estimated losses on loans of approximately 1.50% of total loans at June 30, 2000 as compared to approximately 1.46% at June 30, 1999. The provision for loan losses increased by $160,000, from $892,000 for fiscal 1999 to $1,052,000 for fiscal 2000. For fiscal 2000, commercial and real estate loans combined for total charge-offs of $50,000 and total recoveries of less than $1,000. Consumer loan charge-offs and recoveries totaled $377,000 and $96,000, respectively, for fiscal 2000. Indirect auto loans accounted for a majority of the consumer loan charge-offs. Because asset quality is a priority for Quad City and its subsidiaries, management has made the decision to downscale indirect auto loan activity based on charge-off history. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income. Noninterest income increased by $594,000, from $5.6 million for fiscal 1999 to $6.2 million for fiscal 2000. Noninterest income for fiscal 1999 consisted of the amortization of deferred income resulting from the restructuring of a merchant broker agreement, income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. Noninterest income for fiscal 2000 consisted of income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 11% increase was primarily due to an increase in merchant credit card fees, and increased trust fees received during the period, offset by the decrease in gains on sales of loans, net and the amortization of deferred income resulting from the restructuring of the merchant broker agreement. During fiscal 2000, merchant credit card fees, net of processing costs, increased by $1.0 million to $2.3 million, from $1.3 million for fiscal 1999. The increase was due to increased volumes of credit card transactions processed during fiscal 2000. As previously discussed, pursuant to the contract with its largest ISO, Bancard terminated processing for it in May 2000. Recently, VISA has enacted new capital standards that may restrict the amount of transaction volume that Bancard is allowed to process in the future. This may have resulted in reduced volumes even if the large ISO relationship had been retained. Given the volume restrictions imposed by VISA, Bancard will focus on processing transactions only for the most profitable ISO relationships. For fiscal 2000, trust department fees increased $364,000, or 24%, to approximately $1.9 million from $1.5 million for fiscal 1999. The increase was primarily a reflection of the development of additional trust relationships during the period. Gains on sales of loans, net, were $439,000 for fiscal 2000, which reflected a decrease of 58%, or $605,000, from $1.0 million for fiscal 1999. The decrease resulted from higher interest rates, which created fewer home refinances and first-time home purchases during the fiscal year. Noninterest expenses. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees for both periods. Noninterest expenses for fiscal 2000 were $11.5 million as compared to $9.7 million for the same period in 1999, or an increase of $1.8 million or 18.48%. The following table sets forth the various categories of noninterest expenses for the years ended June 30, 2000 and 1999. Years Ended June 30, ------------------------------------- 2000 1999 % Change ------------------------------------- Salaries and employee benefits ......... $ 6,878,213 $ 5,801,670 18.56% Professional and data processing fees .. 860,216 598,457 43.74 Advertising and marketing .............. 410,106 359,571 14.05 Occupancy and equipment expense ........ 1,580,911 1,453,040 8.80 Stationery and supplies ................ 324,219 267,739 21.10 Postage and telephone .................. 361,623 298,208 21.27 Other .................................. 1,052,173 900,214 16.88 ------------------------- Total noninterest expenses ...... $11,467,461 $ 9,678,899 18.48% ========================= Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For fiscal 2000, total salaries and benefits increased to $6.9 million or $1.1 million over the fiscal 1999 total of $5.8 million. The change was primarily attributable to the addition of new Bank employees during the period. Professional and data processing fees increased $262,000 or 44%. The increase was primarily attributable to an increase in core and ancillary data processing fees as a result of an increase in transaction volumes and number of customer accounts. Additionally, the Bank incurred new ongoing expenses related to loan collection software, cash management software and two new automated teller machines. Stationary and supplies expense increased $56,000 or 21% and postage and telephone expense increased $63,000 or 21%. The increases were the result of the overall increase in business volume of the Bank. Beginning in 1997, Quad City addressed issues related to the Year 2000 and their potential to adversely affect both Quad City's operations and ability to provide prompt, reliable customer service. The estimated total cost of the Year 2000 project was $175,000. This included costs to upgrade equipment specifically for the purpose of Year 2000 compliance and various administrative expenditures. Quad City's cost for the Year 2000 project for fiscal 2000 was $27,000, as compared to $122,000 for fiscal 1999. Income tax expense. The provision for income taxes was $1.7 million for fiscal 2000 compared to $1.6 million for fiscal 1999, an increase of $66,000 or 4%. The increase was attributable to greater net income generated in fiscal 2000 compared to fiscal 1999, partially offset by a reduction in the effective tax rate for fiscal 2000 of 38.0% versus 39.6% for fiscal 1999. Fiscal 1999 compared with fiscal 1998 Overview. Net income for fiscal 1999 was $2.5 million as compared to net income of $2.4 million for the same period in 1998 for a slight increase of $72,000 or 3%. Basic earnings per share for fiscal 1999 were $1.08 as compared to $1.09 for fiscal 1998. The increase in net income was comprised of an increase in net interest income after provision for loan losses of $2.4 million reduced by a decrease in noninterest income of $588,000 and an increase in noninterest expenses of $1.8 million. The decrease in noninterest income was primarily due to the one time gain in fiscal 1998 resulting from the restructuring of Bancard's merchant broker agreement. Interest income. Interest income increased by $5.0 million, from $15.1 million for fiscal 1998 to $20.1 million for fiscal 1999. The 33% rise in interest income was primarily attributable to greater average outstanding balances in interest-earning assets, principally loans receivable. Interest expense. Interest expense increased by $2.7 million, from $8.3 million for fiscal 1998 to $11.0 million for fiscal 1999. The 32% increase in interest expense was primarily attributable to greater average outstanding balances in interest-bearing liabilities. Provision for loan losses. The provision for loan losses is established based on factors such as the local and national economy and the risk associated with the loans in the portfolio. Quad City had an allowance for estimated losses on loans of approximately 1.46% of total loans at June 30, 1999 as compared to approximately 1.44% at June 30, 1998. The provision for loan losses decreased slightly by $10,000, from $902,000 for fiscal 1998 to $892,000 for fiscal 1999. The primary loan growth for fiscal 1999 was in the commercial loan portfolio, as opposed to the consumer loan portfolio, which has historically carried a greater degree of risk, allowing a decrease in the provision necessary for the period. For fiscal 1999, commercial and real estate loans combined for total charge-offs of $130,000 and total recoveries of $53,000. Consumer loan charge-offs and recoveries totaled $349,000 and $79,000, respectively, for fiscal 1999. Indirect auto loans accounted for a majority of the consumer loan charge-offs. Because asset quality is a priority for Quad City and its subsidiaries, management made the decision during fiscal 1999 to downscale indirect auto loan activity based on charge-off history. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income. Noninterest income decreased by $588,000, from $6.1 million for fiscal 1998 to $5.6 million for fiscal 1999. Noninterest income for fiscal 1998 consisted of the gain on the restructuring of a merchant broker agreement, income from the merchant credit card operation, fees from the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. Noninterest income for fiscal 1999 consisted of the amortization of deferred income resulting from the restructuring of a merchant broker agreement, income from the merchant credit card operation, fees from the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 10% decrease was primarily due to the one time gain in fiscal 1998 resulting from the restructuring of Bancard's merchant broker agreement offset by an increase in loan sales activity in the residential real estate department of the Bank, increased trust fees received during the period and the recognition of deferred income resulting from a gain on the restructuring of Bancard's merchant broker agreement. In June 1998, Quad City recognized $2.2 million of gross income as a result of the amendment of the merchant broker agreement with its major ISO. The amended agreement was for a minimum term of one year and revised a prior agreement that was to expire in the year 2002. In consideration for the reduction in term from four years to one year, Quad City received total compensation of $2.9 million, of which $732,000 was deferred and recognized in income during fiscal 1999. In the prior agreement, Quad City and the ISO had shared both merchant servicing fees and related merchant credit risk. The amended agreement exchanged a substantial reduction in merchant servicing income for a like reduction in the related merchant credit risk. With the amended agreement, Quad City receives a fixed, monthly fee of $25,000 for servicing the merchants and was relieved of responsibility for any merchant credit risk. The agreement terminated on May 1, 2000. In an effort to offset the reduced merchant servicing income, Quad City has been actively pursuing other ISO relationships and has begun processing for additional ISOs. During fiscal 1999, merchant credit card fees, net of processing costs, decreased by $73,000 to $1.3 million, from $1.4 million for fiscal 1998. The reduction reflected terms of the amended merchant broker agreement. Also as a result of the amended merchant broker agreement, Quad City recognized $732,000 of the deferred income and earned $300,000 of merchant servicing fees for fiscal 1999. For fiscal 1999, trust department fees increased $382,000, or 34%, to approximately $1.5 million from $1.1 million for fiscal 1998. The increase was primarily a reflection of the development of additional trust relationships during the period. Gain on sales of loans, net, was $1.0 million for fiscal 1999, which reflected an increase of 46%, or $331,000, from $713,000 for fiscal 1998. The increase resulted from lower interest rates, which created large numbers of both home refinances and first-time home purchases, and the subsequent sale of the majority of these loans into the secondary market. Noninterest expenses. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees for both periods. Noninterest expenses for fiscal 1999 were $9.7 million as compared to $7.9 million for the same period in 1998, or an increase of $1.8 million. The following table sets forth the various categories of noninterest expenses for the years ended June 30, 1999 and 1998. Years Ended June 30, ----------------------------------- 1999 1998 % Change ----------------------------------- Salaries and employee benefits ............ $5,801,670 $4,571,126 26.92% Professional and data processing fees ..... 598,457 504,344 18.66 Advertising and marketing ................. 359,571 238,160 50.98 Occupancy and equipment expense ........... 1,453,040 1,045,349 39.00 Stationery and supplies ................... 267,739 219,523 21.96 Provision for merchant credit card losses . 21,777 105,910 (79.44) Postage and telephone ..................... 298,208 231,049 29.07 Other ..................................... 878,437 994,354 (11.66) ----------------------- Total noninterest expenses ........ $9,678,899 $7,909,815 22.37% ======================= Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For fiscal 1999, total salaries and benefits increased to $5.8 million or $1.2 million over the fiscal 1998 total of $4.6 million. The change was primarily attributable to the addition of new Bank employees during the period and increased commission expense in the residential real estate department proportionate to the large volume of residential mortgage loan originations and subsequent loan sales. Advertising and marketing expense increased $121,000 or 51% and postage and telephone expense increased $67,000 or 29%. The increases were the result of the overall increase in business volume of the Bank. For fiscal 1999, occupancy and equipment expense increased $408,000 or 39% over fiscal 1998. The increase was largely due to rent expense for the new Moline location. The provision for merchant credit card losses during fiscal 1999 decreased $84,000 or 79% from fiscal 1998, which reflected Bancard's amended merchant broker agreement and the resulting reduction in Bancard's responsibility for merchant credit risk. Income tax expense. The provision for income taxes was $1.6 million for fiscal 1999 compared to $1.7 million for fiscal 1998, a decrease of $64,000 or 4%. The decrease was attributable to an effective tax rate of 39.6% in fiscal 1999 compared to 41.2% in fiscal 1998. Financial Condition Total assets of Quad City increased by $46.3 million or 14% to $367.6 million at June 30, 2000 from $321.3 million at June 30, 1999. The growth primarily resulted from an increase in the loan portfolio funded by deposits received from customers and short-term borrowings. Cash and Cash Equivalent Assets. Cash and due from banks increased by $6.6 million or 77% to $15.1 million at June 30, 2000 from $8.5 million at June 30, 1999. Cash and due from banks represented both cash maintained at the Bank, as well as funds that the Bank and Quad City had deposited in other banks in the form of demand deposits. Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold decreased by $13.0 million or 33% to $26.1 million at June 30, 2000 from $39.1 million at June 30, 1999. The decrease was attributable to Quad City's decreased liquidity needs at the end of the fiscal year. Quad City had made the decision in fiscal 1999 to increase its liquidity position in case Bank customers began to withdraw funds in anticipation of cash needs associated with the Year 2000. Certificates of deposit at financial institutions increased by $241,000 or 2% to $12.8 million at June 30, 2000 from $12.5 million at June 30,1999. Due to strong loan demand, the Bank has made the decision to limit its deposits in other banks in the form of certificates of deposit. Investments. Securities increased by $5.9 million or 12% to $56.1 million at June 30, 2000 from $50.2 million at June 30, 1999. The net increase was the result of a number of transactions in the securities portfolio. Quad City purchased additional securities, classified as available for sale, in the amount of $24.7 million and classified as held to maturity, in the amount of $50,000. This was offset by the following: paydowns of $1.4 million that were received on mortgage-backed securities, proceeds from the sales of securities available for sale of $5.2 million, proceeds from calls and maturities of $6.2 million, losses recognized on the sales of securities of $28,000, amortization of premiums, net of the accretion of discounts, of $63,000, and an increase in unrealized losses on securities available for sale, before applicable income tax, of $1.2 million Certain investment securities of the Bank are purchased with the intent to hold the securities until they mature. These held to maturity securities, comprised of municipal securities and other bonds, were recorded at amortized cost at June 30, 2000 and June 30, 1999. The balance at June 30, 2000 was $575,000, a decrease of $149,000 or 21%, from $724,000 at June 30, 1999. Market values at June 30, 2000 and June 30, 1999 were $565,000 and $727,000, respectively. All of Quad City's and a portion of the Bank's securities are placed in the available for sale category as the securities may be liquidated to provide cash for operating, investing or financing purposes. These securities were reported at fair value and increased by $6.1 million, or 12%, to $55.6 million at June 30, 2000, from $49.5 million at June 30, 1999. The amortized cost of such securities at June 30, 2000 and June 30, 1999 was $57.2 million and $50.0 million, respectively. Quad City does not use any financial instruments referred to as derivatives to manage interest rate risk and as of June 30, 2000 there existed no security in the investment portfolio (other than U.S. government and U.S. government agency securities) that exceeded 10% of stockholders' equity at that date. Loans. Loans receivable increased by $43.9 million or 22% to $241.9 million at June 30, 2000 from $198.0 million at June 30, 1999. The increase was the result of the origination or purchase of $240.5 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $330,000 and loan repayments or sales of loans of $196.3 million. The majority of residential real estate loans originated by the Bank were sold on the secondary market to avoid the interest rate risk associated with long-term fixed rate loans. As of June 30, 2000, the Bank's legal lending limit was $4.3 million. Allowance for Loan Losses. The allowance for estimated losses on loans was $3.6 million at June 30, 2000 compared to $2.9 million at June 30, 1999 for an increase of $722,000 or 25%. The adequacy of the allowance for estimated losses on loans was determined by management based on factors that included the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, and other factors that, in management's judgment, deserved evaluation in estimating loan losses. The adequacy of the allowance for estimated losses on loans was monitored by the loan review staff, and reported to management and the Board of Directors. Net charge-offs for the years ended June 30, 2000 and 1999, were $330,000 and $346,000 respectively. One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the total loan portfolio. Provisions were made monthly to ensure that an adequate level was maintained. The allowance for estimated losses on loans as a percentage of total loans was 1.50 % at June 30, 2000 and 1.46% at June 30, 1999. Although management believes that the allowance for estimated losses on loans at June 30, 2000 was at a level adequate to absorb losses on existing loans, there can be no assurance that such losses will not exceed the estimated amounts or that Quad City will not be required to make additional provisions for loan losses in the future. Asset quality is a priority for Quad City and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. Nonperforming Assets. The policy of Quad City is to place a loan on nonaccrual status if: (a) payment in full of interest or principal is not expected or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status. Nonaccrual loans were $383,000 at June 30, 2000 compared to $1.3 million at June 30, 1999 for a decrease of $905,000 or 70%. The decrease in nonaccrual loans was comprised of decreases in commercial loans of $833,000 and consumer loans of $133,000 offset by an increase in real estate loans of $61,000. Nonaccrual loans at June 30, 2000 consisted primarily of loans that were well collateralized and were not expected to result in material losses. As of June 30, 2000 and 1999, past due loans of 30 days or more amounted to $3.3 million and $4.0 million, respectively. Past due loans as a percentage of gross loans receivable was 1.4% and 2.0% at June 30, 2000, and 1999, respectively. Other Assets. Premises and equipment increased by $162,000 or 2% to $7.7 million at June 30, 2000 from $7.6 million at June 30, 1999. The increase resulted from the purchase of additional furniture, fixtures and equipment offset by depreciation expense. Additional information regarding the composition of this account and related accumulated depreciation is described in footnote 5 to the consolidated financial statements. Accrued interest receivable on loans, securities and interest-bearing cash accounts increased by $627,000 or 31% to $2.6 million at June 30, 2000 from $2.0 million at June 30, 1999. The increase was primarily due to greater average outstanding balances in interest-bearing assets. Other assets increased by $2.6 million or 42% to $8.9 million at June 30, 2000 from $6.3 million at June 30, 1999. The increase consisted primarily of the purchase of life insurance contracts on two of Quad City's executives in the amount of $2.0 million, as well as an increase in accrued trust department fees, miscellaneous receivables and prepaid expenses associated with the growth of Quad City. Deposits. Deposits increased by $40.1 million or 16% to $288.1 million at June 30, 2000 from $248.0 million at June 30, 1999. The increase resulted from a $9.5 million net increase in noninterest-bearing, NOW, money market and other savings accounts and a $30.6 million net increase in certificates of deposit. The increase was a result of periodic aggressive pricing programs for deposits and increased marketing efforts. Short-term Borrowings. Short-term borrowings increased $11.1 million or 114% from $9.7 million as of June 30, 1999 to $20.8 million as of June 30, 2000. Short-term borrowings were comprised of customer repurchase agreements of $15.8 million and $9.6 million at June 30, 2000 and 1999, respectively, as well as federal funds purchased from correspondent banks of $5.0 million and $140,000 at June 30, 2000 and 1999, respectively. FHLB Advances and Other Borrowings. FHLB advances decreased slightly to $22.4 million as of June 30, 2000 from $24.6 million at June 30, 1999. As of June 30, 2000, the Bank held $1.2 million of FHLB stock. As a result of its membership in the FHLB of Des Moines, the Bank has the ability to borrow funds for short-term or long-term purposes under a variety of programs. In June 1999, Quad City issued 1,200,000 shares of trust preferred securities through its newly formed Capital Trust subsidiary. On Quad City's financial statements, these securities are listed as company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures and were $12,000,000 at both June 30, 2000 and 1999. Under current regulatory guidelines, these securities are considered to be Tier 1 capital, with certain limitations that are applicable to Quad City. Other liabilities decreased by $4.3 million or 50% to $4.3 million as of June 30, 2000 from $8.6 million as of June 30, 1999. Other liabilities were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. The decrease was primarily attributable to $3.8 million due to a broker for the purchase of securities available for sale at June 30, 1999. Stockholders' Equity. Common stock of $2.3 million as of June 30, 2000 increased by $29,000 or 1%. Exercises of stock warrants and options resulting in the issuance of 29,165 additional shares of common stock created the increase. Additional paid-in capital increased by $189,000 or 2% to $12.1 million as of June 30, 2000 from $12.0 million as of June 30, 1999. The increase was due to $108,000 received in excess of the $1.00 per share par value for shares of common stock issued as the result of the exercise of stock warrants and options, as well as $81,000 for the tax benefit recorded on the stock option exercises. Retained earnings increased by $2.7 million or 60% to $7.3 million as of June 30, 2000 from $4.6 million as of June 30, 1999. The increase reflected net income for the year. Accumulated other comprehensive (loss), consisting of unrealized losses on securities available for sale, net of related income taxes, was $1.1 million as of June 30, 2000 as compared to $332,000 as of June 30, 1999. The increase in the loss was attributable to the decrease during the period in fair value of the securities identified as available for sale, primarily as a result of an increase in market interest rates. In April 2000, Quad City announced that the board of directors approved a stock repurchase program enabling Quad City to repurchase up to 60,000 shares of its common stock. At June 30, 2000, Quad City had acquired 41,496 shares at a total cost of $599,480. The weighted average cost of the shares was $14.45. Liquidity Liquidity measures the ability of Quad City to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $54.0 million at June 30, 2000, compared with $60.2 million at June 30, 1999. The Bank has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. Quad City also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities. The liquidity of Quad City is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities was $4.2 million for fiscal 2000 compared to $3.7 million for fiscal 1999. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $46.1 million for fiscal 2000 and $72.7 million for fiscal 1999. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from short-term borrowings, for fiscal 2000 was $48.5 million and for fiscal 1999 was $66.0 million, consisting primarily of deposit growth, proceeds from the issuance of preferred securities of the subsidiary trust, and proceeds from short-term borrowings. Net cash provided by operating activities was $3.7 million for fiscal 1999 compared to $4.4 million of cash used, primarily for loans originated for sale, for fiscal 1998. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $72.7 million for fiscal 1999 and $70.3 million for fiscal 1998. Net cash provided by financing activities, consisting primarily of deposit growth, proceeds from the issuance of preferred securities of the subsidiary trust, and proceeds from short-term borrowings, for fiscal 1999 was $66.0 million and for fiscal 1998 was $79.3 million, consisting principally of deposit growth and proceeds from Federal Home Loan Bank advances. Impact of Inflation and Changing Prices The consolidated financial statements and the accompanying notes have been prepared in accordance with Generally Accepted Accounting Principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Quad City's operations. Unlike industrial companies, nearly all of the assets and liabilities of Quad City are monetary in nature. As a result, interest rates have a greater impact on Quad City's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Forward Looking Statements Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Quad City intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe Quad City's future plans, strategies and expectations are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Quad City's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on Quad City's operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, our implementation of new technologies, Quad City's ability to develop and maintain secure and reliable electronic systems and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Quad City, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. Quad City's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income. In an attempt to manage its exposure to changes in interest rates, management monitors Quad City's interest rate risk. The Asset/Liability Committee meets quarterly to review Quad City's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the Board of Directors. Management also reviews the Bank's securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding Quad City's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting Quad City's asset/liability position, the Board and management attempt to manage Quad City's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase Quad City's interest rate risk position somewhat in order to increase its net interest margin. Quad City's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates. One approach used to quantify interest rate risk is the net portfolio value ("NPV") analysis. In essence, this analysis calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance-sheet contracts. The following table sets forth, at June 30, 2000 and June 30, 1999, an analysis of Quad City's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis points). Change in Estimated Increase (Decrease) in NPV Interest Estimated ---------------------------------------------------------------- Rates NPV Amount Amount Percent ----------------------------------------------------------------------------- ----------------------------- (Basis points) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 --------------------------------------------------------------------------------------------------------------- (Dollars in thousands) +200 $28,583 $29,554 $(2,290) $(1,709) (7.42)% (5.47)% --- 30,873 31,263 -200 31,128 31,710 255 447 0.83% 1.43%
Quad City does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, Quad City does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting Quad City. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of Quad City's business activities. Item 8. Financial Statements QUAD CITY HOLDINGS, INC. Index to Consolidated Financial Statements INDEPENDENT AUDITOR'S REPORT FINANCIAL STATEMENTS Consolidated balance sheets as of June 30, 2000 and 1999 Consolidated statements of income for the years ended June 30, 2000, 1999, and 1998 Consolidated statements of changes in stockholders' equity for the years ended Consolidated statements of cash flows for the years ended June 30, 2000, 1999, and 1998 Notes to consolidated financial statements INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders Quad City Holdings, Inc. Moline, Illinois We have audited the accompanying consolidated balance sheets of Quad City Holdings, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related statements of income, changes in stockholders' equity, and cash flows for the years ended June 30, 2000, 1999, and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quad City Holdings, Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their operations and their cash flows for the years ended June 30, 2000, 1999, and 1998, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Davenport, Iowa August 1, 2000 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2000 and 1999 ASSETS 2000 1999 ---------------------------------------------------------------------------------------------------- Cash and due from banks ........................................... $ 15,130,357 $ 8,528,195 Federal funds sold ................................................ 26,105,000 39,125,000 Certificates of deposit at financial institutions ................. 12,776,463 12,535,193 Securities held to maturity, at amortized cost (fair value 2000 $565,237; 1999 $727,115) (Note 3) .......................... 574,988 724,415 Securities available for sale, at fair value (Note 3) ............. 55,554,062 49,533,909 ------------------------------ 56,129,050 50,258,324 ------------------------------ Loans receivable (Note 4) ......................................... 241,852,851 197,976,692 Less allowance for estimated losses on loans (Note 4) ........... 3,617,401 2,895,457 ------------------------------ 238,235,450 195,081,235 ------------------------------ Premises and equipment, net (Note 5) .............................. 7,715,621 7,553,616 Accrued interest receivable ....................................... 2,633,120 2,006,503 Other assets ...................................................... 8,896,554 6,258,149 ------------------------------ Total assets .............................................. $ 367,621,615 $ 321,346,215 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY --------------------------------------------------------------------------------------------------- Liabilities: Deposits: Noninterest-bearing ........................................... $ 44,043,932 $ 35,833,094 Interest-bearing .............................................. 244,022,824 212,132,785 ------------------------------ Total deposits (Note 6) ................................... 288,066,756 247,965,879 Short-term borrowings (Note 7) .................................... 20,771,724 9,685,877 Federal Home Loan Bank advances (Note 8) .......................... 22,425,398 24,605,890 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures (Note 9) ........................................................ 12,000,000 12,000,000 Other liabilities ................................................. 4,286,318 8,615,098 ------------------------------ Total liabilities ................................................. 347,550,196 302,872,744 ------------------------------ Commitments and Contingencies (Note 18) Stockholders' Equity (Note 16): Common stock, $1 par value; shares authorized 5,000,000; shares issued and outstanding 2000 - 2,325,416 and 2,283,920, respectively; 1999 - 2,296,251 ..................... 2,325,416 2,296,251 Additional paid-in capital ...................................... 12,147,984 11,959,080 Retained earnings ............................................... 7,296,017 4,550,490 Accumulated other comprehensive (loss) .......................... (1,098,518) (332,350) ------------------------------ 20,670,899 18,473,471 Less cost of common shares acquired for the treasury 2000 - 41,496 ................................................. 599,480 -- ----------------------------- Total stockholders' equity ................................ 20,071,419 18,473,471 ------------------------------ Total liabilities and stockholders' equity ................ $ 367,621,615 $ 321,346,215 ==============================
See Notes to Consolidated Financial Statements. QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 2000, 1999, and 1998 2000 1999 1998 -------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans ................................... $ 18,364,812 $ 15,642,235 $ 12,083,990 Interest and dividends on securities: Taxable .................................................... 3,214,722 2,229,178 1,891,019 Nontaxable ................................................. 233,793 56,089 14,649 Interest on federal funds sold ............................... 1,488,267 1,492,173 645,929 Other interest ............................................... 777,604 696,245 440,980 ------------------------------------------- Total interest income .................................. 24,079,198 20,115,920 15,076,567 ------------------------------------------- Interest expense: Interest on deposits ......................................... 10,125,235 9,009,724 6,971,153 Interest on company obligated mandatorily redeemable preferred securities ....................................... 1,137,402 63,518 -- Interest on short-term and other borrowings .................. 2,025,956 1,953,444 1,370,868 ------------------------------------------- Total interest expense ................................. 13,288,593 11,026,686 8,342,021 ------------------------------------------- Net interest income .................................... 10,790,605 9,089,234 6,734,546 Provision for loan losses (Note 4) ........................... 1,051,818 891,800 901,976 ------------------------------------------- Net interest income after provision for loan losses .... 9,738,787 8,197,434 5,832,570 ------------------------------------------- Noninterest income: Merchant credit card fees, net of processing costs ........... 2,346,296 1,322,658 1,395,574 Trust department fees ........................................ 1,884,310 1,520,518 1,138,502 Deposit service fees ......................................... 600,219 433,056 290,721 Gains on sales of loans, net ................................. 438,799 1,043,763 713,121 Securities gains (losses), net ............................... (28,221) 3,757 8,734 Amortization of deferred income resulting from restructuring of merchant broker agreement (Note 11) ..................... -- 732,000 -- Gain on restructuring of merchant broker agreement (Note 11) . -- -- 2,168,000 Other ........................................................ 913,013 504,699 433,765 ------------------------------------------ Total noninterest income ............................... 6,154,416 5,560,451 6,148,417 ------------------------------------------ Noninterest expenses: Salaries and employee benefits ............................... 6,878,213 5,801,670 4,571,126 Professional and data processing fees ........................ 860,216 598,457 504,344 Advertising and marketing .................................... 410,106 359,571 238,160 Occupancy and equipment expense .............................. 1,580,911 1,453,040 1,045,349 Stationery and supplies ...................................... 324,219 267,739 219,523 Postage and telephone ........................................ 361,623 298,208 231,049 Other ........................................................ 1,052,173 900,214 1,100,264 ------------------------------------------ Total noninterest expenses ............................. 11,467,461 9,678,899 7,909,815 ------------------------------------------ Income before income taxes ............................. 4,425,742 4,078,986 4,071,172 Federal and state income taxes (Note 12) ....................... 1,680,215 1,614,165 1,677,900 ------------------------------------------ Net income ............................................. $ 2,745,527 $ 2,464,821 $ 2,393,272 ========================================== Earnings per common share (Note 17): Basic ........................................................ $ 1.19 $ 1.08 $ 1.09 Diluted ...................................................... $ 1.15 $ 1.03 $ 1.02 Weighted average common shares outstanding ................... 2,309,453 2,285,500 2,196,297 Weighted average common and common equivalent shares outstanding ................................................ 2,385,840 2,398,525 2,353,932
See Notes to Consolidated Financial Statements. QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended June 30, 2000, 1999, and 1998 Accumulated Additional Other Preferred Common Paid-In Retained Comprehensive Treasury Stock Stock Capital Earnings Income (Loss) Stock Total ------------------------------------------------------------------------------------------------------------------------------------ Balance, year ended June 30, 1997 ...... $ 10 $1,462,824 $13,039,406 $ 171,171 $ (60,185) $ -- $14,613,226 ----------------------------------------------------------------------------------------- Comprehensive income: Net income ........................... -- -- -- 2,393,272 -- -- 2,393,272 Other comprehensive income, net of tax (Note 2) ....................... -- -- -- -- 72,677 -- 72,677 ----------- Comprehensive income ................... 2,465,949 ----------- Proceeds from sale of 15 shares of preferred stock ..................... 15 -- 1,499,985 -- -- -- 1,500,000 Proceeds from issuance of 71,325 shares of common stock as a result of warrants and stock options exercised (Note 14) .......................... -- 47,550 475,493 -- -- -- 523,043 ----------------------------------------------------------------------------------------- Balance, year ended June 30, 1998 .... 25 1,510,374 15,014,884 2,564,443 12,492 -- 19,102,218 ----------------------------------------------------------------------------------------- Comprehensive income: Net income ......................... -- -- -- 2,464,821 -- -- 2,464,821 Other comprehensive (loss), net of tax (Note 2) ..................... -- -- -- -- (344,842) -- (344,842) ------------ Comprehensive income ......... 2,119,979 ------------ Stock split (3 for 2) ................ -- 760,262 (760,262) (890) -- -- (890) Proceeds from issuance of 30,720 shares of common stock as a result of warrants and stock options exercised (Note 14) ................ -- 25,615 201,215 -- -- -- 226,830 Tax benefit of nonqualified stock options exercised .................. -- -- 3,218 -- -- -- 3,218 Redemption of preferred stock (Note 15) (25) -- (2,499,975) (477,884) -- -- (2,977,884) ------------------------------------------------------------------------------------------ Balance, year ended June 30, 1999 .... -- 2,296,251 11,959,080 4,550,490 (332,350) -- 18,473,471 ------------------------------------------------------------------------------------------ Comprehensive income: Net income ......................... -- -- -- 2,745,527 -- -- 2,745,527 Other comprehensive (loss), net of tax (Note 2) .................. -- -- -- -- (766,168) -- (766,168) ------------ Comprehensive income ................. 1,979,359 ------------ Proceeds from issuance of 29,165 shares of common stock, net of simultaneous redemptions of 8,145 shares, as a result of warrants and stock options exercised (Note 14) .. -- 29,165 107,726 -- -- -- 136,891 Tax benefit of nonqualified stock options exercised .................. -- -- 81,178 -- -- -- 81,178 Purchase of 41,496 shares of common stock for the treasury ............. -- -- -- -- -- (599,480) (599,480) ------------------------------------------------------------------------------------------- Balance, year ended June 30, 2000 .... $ -- $2,325,416 $12,147,984 $7,296,017 $(1,098,518) $(599,480) $20,071,419 ===========================================================================================
See Notes to Consolidated Financial Statements. QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2000, 1999, and 1998 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income ....................................................... $ 2,745,527 $ 2,464,821 $ 2,393,272 Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation ................................................... 635,838 627,075 422,357 Provision for loan losses ...................................... 1,051,818 891,800 901,976 Deferred income taxes .......................................... (398,971) 232,262 (553,283) Amortization of offering costs on subordinated debentures ...... 29,453 1,436 -- Amortization of premiums (accretion of discounts) on securities, net .............................................. 62,539 38,697 (16,742) Investment securities (gains) losses, net ...................... 28,221 (3,757) (8,734) Loans originated for sale ...................................... (36,774,571) (85,027,675) (57,206,140) Proceeds on sales of loans ..................................... 38,124,921 88,804,656 54,008,203 Net gains on sales of loans .................................... (438,799) (1,043,763) (713,121) Amortization of deferred income resulting from restructuring of merchant broker agreement ................................. -- (732,000) -- Gain on restructuring of merchant broker agreement ............. -- -- (2,168,000) Tax benefit of nonqualified stock options exercised ............ 81,178 3,218 -- Increase in accrued interest receivable ........................ (626,617) (233,280) (398,916) (Increase) decrease in other assets ............................ 170,192 (2,405,245) (273,402) Increase (decrease) in other liabilities ....................... (528,780) 52,456 (766,623) ------------------------------------------- Net cash provided by (used in) operating activities ........ 4,161,949 3,670,701 (4,379,153) ------------------------------------------- Cash Flows from Investing Activities: Net (increase) decrease in federal funds sold .................... 13,020,000 (16,165,000) (13,770,000) Net increase in certificates of deposit at financial institutions (241,270) (4,169,070) (3,006,999) Purchase of securities available for sale ........................ (23,659,480) (30,215,760) (16,444,294) Purchase of securities held to maturity .......................... (50,000) -- (276,398) Proceeds from calls and maturities of securities ................. 6,200,000 14,400,000 9,500,000 Proceeds from paydowns on securities ............................. 1,389,269 1,732,539 4,531,123 Proceeds from sales of securities available for sale ............. 5,191,661 280,786 14,020 Purchase of life insurance contracts ............................. (2,023,543) -- -- Increase in cash value of life insurance contracts ............... (14,640) -- -- Proceeds from restructuring of merchant broker agreement ......... -- -- 2,900,000 Net loans originated ............................................. (45,117,584) (38,080,955) (50,883,287) Purchase of premises and equipment, net .......................... (797,843) (520,423) (2,833,936) ------------------------------------------- Net cash used in investing activities ...................... (46,103,430) (72,737,883) (70,269,771) ------------------------------------------- Cash Flows from Financing Activities: Net increase in deposit accounts ................................. 40,100,877 50,581,915 61,423,769 Net increase in short-term borrowings ............................ 11,085,847 7,685,877 2,000,000 Proceeds from Federal Home Loan Bank advances .................... 8,000,000 1,480,000 25,955,000 Payments on Federal Home Loan Bank advances ...................... (10,180,492) (1,541,284) (12,065,538) Net decrease in other borrowings ................................. -- (1,500,000) -- Proceeds from issuance of preferred securities of subsidiary trust -- 12,000,000 -- Redemption of preferred stock .................................... -- (2,977,884) -- Purchase of treasury stock ....................................... (599,480) -- -- Proceeds from issuance of preferred stock ........................ -- -- 1,500,000 Proceeds from issuance of common stock, net of simultaneous redemptions .................................................... 136,891 225,940 523,043 -------------------------------------------- Net cash provided by financing activities .................. $ 48,543,643 $ 65,954,564 $ 79,336,274 -------------------------------------------- Net increase (decrease) in cash and due from banks ......... $ 6,602,162 $ (3,112,618) $ 4,687,350 Cash and due from banks: Beginning ........................................................ 8,528,195 11,640,813 6,953,463 -------------------------------------------- Ending ........................................................... $ 15,130,357 $ 8,528,195 $ 11,640,813 ============================================
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2000, 1999, and 1998 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information, cash payments for: Interest ......................................................... $ 13,024,589 $ 10,735,683 $ 7,769,512 Income taxes ..................................................... 2,001,216 1,527,171 1,974,000 Supplemental Schedule of Noncash Investing Activities: Change in accumulated other comprehensive income, unrealized gains (losses) on securities available for sale, net ........... (766,168) (344,842) 72,677 Investment securities transferred from held to maturity portfolio to available for sale portfolio, at fair value ................. -- 1,030,743 -- Due to broker for purchase of securities available for sale ...... -- 3,800,000 --
See Notes to Consolidated Financial Statements. QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Note 1. Nature of Business and Significant Accounting Policies Nature of business: Quad City Holdings, Inc. (Company) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (Bank), Quad City Bancard, Inc. (Bancard), Allied Merchant Services, Inc. (Allied), and Quad City Holdings Capital Trust I. The Bank is a commercial bank that services the Quad Cities area, is chartered and regulated by the state of Iowa, is insured and subject to regulation by the Federal Deposit Insurance Corporation and is a member of and regulated by the Federal Reserve System. Bancard is an entity formed in April 1995 to conduct the Company's merchant credit card operation and is regulated by the Federal Reserve System. Allied was formed in March 1999 by Bancard as a captive independent sales organization that markets merchant credit card processing services. Allied is a wholly-owned subsidiary of Bancard. Quad City Holdings Capital Trust I was capitalized in June 1999 for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred Securities. Significant accounting policies: Accounting estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for estimated losses on loans is inherently subjective as it requires material estimates that are susceptible to significant change. The fair value disclosure of financial instruments is an estimate that can be computed within a range. Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and amounts due from banks. Cash flows from federal funds sold, certificates of deposit at financial institutions, loans, deposits, short-term borrowings, and other borrowings are treated as net increases or decreases. Cash and due from banks: The Bank is required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $2,753,000 and $1,476,000 at June 30, 2000 and 1999, respectively. Investment securities: Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Pursuant to SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", the Company transferred at fair value $1,030,743 of investment securities from held to maturity to available for sale on January 4, 1999. Loans held for sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Loans and allowance for estimated losses on loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for estimated losses on loans. The allowance for estimated losses on loans is maintained at the level considered adequate by management of the Company and the Bank to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance, the Company and the Bank make continuous evaluations of the loan portfolio and related off-balance-sheet commitments, and consider current economic conditions and other factors that may affect a borrower's ability to repay. In accordance with FASB Statement No. 114 "Accounting for Creditors for Impairment of a Loan", loans are considered impaired when, based on current information and events, it is probable the Company and the Bank will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to an impaired loan is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Company and the Bank recognize interest income on impaired loans on a cash basis. Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements and standby letters of credit. Such financial instruments are recorded when they are funded. Transfers of financial assets: In accordance with FASB Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", transfers of financial assets are accounted for as sales, only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives. Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company. Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Trust assets: Trust assets held by the Bank in a fiduciary, agency, or custodial capacity for its customers, other than cash on deposit at the Bank, are not included in the accompanying consolidated financial statements since such items are not assets of the Bank. Earnings per common share: Basic earnings per share are computed by dividing net income by the weighted average number of common stock shares outstanding for the respective period. Diluted earnings per share are computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding for the respective period. Reclassification: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders' equity, to conform with current year presentation. Note 2. Comprehensive Income Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale. Other comprehensive income (loss) is comprised as follows: Tax Before Expense Net Tax (Benefit) of Tax ----------------------------------------- Year ended June 30, 2000: Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the year ... $(1,195,285) $ (410,590) $ (784,695) Less, reclassification adjustment for (losses) included in net income .............................. (28,221) (9,694) (18,527) ----------------------------------------- Other comprehensive (loss) ........................ $(1,167,064) $ (400,896) $ (766,168) ========================================= Year ended June 30, 1999: Unrealized gains (losses) on securities available for sale: Unrealized holding (losses) arising during the year ... $ (517,765) $ (175,407) $ (342,358) Less, reclassification adjustment for gains included in net income .............................. 3,757 1,273 2,484 ----------------------------------------- Other comprehensive (loss) ........................ $ (521,522) $ (176,680) $ (344,842) ========================================= Year ended June 30, 1998: Unrealized gains on securities available for sale: Unrealized holding gains arising during the year ...... $ 114,505 $ 35,827 $ 78,678 Less, reclassification adjustment for gains included in net income .............................. 8,734 2,733 6,001 ----------------------------------------- Other comprehensive income ........................ $ 105,771 $ 33,094 $ 72,677 =========================================
Note 3. Investment Securities The amortized cost and fair value of investment securities as of June 30, 2000 and 1999 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ----------------------------------------------------------- June 30, 2000: Securities held to maturity: Municipal securities ....... $ 499,988 $ -- $ (8,769) $ 491,219 Other bonds ................ 75,000 -- (982) 74,018 ----------------------------------------------------------- $ 574,988 $ -- $ (9,751) $ 565,237 =========================================================== Securities available for sale: U.S. Treasury securities ..... $ 3,000,406 $ -- $ (11,607) $ 2,988,799 U.S. agency securities ....... 40,199,557 23,275 (1,018,786) 39,204,046 Mortgage-backed securities ... 7,006,906 -- (297,413) 6,709,493 Municipal securities ......... 5,821,229 -- (300,577) 5,520,652 Trust preferred securities ... 919,495 -- (49,780) 869,715 Other securities ............. 277,925 1,474 (18,042) 261,357 ----------------------------------------------------------- $ 57,225,518 $ 24,749 $ (1,696,205) $ 55,554,062 =========================================================== June 30, 1999: Securities held to maturity: Municipal securities ....... $ 699,415 $ 2,115 $ -- $ 701,530 Other bonds ................ 25,000 585 -- 25,585 ----------------------------------------------------------- $ 724,415 $ 2,700 $ -- $ 727,115 =========================================================== Securities available for sale: U.S. Treasury securities ..... $ 9,001,845 $ 47,862 $ (4,866) $ 9,044,841 U.S. agency securities ....... 29,267,483 1,267 (390,870) 28,877,880 Mortgage-backed securities ... 8,390,795 5,319 (183,867) 8,212,247 Municipal securities ......... 3,180,714 40,741 (12,139) 3,209,316 Other securities ............. 197,464 102 (7,941) 189,625 ----------------------------------------------------------- $ 50,038,301 $ 95,291 $ (599,683) $ 49,533,909 ===========================================================
All sales of securities during the years ended June 30, 2000, 1999, and 1998 were from securities identified as available for sale. Information on proceeds received, as well as the gains and losses from the sale of those securities is as follows: 2000 1999 1998 ------------------------------------ Proceeds from sales of securities ....... $5,191,661 $ 280,786 $ 14,020 Gross losses from sales of securities ... 50,587 1,717 -- Gross gains from sales of securities .... 22,366 5,474 8,734 The amortized cost and fair value of securities as of June 30, 2000 by contractual maturity are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the mortgage-backed securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary. Other securities are excluded from the maturity categories as there is no fixed maturity date. Amortized Cost Fair Value --------------------------- Securities held to maturity, due after one year through five years .................. $ 574,988 $ 565,237 =========================== Securities available for sale: Due in one year or less ...................... $ 5,999,708 $ 5,967,050 Due after one year through five years ........ 33,325,941 32,440,980 Due after five years ......................... 10,615,038 10,175,182 --------------------------- 49,940,687 48,583,212 Mortgage-backed securities ................... 7,006,906 6,709,493 Other securities ............................. 277,925 261,357 --------------------------- $57,225,518 $55,554,062 =========================== As of June 30, 2000 and 1999, investment securities with a carrying value of $33,718,441 and $23,399,384, respectively, were pledged on public deposits and for other purposes as required or permitted by law. The Company transferred securities with an amortized cost of $1,029,096 and an unrealized gain of $1,647 from the held to maturity portfolio to the available for sale portfolio on January 4, 1999, based on management's reassessment of their previous designations of securities giving consideration to liquidity needs, management of interest rate risk, and other factors. Note 4. Loans Receivable The composition of the loan portfolio as of June 30, 2000 and 1999 is presented as follows: 2000 1999 ---------------------------- Commercial ..................................... $167,682,652 $136,206,893 Real estate .................................... 36,301,379 27,591,886 Real estate - construction ..................... 3,463,682 3,367,458 Installment and other consumer ................. 34,405,138 30,810,455 ---------------------------- 241,852,851 197,976,692 Less allowance for estimated losses on loans ... 3,617,401 2,895,457 ---------------------------- $238,235,450 $195,081,235 ============================ Real estate loans include loans held for sale with a carrying value of $1,121,474 and $2,033,025 as of June 30, 2000 and 1999, respectively. The market value of these loans exceeded its carrying value at those dates. Loans on nonaccrual status amounted to $382,745 and $1,287,727 as of June 30, 2000 and 1999, respectively. Foregone interest income and cash interest collected on nonaccrual loans was not material during the years ended June 30, 2000, 1999, and 1998. Changes in the allowance for estimated losses on loans for the years ended June 30, 2000, 1999, and 1998 are presented as follows: 2000 1999 1998 ----------------------------------------- Balance, beginning ....................... $ 2,895,457 $ 2,349,838 $ 1,632,500 Provisions charged to expense ............ 1,051,818 891,800 901,976 Loans charged off ........................ (426,708) (478,515) (205,234) Recoveries on loans previously charged off 96,834 132,334 20,596 ---------------------------------------- Balance, ending .......................... $ 3,617,401 $ 2,895,457 $ 2,349,838 =========================================
Impaired loans were not material as of June 30, 2000 and 1999. The loan portfolio included a concentration of loans in certain industries as of June 30, 2000 as follows: Industry Balance -------------------------------------------------------------------------------- Commercial banks $ 12,182,901 Real estate operators and lessors 11,364,772 Retail eating establishments 8,889,778 Hospitals 4,981,975 Automotive dealers 4,932,967 Real estate developers 4,790,558 Fabricated metal products 4,439,792 Physicians 4,045,447 Generally these loans are collateralized by assets of the borrowers. The loans are expected to be repaid from cash flows or from proceeds from the sale of selected assets of the borrowers. Credit losses arising from lending transactions with these entities compare favorably with the Bank's credit loss experience on its loan portfolio as a whole. Loans are made in the normal course of business to directors, officers, and their related interests. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other persons. An analysis of the changes in the aggregate amount of these loans during the years ended June 30, 2000 and 1999 was as follows: 2000 1999 -------------------------------- Balance, beginning ................... $ 5,829,187 $ 4,831,491 Advances ............................. 1,968,717 3,188,483 Repayments ........................... (879,099) (2,190,787) -------------------------------- Balance, ending ...................... $ 6,918,805 $ 5,829,187 ================================ Note 5. Premises and Equipment The following summarizes the components of premises and equipment as of June 30, 2000 and 1999: 2000 1999 ---------------------------- Land ....................................... $ 630,699 $ 630,699 Buildings .................................. 5,003,570 4,634,608 Furniture and equipment .................... 4,324,866 3,955,489 ---------------------------- 9,959,135 9,220,796 Less accumulated depreciation .............. 2,243,514 1,667,180 ---------------------------- $7,715,621 $7,553,616 ============================ Certain facilities are leased under operating leases. Rental expense was $451,097, $429,932, and $176,057 for the years ended June 30, 2000, 1999, and 1998, respectively. Future minimum rental commitments under noncancelable leases on a fiscal year basis were as follows as of June 30, 2000: Year ending June 30: 2001 ............................................... $ 394,115 2002 ............................................... 427,042 2003 ............................................... 441,745 2004 ............................................... 415,526 2005 ............................................... 413,860 Thereafter ......................................... 1,042,253 ---------- $3,134,541 ========== Note 6. Deposits The aggregate amount of certificates of deposit each with a minimum denomination of $100,000, was $50,814,599 and $37,103,749 as of June 30, 2000 and 1999, respectively. As of June 30, 2000, the scheduled maturities of certificates of deposit were as follows: Year ending June 30: 2001 ............................................... $ 140,054,716 2002 ............................................... 10,032,255 2003 ............................................... 4,113,161 2004 ............................................... 1,718,779 2005 ............................................... 339,244 ------------- $ 156,258,155 ============= Note 7. Short-Term Borrowings Short-term borrowings as of June 30, 2000 of $20,771,724 consisted of federal funds purchased of $5,000,000 and overnight repurchase agreements with customers of $15,771,724. As of June 30, 1999 short-term borrowings of $9,685,877 represented federal funds purchased of $140,000 and overnight repurchase agreements with customers of $9,545,877. Information concerning repurchase agreements is summarized as follows as of June 30, 2000 and 1999: 2000 1999 ------------------------- Average daily balance during the year .............. $12,823,612 $ 4,248,238 Average daily interest rate during the year ........ 4.35% 4.14% Maximum month-end balance during the year .......... 18,784,998 11,418,714 Weighted average rate as of June 30 ................ 4.63% 3.99% Securities underlying the agreements as of June 30: Carrying value ................................... $24,397,505 $11,934,561 Fair value ....................................... 24,397,505 11,934,561 The securities underlying the agreements as of June 30, 2000 and 1999 were under the Company's control in safekeeping at third-party financial institutions. Note 8. Federal Home Loan Bank Advances The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As of June 30, 2000 and 1999, the Bank held $1,299,100 of FHLB stock. Maturity and interest rate information on advances from the FHLB as of June 30, 2000 and 1999 is as follows: June 30, 2000 ------------------------- Weighted Average Amount Due Interest Rate ------------------------- Maturity: Year ending June 30: 2001 .......................................... $ 3,250,000 6.45% 2002 .......................................... 2,027,195 6.96 2003 .......................................... 5,822,799 6.33 2004 .......................................... 1,885,915 5.88 2005 .......................................... 750,000 5.90 Thereafter .................................... 8,689,489 6.03 ----------- Total FHLB advances ..................... $22,425,398 6.24 ============ June 30, 1999 ------------------------- Weighted Average Amount Due Interest Rate ------------------------- Maturity: Year ending June 30: 2000 .......................................... $ 3,500,000 5.76% 2001 .......................................... 3,250,000 5.69 2002 .......................................... 2,057,063 6.96 2003 .......................................... 6,989,575 6.19 2004 .......................................... 1,953,075 5.87 Thereafter ...................................... 6,856,177 5.92 ----------- Total FHLB advances ............................. $24,605,890 6.03 =========== Advances from the FHLB are collateralized by 1-to-4 unit residential mortgages equal to 130% of total outstanding notes. Additionally, securities with a carrying value of approximately $4.4 million as of June 30, 2000 and $6.3 million as of June 30, 1999 were pledged as collateral on these advances. Note 9. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures The Company issued all of the 1,200,000 authorized shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities of Quad City Holdings Capital Trust I Holding Solely Subordinated Debentures. Distributions are paid quarterly. Cumulative cash distributions are calculated at a 9.2% annual rate. The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarters, but not beyond June 30, 2029. At the end of any deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on June 30, 2029; however, the Company has the option to shorten the maturity date to a date not earlier than June 30, 2004. The redemption price is $10 per capital security plus any accrued and unpaid distributions to the date of redemption. Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Company's indebtedness and senior to the Company's capital stock. The debentures are included on the balance sheet as of June 30, 2000 and 1999 as liabilities. For regulatory purposes, approximately $7,000,000 of the capital securities are allowed in the calculation of Tier I capital, with the remainder allowed as Tier II 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 $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, 2000 and 1999. The revolving credit note expires on July 1, 2001. Interest is payable quarterly at the adjusted LIBOR rate, as defined in the credit note agreement, and varies by borrowing. As of June 30, 2000 the borrowing rates ranged from 8.6% to 8.9% depending on the repricing interval selected. The revolving credit note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various operating ratios. The Company complied with all of the covenants or they were waived as of June 30, 2000 and 1999. Note 11. Restructuring of Merchant Broker Agreement In June 1998, the Company recognized $2,168,000 of income as a result of signing a new merchant broker agreement with an ISO. The term of the new agreement was for a minimum one-year period, and replaced a prior agreement that had an expiration date in the year 2002. In consideration for reducing the term from four years to a minimum of one year, the Company received total compensation of $2,900,000. The Company recognized $732,000 and $2,168,000 of the income during the years ended June 30, 1999 and 1998, respectively. In addition, the Company received monthly fees of $25,000 for servicing the current merchants during the remaining term of the agreement, which expired May 31, 2000. In future years, if agreements with other ISOs are not established, there could be a reduction in income. The Company has added several new ISOs during the past year and continues to actively pursue relationships with other ISOs. Note 12. Federal and State Income Taxes Federal and state income tax expense was comprised of the following components for the years ended June 30, 2000, 1999, and 1998: Year Ended June 30, -------------------------------------------------- 2000 1999 1998 -------------------------------------------------- Current ............. $ 2,079,186 $ 1,381,903 $ 2,231,183 Deferred ............ (398,971) 232,262 (553,283) -------------------------------------------------- $ 1,680,215 $ 1,614,165 $ 1,677,900 ================================================== A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended June 30, 2000, 1999, and 1998: Year Ended June 30, ---------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------ ------------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ---------------------------------------------------------------------------- Computed "expected" tax expense ............... $ 1,549,010 35.0% $ 1,427,645 35.0% $ 1,424,910 35.0% Effect of graduated tax rates (44,257) (1.0) (40,790) (1.0) (40,712) (1.0) Tax exempt income, net ...... (132,769) (3.0) (46,853) (1.1) (19,759) (0.5) State income taxes, net of federal benefit ........... 172,445 3.9 126,123 3.1 268,796 6.6 Other ....................... 135,786 3.1 148,040 3.6 44,665 1.1 --------------------------------------------------------------------------- $ 1,680,215 38.0% $ 1,614,165 39.6% $ 1,677,900 41.2% ===========================================================================
The net deferred tax assets included with other assets on the balance sheet consisted of the following as of June 30, 2000 and 1999: 2000 1999 ---------------------- Deferred tax assets: Net unrealized losses on securities available for sale $ 572,938 $ 172,042 Deferred compensation ................................ 112,299 -- Loan and credit card losses .......................... 1,357,186 1,063,999 Other ................................................ 69,380 23,801 ---------------------- 2,111,803 1,259,842 ---------------------- Deferred tax liabilities: Premises and equipment ............................... 447,330 406,302 Investment securities accretion ...................... 29,185 27,282 Other ................................................ 34,973 25,810 ---------------------- 511,488 459,394 ---------------------- Net deferred tax asset ......................... $1,600,315 $ 800,448 ====================== The change in deferred income taxes was reflected in the financial statements as follows for the years ended June 30, 2000, 1999, and 1998: 2000 1999 1998 ------------------------------------ Provision for income taxes .............. $(398,971) $ 232,262 $(553,283) Statement of stockholders' equity- accumulated other comprehensive income, unrealized gains (losses) on securities available for sale, net . (400,896) (176,680) 33,094 ------------------------------------ $(799,867) $ 55,582 $(520,189) ==================================== Note 13. Employee Benefit Plans The Company has a profit sharing plan which includes a provision designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions. All employees are eligible to participate in the plan. The Company matches 100% of the first 2% 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 make additional contributions to the plan which are allocated to the accounts of participants in the plan based on relative compensation. Company contributions for the years ended June 30, 2000, 1999, and 1998 were as follows: 2000 1999 1998 ------------------------------------ Matching contribution ................ $155,237 $132,835 $100,164 Discretionary contribution ........... 50,000 45,000 45,000 ------------------------------------ $205,237 $177,835 $145,164 ==================================== During the year ended June 30, 2000, the Company entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company's matching contribution differs by officer and is a maximum of either $15,000 or $20,000 annually. Interest is computed at The Wall Street Journal prime rate, with a minimum of 8% and a maximum of 10%. Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. During the year ended June 30, 2000, the Company expensed $76,860 related to the agreements. As of June 30, 2000 the liability related to the agreements totals $76,860. Note 14. Warrants and Stock Based Compensation Warrants: As part of the underwriting agreement for its initial public offering, the Company issued warrants to the underwriters for the purchase of 37,500 shares of common stock at $8 per share. The underwriters exercised all of the warrants on May 6, 1997. The warrants became exercisable on October 13, 1994 (the date commencing one year from the date of the public offering) and would have remained exercisable for a period of four years after such date. Common stock of $75,000 as of June 30, 1993 represented 112,500 shares of the Company's common stock issued in a private placement in 1993. Each stockholder who purchased stock in the private placement received a unit (at a price of $6.67 per unit) which consisted of one and one-half shares of the Company's common stock and one and one-half warrants. Each warrant entitled the holder to purchase an additional share of Company common stock for $7.33, exercisable by October 13, 1999. During the years ended June 30, 2000, 1999, and 1998 11,250, 30,000, and 71,250, respectively, of the warrants were exercised leaving none remaining as of June 30, 2000. Stock option and incentive plans: The Company's Board of Directors and its stockholders adopted in June 1993 the Quad City Holdings, Inc. Stock Option Plan (Stock Option Plan). Up to 150,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive stock options or nonqualified stock options granted under the Stock Option Plan. The Company's Board of Directors adopted in November 1996 the Quad City Holdings, Inc. 1997 Stock Incentive Plan (Stock Incentive Plan). Up to 150,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock options and restricted stock granted under the Stock Incentive Plan. The Stock Option Plan and the Stock Incentive Plan are administered by the compensation committee appointed by the Board of Directors (Committee). The number and exercise price of options granted under the Stock Option Plan and the Stock Incentive Plan is determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for incentive stock options. All options have a 10-year life and will vest and become exercisable from 1-to-5 years after the date of the grant. Only nonqualified stock options have been issued to date. In the case of nonqualified stock options, the Stock Option Plan and the Stock Incentive Plan provide for the granting of "Tax Benefit Rights" to certain participants at the same time as these participants are awarded nonqualified options. Each Tax Benefit Right entitles a participant to a cash payment equal to the excess of the fair market value of a share of common stock on the exercise date over the exercise price of the related option multiplied by the difference between the rate of tax on ordinary income over the rate of tax on capital gains (federal and state). As permitted under generally accepted accounting principles, grants under the plan are accounted for following the provisions of APB Opinion No. 25 and its related interpretations. Accordingly, no compensation cost has been recognized for grants made to date. Had compensation cost been determined based on the fair value method prescribed in FASB Statement No. 123, reported net income would not have changed by a material amount, and earnings per share would not have changed by more than 2(cent), 2(cent), and 1(cent) for the years ended June 30, 2000, 1999, and 1998, 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, 2000, 1999, and 1998: dividend rate of 0%: risk-free interest rates based upon current rates at the date of grant (5.62% to 6.68%); expected lives of 10 years, and expected price volatility of 15.59% to 23.11%. A summary of the stock option plans as of June 30, 2000, 1999, and 1998 and changes during the years ended on those dates is presented below: 2000 1999 1998 ----------------- ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------------------------------------------------------------- Outstanding, beginning ........ 190,171 $ 9.36 190,887 $ 9.12 175,155 $ 7.89 Granted ..................... 25,900 14.83 8,500 18.03 19,062 20.92 Exercised ................... (26,060) 6.69 (720) 9.49 (75) 7.23 Forfeited ................... (1,006) 17.80 (8,496) 12.67 (3,255) 12.15 ------- ------- ------- Outstanding, ending ........... 189,005 10.24 190,171 9.36 190,887 9.12 ======= ======= ======= Exercisable, ending ........... 138,834 149,109 130,455 Weighted average fair value per option of options granted during the year ............. $ 7.68 $ 8.88 $ 9.72
A further summary of options outstanding as of June 30, 2000 is presented below: Options Outstanding ------------------------------------ Options Exercisable Weighted ---------------------- Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price ------------------------------------------------------------------------------------- $6.00 to $6.83 110,320 3.5 years $ 6.68 110,320 $ 6.68 $7.83 to $8.83 8,655 5.9 years 8.75 7,005 8.75 $10.00 to $11.67 750 6.8 years 11.67 450 11.67 $12.69 to $13.25 11,000 9.6 years 13.07 - - $13.33 to $13.67 21,735 7.0 years 13.67 13,335 13.66 $14.08 to $21.33 36,545 9.0 years 18.42 7,724 20.38 ------- ------- 189,005 138,834 ======= =======
Stock appreciation rights: Additionally, the Stock Incentive Plan allows the granting of stock appreciation rights (SARs). SARs are rights entitling the grantee to receive cash having a fair market value equal to the appreciation in the market value of a stated number of shares from the date of grant. Like options, the number and exercise price of SARs granted is determined by the Committee. The SARs will vest 20% per year, and the term of the SAR may not exceed 10 years from the date of the grant. As of June 30, 2000 and 1999 there were 52,050 and 39,625 SARs, respectively, outstanding, with 17,490 and 9,675, respectively, exercisable. Note 15. Preferred Stock In June 1999, the Company redeemed all 25 outstanding shares of Preferred Stock for cash of $2,977,884. The stock was senior to common stock as to dividends, liquidation, and redemption rights, and did not confer general voting rights. The redemption amount was equal to the sum of (i) $100,000; plus (ii) a premium in the amount of $9,750 multiplied by a fraction, the numerator of which was the total number of calendar days the Preferred Stock being redeemed had been outstanding and the denominator of which was 365. Note 16. Regulatory Capital Requirements and Restrictions on Dividends Federal regulatory agencies have adopted various capital standards for financial institutions, including risk-based capital standards. The primary objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of financial institutions and to take into account the different risks among financial institutions' assets and off-balance-sheet items. Risk-based capital standards have been supplemented with requirements for a minimum Tier 1 capital to average total assets ratio (leverage ratio). In addition, regulatory agencies consider the published capital levels as minimum levels and may require a financial institution to maintain capital at higher levels. The actual amounts and capital ratios as of June 30, 2000 and 1999 with the minimum requirements for the Company and Bank are presented below: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------- As of June 30, 2000: Company: Total risk based capital $ 36,522,000 13.5% $ 21,689,000 > 8.0% $ 27,112,000 > 10.0% --- --- Tier 1 risk based capital 28,173,000 10.4 10,845,000 > 4.0 16,267,000 > 6.0 --- --- Leverage ratio 28,173,000 8.1 13,988,000 > 4.0 17,485,000 > 5.0 --- --- Bank: Total risk based capital $ 28,363,000 10.7% $ 21,165,000 > 8.0% $ 26,457,000 > 10.0% --- --- Tier 1 risk based capital 25,052,000 9.5 10,583,000 > 4.0 15,874,000 > 6.0 --- --- Leverage ratio 25,052,000 7.4 13,481,000 > 4.0 16,852,000 > 5.0 --- --- As of June 30, 1999: Company: Total risk based capital $ 33,695,000 13.8% $ 19,476,000 > 8.0% $ 24,345,000 > 10.0% --- --- Tier 1 risk based capital 25,060,000 10.3 9,738,000 > 4.0 14,607,000 > 6.0 --- --- Leverage ratio 25,060,000 8.0 12,523,000 > 4.0 15,603,000 > 5.0 --- --- Bank: Total risk based capital $ 25,139,000 11.3% $ 17,875,000 > 8.0% $ 22,344,000 > 10.0% --- --- Tier 1 risk based capital 22,244,000 10.0 8,938,000 > 4.0 13,406,000 > 6.0 --- --- Leverage ratio 22,244,000 7.2 12,374,000 > 4.0 15,467,000 > 5.0 --- ---
Federal Reserve Board policy provides that a bank holding company should not pay dividends unless (i) the dividends can be fully funded out of net income from the company's net earnings over the prior year and (ii) the prospective rate of earnings retention appears consistent with the company's (and its subsidiaries') capital needs, asset quality, and overall financial condition. In addition, the Delaware General Corporation Law restricts the Company from paying dividends except out of its surplus, or in the case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. In addition, the Bank, as a member of the Federal Reserve System, will be prohibited from paying dividends to the extent such dividends declared in any calendar year exceed the total of its net profits of that year combined with its retained net profits of the preceding two years, or are otherwise determined to be an "unsafe and unsound practice" by the Federal Reserve Board. Note 17. Earnings Per Common Share The following information was used in the computation of basic and diluted earnings per common share for the years ended June 30, 2000, 1999, and 1998: 2000 1999 1998 ---------------------------------- Basic and diluted earnings, net income ..... $2,745,527 $2,464,821 $2,393,272 ================================== Weighted average common shares outstanding . 2,309,453 2,285,500 2,196,297 Weighted average common shares issuable upon exercise of stock options and warrants ..... 76,387 113,025 157,635 ---------------------------------- Weighted average common and common equivalent shares outstanding .............. 2,385,840 2,398,525 2,353,932 ================================== Note 18. Commitments and Contingencies In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of June 30, 2000 and 1999, commitments to extend credit aggregated $74,934,000 and $58,119,081, respectively. As of June 30, 2000 and 1999, standby letters of credit aggregated $957,000 and $551,500, respectively. Management does not expect that all of these commitments will be funded. Bancard is subject to the risk of chargebacks from cardholders and the merchant being incapable of refunding the amount charged back. Management attempts to mitigate such risk by regular monitoring of merchant activity and in appropriate cases, holding cash reserves deposited by the merchant. The Company also has a guarantee to MasterCard International Incorporated, which is backed up by a performance bond in the amount of $1,000,000. As of June 30, 2000 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 $31,794,780 and $44,004,699 as of June 30, 2000 and 1999, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks. Note 19. Quarterly Results of Operations (Unaudited) Year Ended June 30, 2000 ------------------------------------------------- September December March June 1999 1999 2000 2000 ------------------------------------------------- Total interest income ................ $5,800,637 $5,935,251 $5,952,519 $6,390,791 Total interest expense ............... 3,102,826 3,329,541 3,299,703 3,556,523 ------------------------------------------------- Net interest income .......... 2,697,811 2,605,710 2,652,816 2,834,268 Provision for loan losses ............ 274,700 296,800 85,600 394,718 Noninterest income ................... 1,372,113 1,623,759 1,624,409 1,534,135 Noninterest expenses ................. 2,773,541 2,727,889 2,960,061 3,005,970 ------------------------------------------------- Net income before income taxes 1,021,683 1,204,780 1,231,564 967,715 Federal and state income taxes ....... 389,035 461,860 471,890 357,430 ------------------------------------------------- Net income ................... $ 632,648 $ 742,920 $ 759,674 $ 610,285 ================================================= Earnings per common share: Basic .............................. $ 0.28 $ 0.32 $ 0.33 $ 0.26 Diluted ............................ 0.26 0.31 0.32 0.26 Year Ended June 30, 1999 ------------------------------------------------- September December March June 1998 1998 1999 1999 ------------------------------------------------- Total interest income ................ $4,785,014 $4,949,961 $4,948,755 $5,432,190 Total interest expense ............... 2,692,979 2,718,434 2,673,931 2,941,342 ------------------------------------------------- Net interest income .......... 2,092,035 2,231,527 2,274,824 2,490,848 Provision for loan losses ............ 252,000 174,200 218,200 247,400 Noninterest income ................... 1,191,066 1,329,819 1,437,189 1,602,377 Noninterest expenses ................. 2,301,829 2,376,376 2,472,977 2,527,717 ------------------------------------------------- Net income before income taxes 729,272 1,010,770 1,020,836 1,318,108 Federal and state income taxes ....... 290,451 391,314 406,889 525,511 ------------------------------------------------- Net income ................... $ 438,821 $ 619,456 $ 613,947 $ 792,597 ================================================= Earnings per common share: Basic .............................. $ 0.19 $ 0.27 $ 0.27 $ 0.35 Diluted ............................ 0.18 0.26 0.25 0.34 Year Ended June 30, 1998 ------------------------------------------------- September December March June 1997 1997 1998 1998 ------------------------------------------------- Total interest income ................ $3,305,107 $3,617,832 $3,797,383 $4,356,245 Total interest expense ............... 1,757,272 1,963,477 2,157,917 2,463,355 ------------------------------------------------- Net interest income .......... 1,547,835 1,654,355 1,639,466 1,892,890 Provision for loan losses ............ 304,355 215,643 233,260 148,718 Noninterest income ................... 922,495 872,117 1,134,103 3,219,702 Noninterest expenses ................. 1,606,833 1,706,098 2,048,517 2,548,367 ------------------------------------------------- Net income before income taxes 559,142 604,731 491,792 2,415,507 Federal and state income taxes ....... 218,200 237,075 191,425 1,031,200 ------------------------------------------------- Net income ................... $ 340,942 $ 367,656 $ 300,367 $1,384,307 ================================================= Earnings per common share: Basic .............................. $ 0.15 $ 0.17 $ 0.14 $ 0.63 Diluted ............................ 0.14 0.15 0.13 0.60
Note 20. Parent Company Only Financial Statements The following is condensed financial information of Quad City Holdings, Inc. (parent company only): Condensed Balance Sheets June 30, ---------------------------- ASSETS 2000 1999 ----------------------------------------------------------------------------------- Cash and due from banks ............................ $ 1,803,841 $ 4,911,367 Securities available for sale, at fair value ....... 1,131,073 189,625 Investment in Quad City Bank and Trust Company ..... 23,992,847 21,916,436 Investment in Quad City Bancard, Inc. .............. 2,529,026 1,432,802 Investment in Quad City Holdings Capital Trust I ... 390,432 380,000 Net loans receivable ............................... 532,443 -- Other assets ....................................... 1,895,581 1,984,519 ---------------------------- Total assets ............................... $ 32,275,243 $ 30,814,749 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY ----------------------------------------------------------------------------------- Liabilities: COMR preferred securities of subsidiary trust .... $ 12,000,000 $ 12,000,000 Other liabilities ................................ 203,824 341,278 ---------------------------- Total liabilities .......................... 12,203,824 12,341,278 ---------------------------- Stockholders' Equity: Common stock ..................................... 2,325,416 2,296,251 Additional paid-in capital ....................... 12,147,984 11,959,080 Retained earnings ................................ 7,296,017 4,550,490 Accumulated other comprehensive (loss) ........... (1,098,518) (332,350) Less cost of common shares acquired for the treasury ....................................... (599,480) -- ---------------------------- Total stockholders' equity ................. 20,071,419 18,473,471 ---------------------------- Total liabilities and stockholders' equity ......... $ 32,275,243 $ 30,814,749 ============================
Condensed Statements of Income Year Ended June 30, ------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------------------------- Total interest income .................................... $ 197,387 $ 78,763 $ 48,178 Investment securities gains, net ......................... 21,983 5,474 8,734 Equity in net income of Quad City Bank and Trust Company .......................................... 2,808,058 2,212,931 1,208,090 Equity in net income of Quad City Bancard, Inc. .......... 596,224 564,886 1,325,992 Equity in net income of Quad City Holdings Capital Trust I 10,432 -- -- Other .................................................... 233,927 85,945 81,435 ------------------------------------ Total income ..................................... 3,868,011 2,947,999 2,672,429 ------------------------------------ Interest expense ......................................... 1,137,402 220,794 129,271 Other .................................................... 583,282 495,284 304,186 ------------------------------------ Total expenses ................................... 1,720,684 716,078 433,457 ----------------------------------- Income before income tax benefit ................. 2,147,327 2,231,921 2,238,972 Income tax benefit ....................................... 598,200 232,900 154,300 ------------------------------------ Net income ....................................... $2,745,527 $2,464,821 $2,393,272 ====================================
Condensed Statements of Cash Flows Year Ended June 30, -------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income ............................................. $ 2,745,527 $ 2,464,821 $ 2,393,272 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Distributions in excess of (less than) earnings of: Quad City Bank and Trust Company ................... (2,808,058) (2,212,931) (1,208,090) Quad City Bancard, Inc. ............................ (596,224) (564,886) 574,008 Quad City Holdings Capital Trust I ................. (10,432) -- -- Depreciation ......................................... 4,543 4,036 3,520 Provision for loan losses ............................ 6,000 (7,500) -- Investment securities gains, net ..................... (21,983) (5,474) (8,734) Tax benefit of nonqualified stock options exercised .. 81,178 3,218 -- (Increase) decrease in accrued interest receivable ... (20,140) 4,780 749 (Increase) decrease in other assets .................. 130,943 (770,199) (605,877) Increase (decrease) in other liabilities ............. (137,454) 220,129 (14,606) -------------------------------------------- Net cash provided by (used in) operating activities ....................................... (626,100) (864,006) 1,134,242 -------------------------------------------- Cash Flows from Investing Activities: Purchase of securities available for sale .............. (1,228,400) (67,400) (5,958) Proceeds from sale of securities available for sale .... 250,426 32,865 14,020 Capital infusion, Quad City Bank and Trust Company ..... -- (2,000,000) (3,200,000) Capital infusion, Quad City Bancard, Inc. .............. (500,000) (500,000) -- Capital infusion, Quad City Holdings Capital Trust I .. -- (380,000) -- Net loans (originated) repaid .......................... (538,443) 510,344 (169,850) (Purchase) disposal of premises and equipment .......... (2,420) (2,420) 10,623 -------------------------------------------- Net cash (used in) investing activities .......... (2,018,837) (2,406,611) (3,351,165) -------------------------------------------- Cash Flows from Financing Activities: Net (decrease) in other borrowings ..................... -- (1,500,000) -- Proceeds from issuance of preferred securities of subsidiary trust ..................................... -- 12,000,000 -- Redemption of preferred stock .......................... -- (2,977,884) -- Purchase of treasury stock ............................. (599,480) -- -- Proceeds from issuance of preferred stock .............. -- -- 1,500,000 Proceeds from issuance of common stock, net of simultaneous redemptions ............................... 136,891 225,940 523,043 -------------------------------------------- Net cash provided by (used in) financing activities (462,589) 7,748,056 2,023,043 -------------------------------------------- Net increase (decrease) in cash and due from banks ....... (3,107,526) 4,477,439 (193,880) Cash and due from banks: Beginning .............................................. 4,911,367 433,928 627,808 -------------------------------------------- Ending ................................................. $ 1,803,841 $ 4,911,367 $ 433,928 ============================================
Note 21. Fair Value of Financial Instruments FASB Statement No. 107 "Disclosures about Fair Value of Financial Instruments" requires disclosures of fair value information about financial instruments for which it is practicable to estimate that value. When quoted market prices are not available, fair values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the discounted rates and estimates of future cash flows. In this regard, fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement. Some financial instruments and all nonfinancial instruments are excluded from the disclosures. The aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of their financial instruments. Cash and due from banks, federal funds sold, and certificates of deposit at financial institutions: The carrying amounts reported in the balance sheets for cash and due from banks, federal funds sold, and certificates of deposit at financial institutions equal their fair values. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: The fair values for variable rate loans equal their carrying values. The fair values for all other types of loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Accrued interest receivable and payable: The fair value of accrued interest receivable and payable is equal to its carrying value. Deposits: The fair values disclosed for demand deposits equal their carrying amounts, which represents the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits. Short-term borrowings: The fair value for short-term borrowings is equal to its carrying value. Federal Home Loan Bank advances and Company obligated mandatorily redeemable preferred securities: The fair value of the Company's Federal Home Loan Bank advances and Company obligated mandatorily redeemable preferred securities is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Commitments to extend credit: The fair value of these commitments is not material. The carrying values and estimated fair values of the Company's financial instruments as of June 30, 2000 and 1999 are presented as follows: 2000 1999 --------------------------- --------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------------------------------------------------- Cash and due from banks .......................... $ 15,130,357 $ 15,130,357 $ 8,528,195 $ 8,528,195 Federal funds sold ............................... 26,105,000 26,105,000 39,125,000 39,125,000 Certificates of deposit at financial institutions 12,776,463 12,776,463 12,535,193 12,535,193 Investment securities: Held to maturity ............................... 574,988 565,237 724,415 727,115 Available for sale ............................. 55,554,062 55,554,062 49,533,909 49,533,909 Loans receivable, net ............................ 238,235,450 237,441,000 195,081,235 196,217,000 Accrued interest receivable ...................... 2,633,120 2,633,120 2,006,503 2,006,503 Deposits ......................................... 288,066,756 287,771,000 247,965,879 248,312,000 Short-term borrowings ............................ 20,771,724 20,771,724 9,685,877 9,685,877 Federal Home Loan Bank advances .................. 22,425,398 22,287,000 24,605,890 24,742,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures ........................ 12,000,000 11,896,154 12,000,000 12,000,000 Accrued interest payable ......................... 1,852,267 1,852,267 1,588,263 1,588,263
Note 22. Business Segment Information Selected financial information on the Company's business segments is presented as follows for the years ended June 30, 2000, 1999, and 1998: Year Ended June 30, ----------------------------------------------- 2000 1999 1998 ----------------------------------------------- Quad City Holdings, Inc.: Revenue ........................................... $ 265,204 $ 48,485 $ 114,347 Net income (loss) ................................. (839,280) (312,996) (140,810) Assets ............................................ 3,696,110 2,182,658 1,906,958 Depreciation ...................................... 4,543 4,036 3,520 Capital expenditures .............................. 2,420 2,420 -- Quad City Bank and Trust Company, excluding Trust Department: Revenue ........................................... 25,563,964 22,040,065 16,408,561 Net income ........................................ 2,446,654 1,881,433 947,510 Assets ............................................ 361,927,225 317,059,752 247,441,852 Depreciation ...................................... 584,872 589,287 389,177 Capital expenditures .............................. 751,653 451,535 2,870,009 Quad City Bancard, Inc.: Revenue ........................................... 2,520,136 2,067,303 3,563,574 Net income ........................................ 674,800 564,886 1,325,992 Assets ............................................ 1,998,280 2,103,805 802,179 Depreciation ...................................... 46,423 33,752 29,660 Capital expenditures .............................. 43,770 66,468 28,786 Trust Department, Quad City Bank and Trust Company: Revenue ........................................... 1,884,310 1,520,518 1,138,502 Net income ........................................ 463,353 331,498 260,580 Assets ............................................ N/A N/A N/A Depreciation ...................................... N/A N/A N/A Capital expenditures .............................. N/A N/A N/A
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant The information required by this item is set forth under the caption "Election of Directors" in the Proxy Statement, and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is set forth under the caption "Executive Compensation" in the Proxy Statement, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is set forth under the caption "Security Ownership of Certain Beneficial Owners" in the Proxy Statement, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Transactions with Management" in the Proxy Statement, and is incorporated herein by reference. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements These documents are listed in the Index to Consolidated Financial Statements under Item 8. 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 Quad City filed a current report on Form 8-K dated April 5, 2000 with the Securities and Exchange Commission on June 9, 2000. (c) Exhibits The Index to Exhibits appears at page xx of this report. Appendix A SUPERVISION AND REGULATION General Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of Quad City Holdings, Inc. (the "Company") can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Iowa Superintendent of Banking (the "Superintendent"), the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the "SEC"). The effect of applicable statutes, regulations and regulatory policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following is a summary of the material elements of the regulatory framework that applies to the Company and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply to the Company and its subsidiaries, nor does it restate all of the requirements of the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries. Recent Regulatory Developments The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November, 1999, allows eligible bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. Under the Act, an eligible bank holding company that elects to become a financial holding company may engage in any activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity, or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. National banks are also authorized by the Act to engage, through "financial subsidiaries," in certain activity that is permissible for financial holding companies (as described above) and certain activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity. Various bank regulatory agencies have begun issuing regulations as mandated by the Act. During June 2000, all of the federal bank regulatory agencies jointly issued regulations implementing the privacy provisions of the Act. In addition, the Federal Reserve issued interim regulations establishing procedures for bank holding companies to elect to become financial holding companies and listing the financial activities permissible for financial holding companies, as well as describing the extent to which financial holding companies may engage in securities and merchant banking activities. The Federal Reserve has issued an interim regulation regarding the parameters under which state member banks may establish and maintain financial subsidiaries. At this time, it is not possible to predict the impact the Act and its implementing regulations may have on the Company. As of the date of this filing, the Company has not applied for or received approval to operate as a financial holding company. In addition, the Quad City Bank and Trust Company, a banking subsidiary of the Company (the "Bank"), has not applied for or received approval to establish financial subsidiaries. The Company General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company's operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require. Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. 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 to 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 a bank holding company without prior notice to the appropriate federal bank regulator. "Control" is defined in certain cases as the acquisition of 10% of the outstanding shares of a bank or a bank holding company. Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: 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 qualify as Tier 1 capital and a portion of the company's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of June 30, 2000, the Company had regulatory capital in excess of the Federal Reserve's minimum requirements, with a risk-based capital ratio of 13.5% and a leverage ratio of 8.1%. Dividends. The Delaware General Corporation Law (the "DGCL") allows the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, the Federal Reserve has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Federal Securities Regulation. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Bank General. The Bank is an Iowa-chartered bank, the deposit accounts of which are insured by the FDIC's Bank Insurance Fund ("BIF"). The Bank is also a member of the Federal Reserve System ("member bank"). As an Iowa-chartered, FDIC-insured member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the Superintendent, as the chartering authority for Iowa banks, the Federal Reserve, as the primary federal regulator of member banks, and the FDIC, as administrator of the BIF. Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the semi-annual period ending June 30, 2000, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning July 1, 2000, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution (i) has engaged or is engaging in unsafe or unsound practices, (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. 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, 1999, the FICO assessment rate for SAIF members ranged between approximately 0.058% of deposits and approximately 0.061% of deposits, while the FICO assessment rate for BIF members ranged between approximately 0.0116% of deposits and approximately 0.0122% of deposits. During the fiscal year ended June 30, 2000, the Bank paid FICO assessments totaling $41,646. Supervisory Assessments. All Iowa banks are required to pay supervisory assessments to the Superintendent to fund the operations of the Superintendent. During the fiscal year ended June 30, 2000, the Bank paid supervisory assessments to the Superintendent totaling $73,910. Capital Requirements. The Federal Reserve has established the following minimum capital standards for state-chartered Federal Reserve System member banks, such as the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital and total capital under the Federal Reserve's capital guidelines for bank holding companies (see "--The Company--Capital Requirements"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the Federal Reserve provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the fiscal year ended June 30, 2000, the Bank was not required by the Federal Reserve to increase its capital to an amount in excess of the minimum regulatory requirement. As of June 30, 2000, the Bank exceeded its minimum regulatory capital requirements with a leverage ratio of 7.4% and a risk-based capital ratio of 10.7%. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the institution to submit a capital 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 to be acquired; restricting transactions between the institution 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 payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. As of June 30, 2000, the Bank was well capitalized, as defined by Federal Reserve regulations. Dividends. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by a state member bank, such as the Bank. Generally, a member bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior Federal Reserve approval, however, a state member bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank's calendar year-to-date net income plus the bank's retained net income for the two preceding calendar years. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of June 30, 2000. As of June 30, 2000, approximately $1.9 million was available to be paid as dividends to the Company by the Bank. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the Bank if the Federal Reserve determines such payment would constitute an unsafe or unsound practice. Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship. Safety and Soundness Standards. The federal banking agencies have adopted guidelines 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 general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments. Branching Authority. Iowa law strictly regulates the establishment of bank offices. Under the Iowa Banking Act, an Iowa state bank, such as the 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 bank is located. Further, Iowa law prohibits an Iowa bank from establishing de novo branches in a municipality other than the municipality in which the bank's principal place of business is located, if another bank already operates one or more offices in the municipality in which the de novo branch is to be located. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), both state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Iowa permits interstate bank mergers, subject to certain restrictions, including a prohibition against interstate mergers involving an Iowa bank that has been in existence and continuous operation for fewer than five years. In 1997, the Company formed a de novo Illinois bank that was merged into the Bank, resulting in the Bank establishing a branch office in Illinois. Under Illinois law, the Bank may continue to establish offices in Illinois to the same extent permitted for an Illinois bank (subject to certain conditions, including certain regulatory notice requirements). State Bank Activities. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank. Federal Reserve System. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $44.3 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $44.3 million, the reserve requirement is $1.329 million plus 10% of the aggregate amount of total transaction accounts in excess of $44.3 million. The first $5.0 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank is in compliance with the foregoing requirements. 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 Quad City Holdings, Inc. ("the Company") for the periods shown. All average amounts in these tables and schedules were determined by using month end data, which management believes provides a fair representation of the daily operations of the Company. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential. A and B. Consolidated Average Balance Sheets and Analysis of Net Interest Earnings Years Ended June 30, ----------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------ ---------------------------- -------------------------------- Interest Average Interest Average Interest Average Average Earned Yield Or Average Earned Yield Or Average Earned Or Yield Or Balance Or Paid Cost Balance Or Paid Cost Balance Paid Cost ----------------------------------------------------------------------------------------------- (Dollars in Thousands) ASSETS Interest earnings assets: Federal funds sold .............. $ 27,068 $ 1,488 5.50% $ 30,224 $ 1,492 4.94% $ 11,005 $ 646 5.87% Certificates of deposit at financial institutions ...... 12,444 778 6.25 11,814 696 5.89 7,173 441 6.15 Investment securities (1) ....... 56,898 3,448 6.06 41,468 2,286 5.51 31,457 1,906 6.06 Net loans receivable (2) ........ 209,311 18,365 8.77 182,130 15,642 8.59 139,860 12,084 8.64 ------------------- ------------------ ------------------- Total Interest earning assets 305,721 24,079 7.88 265,636 20,116 7.57 189,495 15,077 7.96 Noninterest-earning assets: Cash and due from banks ......... $ 13,699 $ 9,431 $ 9,595 Premises and equipment .......... 7,612 7,536 6,527 Other ........................... 8,822 5,157 3,756 -------- -------- -------- Total assets .................. $335,854 $287,760 $209,373 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Interest-bearing demand deposits ..................... $ 81,979 2,709 3.30% $ 75,530 2,559 3.39% $ 56,612 2,053 3.63% Savings deposits ............... 6,112 125 2.05 4,654 93 2.00 2,954 65 2.20 Time deposits .................. 134,245 7,291 5.43 113,752 6,358 5.59 83,790 4,853 5.79 Short-term borrowings .......... 14,530 665 4.58 5,414 258 4.77 166 9 5.42 Federal Home Loan Bank advances 22,048 1,361 6.17 25,393 1,539 6.06 20,220 1,234 6.10 COMR ........................... 12,000 1,137 9.48 1,000 63 6.30 0 0 0.00 Other borrowings ............... 0 0 0.00 2,125 157 7.39 1,500 128 8.53 ------------------- ------------------ ------------------- Total Interest bearing liabilities ................. 270,914 13,288 4.90 227,868 11,027 4.84 165,242 8,342 5.05 Noninterest-bearing demand ...... 40,072 33,619 23,545 Other noninterest-bearing liabilities .................. 5,492 5,974 3,896 Total liabilities ............. 316,479 267,461 192,683 Stockholders' equity ............ 19,376 20,299 16,690 -------- -------- -------- Total liabilities and stockholders' equity .. $335,854 $287,760 $209,373 ======== ======== ======== Net interest income ............. $ 10,791 $ 9,089 $ 6,735 ======== ======= ======= Net interest spread ............. 2.98% 2.73% 2.91% ===== ===== ===== Net interest margin ............. 3.53% 3.42% 3.55% ===== ===== ===== Ratio of average interest earning assets to average interest- bearing liabilities .... 112.85% 116.57% 114.68% ========= ======== ======== (1) Interest earned and yields on nontaxable investment securities are stated at face rate. (2) Loan fees are not material and are included in interest income from loans receivable.
I. Interest Rates and Interest Differential. C. Analysis of Changes of Interest Income/Interest Expense For the years ended June 30, 2000, 1999 and 1998. Components Inc./(Dec.) of Change (1) from ----------------- Prior Year Rate Volume ------------------------------ 2000 vs. 1999 ------------------------------ (Dollars in thousands) INTEREST INCOME Federal funds sold ................................................ $ (4) $ 160 $ (164) Certificates of deposit at financial institutions ................. 81 43 38 Investment securities (2) ......................................... 1,163 246 917 Net loans receivable (3) .......................................... 2,723 344 2,379 ----------------------------- Total change in interest income ........................... $ 3,963 $ 793 $ 3,170 ----------------------------- INTEREST EXPENSE Interest-bearing demand deposits .................................. $ 150 $ (64) $ 214 Savings deposits .................................................. 32 2 30 Time deposits ..................................................... 933 (185) 1,118 Short-term borrowings ............................................. 407 (10) 417 Federal Home Loan Bank advances ................................... (178) 28 (206) COMR .............................................................. 1,074 0 1,074 Other borrowings .................................................. (157) (79) (78) ----------------------------- Total change in interest expense .......................... 2,261 $ (308) $ 2,569 ----------------------------- Total change in net interest income ............................... $ 1,702 $ 1,101 $ 601 ============================= 1999 vs 1998 ----------------------------- INTEREST INCOME Federal funds sold ................................................ $ 846 $ (118) $ 964 Certificates of deposit at financial institutions ................. 255 (19) 274 Investment securities (2) ......................................... 380 (184) 564 Net loans receivable (3) .......................................... 3,558 (73) 3,631 ----------------------------- Total change in interest income ........................... $ 5,039 $ (394) $ 5,433 ----------------------------- INTEREST EXPENSE Interest-bearing demand deposits .................................. $ 506 $ (143) $ 649 Savings deposits .................................................. 28 (6) 34 Time deposits ..................................................... 1,505 (175) 1,680 Short-term borrowings ............................................. 249 (2) 251 Federal Home Loan Bank advances ................................... 305 (9) 314 COMR .............................................................. 63 0 63 Other borrowings .................................................. 29 (18) 47 ----------------------------- Total change in interest expense .......................... $ 2,685 $ (353) $3,038 ----------------------------- Total change in net interest income ............................... $ 2,354 $ (41) $ 2,395 ============================= (1) The column "increase/decrease from prior year" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. (2) Interest earned and yields on nontaxable investment securities are stated at face rate. (3) Loan fees are not material and are included in interest income from loans receivable.
II. Investment Portfolio. A. Investment Securities The following table presents the amortized cost and fair value of investment securities held on June 30, 2000, 1999 and 1998. Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------------------------------------------------ June 30, 2000 ------------- Securities held to maturity: Municipal securities .................... $ 499,988 $ 0 $ (8,769) $ 491,219 Other bonds ............................. 75,000 0 (982) 74,018 ------------------------------------------------------ Totals .............................. $ 574,988 $ 0 $ (9,751) $ 565,237 ====================================================== Securities available for sale: U.S. treasury securities ................ $ 3,000,406 $ 0 $ (11,607) $ 2,988,799 U.S. agency securities .................. 40,199,557 23,275 (1,018,786) 39,204,046 Mortgage-backed securities .............. 7,006,906 0 (297,413) 6,709,493 Municipal securities .................... 5,821,229 0 (300,577) 5,520,652 Trust preferred securities .............. 919,495 0 (49,780) 869,715 Other securities ........................ 277,925 1,474 (18,042) 261,357 ------------------------------------------------------ Totals .............................. $57,225,518 $ 24,749 $(1,696,205) $55,554,062 ====================================================== June 30, 1999 ------------- Securities held to maturity: Municipal securities .................... 699,415 2,115 0 701,530 Other bonds ............................. 25,000 585 0 25,585 ------------------------------------------------------ Totals .............................. $ 724,415 $ 2,700 $ 0 $ 727,115 ====================================================== Securities available for sale: U.S. treasury securities ................ $ 9,001,845 $ 47,862 $ (4,866) $ 9,044,841 U.S. agency securities .................. 29,267,483 1,267 (390,870) 28,877,880 Mortgage-backed securities .............. 8,390,795 5,319 (183,867) 8,212,247 Municipal securities .................... 3,180,714 40,741 (12,139) 3,209,316 Other securities ........................ 197,464 102 (7,941) 189,625 ------------------------------------------------------ Totals .............................. $50,038,301 $ 95,291 $ (599,683) $49,533,909 ====================================================== June 30, 1998 ------------- Securities held to maturity: Mortgage-backed securities .............. $ 1,506,569 $ 0 $ (5,534) $ 1,501,035 Municipal securities .................... 848,740 1,704 (13,557) 836,887 Other bonds ............................. 25,000 776 0 25,776 ------------------------------------------------------ Totals .............................. $ 2,380,309 $ 2,480 $ (19,091) $ 2,363,698 ====================================================== Securities available for sale: U.S. treasury securities ................ $17,007,239 $ 54,811 $ (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 (11,193) 606,559 Other securities ........................ 1,500,806 6,733 (3,243) 1,504,296 ------------------------------------------------------ Totals .............................. $32,221,115 $ 66,829 $ (49,699) $32,238,245 ======================================================
B. Investment Securities Maturities and Yields The following table presents the maturity of securities held on June 30, 2000 and the weighted average rates by range of maturity: Average Amount Yield ------------------------ U.S. treasury securities: Within 1 year .................................. $ 3,000,406 5.40% ------------------------ Total ..................................... $ 3,000,406 5.40% ======================== U.S. agency securities: Within 1 year .................................. $ 2,999,302 6.01% After 1 but within 5 years ..................... 32,199,691 5.84% After 5 but within 10 years .................... 5,000,564 7.20% ------------------------ Total ..................................... $40,199,557 6.03% ======================== Mortgage-backed securities: Within 1 year .................................. $ 370,136 5.57% After 1 but within 5 years ..................... 853,882 6.34% After 5 but within 10 years .................... 1,898,279 5.81% After 10 years ................................. 3,884,609 5.94% ------------------------ Total ..................................... $ 7,006,906 5.93% ======================== Municipal securities (1): After 1 but within 5 years ..................... 1,626,237 5.27% After 5 but within 10 years .................... 1,374,037 4.80% After 10 years ................................. 3,320,943 5.05% ------------------------ Total ..................................... $ 6,321,217 5.04% ======================== Trust preferred securities: After 10 years ................................. $ 919,495 9.43% ======================== Other bonds: After 1 but within 5 years ..................... $ 75,000 6.50% ======================== Other securities with no maturity or stated face rate ......................................... $ 277,925 =========== The Company does not use any financial instruments referred to as derivatives to manage interest rate risk. (1) Average yields on nontaxable investment securities are stated at face rate. C. Investment Concentrations As of June 30, 2000, there existed no security in the investment portfolio above (other than U.S. Government and U.S. Government agencies) that exceeded 10% of stockholders' equity at that date. III. Loan Portfolio. A. Types of Loans The composition of the loan portfolio at June 30, 2000, 1999, 1998, 1997, and 1996 is presented as follows: 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------------------- Commercial ................. $ 167,682,652 $ 136,206,893 $ 99,097,297 $ 68,634,556 $ 40,338,645 Real estate - construction . 3,463,682 3,367,458 1,798,257 1,778,310 750,462 Real estate ................ 36,301,379 27,591,886 29,347,260 18,515,130 8,261,146 Installment and other consumer ................ 34,405,138 30,810,455 32,732,322 19,437,433 7,459,467 --------------------------------------------------------------------------------- Total loans ........... 241,852,851 197,976,692 162,975,136 108,365,429 56,809,720 Less allowance for Estimated losses on loans (3,617,401) (2,895,457) (2,349,838) (1,632,500) (852,500) --------------------------------------------------------------------------------- Net loans ............. $ 238,235,450 $ 195,081,235 $ 160,625,298 $ 106,732,929 $ 55,957,220 =================================================================================
B. Maturities and Sensitivities of Loans to Changes in Interest Rates The following table presents consolidated loan maturities by yearly ranges. Also included for loans after one year are the amounts that have predetermined interest rates and floating or adjustable rates. Maturities After One Year ------------------------------ At June 30, 2000 Due in one Due after one Due after Predetermined Adjustable year or less through 5 years 5 years interest rates interest rates -------------------------------------------------------------------------- Commercial ..................... $ 59,350,274 $ 81,101,842 $ 27,230,536 $ 83,097,337 $ 25,235,041 Real estate - construction ..... 3,425,642 38,040 0 38,040 0 Real estate .................... 1,938,340 1,600,056 32,762,983 11,349,343 23,013,696 Installment and other consumer .............. 8,411,942 24,289,347 1,703,849 23,130,431 2,862,765 ------------------------------------------------------------------------- Totals .................... $ 73,126,198 $107,029,285 $ 61,697,368 $117,615,151 $ 51,111,502 =========================================================================
C. Risk Elements 1. Nonaccrual, Past Due and Renegotiated Loans. 2000 1999 1998 1997 1996 -------------------------------------------------------------- Loans accounted for on nonaccrual basis .. $ 382,745 $1,287,727 $1,025,761 $ 230,591 $ 0 Accruing loans past due 90 days or more .... 352,376 238,046 259,277 223,966 306,774 Other real estate owned 0 119,600 0 0 0 Troubled debt restructurings 0 0 0 0 0 -------------------------------------------------------------- Total ............ $ 735,121 $1,645,373 $1,285,038 $ 454,557 $ 306,774 ==============================================================
The policy of the Company is to place a loan on nonaccrual status if: (a) payment in full of interest or principal is not expected, or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status. 2. Potential Problem Loans. To management's best knowledge, there are no such significant loans that have not been disclosed in the above table. 3. Foreign Outstandings. None 4. Loan Concentrations. Loan concentrations are disclosed in the Notes to Consolidated Financial Statements in Note 4. D. Other Interest Bearing Assets There are no 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, 2000, 1999, 1998, 1997, and 1996: 2000 1999 1998 1997 1996 ------------------------------------------------------------------------ Average amount of loans outstanding, before allowance for estimated losses on loans ....................... $212,497,181 $184,756,698 $141,974,417 $ 81,251,090 $ 44,749,454 Allowance for estimated losses on loans: Balance, beginning of fiscal year ........ $ 2,895,457 $ 2,349,838 $ 1,632,500 $ 852,500 $ 472,475 Charge-offs: Commercial ......................... (43,295) (104,596) (62,763) (26,141) (117,555) Real estate ........................ (6,822) (25,142) 0 0 0 Installment and other consumer ........................ (376,591) (348,777) (142,471) (38,772) (2,817) ------------------------------------------------------------------------ Subtotal charge-offs ................ (426,708) (478,515) (205,234) (64,913) (120,372) ------------------------------------------------------------------------ Recoveries: Commercial .......................... 762 53,314 13,146 266 0 Real estate ........................ 0 0 0 0 0 Installment and other consumer ..... 96,072 79,020 7,450 256 0 ------------------------------------------------------------------------ Subtotal recoveries ................. 96,834 132,334 20,596 522 0 ------------------------------------------------------------------------ Net charge-offs ..................... (329,874) (346,181) (184,638) (64,391) (120,372) Provision charged to expense ............. 1,051,818 891,800 901,976 844,391 500,397 ------------------------------------------------------------------------ Balance, end of fiscal year .............. $ 3,617,401 $ 2,895,457 $ 2,349,838 $ 1,632,500 $ 852,500 ======================================================================== Ratio of net charge-offs to average loans outstanding ............. 0.16% 0.19% 0.13% 0.08% 0.27%
B. Allocation of the Allowance for Estimated Losses on Loans The following table presents the allowance for estimated losses on loans by type of loans and the percentage of loans in each category to total loans: % % % Of Loans Of Loans Of Loans to Total to Total to Total Amount Loans Amount Loans Amount Loans -------------------- --------------------- -------------------- 2000 1999 1998 -------------------- --------------------- -------------------- Commercial ............................. $2,863,319 69.33% $2,164,668 68.80% $1,213,439 60.81% Real estate - construction ............. 8,659 1.43% 8,419 1.70% 4,496 1.10% Real estate ............................ 121,530 15.01% 102,693 13.94% 74,702 18.01% Installment and other .................. 617,893 14.23% 578,937 15.56% 515,489 20.08% consumer Unallocated ............................ 6,000 N/A 49,159 N/A 541,712 N/A -------------------- --------------------- -------------------- Total ............................. $3,617,401 100.00% $2,895,457 100.00% $2,349,838 100.00% ==================== ===================== ==================== 1997 1996 -------------------- ------------------- Commercial ............................. $ 799,566 63.34% $ 0 71.01% Real estate - construction ............. 4,446 1.64% 0 1.32% Real estate ............................ 62,296 17.09% 0 14.54% Installment and other .................. 387,096 17.93% 0 13.13% Unallocated ............................ 379,096 N/A 852,500 N/A --------------------- ------------------- Total ............................. $1,632,500 100.00% $ 852,500 100.00% ===================== ====================
V. Deposits. The average amount of and average rate paid for the categories of deposits for the years 2000, 1999, and 1998 are disclosed in the consolidated average balance sheets and can be found on page 2 of Appendix B. Included in interest bearing deposits at June 30, 2000, 1999, and 1998 were certificates of deposit totaling $50,814,599, $37,103,749, and $31,937,377 respectively, that were $100,000 or greater. Maturities of these certificates were as follows: 2000 1999 1998 -------------------------------------- One to three months .................... $ 24,105,269 $13,313,388 $ 8,633,273 Three to six months .................... 11,176,203 6,339,507 9,647,980 Six to twelve months ................... 11,781,428 9,901,595 10,997,407 Over twelve months ..................... 3,751,699 7,549,259 2,658,717 -------------------------------------- Total certificates of deposit greater than $100,000 ... $50,814,599 $37,103,749 $31,937,377 ====================================== VI. Return on Equity and Assets. The following table presents the return on assets and equity and the equity to assets ratio of the Company for the years ended June 30, 2000, 1999, and 1998. 2000 1999 1998 -------------------------------------------- Average total assets ... $335,854,396 $287,760,434 $209,373,383 Average equity ......... 19,375,865 $ 20,299,371 $ 16,690,420 Net income ............. 2,745,527 $ 2,464,821 $ 2,393,272 Return on average assets .82% .86% 1.14% Return on average equity 14.17% 12.14% 14.34% Average equity to average assets ratio 5.77% 7.05% 7.97% VII. Short Term Borrowings. The information requested is disclosed in the Notes to Consolidated Financial Statements in Note 7. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QUAD CITY HOLDINGS, INC. Dated: September 28, 2000 By: /s/ Douglas M. Hultquist ------ ------------------------------------- Douglas M. Hultquist President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Michael A. Bauer Chairman of the Board of Directors September 28, 2000 ---------------------------- Michael A. Bauer /s/ Douglas M. Hultquist President, Chief Executive September 28, 2000 ---------------------------- and Financial Officer and Director Douglas M. Hultquist /s/ Richard R. Horst Director and Secretary September 28, 2000 ---------------------------- Richard R. Horst /s/ James J. Brownson Director September 28, 2000 ---------------------------- James J. Brownson /s/ Ronald G. Peterson Director September 28, 2000 Ronald G. Peterson /s/ John W. Schricker Director September 28, 2000 ---------------------------- John W. Schricker
INDEX TO EXHIBITS Incorporated Herein by in Filed Sequential Exhibit No. Description Reference To Herewith Page No. --------------------------------------------------------------------------------------------- 3.1 Certificate of Exhibit 3.1 to the Incorporation of Quad Registration City Holdings, Inc., as Statement of Quad amended City Holdings, Inc. on Form SB-2, File No. 33-67028 3.2 Bylaws of Quad City Exhibit 3.2 to the Holdings, Inc. Registration Statement of Quad City Holdings, Inc. on Form SB-2, File No. 33-67028 4.1 Specimen Stock Exhibit 4.1 to the Certificate of Quad Registration City Holdings, Inc.(See Statement of Quad also Articles VIII, XII City Holdings, Inc. and XIII of Exhibit 3.1 on Form SB-2, File and Articles II, VI, IX No. 33-67028 and XII of Exhibit 3.2) 10.1 Employment Agreement between Quad City Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer dated July 1, 2000 X 10.2 Employment Agreement between Quad City Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated July 1, 2000 X 10.3 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Michael A. Bauer dated June 28, 2000 X 10.4 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Douglas M. Hultquist dated June 28, 2000 X 10.5 Lease Agreement between Quad City Bank and Trust Company and 56 Utica L.L.C. X Incorporated Herein by in Filed Sequential Exhibit No. Description Reference To Herewith Page No. --------------------------------------------------------------------------------------------- 12.1 Statement re: Computation of Ratios X 21.1 Subsidiaries of Quad City Holdings, Inc. X 23.1 Consent of McGladrey and Pullen X 27.1 Financial Data Schedule X