-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D2+5w7ORVSLxFWbpA9vhGYz0HtUnuPmvhs95/9UaPTPQPEkVyIH6Nhwt3JngQAj4 XVlr02uZImAxH7Za2+k9/g== 0000743530-01-500052.txt : 20010830 0000743530-01-500052.hdr.sgml : 20010830 ACCESSION NUMBER: 0000743530-01-500052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010829 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAD CITY HOLDINGS INC CENTRAL INDEX KEY: 0000906465 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421397595 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22208 FILM NUMBER: 1727336 BUSINESS ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097363580 10-K 1 qc10ka.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, 2001 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 Identificationb 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 21, 2001 was approximately $23,400,000. As of August 21, 2001, the issuer had 2,265,420 shares of Common Stock outstanding. Documents incorporated by reference: ------------------------------------------------------------- Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be held in October 2001. 1 Part I Item 1. Business General. Quad City Holdings, Inc. ("Quad City") was formed in February 1993 under the laws of the state of Delaware for the purpose of becoming the bank holding company of Quad City Bank and Trust Company (the "Bank"). At the annual stockholders meeting to be held on October 24, 2001, management is seeking stockholder approval to change the name of the company to QCR Holdings, Inc. The Bank was capitalized on October 13, 1993 and commenced operations on January 7, 1994. The Bank is organized as an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank provides full service commercial and consumer banking, and trust and asset management services in the Quad City and Cedar Rapids areas through its four offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois and its new office located in Cedar Rapids, Iowa. After focusing its operations in the Quad Cities area since its inception, Quad City expanded its banking operations into the Cedar Rapids, Iowa market during the fourth fiscal quarter of 2001. The Cedar Rapids operation is currently functioning as a branch of Quad City Bank and Trust Company. Quad City has filed the required regulatory applications to obtain a separate bank charter in the Cedar Rapids market, to be named Cedar Rapids Bank and Trust Company. Expectations are to convert the branch operations into this newly chartered bank upon receiving regulatory approval, which is likely to occur in the fall of 2001. Quad City is in the process of raising additional equity capital of approximately $5 million through a private placement of its common stock to assist with capitalization of the new bank. Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a Delaware corporation that provides merchant credit card processing services. This operation had previously been a division of the Bank since July 1994. Currently, approximately 14,700 merchants process transactions with Bancard. On March 29, 1999, Bancard formed its own independent sales organization ("ISO") subsidiary, Allied Merchant Services, Inc. ("Allied"), which generates merchant credit card processing business. Bancard owns 100% of Allied. Quad City Holdings Capital Trust I ("Capital Trust") was formed in April 1999 and capitalized in June 1999 in connection with the public offering of $12 million of 9.2% trust preferred capital securities due June 30, 2029. Quad City owns 100% of the Bank and Bancard and 100% of the common securities of Capital Trust, and in addition to such ownership invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with the Bank. Quad City, the Bank, Bancard and Allied have a June 30th fiscal year end and collectively employed 183 individuals at June 30, 2001. No one customer accounts for more than 10% of revenues, loans or deposits. Competition. Quad City currently has most of its operations in the highly competitive environment of the Quad Cities area. The Cedar Rapids market is also highly competitive with respect to financial services. Competitors include not only other commercial banks, credit unions, savings banks, savings and loan institutions and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as Quad City. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. Additionally, Quad City competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits. These competitive trends are likely to continue and may increase as a result of the continuing reduction on restrictions on the interstate operations of financial institutions. Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which Quad City and its subsidiary banks conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. 2 The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") regulates Quad City and its subsidiaries. In addition, the Bank is regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC"). Business. Quad City's principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The deposits of the Bank are insured to the maximum amount allowable by the FDIC. Quad City's results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits and borrowings. Its operating results are affected by merchant credit card fees, trust fees, deposit service charge fees, fees from the sales of residential real estate loans and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses and other administrative expenses. Quad City's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Lending. Quad City and its subsidiaries provide a broad range of commercial and retail lending and investment services to corporations, partnerships, individuals and government agencies. The Bank actively markets its services to qualified lending customers. Lending officers actively solicit the business of new borrowers entering their market areas as well as long-standing members of the local business community. The Bank has established lending policies, which include a number of underwriting factors to be considered in making a loan, including location, loan to value ratio, cash flow, interest rate and the credit history of the borrower. The Bank's current lending limit is approximately $5.0 million. Its loan portfolio is comprised primarily of loans in the areas of commercial, residential real estate and consumer lending. As of June 30, 2001, commercial loans made up approximately 73% of the loan portfolio, while residential mortgages comprised approximately 14% and consumer lending comprised 13%. As part of the loan monitoring activity at the Bank, loan review personnel interact with senior bank management weekly. The Bank's Loan Review Committee meets on a monthly basis to review the loan portfolio. Quad City has also instituted a separate loan review function to analyze credits of the Bank. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of these situations. As noted above, the Bank is an active commercial lender. The Bank's areas of emphasis include, but are not limited to, loans to wholesalers, manufacturers, building contractors, developers, business services companies and retailers. The Bank provides a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, the Bank often takes personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. A significant portion of the Bank's commercial business loans have floating interest rates or reprice within one year. Commercial real estate loans are also made. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. Residential mortgage lending has been a focal point of the Bank as it continues to build its real estate lending business. As a result of this focus, the Bank's real estate loan portfolio has experienced rapid growth, increasing from approximately $354 thousand at the end of the 1994 fiscal year, to approximately $40.6 million at the end of fiscal 2001. The Bank currently has seven mortgage originators. The Bank sells a significant portion of its real estate loans in the secondary market. The Bank typically sells virtually all of its fixed rate loans. During fiscal 2001, the Bank originated $97.6 million of real estate loans and sold $92.9 million types of these loans. Generally, the Bank's residential mortgage loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the Bank to resell loans in the secondary market. The Bank structures most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature in one to three years. The Bank generally retains these loans in its portfolio. Servicing rights are not presently retained on the loans sold in the secondary market. 3 The Bank's consumer lending department provides all types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The Bank has reduced its involvement in indirect automobile loans, and intends to actively seek to increase its home equity loans. Appendices. The commercial banking business is a highly regulated business. See Appendix A for a brief summary regarding federal and state statutes and regulations, which are applicable to Quad City and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks. See Appendix B for tables and schedules that show selected comparative statistical information required pursuant to the industry guides promulgated under the Securities Act of 1933 and 1934, relating to the business of Quad City. Item 2. Property The main office of the Bank is in a 6,700 square foot facility, which was completed in January 1994. In March 1994, the Bank acquired that facility, which is located at 2118 Middle Road in Bettendorf. Construction of a second full service banking facility was completed in July 1996 to provide for the convenience of customers and to expand its market territory. The Bank also owns its portion of that facility which is located at 4500 Brady Street in Davenport. The two-story building is in two segments that are separated by an atrium. The Bank owns the south half of the building, while the northern portion is owned by the developer. Each floor is 6,000 square feet. The Bank occupies its first floor and utilizes the basement for operational functions, item processing and storage. Currently, approximately 1,500 square feet on the second floor is leased to a professional services firm and approximately 4,500 square feet is vacant and leasable. In addition, the residential real estate department of the Bank leases approximately 2,500 square feet on the first floor in the north half of the building. Renovation of a third full service banking facility was completed in February 1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near the intersection of 7th Street and John Deere Road in Moline near the Rock Island/Moline border. The building is owned by a third party limited liability company and the Bank and Bancard are its major tenants. Quad City has purchased a 20% interest in the company that owns the building. Bancard relocated its operations to the lower level of the 30,000 square foot building in late 1997. Quad City relocated its corporate headquarters to the building in February 1998 and occupies approximately 2,000 square feet on the second floor. In March 1999, the Bank acquired a 3,000 square foot office building adjacent to the Davenport. The office space is utilized for various operational and administrative functions. Construction of a fourth full service banking facility was completed in October 2000 at 5515 Utica Ridge Road in Davenport, Iowa. The Bank leases approximately 6,000 square feet on the first floor and 2,200 square feet on the lower level of the 24,000 square foot facility. The office opened in October 2000. The start-up operations of the Cedar Rapids branch of the Bank are located in Suite 250 of the Town Centre Building, 221 Third Avenue, S.E., Cedar Rapids. When the branch operations are converted into the newly chartered Cedar Rapids Bank and Trust Company, the location in Cedar Rapids will be moved to leased space in the GreatAmerica Building, 625 First Street, S.E., Cedar Rapids. The retail banking operations will consist of 1,500 square feet on the first floor and the commercial banking and operations facility will consist of approximately 6,200 square feet on the second floor. The necessary tenant improvements are currently being installed in both suites, and occupancy is expected during September 2001. The lease term is for an initial period of five years with two five-year renewal options. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of Quad City. The Bank intends to limit its investment in premises to no more than 50% of Bank capital. The Bank frequently invests in commercial real estate mortgages. The Bank also invests in residential mortgages. The Bank has established lending policies which include a number of underwriting factors to be considered in making a loan including, location, loan to value ratio, cash flow, interest rate and credit worthiness of the borrower. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. 4 Item 3. Legal Proceedings Bancard is the holder of an account receivable in the approximate amount of $1.7 million owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova Corporation (trading symbol NIS on the New York Stock Exchange). This receivable arises pursuant to Bancard's provision of electronic credit card sales authorization and settlement services to PMT pursuant to a written contract that includes PMT's obligation to indemnify Bancard for credit card chargeback losses arising from those services. PMT has failed to timely pay Bancard for monthly invoices, including service charges and substantial chargeback losses, for the period beginning May 2000. Bancard intends to vigorously pursue collection of this receivable. On September 25, 2000, PMT filed a lawsuit in federal court in Los Angeles, California, against Bancard and Quad City. This lawsuit alleges tortuous acts and breaches of contract by Bancard, Quad City, and others and seeks recovery from Bancard and Quad City of not less than $3,600,000 of alleged actual damages, plus punitive damages. Bancard and Quad City filed lawsuits in federal and state courts in Davenport, Iowa against PMT. These lawsuits sought a court order compelling PMT to participate in arbitration in Bettendorf, Iowa, as provided for in the pertinent contract documents, and to resolve the disputes between PMT, Bancard and Quad City, including the unpaid account receivable. The federal court in Iowa ruled that the arbitration issue should be determined by the state court in Iowa. Subsequently, the Iowa District Court of Scott County ruled that all claims, including the tort claims, must be arbitrated in Iowa. Because of that ruling, the California lawsuit was dismissed, and arbitration is pending. Bancard and Quad City continue to believe that PMT's allegations are without merit and will vigorously pursue the collection of the receivable and the defense of PMT's claims. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the stockholders of Quad City for a vote during the fourth quarter of the fiscal year ended June 30, 2001. 5 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The common stock, par value $1.00 per share of Quad City is traded on The Nasdaq SmallCap Market under the symbol "QCHI". The stock began trading on October 6, 1993. As of June 30, 2001, there were 2,265,420 shares of common stock outstanding held by approximately 2,500 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by The Nasdaq SmallCap Market, for the periods indicated. No cash dividends were declared during the periods indicated. At the annual stockholders meeting to be held in October 2001, management is seeking stockholder approval to change the name of the company to QCR Holdings, Inc. It is anticipated that Quad City's trading symbol will be changed to "QCRH" at that time. Fiscal 2001 Fiscal 2000 sales price sales price ------------------- ------------------- High Low High Low ----------------------------------------- First quarter .......... $ 17.250 $ 11.313 $ 20.000 $ 16.500 Second quarter ......... 12.250 9.938 17.500 13.500 Third quarter .......... 12.563 9.750 15.250 10.250 Fourth quarter ......... 10.813 9.250 17.000 11.125 Quad City expects that all earnings will be retained to finance the growth of Quad City, the Bank and Bancard, and that no cash dividends will be paid in the near future. If and when dividends are declared, Quad City will likely be largely dependent upon dividends from the Bank and Bancard for funds to pay dividends on the common stock. Under Iowa law, the Bank will be restricted as to the maximum amount of dividends it may pay on its common stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. The Bank is a member of the Federal Reserve System. The total of all dividends declared by the Bank in a calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, the Federal Reserve Board, the Iowa Superintendent and the FDIC are authorized under certain circumstances to prohibit the payment of dividends by the Bank. In the case of Quad City, further restrictions on dividends may be imposed by the Federal Reserve Board. Item 6. Selected Financial Data The "Selected Consolidated Financial Data" of Quad City set forth below is derived in part from, and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto. See Item 8 "Financial Statements and Supplementary Data." Results for past periods are not necessarily indicative of results to be expected for any future period. 6 SELECTED CONSOLIDATED FINANCIAL DATA Years Ended June 30, ---------------------------------------------------- 2001 2000 1999 1998 1997 ---------------------------------------------------- Statement of Income Data: (Dollars in thousands) Interest income ....................... $ 28,544 $ 24,079 $ 20,116 $ 15,077 $ 9,706 Interest expense ...................... 16,612 13,289 11,027 8,342 4,994 Net interest income ................... 11,932 10,790 9,089 6,735 4,712 Provision for loan losses ............. 889 1,052 892 902 844 Noninterest income (1) ................ 6,313 6,154 5,561 6,148 2,807 Noninterest expenses .................. 13,800 11,467 9,679 7,910 5,291 Pre-tax net income .................... 3,556 4,425 4,079 4,071 1,384 Income tax expense .................... 1,160 1,680 1,614 1,678 165 Net income ............................ 2,396 2,745 2,465 2,393 1,219 Per Common Share Data: Net income-basic ...................... $ 1.06 $ 1.19 $ 0.98 $ 1.00 $ 0.54 Net income-diluted .................... 1.04 1.15 0.93 0.93 0.52 Balance Sheet: Total assets .......................... $400,948 $367,622 $321,346 $250,151 $168,379 Securities ............................ 56,710 56,129 50,258 33,276 29,589 Loans ................................. 287,865 241,853 197,977 162,975 108,365 Allowance for estimated losses on loans 4,248 3,617 2,895 2,350 1,633 Deposits .............................. 302,155 288,067 247,966 197,384 135,960 Stockholders' equity: Common ........................... 23,817 20,071 18,473 16,602 13,613 Preferred ........................ -- -- -- 2,500 1,000 Key Ratios: Return on average assets .............. 0.62% 0.82% 0.86% 1.14% 0.86% Return on average common equity ....... 10.95 14.17 13.69 16.40 9.85 Net interest margin ................... 3.35 3.53 3.42 3.55 3.74 Efficiency ratio (2) .................. 75.64 67.68 66.07 61.40 70.37 Nonperforming assets to total assets .. 0.44 0.20 0.51 0.51 0.27 Allowance for estimated losses on loans to total loans ...................... 1.48 1.50 1.46 1.44 1.51 Net charge-offs to average loans ...... 0.10 0.16 0.26 0.13 0.08 Average common stockholders' equity to average assets ................... 5.69 5.77 6.26 6.97 8.73 Average stockholders' equity to average assets ................... 5.69 5.77 7.05 7.97 9.15 Earnings to fixed charges Excluding interest on deposits .... 1.90 x 2.29 x 2.81 x 3.78 x 3.17 x Including interest on deposits .... 1.21 1.33 1.36 1.48 1.28 (1) Year ended June 30, 1998 noninterest income includes a pre-tax gain of $2,168 from Bancard's restructuring of an agreement with an independent sales organization (ISO). Year ended June 30, 1999 noninterest income includes amortization of $732 from Bancard's restructuring of an ISO agreement. (2) Noninterest expenses divided by the sum of net interest income before provision for loan losses and noninterest income.
7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion provides additional information regarding our operations for the fiscal years ended June 30, 2001, 2000 and 1999, and financial condition for the fiscal years ended June 30, 2001 and 2000. This discussion should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document. Overview Quad City was formed in February 1993 for the purpose of organizing the Bank. The Bank opened in January 1994 with $4.5 million in assets and reached the milestone of $400 million in total assets as of June 30, 2001. Management expects continued opportunities for growth, even though the rate of growth will probably be slower than that experienced to date. Quad City reported earnings of $2.4 million or $1.06 basic earnings per share for fiscal 2001 as compared to $2.7 million and $1.19 per share for fiscal 2000 and $2.5 million and $.98 per share for fiscal 1999. The decrease in fiscal 2001 from fiscal 2000 was attributable to an increase in noninterest expenses partially offset by an increase in noninterest income and net interest income. The improvement in fiscal 2000 from fiscal 1999 was attributable to increased net interest income and increased volumes of business for the Bank, reduced by an increase in noninterest expenses. Quad City's results of operations are dependent primarily on net interest income, which is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. Quad City's average yield on interest earning assets increased 0.13% for fiscal 2001 as compared to fiscal 2000. With the same comparison, the average cost of interest-bearing liabilities increased 0.42%, which resulted in a 0.29% decrease in the net interest spread of 2.98% at June 30, 2000 to 2.69% at June 30, 2001. The narrowing of the net interest spread created a decline in the net interest margin. For fiscal 2001, net interest margin was 3.35% compared to 3.53% for fiscal 2000. Management continues to closely monitor and manage net interest margin. Quad City's operating results are also affected by sources of noninterest income, including merchant credit card fees, trust fees, deposit service charge fees, fees from the sales of residential real estate loans and other income. Operating expenses of Quad City include employee compensation and benefits, occupancy and equipment expense and other administrative expenses. Quad City's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The majority of the Bank's loan portfolio is invested in commercial loans. Deposits from commercial customers represent a significant funding source as well. The Bank has added facilities and employees to accommodate both its historical growth and anticipated future growth. As such, overhead expenses have had a significant impact on earnings. This trend is likely to continue as the Bank's newest Davenport location opened in October 2000 and the new bank in Cedar Rapids is expected to move to its initial permanent facility in the fall of 2001. The primary challenge for the Bank currently, from a profitability standpoint, is to increase its net interest margin. Large commercial depositors and certificate of deposit customers create a relatively high cost of funds and this fact, along with a very competitive loan rate environment, have resulted in the Bank's interest margin being below its national peer group. Management continues to address this issue with alternative funding sources and pricing strategies. 8 During 1994, the Bank began to develop internally a merchant credit card processing operation and in 1995 transferred this function to Bancard, a separate subsidiary of Quad City. Bancard initially had an arrangement to provide processing services exclusively to clients of a single independent sales organization or ISO. This ISO was sold in 1998, and the purchaser requested a reduction in the term of the contract. Bancard agreed to amend the contract to reduce the term and accept a fixed monthly processing fee of $25,000 for merchants existing at the time the agreement was signed and a lower transaction fee for new merchants in exchange for a payment of $2.9 million, the ability to transact business with other ISOs and the assumption of the credit risk by the ISO. Approximately two thirds of the income from this settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of $732,000 being recognized as an adjustment to the fixed processing fee during fiscal 1999. Bancard terminated its processing for this ISO in May 2000. During fiscal 2000 and 2001, Bancard began processing for nine new ISOs. In spite of this, Bancard expects its merchant credit card fee income to remain below previous levels until such time as Bancard can develop relationships with additional ISOs, increase volumes with existing ISOs or Allied can generate processing business revenues comparable to those Bancard experienced prior to termination of processing for the initial ISO. Bancard's average dollar volume of transactions processed during fiscal 2000 was $90 million, and $58 million was attributable to the ISO that terminated its relationship. During fiscal 2001, the average dollar volume of transactions processed per month by Bancard decreased 15% to $76 million. This reduction in processing fees and cessation of the settlement income at Bancard is expected to continue to adversely affect consolidated net income in fiscal 2002 as compared with fiscal 2001 and prior years. During fiscal 1998, the Bank expanded its presence in the mortgage banking market by hiring several experienced loan originators and an experienced underwriter. The Bank originates mortgage loans on personal residences and sells the majority of these loans into the secondary market to avoid the interest rate risk associated with long-term fixed rate financing. The Bank realizes revenue from this mortgage banking activity from a combination of loan origination fees and gain on sale of the loans in the secondary market. During fiscal 2001, the Bank originated $97.6 million of real estate loans and sold $92.9 million of loans, which resulted in gains of $1.1 million. The decrease in interest rates during that time caused a significant increase in the Bank's mortgage origination volume. In fiscal 2000, the Bank originated $36.8 million of real estate loans and sold $37.7 million, which resulted in gains of $439,000. Trust department income continues to be a significant contributor to noninterest income, growing from $1.5 million in fiscal 1999 to $1.9 million in fiscal 2000 and to $2.1 million in fiscal 2001. Income is generated primarily from fees charged based on assets under management for corporate and personal trusts and for custodial services. Assets under administration have grown from $586.4 at June 30, 2000 to $617.5 million at June 30, 2001. Growth in the current fiscal year resulted primarily from new trust relationships created during the year. Quad City's initial public offering during the fourth calendar quarter of 1993 raised approximately $14 million. In order to provide additional capital to support the growth of the Bank, Quad City formed a statutory business trust, which issued $12 million of capital securities to the public for cash on June 9, 1999. In conjunction with the establishment of the new bank in Cedar Rapids, Quad City is in the process of selling approximately $5.0 million of its common stock through a private placement offering, primarily to investors in the Cedar Rapids area. Results of Operations Fiscal 2001 compared with fiscal 2000 Overview. Net income for fiscal 2001 was $2.4 million as compared to net income of $2.7 million for the same period in 2000 for a decrease of $300,000 or 13%. Basic earnings per share for fiscal 2001 were $1.06 as compared to $1.19 for fiscal 2000. The decrease in net income was comprised of an increase in noninterest expenses of $2.3 million partially offset by an increase in net interest income after provision for loan losses of $1.3 million, an increase in noninterest income of $200,000 and a decrease in federal and state income taxes of $500,000. Several factors contributed to the reduction in net income. These factors included the opening of Quad City's fourth full-service banking facility on Utica Ridge Road in Davenport, a reduction in processing volumes and profitability at Quad City Bancard and initial start-up expenses associated with Quad City's expansion to the Cedar Rapids market. 9 Interest income. Interest income increased by $4.4 million, from $24.1 million for fiscal 2000 to $28.5 million for fiscal 2001. The 19% rise in interest income was basically attributable to greater average outstanding balances in interest-earning assets, principally loans receivable. Despite the Federal Reserve's dramatic reduction in short-term interest rates by 2.75% since January of 2001, the average yield on interest earning assets for fiscal 2001 was 8.01% as compared to 7.88% for fiscal 2000. Interest expense. Interest expense increased by $3.3 million, from $13.3 million for fiscal 2000 to $16.6 million for fiscal 2001. The 25% increase in interest expense was primarily attributable to greater average outstanding balances in interest-bearing liabilities and higher interest rates. Despite the Federal Reserve's reduction in short-term interest rates since January of 2001, the average cost on interest bearing liabilities was 5.32% for fiscal 2001 as compared to 4.90% for 2000. Provision for loan losses. The provision for loan losses is established based on a number of factors, including the local and national economy and the risk associated with the loans in the portfolio. Quad City had an allowance for estimated losses on loans of approximately 1.48% of total loans at June 30, 2001 as compared to approximately 1.50% at June 30, 2000. The provision for loan losses decreased by $200,000, from $1.1 million for fiscal 2000 to $900,000 for fiscal 2001. During the year, management made monthly provisions for loan losses based upon the increase in loans and a detailed analysis of the loan portfolio. For fiscal 2001, commercial loans combined for total charge-offs of $87,000 and total recoveries of $2,000. Consumer loan charge-offs and recoveries totaled $214,000 and $39,000, respectively, for fiscal 2001. Indirect auto loans accounted for a majority of the consumer loan charge-offs. Because asset quality is a priority for Quad City and its subsidiaries, management made the decision in the first quarter of fiscal 1999 to downscale indirect auto loan activity based on charge-off history. The average balance in the indirect auto loan portfolio for fiscal 2001 was $3.4 million compared to $8.2 million for fiscal 2000. This 59% decrease in the average portfolio brought with it a 56% decrease in the net charge-offs of indirect auto loans. Net charge-offs for the indirect auto loan portfolio were $46,000 for fiscal 2001 compared to $77,000 for fiscal 2000, for a decrease of $31,000. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income. Noninterest income increased by $200,000, from $6.1 million for fiscal 2000 to $6.3 million for fiscal 2001. Noninterest income for fiscal 2001 and 2000 consisted of income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 3% increase was primarily due to an increase in gains on sales of loans, net, and increased trust fees and deposit service fees received during the period, offset by the decrease in merchant credit card fees. During fiscal 2001, merchant credit card fees, net of processing costs, decreased by $600,000 to $1.7 million, from $2.3 million for fiscal 2000. The decrease was due to decreased volumes of credit card transactions processed during fiscal 2001. As previously discussed, Bancard terminated processing for its largest ISO in May 2000. For fiscal 2001, trust department fees increased $200,000, or 10%, to $2.1 million from $1.9 million for fiscal 2000. The increase was primarily a reflection of the development of additional trust relationships during the period. Gains on sales of loans, net, were $1.1 million for fiscal 2001, which reflected an increase of 159%, or $700,000, from $400,000 for fiscal 2000. The increase resulted from a decline in interest rates over recent months, which was driven by corresponding cuts by the Federal Reserve during the first half of calendar 2001. This created significantly more home refinances and home purchases during the fiscal year and the subsequent sale of the majority of these loans into the secondary market. Noninterest expenses. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees for both periods. Noninterest expenses for fiscal 2001 were $13.8 million as compared to $11.5 million for the same period in 2000, or an increase of $2.3 million or 20%. 10 The following table sets forth the various categories of noninterest expenses for the years ended June 30, 2001 and 2000. Years Ended June 30, ---------------------------------------- 2001 2000 % Change ---------------------------------------- Salaries and employee benefits ......................... $ 8,014,268 $ 6,878,213 17% Professional and data processing fees .................. 1,159,929 860,216 35 Advertising and marketing .............................. 579,524 410,106 41 Occupancy and equipment expense ........................ 1,925,820 1,580,911 22 Stationery and supplies ................................ 352,441 324,219 9 Postage and telephone .................................. 409,626 361,623 13 Other .................................................. 1,358,345 1,052,173 29 ---------------------------------------- Total noninterest expenses ............... $13,799,953 $11,467,461 20% ========================================
Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For fiscal 2001, total salaries and benefits increased to $8.0 million or $1.1 million over the fiscal 2000 total of $6.9 million. The change was primarily attributable to the addition of new Bank employees during the period. Advertising and marketing increased $200,000 or 41%. The increase was the result of the development and start-up of the Bank's new website (qcbt.com), the establishment of an online partnership with America Online, Inc. creating local access to that website, and media expenses incurred in support of marketing efforts for the Bank's Utica location and various Bank products and departments. Professional and data processing fees increased $300,000 or 35%. The increase was primarily attributable to legal fees resulting from the legal proceedings in process between Bancard and PMT Services, Inc., combined with increased fees to outside consultants addressing compliance, efficiency and profitability issues for the Bank. Other noninterest expense increased $300,000 or 29% for the fiscal year. The increase was primarily the result of increased service charges from upstream banks incurred by the Bank and increased expenses related to Bancard's cardholder program. Income tax expense. The provision for income taxes was $1.2 million for fiscal 2001 compared to $1.7 million for fiscal 2000, a decrease of $500,000 or 31%. The decrease was primarily attributable to decreased net income generated in fiscal 2001 compared to fiscal 2000, and a reduction in the effective tax rate for fiscal 2001 of 32.6% versus 38.0% for fiscal 2000. Fiscal 2000 compared with fiscal 1999 Overview. Net income for fiscal 2000 was $2.7 million as compared to net income of $2.5 million for the same period in 1999 for an increase of $281,000 or 11%. Basic earnings per share for fiscal 2000 were $1.19 as compared to $0.98 for fiscal 1999. The increase in net income was comprised of an increase in net interest income after provision for loan losses of $1.5 million and an increase in noninterest income of $594,000 reduced by an increase in noninterest expenses of $1.8 million. The increase in noninterest income occurred despite the fact that fiscal 1999 included $732,000 of revenue, which was related to a one-time gain recognized by Bancard. The recognition of this income ceased as of June 30, 1999. Interest income. Interest income increased by $4.0 million, from $20.1 million for fiscal 1999 to $24.1 million for fiscal 2000. The 20% rise in interest income was basically attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, and higher interest rates. Interest expense. Interest expense increased by $2.3 million, from $11.0 million for fiscal 1999 to $13.3 million for fiscal 2000. The 20% increase in interest expense was primarily attributable to greater average outstanding balances in interest-bearing liabilities and higher interest rates. Provision for loan losses. The provision for loan losses is established based on factors including the local and national economy and the risk associated with the loans in the portfolio. Quad City had an allowance for estimated losses on loans of approximately 1.50% of total loans at June 30, 2000 as compared to approximately 1.46% at June 30, 1999. The provision for loan losses increased by $160,000, from $892,000 for fiscal 1999 to $1,052,000 for fiscal 2000. For fiscal 2000, commercial and real estate loans combined for total charge-offs of $50,000 and total recoveries of less than $1,000. Consumer loan charge-offs and recoveries totaled $377,000 and $96,000, respectively, for fiscal 2000. Indirect auto loans accounted for a majority of the consumer loan charge-offs. Because asset quality is a priority for Quad City and its subsidiaries, management made the decision to downscale indirect auto loan activity based on charge-off history. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. 11 Noninterest income. Noninterest income increased by $594,000, from $5.6 million for fiscal 1999 to $6.2 million for fiscal 2000. Noninterest income for fiscal 1999 consisted of the amortization of deferred income resulting from the restructuring of a merchant broker agreement, income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. Noninterest income for fiscal 2000 consisted of income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 11% increase was primarily due to an increase in merchant credit card fees, and increased trust fees received during the period, offset by the decrease in gains on sales of loans, net and the amortization of deferred income resulting from the restructuring of the merchant broker agreement. During fiscal 2000, merchant credit card fees, net of processing costs, increased by $1.0 million to $2.3 million, from $1.3 million for fiscal 1999. The increase was due to increased volumes of credit card transactions processed during fiscal 2000. As previously discussed, pursuant to the contract with its largest ISO, Bancard terminated processing for it in May 2000. For fiscal 2000, trust department fees increased $364,000, or 24%, to approximately $1.9 million from $1.5 million for fiscal 1999. The increase was primarily a reflection of the development of additional trust relationships during the period. Gains on sales of loans, net, were $439,000 for fiscal 2000, which reflected a decrease of 58%, or $605,000, from $1.0 million for fiscal 1999. The decrease resulted from higher interest rates, which created fewer home refinances and first-time home purchases during the fiscal year. Noninterest expenses. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees for both periods. Noninterest expenses for fiscal 2000 were $11.5 million as compared to $9.7 million for the same period in 1999, or an increase of $1.8 million or 18.48%. The following table sets forth the various categories of noninterest expenses for the years ended June 30, 2000 and 1999. Years Ended June 30, ---------------------------------------- 2000 1999 % Change ---------------------------------------- Salaries and employee benefits ......................... $ 6,878,213 $ 5,801,670 19% Professional and data processing fees .................. 860,216 598,457 44 Advertising and marketing .............................. 410,106 359,571 14 Occupancy and equipment expense ........................ 1,580,911 1,453,040 9 Stationery and supplies ................................ 324,219 267,739 21 Postage and telephone .................................. 361,623 298,208 21 Other .................................................. 1,052,173 900,214 17 ---------------------------------------- Total noninterest expenses ............... $11,467,461 $ 9,678,899 18% ========================================
Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For fiscal 2000, total salaries and benefits increased to $6.9 million or $1.1 million over the fiscal 1999 total of $5.8 million. The change was primarily attributable to the addition of new Bank employees during the period. Professional and data processing fees increased $262,000 or 44%. The increase was primarily attributable to an increase in core and ancillary data processing fees as a result of an increase in transaction volumes and number of customer accounts. Additionally, the Bank incurred new ongoing expenses related to loan collection software, cash management software and two new automated teller machines. Stationary and supplies expense increased $56,000 or 21% and postage and telephone expense increased $63,000 or 21%. The increases were the result of the overall increase in business volume of the Bank. 12 Beginning in 1997, Quad City addressed issues related to the Year 2000 and their potential to adversely affect both Quad City's operations and ability to provide prompt, reliable customer service. The estimated total cost of the Year 2000 project was $175,000. This included costs to upgrade equipment specifically for the purpose of Year 2000 compliance and various administrative expenditures. Quad City's cost for the Year 2000 project for fiscal 2000 was $27,000, as compared to $122,000 for fiscal 1999. Income tax expense. The provision for income taxes was $1.7 million for fiscal 2000 compared to $1.6 million for fiscal 1999, an increase of $66,000 or 4%. The increase was attributable to greater net income generated in fiscal 2000 compared to fiscal 1999, partially offset by a reduction in the effective tax rate for fiscal 2000 of 38.0% versus 39.6% for fiscal 1999. Financial Condition Total assets of Quad City increased by $33.3 million or 9% to $400.9 million at June 30, 2001 from $367.6 million at June 30, 2000. The growth primarily resulted from an increase in the loan portfolio funded by deposits received from customers and by proceeds from short-term borrowings and Federal Home Loan Bank advances. Cash and Cash Equivalent Assets. Cash and due from banks increased by $5.1 million or 34% to $20.2 million at June 30, 2001 from $15.1 million at June 30, 2000. Cash and due from banks represented both cash maintained at the Bank, as well as funds that the Bank and Quad City had deposited in other banks in the form of demand deposits. Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold decreased by $18.3 million or 70% to $7.8 million at June 30, 2001 from $26.1 million at June 30, 2000. The decrease was attributable to Quad City's decreased liquidity needs at the end of the fiscal year. Certificates of deposit at financial institutions decreased by $2.3 million or 18% to $10.5 million at June 30, 2001 from $12.8 million at June 30, 2000. Due to strong loan demand, the Bank has made the decision to limit its deposits in other banks in the form of certificates of deposit. Investments. Securities increased by $600,000 or 1% to $56.7 million at June 30, 2001 from $56.1 million at June 30, 2000. The net increase was the result of a number of transactions in the securities portfolio. Quad City purchased additional securities, classified as available for sale, in the amount of $17.0 and recognized an increase in unrealized gains on securities available for sale, before applicable income tax of $1.6 million. This was offset by paydowns of $1.5 million that were received on mortgage-backed securities, proceeds from the sales of securities available for sale of $1.3 million, proceeds from calls and maturities of $15.0 million, losses recognized on the sales of securities of $14,000, and amortization of premiums, net of the accretion of discounts, of $60,000. Certain investment securities of the Bank are purchased with the intent to hold the securities until they mature. These held to maturity securities, comprised of municipal securities and other bonds, were recorded at amortized cost at June 30, 2001 and June 30, 2000. The balance at June 30, 2001 was $576,000, an increase of $1,000 from $575,000 at June 30, 2000. Market values at June 30, 2001 and June 30, 2000 were $583,000 and $565,000, respectively. All of Quad City's and a portion of the Bank's securities are placed in the available for sale category as the securities may be liquidated to provide cash for operating, investing or financing purposes. These securities were reported at fair value and increased by $500,000, or 1%, to $56.1 million at June 30, 2001, from $55.6 million at June 30, 2000. The amortized cost of such securities at June 30, 2001 and June 30, 2000 was $55.3 million and $57.2 million, respectively. Quad City does not use any financial instruments referred to as derivatives to manage interest rate risk and as of June 30, 2001 there existed no security in the investment portfolio (other than U.S. Government and U.S. Government agency securities) that exceeded 10% of stockholders' equity at that date. 13 Loans. Loans receivable held for investment increased by $46.0 million or 19% to $287.9 million at June 30, 2001 from $241.9 million at June 30, 2000. The increase was the result of the origination or purchase of $283.8 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $260,000 and loan repayments or sales of loans of $237.5 million.. The majority of residential real estate loans originated by the Bank were sold on the secondary market to avoid the interest rate risk associated with long-term fixed rate loans. As of June 30, 2001, the Bank's legal lending limit was approximately $5.0 million. Allowance for Loan Losses. The allowance for estimated losses on loans was $4.2 million at June 30, 2001 compared to $3.6 million at June 30, 2000 for an increase of $600,000 or 17%. The adequacy of the allowance for estimated losses on loans was determined by management based on factors that included the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions and other factors that, in management's judgment, deserved evaluation in estimating loan losses. To ensure that an adequate allowance was maintained, provisions were made based on the increase in loans and a detailed analysis of the loan portfolio. The loan portfolio was reviewed and analyzed monthly utilizing the percentage allocation method. In addition, beginning in December 2000, specific reviews were completed on all credits risk-rated less than "fair quality" and carrying aggregate exposure in excess of $250,000. The adequacy of the allowance for estimated losses on loans was monitored by the loan review staff, and reported to management and the Board of Directors. Net charge-offs for the years ended June 30, 2001 and 2000, were $260,000 and $330,000 respectively. One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the total loan portfolio. Provisions were made monthly to ensure that an adequate level was maintained. The allowance for estimated losses on loans as a percentage of total loans was 1.48 % at June 30, 2001 and 1.50% at June 30, 2000. Although management believes that the allowance for estimated losses on loans at June 30, 2001 was at a level adequate to absorb losses on existing loans, there can be no assurance that such losses will not exceed the estimated amounts or that Quad City will not be required to make additional provisions for loan losses in the future. Asset quality is a priority for Quad City and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. Along with other financial institutions, management shares a concern for the possible continued softening of the economy in 2001. Should the economic climate continue to deteriorate, borrowers may experience difficulty, and the level of non-performing loans, charge-offs and delinquencies could rise and require further increases in the provision. Nonperforming Assets. The policy of Quad City is to place a loan on nonaccrual status if: (a) payment in full of interest or principal is not expected or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status. Nonaccrual loans were $1.2 million at June 30, 2001 compared to $383,000 at June 30, 2000 for an increase of $849,000 or 222%. The increase in nonaccrual loans was comprised of increases in commercial loans of $248,000 and real estate loans of $646,000 offset by a decrease in consumer loans of $45,000. The increase in nonaccrual commercial loans was due entirely to the addition of a single loan. The increase in nonaccrual real estate loans was due to the addition of seven loans with outstanding balances ranging from $39,000 to $150,000. Nonaccrual loans at June 30, 2001 consisted primarily of loans that were well collateralized and were not expected to result in material losses and represented less than one half of one percent of the Bank's loan portfolio.. As of June 30, 2001 and 2000, past due loans of 30 days or more amounted to $3.2 million and $3.3 million, respectively. Past due loans as a percentage of gross loans receivable decreased to 1.1% at June 30, 2001 from 1.4% at June 30, 2000. Other Assets. Premises and equipment increased by $1 million or 12% to $8.7 million at June 30, 2001 from $7.7 million at June 30, 2000. The increase resulted from the purchase of additional furniture, fixtures and equipment offset by depreciation expense. Additional information regarding the composition of this account and related accumulated depreciation is described in footnote 5 to the consolidated financial statements. 14 Accrued interest receivable on loans, securities and interest-bearing cash accounts increased by $300,000 or 9% to $2.9 million at June 30, 2001 from $2.6 million at June 30, 2000. The increase was primarily due to greater average outstanding balances in interest-bearing assets. Other assets increased by $1.7 million or 19% to $10.6 million at June 30, 2001 from $8.9 million at June 30, 2000. The largest component of the increase was the $1.3 million growth in receivables due Bancard from its terminated, primary ISO. Bancard is vigorously pursuing the collection of this receivable through legal avenues. Other assets also included life insurance contracts on two of Quad City's executives, accrued trust department fees, other miscellaneous receivables and various prepaid expenses. Deposits. Deposits increased by $14.1 million or 5% to $302.2 million at June 30, 2001 from $288.1 million at June 30, 2000. The increase resulted from a $20.4 million net increase in noninterest-bearing, NOW, money market and other savings accounts and a $6.3 million net decrease in certificates of deposit. Short-term Borrowings. Short-term borrowings increased $7.5 million or 36% from $20.8 million as of June 30, 2000 to $28.3 million as of June 30, 2001. The Bank offers short-term repurchase agreements to some of its significant deposit customers. Also, on occasion, the Bank purchases Federal funds for short-term funding needs from the Federal Reserve Bank, or from some of its correspondent banks. Short-term borrowings were comprised of customer repurchase agreements of $28.3 million and $15.8 million at June 30, 2001 and 2000, respectively, as well as federal funds purchased from correspondent banks of $0 and $5.0 million at June 30, 2001 and 2000, respectively. FHLB Advances and Other Borrowings. FHLB advances increased $7.3 million or 33% from $22.4 million as of June 30, 2000 to $29.7 million as of June 30, 2001. As of June 30, 2001, the Bank held $1.5 million of FHLB stock. As a result of its membership in the FHLB of Des Moines, the Bank has the ability to borrow funds for short-term or long-term purposes under a variety of programs. The Bank utilized FHLB advances for loan matching as a hedge against the possibility of rising interest rates when these advances provided a less costly source of funds than customer deposits. In June 1999, Quad City issued 1,200,000 shares of trust preferred securities through its newly formed Capital Trust subsidiary. On Quad City's financial statements, these securities are listed as company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures and were $12,000,000 at both June 30, 2001 and 2000. Under current regulatory guidelines, these securities are considered to be Tier 1 capital, with certain limitations that are applicable to Quad City. Other liabilities increased by $600,000 or 15% to $4.9 million as of June 30, 2001 from $4.3 million as of June 30, 2000. Other liabilities were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At June 30, 2001, the primary component of other liabilities was $2.4 million of interest payable. Stockholders' Equity. Common stock of $2.3 million as of June 30, 2001 increased slightly due to the exercise of stock options resulting in the issuance of 150 additional shares of common stock. Additional paid-in capital also increased slightly to $12.1 million as of June 30, 2001. The increase was due to $1,000 received in excess of the $1.00 per share par value for shares of common stock issued as the result of the exercise of stock options. Retained earnings increased by $2.4 million or 33% to $9.7 million as of June 30, 2001 from $7.3 million as of June 30, 2000. The increase reflected net income for the year. Accumulated other comprehensive income (loss), consisting of unrealized gains (losses) on securities available for sale, net of related income taxes, was a $500,000 gain as of June 30, 2001 as compared to a $1.1 million loss as of June 30, 2000. The increase in the gain was attributable to the increase during the period in the fair value of the securities identified as available for sale, primarily as a result of a decline in market interest rates. In April 2000, Quad City announced that the board of directors approved a stock repurchase program enabling Quad City to repurchase approximately 60,000 shares of its common stock. This stock repurchase program was completed in the fall of 2000 and at June 30, 2001 and 2000, Quad City had acquired 60,146 shares and 41,496 shares at a total cost of $855,000 and $599,000, respectively. The weighted average cost of the shares at June 30, 2001 was $14.21 compared to $14.45 at June 30, 2000. Liquidity 15 Liquidity Liquidity measures the ability of Quad City to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $38.5 million at June 30, 2001, compared with $54.0 million at June 30, 2000. The Bank has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. Quad City also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities. The liquidity of Quad City is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash used in operating activities was $1.7 million for fiscal 2001 compared to net cash provided by operating activities of $4.2 million for fiscal 2000. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $22.0 million for fiscal 2001 and $46.1 million for fiscal 2000. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from short-term borrowings and Federal Home Loan Bank advances was $28.7 million for fiscal 2001 compared to $48.5 million for fiscal 2000. Net cash provided by operating activities was $4.2 million for fiscal 2000 compared to $3.7 million for fiscal 1999. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $46.1 million for fiscal 2000 and $72.7 million for fiscal 1999. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from short-term borrowings, for fiscal 2000 was $48.5 million and for fiscal 1999 was $66.0 million, consisting primarily of deposit growth, proceeds from the issuance of preferred securities of the subsidiary trust, and proceeds from short-term borrowings. Quad City has a variety of sources of short-term liquidity available to it, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. At both June 30, 2001 and 2000, the Bank had six unused lines of credit totaling $31.0 million of which $8.0 million was secured and $23.0 million was unsecured. At both June 30, 2001 and 2000, Quad City also had an unused line of credit for $3.0 million, which was secured. Impact of Inflation and Changing Prices The consolidated financial statements and the accompanying notes have been prepared in accordance with Generally Accepted Accounting Principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Quad City's operations. Unlike industrial companies, nearly all of the assets and liabilities of Quad City are monetary in nature. As a result, interest rates have a greater impact on Quad City's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement 141, "Business Combinations" and Statement 142, "Goodwill and Other Intangible Assets". Statement 141 eliminates the pooling method for accounting for business combinations; requires that intangible assets that meet certain criteria be reported separately from goodwill; and requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142 eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life; and requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. For Quad City, the provisions of the Statements are generally effective July 1, 2002. However, the Statements would allow for an early application effective July 1, 2001, provided that the decision to early implement is made prior to the release of the first quarter 10-Q. Implementation of the standards is not expected to have a material effect on Quad City's consolidated financial statements. 16 Forward Looking Statements Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Quad City intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe Quad City's future plans, strategies and expectations are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Quad City's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on Quad City's operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, our implementation of new technologies, Quad City's ability to develop and maintain secure and reliable electronic systems and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning Quad City and its business, including additional factors that could materially affect Quad City's financial results, is included in Quad City's filings with the Securities and Exchange Commission. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Quad City, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. Quad City's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income. In an attempt to manage its exposure to changes in interest rates, management monitors Quad City's interest rate risk. The Asset/Liability Committee meets quarterly to review Quad City's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the board of directors. Management also reviews the Bank's securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in the most effective manner. Notwithstanding Quad City's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting Quad City's asset/liability position, the board and management attempt to manage Quad City's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board and management may determine to increase Quad City's interest rate risk position somewhat in order to increase its net interest margin. Quad City's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates. 17 One approach used to quantify interest rate risk is the net portfolio value analysis. In essence, this analysis calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance-sheet contracts. The following table sets forth, at June 30, 2001 and June 30, 2000, an analysis of Quad City's interest rate risk as measured by the estimated changes in the net portfolio value resulting from instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis points). Estimated Increase Change in (Decrease) in NPV Interest Estimated ----------------------------------------------------------- Rates NPV Amount Amount Percent - -------------- ---------------------------- ---------------------------- ----------------------------- (Basis points) June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 - --------------------------------------------------------------------------------------------------------- (Dollars in thousands) +200 $24,705 $28,583 $ (4,282) $(2,290) (14.77)% (7.42)% --- 28,987 30,873 -200 27,572 31,128 (1,415) 255 ( 4.88) .83
Quad City does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the board of directors, Quad City does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting Quad City. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of Quad City's business activities. 18 Item 8. Financial Statements QUAD CITY HOLDINGS, INC. Index to Consolidated Financial Statements INDEPENDENT AUDITOR'S REPORT 20 FINANCIAL STATEMENTS Consolidated balance sheets as of June 30, 2001 and 2000 21 Consolidated statements of income for the years ended June 30, 2001, 2000, and 1999 22 Consolidated statements of changes in stockholders' equity for the years ended 23 Consolidated statements of cash flows for the years ended June 30, 2001, 2000, and 1999 24 Notes to consolidated financial statements 25 - 43 19 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders Quad City Holdings, Inc. Moline, Illinois We have audited the accompanying consolidated balance sheets of Quad City Holdings, Inc. and subsidiaries as of June 30, 2001 and 2000, and the related statements of income, changes in stockholders' equity, and cash flows for the years ended June 30, 2001, 2000, and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quad City Holdings, Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for the years ended June 30, 2001, 2000, and 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP - --------------------------- Davenport, Iowa July 25, 2001 20 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2001 and 2000 ASSETS 2001 2000 - --------------------------------------------------------------------------------------------------- Cash and due from banks ........................................... $ 20,217,219 $ 15,130,357 Federal funds sold ................................................ 7,775,000 26,105,000 Certificates of deposit at financial institutions ................. 10,512,585 12,776,463 Securities held to maturity, at amortized cost (fair value 2001 $583,411; 2000 $565,237) (Note 3) .......................... 575,559 574,988 Securities available for sale, at fair value (Note 3) ............. 56,134,521 55,554,062 ----------------------------- 56,710,080 56,129,050 ----------------------------- Loans receivable (Note 4) ......................................... 287,864,766 241,852,851 Less allowance for estimated losses on loans (Note 4) ........... 4,248,182 3,617,401 ----------------------------- 283,616,584 238,235,450 ----------------------------- Premises and equipment, net (Note 5) .............................. 8,660,698 7,715,621 Accrued interest receivable ....................................... 2,863,178 2,633,120 Other assets ...................................................... 10,592,590 8,896,554 ----------------------------- Total assets .............................................. $ 400,947,934 $ 367,621,615 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------- Liabilities: Deposits: Noninterest-bearing ........................................... $ 52,582,264 $ 44,043,932 Interest-bearing .............................................. 249,572,960 244,022,824 ---------------------------- Total deposits (Note 6) ................................... 302,155,224 288,066,756 Short-term borrowings (Note 7) .................................... 28,342,542 20,771,724 Federal Home Loan Bank advances (Note 8) .......................... 29,712,759 22,425,398 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures (Note 9) ........................................................ 12,000,000 12,000,000 Other liabilities ................................................. 4,919,949 4,286,318 ----------------------------- Total liabilities ......................................... 377,130,474 347,550,196 ----------------------------- Commitments and Contingencies (Note 18) Stockholders' Equity (Note 16): Common stock, $1 par value; shares authorized 5,000,000; shares issued and outstanding 2001 - 2,325,566 and 2,265,420; 2000 - 2,325,416 and 2,283,920, respectively .................. 2,325,566 2,325,416 Additional paid-in capital ...................................... 12,148,759 12,147,984 Retained earnings ............................................... 9,691,749 7,296,017 Accumulated other comprehensive income (loss) ................... 505,922 (1,098,518) ----------------------------- 24,671,996 20,670,899 Less cost of common shares acquired for the treasury 2001 - 60,146; 2000 - 41,496 .................................. 854,536 599,480 ----------------------------- Total stockholders' equity ................................ 23,817,460 20,071,419 ---------------------------- Total liabilities and stockholders' equity ................ $ 400,947,934 $ 367,621,615 =============================
See Notes to Consolidated Financial Statements. 21 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 2001, 2000, and 1999 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans ..................................... $ 22,970,407 $ 18,364,812 $ 15,642,235 Interest and dividends on securities: Taxable ...................................................... 3,067,722 3,214,722 2,229,178 Nontaxable ................................................... 290,990 233,793 56,089 Interest on federal funds sold ................................. 1,267,062 1,488,267 1,492,173 Other interest ................................................. 947,755 777,604 696,245 -------------------------------------------- Total interest income .................................... 28,543,936 24,079,198 20,115,920 -------------------------------------------- Interest expense: Interest on deposits ........................................... 13,022,210 10,125,235 9,009,724 Interest on company obligated mandatorily redeemable preferred securities ......................................... 1,134,541 1,137,402 63,518 Interest on short-term and other borrowings .................... 2,454,998 2,025,956 1,953,444 -------------------------------------------- Total interest expense ................................... 16,611,749 13,288,593 11,026,686 -------------------------------------------- Net interest income ...................................... 11,932,187 10,790,605 9,089,234 Provision for loan losses (Note 4) ............................. 889,670 1,051,818 891,800 -------------------------------------------- Net interest income after provision for loan losses ...... 11,042,517 9,738,787 8,197,434 -------------------------------------------- Noninterest income: Merchant credit card fees, net of processing costs ............. 1,673,444 2,346,296 1,322,658 Trust department fees .......................................... 2,071,971 1,884,310 1,520,518 Deposit service fees ........................................... 816,489 600,219 433,056 Gains on sales of loans, net ................................... 1,136,572 438,799 1,043,763 Securities gains (losses), net ................................. (14,047) (28,221) 3,757 Amortization of deferred income resulting from restructuring of merchant broker agreement (Note 11) ......... -- -- 732,000 Other .......................................................... 628,639 913,013 504,699 -------------------------------------------- Total noninterest income ................................. 6,313,068 6,154,416 5,560,451 -------------------------------------------- Noninterest expenses: Salaries and employee benefits ................................. 8,014,268 6,878,213 5,801,670 Professional and data processing fees .......................... 1,159,929 860,216 598,457 Advertising and marketing ...................................... 579,524 410,106 359,571 Occupancy and equipment expense ................................ 1,925,820 1,580,911 1,453,040 Stationery and supplies ........................................ 352,441 324,219 267,739 Postage and telephone .......................................... 409,626 361,623 298,208 Other .......................................................... 1,358,345 1,052,173 900,214 -------------------------------------------- Total noninterest expenses ............................... 13,799,953 11,467,461 9,678,899 -------------------------------------------- Income before income taxes ............................... 3,555,632 4,425,742 4,078,986 Federal and state income taxes (Note 12) ......................... 1,159,900 1,680,215 1,614,165 -------------------------------------------- Net income ............................................... $ 2,395,732 $ 2,745,527 $ 2,464,821 ============================================ Earnings per common share (Note 17): Basic .......................................................... $ 1.06 $ 1.19 $ 0.98 Diluted ........................................................ $ 1.04 $ 1.15 $ 0.93 Weighted average common shares outstanding ..................... 2,268,465 2,309,453 2,285,500 Weighted average common and common equivalent shares outstanding 2,314,334 2,385,840 2,398,525
See Notes to Consolidated Financial Statements. 22 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended June 30, 2001, 2000, and 1999 Accumulated Additional Other Preferred Common Paid-In Retained Comprehensive Treasury Stock Stock Capital Earnings Income (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, year ended June 30, 1998 ....... $ 25 $1,510,374 $15,014,884 $2,564,443 $ 12,492 $ -- $19,102,218 ----------------------------------------------------------------------------------------- Comprehensive income: Net income .......................... -- -- -- 2,464,821 -- -- 2,464,821 Other comprehensive (loss), net of tax (Note 2) ...................... -- -- -- -- (344,842) -- (344,842) ----------- Comprehensive income ............ 2,119,979 ------------ Stock split (3-for-2) ................... -- 760,262 (760,262) (890) -- -- (890) Proceeds from issuance of 30,720 shares of common stock as a result of warrants and stock options exercised (Note 14) . -- 25,615 201,215 -- -- -- 226,830 Tax benefit of nonqualified stock options exercised ............................. -- -- 3,218 -- -- -- 3,218 Redemption of preferred stock (Note 15) . (25) -- (2,499,975) (477,884) -- -- (2,977,884) ----------------------------------------------------------------------------------------- Balance, year ended June 30, 1999 ....... -- 2,296,251 11,959,080 4,550,490 (332,350) -- 18,473,471 ----------------------------------------------------------------------------------------- Comprehensive income: Net income .......................... -- -- -- 2,745,527 -- -- 2,745,527 Other comprehensive (loss), net of tax (Note 2) ...................... -- -- -- -- (766,168) -- (766,168) ------------ Comprehensive income ............ 1,979,359 ------------ Proceeds from issuance of 37,310 shares of common stock, as a result of warrants and stock options exercised (Note 14) ............................. -- 37,310 219,544 -- -- -- 256,854 Exchange of 8,145 shares of common stock in connection with options exercised .. -- (8,145) (111,818) -- -- -- (119,963) Tax benefit of nonqualified stock options exercised ............................. -- -- 81,178 -- -- -- 81,178 Purchase of 41,496 shares of common stock for the treasury ...................... -- -- -- -- -- (599,480) (599,480) ----------------------------------------------------------------------------------------- Balance, year ended June 30, 2000 ....... -- 2,325,416 12,147,984 7,296,017 (1,098,518) (599,480) 20,071,419 ----------------------------------------------------------------------------------------- Comprehensive income: Net income .......................... -- -- -- 2,395,732 -- -- 2,395,732 Other comprehensive gain, net of tax (Note 2) ........................... -- -- -- -- 1,604,440 -- 1,604,440 ------------ Comprehensive income ............ 4,000,172 ------------ Proceeds from issuance of 150 shares of common stock as a result of stock options exercised (Note 14) ........... -- 150 775 -- -- -- 925 Purchase of 18,650 shares of common stock for the treasury ...................... -- -- -- -- -- (255,056) (255,056) ----------------------------------------------------------------------------------------- Balance, year ended June 30, 2001 ....... $ -- $2,325,566 $12,148,759 $9,691,749 $ 505,922 $(854,536) $23,817,460 =========================================================================================
See Notes to Consolidated Financial Statements. 23 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2001, 2000, and 1999 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income ....................................................... $ 2,395,732 $ 2,745,527 $ 2,464,821 Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation ................................................... 770,730 635,838 627,075 Provision for loan losses ...................................... 889,670 1,051,818 891,800 Deferred income taxes .......................................... (362,995) (398,971) 232,262 Amortization of offering costs on subordinated debentures ...... 29,506 29,453 1,436 Amortization of premiums on securities, net .................... 60,062 62,539 38,697 Investment securities (gains) losses, net ...................... 14,047 28,221 (3,757) Loans originated for sale ...................................... (97,605,425) (36,774,571) (85,027,675) Proceeds on sales of loans ..................................... 94,039,651 38,124,921 88,804,656 Net gains on sales of loans .................................... (1,136,572) (438,799) (1,043,763) Amortization of deferred income resulting from restructuring of merchant broker agreement ................... -- -- (732,000) Tax benefit of nonqualified stock options exercised ............ -- 81,178 3,218 Increase in accrued interest receivable ........................ (230,058) (626,617) (233,280) (Increase) decrease in other assets ............................ (1,166,767) 170,192 (2,405,245) Increase (decrease) in other liabilities ....................... 633,631 (528,780) 52,456 -------------------------------------------- Net cash provided by (used in) operating activities ........ (1,668,788) 4,161,949 3,670,701 -------------------------------------------- Cash Flows from Investing Activities: Net (increase) decrease in federal funds sold .................... 18,330,000 13,020,000 (16,165,000) Net (increase) decrease in certificates of deposit at financial institutions ......................................... 2,263,878 (241,270) (4,169,070) Purchase of securities available for sale ........................ (17,003,552) (23,659,480) (30,215,760) Purchase of securities held to maturity .......................... -- (50,000) -- Proceeds from calls and maturities of securities ................. 15,045,000 6,200,000 14,400,000 Proceeds from paydowns on securities ............................. 1,537,072 1,389,269 1,732,539 Proceeds from sales of securities available for sale ............. 1,262,841 5,191,661 280,786 Purchase of life insurance contracts ............................. -- (2,023,543) -- Increase in cash value of life insurance contracts ............... (87,840) (14,640) -- Net loans originated ............................................. (41,568,458) (45,117,584) (38,080,955) Purchase of premises and equipment, net .......................... (1,715,807) (797,843) (520,423) -------------------------------------------- Net cash used in investing activities ...................... (21,936,866) (46,103,430) (72,737,883) -------------------------------------------- Cash Flows from Financing Activities: Net increase in deposit accounts ................................. 14,088,468 40,100,877 50,581,915 Net increase in short-term borrowings ............................ 7,570,818 11,085,847 7,685,877 Proceeds from Federal Home Loan Bank advances .................... 16,750,000 8,000,000 1,480,000 Payments on Federal Home Loan Bank advances ...................... (9,462,639) (10,180,492) (1,541,284) Net decrease in other borrowings ................................. -- -- (1,500,000) Proceeds from issuance of preferred securities of subsidiary trust -- -- 12,000,000 Redemption of preferred stock .................................... -- -- (2,977,884) Purchase of treasury stock ....................................... (255,056) (599,480) -- Proceeds from issuance of common stock ........................... 925 136,891 225,940 -------------------------------------------- Net cash provided by financing activities .................. $ 28,692,516 $ 48,543,643 $ 65,954,564 -------------------------------------------- Net increase (decrease) in cash and due from banks ................................................ $ 5,086,862 $ 6,602,162 $ (3,112,618) Cash and due from banks: Beginning ....................................................... 15,130,357 8,528,195 11,640,813 -------------------------------------------- Ending .......................................................... $ 20,217,219 $ 15,130,357 $ 8,528,195 ============================================ Supplemental Disclosures of Cash Flow Information, cash payments for: Interest ........................................................ $ 16,069,527 $ 13,024,589 $ 10,735,683 Income taxes .................................................... 1,480,894 2,001,216 1,527,171 Supplemental Schedule of Noncash Investing Activities: Change in accumulated other comprehensive income, unrealized gains (losses) on securities available for sale, net .......... 1,604,440 (766,168) (344,842) Investment securities transferred from held to maturity portfolio to available for sale portfolio, at fair value ................ -- -- 1,030,743 Due (from broker) to broker for (call) purchase of securities available for sale ................................. (1,000,000) -- 3,800,000 Exchange of 8,145 shares of common stock in connection with options exercised ........................................ -- (119,963) --
See Notes to Consolidated Financial Statements. 24 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1. Nature of Business and Significant Accounting Policies Nature of business: Quad City Holdings, Inc. (Company) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (Bank), Quad City Bancard, Inc. (Bancard), Allied Merchant Services, Inc. (Allied), and Quad City Holdings Capital Trust I. The Bank is a commercial bank that serves the Quad Cities and Cedar Rapids areas, is chartered and regulated by the state of Iowa, is insured and subject to regulation by the Federal Deposit Insurance Corporation and is a member of and regulated by the Federal Reserve System. Bancard is an entity formed in April 1995 to conduct the Company's merchant credit card operation and is regulated by the Federal Reserve System. Allied was formed in March 1999 by Bancard as a captive independent sales organization that markets merchant credit card processing services. Allied is a wholly-owned subsidiary of Bancard. Quad City Holdings Capital Trust I was capitalized in June 1999 for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred Securities. Significant accounting policies: Accounting estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for estimated losses on loans is inherently subjective as it requires material estimates that are susceptible to significant change. The fair value disclosure of financial instruments is an estimate that can be computed within a range. Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and amounts due from banks. Cash flows from federal funds sold, certificates of deposit at financial institutions, loans, deposits, short-term borrowings, and other borrowings are treated as net increases or decreases. Cash and due from banks: The Bank is required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $3,641,000 and $2,753,000 as of June 30, 2001 and 2000, respectively. Investment securities: Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Pursuant to SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", the Company transferred at fair value $1,030,743 of investment securities from held to maturity to available for sale on January 4, 1999. Loans held for sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. 25 Loans and allowance for estimated losses on loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for estimated losses on loans. The allowance for estimated losses on loans is maintained at the level considered adequate by management of the Company and the Bank to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance, the Company and the Bank consider the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions, and other factors that in management's judgment deserve evaluation. Loans are considered impaired when, based on current information and events, it is probable the Company and the Bank will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to an impaired loan is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Company and the Bank recognize interest income on impaired loans on a cash basis. Direct loan origination fees and costs are deferred and the net amounts amortized as an adjustment of the related loan's yield. Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded. Transfers of financial assets: Transfers of financial assets are accounted for as sales, only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives. Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company. Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Trust assets: Trust assets held by the Bank in a fiduciary, agency, or custodial capacity for its customers, other than cash on deposit at the Bank, are not included in the accompanying consolidated financial statements since such items are not assets of the Bank. Earnings per common share: Basic earnings per share is computed by dividing net income by the weighted average number of common stock shares outstanding for the respective period. Diluted earnings per share is computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding for the respective period. Reclassification: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders' equity, to conform with current year presentation. 26 Note 2. Comprehensive Income Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale. Other comprehensive income (loss) is comprised as follows: Tax Before Expense Net Tax (Benefit) of Tax ----------------------------------------- Year ended June 30, 2001: Unrealized gains (losses) on securities available for sale: Unrealized holding gains arising during the year ........ $ 2,482,453 $ 887,041 $ 1,595,412 Less, reclassification adjustment for (losses) included in net income ................................ (14,047) (5,019) (9,028) ----------------------------------------- Other comprehensive income .......................... $ 2,496,500 $ 892,060 $ 1,604,440 ========================================= Year ended June 30, 2000: Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the year ..... $(1,195,285) $ (410,590) $ (784,695) Less, reclassification adjustment for (losses) included in net income ................................ (28,221) (9,694) (18,527) ----------------------------------------- Other comprehensive (loss) .......................... $(1,167,064) $ (400,896) $ (766,168) ========================================= Year ended June 30, 1999: Unrealized gains (losses) on securities available for sale: Unrealized holding (losses) arising during the year ..... $ (517,765) $ (175,407) $ (342,358) Less, reclassification adjustment for gains included in net income ................................ 3,757 1,273 2,484 ----------------------------------------- Other comprehensive (loss) .......................... $ (521,522) $ (176,680) $ (344,842) =========================================
Note 3. Investment Securities The amortized cost and fair value of investment securities as of June 30, 2001 and 2000 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ----------------------------------------------------------- June 30, 2001: Securities held to maturity: Municipal securities ..... $ 500,559 $ 4,638 $ -- $ 505,197 Other bonds .............. 75,000 3,214 -- 78,214 ----------------------------------------------------------- $ 575,559 $ 7,852 $ -- $ 583,411 =========================================================== Securities available for sale: U.S. agency securities ..... $ 31,787,602 $ 626,091 $ (104) $ 32,413,589 Mortgage-backed securities . 5,509,433 17,646 (18,797) 5,508,282 Municipal securities ....... 11,892,825 144,098 (39,556) 11,997,367 Corporate securities ....... 4,577,918 31,014 (13,185) 4,595,747 Trust preferred securities . 1,148,488 94,897 (14,405) 1,228,980 Other securities ........... 393,211 19,075 (21,730) 390,556 ----------------------------------------------------------- $ 55,309,477 $ 932,821 $ (107,777) $ 56,134,521 =========================================================== 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 ===========================================================
27 All sales of securities during the years ended June 30, 2001, 2000, and 1999 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: 2001 2000 1999 ------------------------------------ Proceeds from sales of securities ....... $1,262,841 $5,191,661 $ 280,786 Gross gains from sales of securities .... 11,831 22,366 5,474 Gross losses from sales of securities ... 25,878 50,587 1,717 The amortized cost and fair value of securities as of June 30, 2001 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 in one year or less ...................... $ 249,903 $ 250,609 Due in one year through five years ........... 325,656 332,802 --------------------------- $ 575,559 $ 583,411 =========================== Securities available for sale: Due in one year or less ...................... $ 2,011,645 $ 2,025,228 Due after one year through five years ........ 28,818,511 29,359,855 Due after five years ......................... 18,576,677 18,850,800 --------------------------- 49,406,833 50,235,883 Mortgage-backed securities ................... 5,509,433 5,508,282 Other securities ............................. 393,211 390,556 --------------------------- $55,309,477 $56,134,721 =========================== As of June 30, 2001 and 2000, investment securities with a carrying value of $37,120,191 and $33,718,441, 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, 2001 and 2000 is presented as follows: 2001 2000 ---------------------------- Commercial ..................................... $209,888,773 $167,682,652 Real estate .................................... 38,018,551 36,301,379 Real estate - construction ..................... 2,568,140 3,463,682 Installment and other consumer ................. 37,389,302 34,405,138 ---------------------------- 287,864,766 241,852,851 Less allowance for estimated losses on loans ... 4,248,182 3,617,401 ---------------------------- $283,616,584 $238,235,450 ============================ Real estate loans include loans held for sale with a carrying value of $5,823,820 and $1,121,474 as of June 30, 2001 and 2000, respectively. The market value of these loans exceeded its carrying value at those dates. 28 Loans on nonaccrual status amounted to $1,231,741 and $382,745 as of June 30, 2001 and 2000, respectively. Foregone interest income and cash interest collected on nonaccrual loans was not material during the years ended June 30, 2001, 2000, and 1999. Changes in the allowance for estimated losses on loans for the years ended June 30, 2001, 2000, and 1999 are presented as follows: 2001 2000 1999 ----------------------------------------- Balance, beginning ......................... $ 3,617,401 $ 2,895,457 $ 2,349,838 Provisions charged to expense ............ 889,670 1,051,818 891,800 Loans charged off ........................ (300,463) (426,708) (478,515) Recoveries on loans previously charged off 41,574 96,834 132,334 ----------------------------------------- Balance, ending ............................ $ 4,248,182 $ 3,617,401 $ 2,895,457 =========================================
Impaired loans were not material as of June 30, 2001 and 2000. The loan portfolio included a concentration of loans in certain industries as of June 30, 2001 as follows: Industry Balance - -------------------------------------------------------------------------------- Real estate operators and lessors $ 20,236,373 Retail eating establishments 14,425,551 Commercial banks 13,889,782 Plumbing, HVAC 7,739,577 Real estate developers 7,288,725 Physicians 6,845,206 Hospitals 6,662,132 Hardware, wholesale 6,654,391 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, 2001 and 2000 was as follows: 2001 2000 ---------------------------- Balance, beginning ............................. $ 6,918,805 $ 5,829,187 Net increase due to change in related parties 11,439,009 -- Advances ..................................... 6,509,174 1,968,717 Repayments ................................... (5,483,496) (879,099) ---------------------------- Balance, ending ................................ $ 19,383,492 $ 6,918,805 ============================ Note 5. Premises and Equipment The following summarizes the components of premises and equipment as of June 30, 2001 and 2000: 2001 2000 ----------------------------- Land ....................................... $ 813,400 $ 630,699 Buildings .................................. 5,536,999 5,003,570 Furniture and equipment .................... 5,309,098 4,324,866 ----------------------------- 11,659,497 9,959,135 Less accumulated depreciation .............. 2,998,799 2,243,514 ----------------------------- $ 8,660,698 $ 7,715,621 ============================= 29 Certain facilities are leased under operating leases. Rental expense was $615,058, $451,097, and $429,932 for the years ended June 30, 2001, 2000, and 1999, respectively. Future minimum rental commitments under noncancelable leases on a fiscal year basis were as follows as of June 30, 2001: Year ending June 30: 2002 $ 486,358 2003 501,061 2004 462,485 2005 413,860 2006 397,766 Thereafter 636,255 ----------- $ 2,897,785 =========== Note 6. Deposits The aggregate amount of certificates of deposit each with a minimum denomination of $100,000, was $50,298,560 and $50,814,599 as of June 30, 2001 and 2000, respectively. As of June 30, 2001, the scheduled maturities of certificates of deposit were as follows: Year ending June 30: 2002 $129,590,003 2003 14,389,452 2004 2,396,708 2005 366,522 2006 1,207,137 Thereafter 2,000,000 ------------ $149,949,822 ============ Note 7. Short-Term Borrowings As of June 30, 2001 short-term borrowings of $28,342,542 consisted of overnight repurchase agreements. 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. Information concerning repurchase agreements is summarized as follows as of June 30, 2001 and 2000: 2001 2000 --------------------------- Average daily balance during the year ............. $21,584,795 $12,823,612 Average daily interest rate during the year ....... 4.40% 4.35% Maximum month-end balance during the year ......... 28,342,542 18,784,998 Weighted average rate as of June 30 ............... 4.34% 4.63% Securities underlying the agreements as of June 30: Carrying value .................................. $28,947,957 $24,397,505 Fair value ...................................... 28,947,957 24,397,505 The securities underlying the agreements as of June 30, 2001 and 2000 were under the Company's control in safekeeping at third-party financial institutions. 30 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, 2001 and 2000, the Bank held $1,487,000 and $1,299,100, respectively, of FHLB stock. Maturity and interest rate information on advances from the FHLB as of June 30, 2001 and 2000 is as follows: June 30, 2001 -------------------------- Weighted Average Amount Due Interest Rate -------------------------- Maturity: Year ending June 30: 2002 ......................................... $ 1,995,266 6.97% 2003 ......................................... 7,894,786 6.35 2004 ......................................... 1,815,009 5.90 2005 ......................................... 750,000 5.90 2006 ......................................... 700,000 6.28 Thereafter ................................... 16,557,697 5.12 ----------- Total FHLB advances ...................... $29,712,758 5.67 =========== June 30, 2001 -------------------------- 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 =========== Advances from the FHLB are collateralized by 1-to-4 unit residential, commercial real estate, and business mortgages equal to 130%, 175%, and 250%, respectively, of total outstanding notes. Additionally, securities with a carrying value of approximately none and $4.4 million as of June 30, 2001 and 2000, respectively, 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 sheets as of June 30, 2001 and 2000 as liabilities. For regulatory purposes, approximately $8,000,000 and $7,000,000 of the capital securities are allowed in the calculation of Tier I capital as of June 30, 2001 and 2000, respectively, with the remainder allowed as Tier II capital. The capital securities are traded on the American Stock Exchange under the symbol "CQP.PR.A". 31 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, 2001 and 2000. The revolving credit note expired on July 1, 2001. The note was renewed and increased to $10,000,000, effective July 1, 2001 with a maturity three years from the date of funding. Interest is payable quarterly at the adjusted LIBOR rate, as defined in the credit note agreement, and varies by borrowing. As of June 30, 2001 the borrowing rates ranged from 5.3% to 5.4% 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. 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 independent sales organization. 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. Merchant credit card fees decreased during the year ended June 30, 2001 as a result of the termination of this agreement. 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, 2001, 2000, and 1999: Year Ended June 30, --------------------------------------------------- 2001 2000 1999 --------------------------------------------------- Current ............. $ 1,522,895 $ 2,079,186 $ 1,381,903 Deferred ............ (362,995) (398,971) 232,262 --------------------------------------------------- $ 1,159,900 $ 1,680,215 $ 1,614,165 =================================================== 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, 2001, 2000, and 1999: Year Ended June 30, ------------------------------------------------------------------------ 2001 2000 1999 ----------------------- ----------------------- ---------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------------------------------------------------------------------------ Computed "expected" tax expense ............... $ 1,244,471 35.0% $ 1,549,010 35.0% $ 1,427,645 35.0% Effect of graduated tax rates (35,556) (1.0) (44,257) (1.0) (40,790) (1.0) Tax exempt income, net ...... (147,396) (4.1) (132,769) (3.0) (46,853) (1.1) State income taxes, net of federal benefit ........... 132,546 3.7 172,445 3.9 126,123 3.1 Other ....................... (34,165) (1.0) 135,786 3.1 148,040 3.6 ------------------------------------------------------------------------- $ 1,159,900 32.6% $ 1,680,215 38.0% $ 1,614,165 39.6% =========================================================================
32 The net deferred tax assets included with other assets on the balance sheet consisted of the following as of June 30, 2001 and 2000: 2001 2000 --------------------- Deferred tax assets: Net unrealized losses on securities available for sale $ -- $ 572,938 Deferred compensation ................................ 180,863 112,299 Loan and credit card losses .......................... 1,701,189 1,357,186 Other ................................................ 65,651 69,380 ---------------------- 1,947,703 2,111,803 ---------------------- Deferred tax liabilities: Net unrealized gains on securities available for sale 319,122 -- Premises and equipment ............................... 469,893 447,330 Investment securities accretion ...................... 35,500 29,185 Other ................................................ 51,938 34,973 ---------------------- 876,453 511,488 ---------------------- Net deferred tax asset ......................... $1,071,250 $1,600,315 ====================== The change in deferred income taxes was reflected in the financial statements as follows for the years ended June 30, 2001, 2000, and 1999: 2001 2000 1999 ----------------------------------- Provision for income taxes .............. $(362,995) $(398,971) $ 232,262 Statement of stockholders' equity- accumulated other comprehensive income, unrealized gains (losses) on securities available for sale, net . 892,060 (400,896) (176,680) ----------------------------------- $ 529,065 $(799,867) $ 55,582 =================================== 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 3% of employee contributions, and 50% of the next 3% of employee contributions, up to a maximum amount of 4.5% 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, 2001, 2000, and 1999 were as follows: 2001 2000 1999 ------------------------------------ Matching contribution ................ $240,960 $155,237 $132,835 Discretionary contribution ........... 41,500 50,000 45,000 ------------------------------------ $282,460 $205,237 $177,835 ==================================== 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 years ended June 30, 2001 and 2000, the Company expensed $27,791 and $41,860, respectively, related to the agreements. As of June 30, 2001 and 2000 the liability related to the agreements totals $139,651 and $76,860, respectively. 33 Note 14. Warrants and Stock Based Compensation Warrants: 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 and 1999, 11,250 and 30,000, 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 and earnings per common share would have been reduced to the proforma amounts shown below for the years ending June 30: 2001 2000 1999 ---------------------------------------- Net income: As reported ..................... $2,395,732 $2,745,527 $2,464,821 Pro forma ....................... 2,325,404 2,690,807 2,421,462 Earnings per share: Basic: As reported ................... $ 1.06 $ 1.19 $ 0.98 Pro forma ..................... 1.03 1.17 0.96 Diluted: As reported ................... 1.04 1.15 0.93 Pro forma ..................... 1.00 1.13 0.91 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, 2001, 2000, and 1999: dividend rate of 0%: risk-free interest rates based upon current rates at the date of grant (5.21% to 6.81%); expected lives of 10 years, and expected price volatility of 18.61% to 24.81%. 34 A summary of the stock option plans as of June 30, 2001, 2000, and 1999 and changes during the years ended on those dates is presented below: 2001 2000 1999 ----------------- ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------------------------------------------------- Outstanding, beginning ........ 189,005 $10.24 190,171 $ 9.36 190,887 $ 9.12 Granted ..................... 50,200 10.52 25,900 14.83 8,500 18.03 Exercised ................... (150) 6.17 (26,060) 6.69 (720) 9.49 Forfeited ................... (2,618) 17.10 (1,006) 17.80 (8,496) 12.67 ------- ------- ------- Outstanding, ending ........... 236,437 10.22 189,005 10.24 190,171 9.36 ======= ======= ======= Exercisable, ending ........... 153,390 138,834 149,109 Weighted average fair value per option of options granted during the year ............. $ 5.17 $ 7.68 $ 8.88
A further summary of options outstanding as of June 30, 2001 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 $6.83 110,170 3.60 $ 6.68 110,170 $ 6.68 $7.83 to $8.83 8,640 4.92 8.75 8,640 8.75 $10.00 to $11.67 50,450 9.94 10.48 600 11.67 $12.69 to $13.25 11,000 8.57 13.07 2,200 13.07 $13.33 to $13.67 21,525 6.00 13.67 17,430 13.66 $14.08 to $16.13 14,650 8.98 16.02 3,130 15.83 $17.75 to $21.33 20,002 7.50 20.23 11,220 20.49 ------- -------------- 236,437 153,390 ======= ==============
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, 2001, 2000, and 1999 there were 90,850, 52,050, and 39,625 SARs, respectively, outstanding, with 28,200, 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. 35 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, 2001 and 2000 with the minimum requirements for the Company and Bank are presented below (amounts in thousands of dollars): To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------- As of June 30, 2001: Company: Total risk based capital $39,351 12.2% $25,863 8.0% $32,329 10.0% Tier 1 risk based capital 31,228 9.7 12,932 4.0 19,397 6.0 Leverage ratio .......... 31,228 7.8 16,044 4.0 20,055 5.0 Bank: Total risk based capital $32,506 10.2% $25,464 8.0% $31,830 10.0% Tier 1 risk based capital 28,524 9.0 12,732 4.0 19,098 6.0 Leverage ratio .......... 28,524 7.3 15,693 4.0 19,616 5.0 As of June 30, 2000: Company: Total risk based capital $36,522 13.5% $21,689 8.0% $27,112 10.0% Tier 1 risk based capital 28,173 10.4 10,845 4.0 16,267 6.0 Leverage ratio .......... 28,173 8.1 13,988 4.0 17,485 5.0 Bank: Total risk based capital $28,363 10.7% $21,165 8.0% $26,457 10.0% Tier 1 risk based capital 25,052 9.5 10,583 4.0 15,874 6.0 Leverage ratio .......... 25,052 7.4 13,481 4.0 16,852 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. 36 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, 2001, 2000, and 1999: 2001 2000 1999 ------------------------------------ Basic and diluted earnings, net income ............. $2,395,732 $2,745,527 $2,464,821 Less accretion of preferred stock redemption premium -- -- 231,062 ------------------------------------ Income available to common stockholders .... $2,395,732 $2,745,527 $2,233,759 ==================================== Weighted average common shares outstanding ......... 2,268,465 2,309,453 2,285,500 Weighted average common shares issuable upon exercise of stock options and warrants ........... 45,869 76,387 113,025 ------------------------------------ Weighted average common and common equivalent shares outstanding .................... 2,314,334 2,385,840 2,398,525 ====================================
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, marketable securities, 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, 2001 and 2000, commitments to extend credit aggregated $91,893,000 and $74,934,000, respectively. As of June 30, 2001 and 2000, standby letters of credit aggregated $1,686,000 and $957,000, 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, 2001 there were no significant pending liabilities. 37 Bancard is the holder of an account receivable in the approximate amount of $1,700,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova Corporation (trading symbol NIS on the New York Stock Exchange). This receivable arises pursuant to Bancard's provision of electronic credit card sales authorization and settlement services to PMT pursuant to a written contract that includes PMT's obligation to indemnify Bancard for credit card chargeback losses arising from those services. PMT has failed to timely pay Bancard for monthly invoices, including service charges and substantial chargeback losses, for the period beginning May 2000. Bancard intends to vigorously pursue collection of this receivable. On September 25, 2000, PMT filed a lawsuit in federal court in Los Angeles, California, against Bancard and the Company. This lawsuit alleges tortuous acts and breaches of contract by Bancard, the Company, and others and seeks recovery from Bancard and the Company of not less than $3,600,000 of alleged actual damages, plus punitive damages. Bancard and the Company filed lawsuits in federal and state courts in Davenport, Iowa against PMT. These lawsuits sought a court order compelling PMT to participate in arbitration in Bettendorf, Iowa, as provided for in the pertinent contract documents, and to resolve the disputes between PMT, Bancard and the Company, including the unpaid account receivable. The federal court in Iowa ruled that the arbitration issue should be determined by the state court in Iowa. Subsequently, the Iowa District Court of Scott County ruled that all claims, including the tort claims, must be arbitrated in Iowa. Because of that ruling, the California lawsuit was dismissed, and arbitration is pending. Bancard and the Company continue to believe that PMT's allegations are without merit and will vigorously pursue the collection of the receivable and the defense of PMT's claims. 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 $15,146,866 and $31,794,780 as of June 30, 2001 and 2000, 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, 2001 ------------------------------------------------- September December March June 2000 2000 2001 2001 ------------------------------------------------- Total interest income ........ $6,978,039 $7,264,701 $7,279,539 $7,021,657 Total interest expense ....... 4,119,175 4,323,023 4,313,369 3,856,182 ------------------------------------------------- Net interest income .. 2,858,864 2,941,678 2,966,170 3,165,475 Provision for loan losses .... 176,075 343,800 148,374 221,421 Noninterest income ........... 1,372,085 1,415,496 1,632,061 1,893,426 Noninterest expenses ......... 3,077,638 3,466,171 3,471,466 3,784,678 ------------------------------------------------- Net income before income taxes ......... 977,236 547,203 978,391 1,052,802 Federal and state income taxes 316,987 203,258 355,520 284,135 ------------------------------------------------- Net income ........... $ 660,249 $ 343,945 $ 622,871 $ 768,667 ================================================= Earnings per common share: Basic ...................... $ 0.29 $ 0.15 $ 0.28 $ 0.34 Diluted .................... 0.28 0.15 0.27 0.34 38 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 ...................... $ 0.17 $ 0.24 $ 0.24 $ 0.33 Diluted .................... 0.16 0.23 0.23 0.31 39 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 2001 2000 - ------------------------------------------------------------------------------------- Cash and due from banks .............................. $ 723,209 $ 1,803,841 Securities available for sale, at fair value ......... 1,419,536 1,131,073 Investment in Quad City Bank and Trust Company ....... 28,986,909 23,992,847 Investment in Quad City Bancard, Inc. ................ 3,296,760 2,529,026 Investment in Quad City Holdings Capital Trust I ..... 390,432 390,432 Net loans receivable ................................. 145,106 532,443 Other assets ......................................... 1,517,166 1,895,581 ---------------------------- Total assets ................................. $ 36,479,118 $ 32,275,243 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------- Liabilities: COMR preferred securities of subsidiary trust ...... $ 12,000,000 $ 12,000,000 Other liabilities .................................. 661,658 203,824 ---------------------------- Total liabilities ............................ 12,661,658 12,203,824 ---------------------------- Stockholders' Equity: Common stock ....................................... 2,325,566 2,325,416 Additional paid-in capital ......................... 12,148,759 12,147,984 Retained earnings .................................. 9,691,749 7,296,017 Accumulated other comprehensive income (loss) ...... 505,922 (1,098,518) Less cost of common shares acquired for the treasury (854,536) (599,480) ---------------------------- Total stockholders' equity ................... 23,817,460 20,071,419 ---------------------------- Total liabilities and stockholders' equity ... $ 36,479,118 $ 32,275,243 ============================
Condensed Statements of Income Year Ended June 30, ---------------------------------------- 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Total interest income .................................... $ 170,319 $ 197,387 $ 78,763 Investment securities gains (losses), net ................ (25,753) 21,983 5,474 Equity in net income of Quad City Bank and Trust Company .......................................... 3,471,422 2,808,058 2,212,931 Equity in net income of Quad City Bancard, Inc. .......... 184,234 596,224 564,886 Equity in net income of Quad City Holdings Capital Trust I -- 10,432 -- Other .................................................... (7,745) 233,927 85,945 --------------------------------------- Total income ..................................... 3,792,477 3,868,011 2,947,999 ---------------------------------------- Interest expense ......................................... 1,134,541 1,137,402 220,794 Other .................................................... 958,504 583,282 495,284 ---------------------------------------- Total expenses ................................... 2,093,045 1,720,684 716,078 ---------------------------------------- Income before income tax benefit .......................................... 1,699,432 2,147,327 2,231,921 Income tax benefit ....................................... 696,300 598,200 232,900 ---------------------------------------- Net income ....................................... $ 2,395,732 $ 2,745,527 $ 2,464,821 ========================================
40 Condensed Statements of Cash Flows Year Ended June 30, -------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net income .......................................... $ 2,395,732 $ 2,745,527 $ 2,464,821 Adjustments to reconcile net income to net cash used in operating activities: Distributions in excess of (less than) earnings of: Quad City Bank and Trust Company ................ (3,471,422) (2,808,058) (2,212,931) Quad City Bancard, Inc. ......................... 132,266 (596,224) (564,886) Quad City Holdings Capital Trust I .............. -- (10,432) -- Depreciation ...................................... 3,541 4,543 4,036 Provision for loan losses ......................... (3,790) 6,000 (7,500) Investment securities (gains) losses, net ......... 25,753 (21,983) (5,474) Tax benefit of nonqualified stock options exercised -- 81,178 3,218 (Increase) decrease in accrued interest receivable (2,802) (20,140) 4,780 (Increase) decrease in other assets ............... 317,712 130,943 (770,199) Increase (decrease) in other liabilities .......... 457,834 (137,454) 220,129 -------------------------------------------- Net cash used in operating activities ......... (145,176) (626,100) (864,006) -------------------------------------------- Cash Flows from Investing Activities: Purchase of securities available for sale ........... (269,279) (1,228,400) (67,400) Proceeds from sale of securities available for sale . 99,247 250,426 32,865 Capital infusion, Quad City Bank and Trust Company ..................................... -- -- (2,000,000) Capital infusion, Quad City Bancard, Inc. ........... (900,000) (500,000) (500,000) Capital infusion, Quad City Holdings Capital Trust I -- -- (380,000) Net loans (originated) repaid ....................... 391,127 (538,443) 510,344 Purchase of premises and equipment .................. (2,420) (2,420) (2,420) -------------------------------------------- Net cash used in investing activities ......... (681,325) (2,018,837) (2,406,611) -------------------------------------------- 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 .......................... (255,056) (599,480) -- Proceeds from issuance of common stock, net of simultaneous redemptions .......................... 925 136,891 225,940 -------------------------------------------- Net cash provided by (used in) financing activities .................................... (254,131) (462,589) 7,748,056 -------------------------------------------- Net increase (decrease) in cash and due from banks ................................ (1,080,632) (3,107,526) 4,477,439 Cash and due from banks: Beginning ........................................... 1,803,841 4,911,367 433,928 -------------------------------------------- Ending .............................................. $ 723,209 $ 1,803,841 $ 4,911,367 ============================================
41 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, 2001 and 2000 are presented as follows: 2001 2000 --------------------------- --------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------------------------------------------------- Cash and due from banks .......................... $ 20,217,219 $ 20,217,219 $ 15,130,357 $ 15,130,357 Federal funds sold ............................... 7,775,000 7,775,000 26,105,000 26,105,000 Certificates of deposit at financial institutions 10,512,585 10,512,585 12,776,463 12,776,463 Investment securities: Held to maturity ............................... 575,559 583,411 574,988 565,237 Available for sale ............................. 56,134,521 56,134,521 55,554,062 55,554,062 Loans receivable, net ............................ 283,616,584 289,206,000 238,235,450 237,441,000 Accrued interest receivable ...................... 2,863,178 2,863,178 2,633,120 2,633,120 Deposits ......................................... 302,155,224 302,813,000 288,066,756 287,771,000 Short-term borrowings ............................ 28,342,542 28,342,542 20,771,724 20,771,724 Federal Home Loan Bank advances .................. 29,712,759 29,977,000 22,425,398 22,287,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures ........................ 12,000,000 12,206,596 12,000,000 11,896,154 Accrued interest payable ......................... 2,394,489 2,394,489 1,852,267 1,852,267
42 Note 22. Business Segment Information Selected financial information on the Company's business segments is presented as follows for the years ended June 30, 2001, 2000, and 1999: Year Ended June 30, --------------------------------------------- 2001 2000 1999 --------------------------------------------- Commercial banking: Revenue ...................... 30,786,066 25,563,964 22,040,065 Net income ................... 2,818,311 2,446,654 1,881,433 Assets ....................... 394,223,857 361,927,225 317,059,752 Depreciation ................. 724,330 584,872 589,287 Capital expenditures ......... 1,702,763 751,653 451,535 Merchant credit card processing: Revenue ...................... 1,883,540 2,520,136 2,067,303 Net income ................... 220,890 674,800 564,886 Assets ....................... 3,672,002 1,998,280 2,103,805 Depreciation ................. 42,859 46,423 33,752 Capital expenditures ......... 10,624 43,770 66,468 Trust management: Revenue ...................... 2,071,971 1,884,310 1,520,518 Net income ................... 523,670 463,353 331,498 Assets ....................... N/A N/A N/A Depreciation ................. N/A N/A N/A Capital expenditures ......... N/A N/A N/A All other: Revenue ...................... $ 115,427 $ 265,204 $ 48,485 Net income (loss) ............ (1,167,139) (839,280) (312,996) Assets ....................... 3,052,075 3,696,110 2,182,658 Depreciation ................. 3,541 4,543 4,036 Capital expenditures ......... 2,420 2,420 2,420
Note 23. Business Expansion The Company is in the process of raising additional equity capital of approximately $5,000,000 through a private placement of its common stock. In April 2001, the Company announced plans to expand its banking operations to the Cedar Rapids, Iowa market. The Cedar Rapids operation is currently functioning as a branch of the Bank. The Company has filed the required regulatory applications to obtain a separate bank charter in the Cedar Rapids market, to be named Cedar Rapids Bank and Trust Company. Expectations are to convert the branch operations into this newly chartered bank upon receiving regulatory approval, which is likely to occur in the fall of 2001. The proceeds of the private placement of common stock will be used to assist with capitalization of the new bank. Cedar Rapids Bank and Trust Company will operate as a wholly-owned subsidiary of the Company, with a Cedar Rapids based executive management team and a predominantly local Board of Directors. Concurrent with the establishment of Cedar Rapids Bank & Trust Company, the Company plans to change its name to QCR Holdings, Inc. 43 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers 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. (a) 2. Financial Statement Schedules Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the consolidated financial statements and the accompanying notes thereto. 44 (a) 3. Exhibits The following exhibits are either filed as a part of this Annual Report on Form 10-k or are incorporated herein by reference: Exhibit Number. Exhibit Description 3.1 Certificate of Incorporation of Quad City Holdings, Inc., as amended (incorporated herein by reference to Exhibit 3.1 of Registrant's Form SB-2, File No. 33-67028). 3.2 Bylaws of Quad City Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 of Registrant's Form SB-2, File No. 33-67028). 4.1 Specimen Stock Certificate of Quad City Holdings, Inc (incorporated herein by reference to Exhibit 4.1 of Registrant's Form SB-2, File No. 33-67028). 10.1 Employment Agreement between Quad City Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer dated July 1, 2000 (incorporated herein by reference to Exhibit 10.1 of Registrant's Annual Report or Form 10-K for the year ended June 30, 2000). 10.2 Employment Agreement between Quad City Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated July 1, 2000 (incorporated herein by reference to Exhibit 10.2 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.3 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Michael A. Bauer dated June 28, 2000 (incorporated herein by reference to Exhibit 10.3 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.4 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Douglas M. Hultquist dated June 28, 2000 (incorporated herein by reference to Exhibit 10.4 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.5 Lease Agreement between Quad City Bank and Trust Company and 56 Utica L.L.C. (incorporated herein by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.6 Employment Agreement between Quad City Bank and Trust Company and Larry J. Helling dated April 11, 2001 (exhibit is being filed herewith). 10.7 Lease Agreement between Quad City Bank and Trust Company and Ryan Companies (exhibit is being filed herewith). 12.1 Statement re: Computation of Ratios (exhibit is being filed herewith). 21.1 Subsidiaries of Quad City Holdings, Inc. (exhibit is being filed herewith). 23.1 Consent of Independent Accountant - McGladrey and Pullen LLP (exhibit is being filed herewith).
(b) Reports on Form 8-K Quad City filed a current report on Form 8-K with the Securities and Exchange Commission on April 18, 2001 under Item 5 which reported information on it's expansion into Cedar Rapids, Iowa in the format of a press release. (c) Exhibits Exhibits to the Form 10-K required by Item 601 of Regulation S-K are attached or incorporated herein by reference as stated in the Index to Exhibits. (d) Financial Statements Excluded from Annual Report to Shareholders Pursuant to Rule 14a3(b) Not applicable 45 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. 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. 46 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 that have not received approval to operate as financial 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, this authority would permit the Company 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. Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other 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. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. As of the date of this filing, the Company has not applied for nor received approval to operate as a financial holding company. 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: (i) a risk-based requirement expressed as a percentage of total risk-weighted assets; and (ii) 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, 2001, the Company had regulatory capital in excess of the Federal Reserve's minimum requirements, with a risk-based capital ratio of 12.2% and a leverage ratio of 7.8%. 47 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 year ended December 31, 2000, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the year ending December 31, 2001, 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 fiscal year ended June 30, 2001, the FICO assessment rate for BIF and SAIF members was approximately 0.02% of deposits. 48 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, 2001, the Bank paid supervisory assessments to the Superintendent totaling $8,642. Capital Requirements. The Federal Reserve has established the following minimum capital standards for state-chartered Federal Reserve System member banks, such as the Bank: (i) 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 (ii) 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, 2001, 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, 2001, the Bank exceeded its minimum regulatory capital requirements with a leverage ratio of 7.3% and a risk-based capital ratio of 10.2%. 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: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution's asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution. As of June 30, 2001, 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. 49 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, 2001. As of June 30, 2001, approximately $676,000 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, which 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. Until 2001, an Iowa state bank could only 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 was located. Further, Iowa law prohibited an Iowa bank from establishing de novo branches in a municipality other than the municipality in which the bank's principal place of business was located, if another bank already operated one or more offices in the municipality in which the de novo branch was to be located. Under a recent change to the Iowa Banking Act, until June 30, 2004, Iowa banks, such as the Bank, have authority under Iowa law to establish up to three de novo branches at any location in Iowa, subject to regulatory approval, in addition to any branches established under the branching rules described above. Beginning July 1, 2004, Iowa banks may establish any number of branches at any location in Iowa, still subject to regulatory approval. 50 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. Financial Subsidiaries. Eligible state and national banks are also authorized to engage, through "financial subsidiaries," in certain activities that are permissible for financial holding companies (as described above) and certain activities that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity. As of the date of this filing, the Bank has not applied for nor received approval to establish any financial subsidiaries. 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 $42.8 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $42.8 million, the reserve requirement is $1.284 million plus 10% of the aggregate amount of total transaction accounts in excess of $42.8 million. The first $5.5 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. 51 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. 52 I. 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, ---------------------------- ---------------------------- --------------------------- Interest Average Interest Average Interest Average Average Earned Yield or Average Earned Yield or Average Earned Yield or Balance Or Paid Cost Balance Or Paid Cost Balance Or Paid Cost - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) ASSETS Interest earnings assets: Federal funds sold ...................... $ 21,404 $ 1,267 5.92% $ 27,068 $ 1,488 5.50% $ 30,224 $ 1,492 4.94% Interest bearing deposits with other financial institutions ......... 12,453 763 6.13 12,444 778 6.25 11,814 696 5.89 Investment securities (1) ............... 57,454 3,359 5.85 56,898 3,448 6.06 41,468 2,286 5.51 Net loans receivable (1)(2) ............. 261,404 22,971 8.79 209,311 18,365 8.77 182,130 15,642 8.59 Other interest earning assets ........... 3,564 184 5.16 0 0 0.00 0 0 0.00 ------------------ ------------------ ----------------- Total Interest earning assets ......... 356,279 28,544 8.01 305,721 24,079 7.88 265,636 20,116 7.57 Noninterest-earning assets: Cash and due from banks ................. $ 15,085 $ 13,699 $ 9,431 Premises and equipment .................. 8,295 7,612 7,536 Other ................................... 5,231 8,822 5,157 -------- -------- -------- Total assets .......................... $384,890 $335,854 $287,760 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Interest-bearing demand deposits ....... $ 86,639 2,918 3.37% $ 81,979 2,709 3.30% $ 75,530 2,559 3.39% Savings deposits ....................... 6,707 132 1.97 6,112 125 2.05 4,654 93 2.00 Time deposits .......................... 159,822 9,972 6.24 134,245 7,291 5.43 113,752 6,358 5.59 Short-term borrowings .................. 22,477 992 4.41 14,530 665 4.58 5,414 258 4.77 Federal Home Loan Bank advances ........ 24,324 1,463 6.01 22,048 1,361 6.17 25,393 1,539 6.06 COMR ................................... 12,000 1,135 9.46 12,000 1,137 9.48 1,000 63 6.30 Other borrowings ....................... 0 0 0.00 0 0 0.00 2,125 157 7.39 ------------------ ------------------- ----------------- Total Interest bearing liabilities .... 311,969 16,612 5.32 270,914 13,288 4.90 227,868 11,027 4.84 Noninterest-bearing demand .............. 45,902 40,072 33,619 Other noninterest-bearing liabilities ... 5,133 5,492 5,974 Total liabilities ..................... 363,004 316,478 267,461 Stockholders' equity .................... 21,886 19,376 20,299 -------- -------- -------- Total liabilities and stockholders' equity ............. $384,890 $335,854 $287,760 ======== ======== ======== Net interest income ..................... $ 11,932 $ 10,791 $ 9,089 ======== ======== ======= Net interest spread ..................... 2.69% 2.98% 2.73% ===== ===== ===== Net interest margin ..................... 3.35% 3.53% 3.42% ===== ===== ===== Ratio of average interest earning assets to average interest- bearing liabilities ............ 114.20% 112.85% 116.57% ======= ======= ======= (1) Interest earned and yields on nontaxable investment securities and loans are stated at face rate. (2) Loan fees are not material and are included in interest income from loans receivable.
53 C. Analysis of Changes of Interest Income/Interest Expense For the years ended June 30, 2001, 2000 and 1999 Components Inc./(Dec.) of Change (1) from ----------------- Prior Year Rate Volume ---------------------------- 2001 vs. 2000 ---------------------------- (Dollars in thousands) INTEREST INCOME Federal funds sold ............................................... $ (221) $ 108 $ (329) Interest bearing deposits with other financial institutions ...... (15) (16) 1 Investment securities (2) ........................................ (89) (123) 34 Net loans receivable (2)(3) ...................................... 4,606 28 4,578 Other interest earning assets .................................... 184 0 184 ---------------------------- Total change in interest income .......................... $ 4,465 $ (3) $ 4,468 ---------------------------- INTEREST EXPENSE Interest-bearing demand deposits ................................. $ 209 $ 53 $ 156 Savings deposits ................................................. 7 (5) 12 Time deposits .................................................... 2,681 1,176 1,505 Short-term borrowings ............................................ 327 (25) 352 Federal Home Loan Bank advances .................................. 102 (36) 138 COMR ............................................................. (2) (2) 0 Other borrowings ................................................. 0 0 0 ---------------------------- Total change in interest expense ......................... $ 3,324 $ 1,161 $ 2,163 ---------------------------- Total change in net interest income .............................. $ 1,141 $(1,164) $ 2,305 ============================ 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) Interest bearing deposits with other 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 ============================ (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 and loans are stated at face rate. (3) Loan fees are not material and are included in interest income from loans receivable.
54 II. Investment Portfolio. A. Investment Securities The following table presents the amortized cost and fair value of investment securities held on June 30, 2001, 2000 and 1999. Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------------------------------------------------ June 30, 2001 - ------------- Securities held to maturity: Municipal securities .................... $ 500,559 $ 4,638 $ 0 $ 505,197 Other bonds ............................. 75,000 3,214 0 78,214 ------------------------------------------------------ Totals .............................. $ 575,559 $ 7,852 $ 0 $ 583,411 ====================================================== Securities available for sale: U.S. agency securities .................. $31,787,602 $ 626,091 $ (104) $32,413,589 Mortgage-backed securities .............. 5,509,433 17,646 (18,797) 5,508,282 Municipal securities .................... 11,892,825 144,098 (39,556) 11,997,367 Corporate securities .................... 4,577,918 31,014 (13,185) 4,595,747 Trust preferred securities .............. 1,148,488 94,897 (14,405) 1,228,980 Other securities ........................ 393,211 19,075 (21,730) 390,556 ------------------------------------------------------ Totals .............................. $55,309,477 $ 932,821 $ (107,777) $56,134,521 ====================================================== 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 ======================================================
55 B. Investment Securities Maturities and Yields The following table presents the maturity of securities held on June 30, 2001 and the weighted average rates by range of maturity: Average Amount Yield ------------------------ U.S. agency securities: Within 1 year .................................. $ 2,011,645 5.77% After 1 but within 5 years ..................... 23,636,625 5.74% After 5 but within 10 years .................... 6,139,332 6.74% ------------------------ Total ..................................... $31,787,602 5.93% ======================== Mortgage-backed securities: Within 1 year .................................. $ 259,084 6.12% After 1 but within 5 years ..................... 917,869 6.00% After 5 but within 10 years .................... 969,151 5.66% After 10 years ................................. 3,363,329 5.94% ------------------------ Total ..................................... $ 5,509,433 5.91% ======================== Municipal securities: Within 1 year .................................. $ 249,903 6.15% After 1 but within 5 years ..................... 2,383,016 6.04% After 5 but within 10 years .................... 4,304,658 6.34% After 10 years ................................. 5,455,807 7.61% ------------------------ Total ..................................... $12,393,384 6.84% ======================== Corporate securities: After 1 but within 5 years ..................... $ 3,049,526 6.50% After 5 but within 10 years .................... 1,528,392 6.09% ------------------------ Total ..................................... $ 4,577,918 6.36% ======================== Trust preferred securities: After 10 years ................................. $ 1,148,488 9.22% ======================== Other bonds: After 1 but within 5 years ..................... $ 75,000 6.50% ======================== Other securities with no maturity or stated face rate $ 393,211 =========== The Company does not use any financial instruments referred to as derivatives to manage interest rate risk. C. Investment Concentrations At June 30, 2001, there existed no security in the investment portfolio above (other than U.S. Government, U.S. Government agencies, and corporations) that exceeded 10% of stockholders' equity at that date. III. Loan Portfolio. The composition of the loan portfolio at June 30, 2001, 2000, 1999, 1998, and 1997 is presented as follows: 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Commercial ................... $ 209,888,773 $ 167,682,652 $ 136,206,893 $ 99,097,297 $ 68,634,556 Real estate - construction.... 2,568,140 3,463,682 3,367,458 1,798,257 1,778,310 Real estate .................. 38,018,551 36,301,379 27,591,886 29,347,260 18,515,130 Installment and other consumer 37,389,302 34,405,138 30,810,455 32,732,322 19,437,433 ------------------------------------------------------------------------------- Total loans ............. 287,864,766 241,852,851 197,976,692 162,975,136 108,365,429 Less allowance for Estimated losses on loans (4,248,182) (3,617,401) (2,895,457) (2,349,838) (1,632,500) ------------------------------------------------------------------------------- Net loans ............... $ 283,616,584 $ 238,235,450 $ 195,081,235 $ 160,625,298 $ 106,732,929 ===============================================================================
56 B. Maturities and Sensitivities of Loans to Changes in Interest Rates Maturities After One Year ------------------------------ At June 30, 2001 Due in one Due after one Due after Predetermined Adjustable year or less through 5 years 5 years interest rates interest rates ------------------------------------------------------------------------- Commercial ..................... $ 79,190,937 $100,652,557 $ 30,045,279 $102,406,782 $ 28,291,054 Real estate - construction ..... 2,487,148 80,992 0 80,992 0 Real estate .................... 1,362,323 1,695,584 34,960,644 14,789,289 21,866,939 Installment and other consumer . 10,092,073 24,624,952 2,672,277 23,598,986 3,698,243 ------------------------------------------------------------------------ Totals .................... $ 93,132,481 $127,054,085 $ 67,678,200 $140,876,049 $ 53,856,236 ========================================================================
C. Risk Elements The following table represents Nonaccrual, Past Due, Renegotiated Loans, and other Real Estate owned at June 30, 2001, 2000, 1999, 1998, and 1997. 2001 2000 1999 1998 1997 --------------------------------------------------------------- Loans accounted for on nonaccrual basis ... $1,231,741 $ 382,745 $1,287,727 $1,025,761 $ 230,591 Accruing loans past due 90 days or more .... 494,827 352,376 238,046 259,277 223,966 Other real estate owned 47,687 0 119,600 0 0 Troubled debt restructurings ..... 0 0 0 0 0 -------------------------------------------------------------- Total ............ $1,774,255 $ 735,121 $1,645,373 $1,285,038 $ 454,557 ==============================================================
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 other interest bearing assets required to be disclosed here. 57 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, 2001, 2000, 1999, 1998, and 1997: 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Average amount of loans outstanding, before allowance for estimated losses on loans ..................... $ 262,237,267 $ 212,497,181 $ 184,756,698 $ 141,974,417 $ 81,251,090 Allowance for estimated losses on loans: Balance, beginning of fiscal year ...... 3,617,401 $ 2,895,457 $ 2,349,838 $ 1,632,500 $ 852,500 Charge-offs: Commercial ....................... (86,936) (43,295) (104,596) (62,763) (26,141) Real estate ...................... 0 (6,822) (25,142) 0 0 Installment and other consumer ... (213,527) (376,591) (348,777) (142,471) (38,772) ------------------------------------------------------------------------------------ Subtotal charge-offs .............. (300,463) (426,708) (478,515) (205,234) (64,913) ------------------------------------------------------------------------------------ Recoveries: Commercial ........................ 2,100 762 53,314 13,146 266 Real estate ...................... 0 0 0 0 0 Installment and other consumer ... 39,474 96,072 79,020 7,450 256 ----------------------------------------------------------------------------------- Subtotal recoveries ............... 41,574 96,834 132,334 20,596 522 ----------------------------------------------------------------------------------- Net charge-offs ................... (258,889) (329,874) (346,181) (184,638) (64,391) Provision charged to expense ........... 889,670 1,051,818 891,800 901,976 844,391 ----------------------------------------------------------------------------------- Balance, end of fiscal year ............ $ 4,248,182 $ 3,617,401 $ 2,895,457 $ 2,349,838 $ 1,632,500 =================================================================================== Ratio of net charge-offs to average loans outstanding ........... 0.10% 0.16% 0.19% 0.13% 0.08%
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 for the fiscal years ending June 30, 2001, 2000, 1999, 1998, and 1997: % % % Of Loans Of Loans Of Loans to Total to Total to Total Amount Loans Amount Loans Amount Loans --------------------- -------------------- -------------------- 2001 2000 1999 --------------------- -------------------- -------------------- Commercial ............................. $3,231,286 72.91% $2,863,319 69.33% $2,164,668 68.80% Real estate - construction ............. 0 0.89% 8,659 1.43% 8,419 1.70% Real estate ............................ 182,365 13.21% 121,530 15.01% 102,693 13.94% Installment and other consumer ......... 834,531 12.99% 617,893 14.23% 578,937 15.56% Unallocated ............................ 0 0.00% 6,000 N/A 49,159 N/A -------------------- --------------------- -------------------- Total ............................. $4,248,182 100.00% $3,617,401 100.00% $2,895,457 100.00% ==================== ===================== ==================== 1998 1997 -------------------- ------------------- Commercial ............................. $1,213,439 60.81% $ 799,566 63.34% Real estate - construction ............. 4,496 1.10% 4,446 1.64% Real estate ............................ 74,702 18.01% 62,296 17.09% Installment and other consumer.......... 515,489 20.08% 387,096 17.93% Unallocated ............................ 541,712 N/A 3 79,096 N/A --------------------- --------------------- Total ............................. $2,349,838 100.00% $1,632,500 100.00% ===================== =====================
58 V. Deposits. The average amount of and average rate paid for the categories of deposits for the years 2001, 2000, and 1999 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, 2001, 2000, and 1999 were certificates of deposit totaling $50,298,560, $50,814,599, and $37,103,749 respectively, that were $100,000 or greater. Maturities of these certificates were as follows: 2001 2000 1999 -------------------------------------- One to three months .................... $20,948,861 $24,105,269 $13,313,388 Three to six months .................... 11,487,826 11,176,203 6,339,507 Six to twelve months ................... 12,972,591 11,781,428 9,901,595 Over twelve months ..................... 4,889,281 3,751,699 7,549,259 -------------------------------------- Total certificates of deposit greater than $100,000 ... $50,298,560 $50,814,599 $37,103,749 ====================================== 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, 2001, 2000, and 1999. 2001 2000 1999 ----------------------------------------------------- Average total assets ... $ 384,890,061 $ 335,854,396 $ 287,760,434 Average equity ......... 21,886,477 19,375,865 $ 20,299,371 Net income ............. 2,395,732 2,745,527 $ 2,464,821 Return on average assets .62% .82% .86% Return on average equity 10.95% 14.17% 12.14% Average equity to average assets ratio 5.69% 5.77% 7.05% VII. Short Term Borrowings. The information requested is disclosed in the Notes to Consolidated Financial Statements in Note 7. 59 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: August 29, 2001 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 August 29, 2001 - ------------------------ Michael A. Bauer /s/ Douglas M. Hultquist President, Chief Executive August 29, 2001 - ------------------------ and Financial Officer and Director Douglas M. Hultquist /s/ Richard R. Horst Director and Secretary August 29, 2001 - ------------------------ Richard R. Horst /s/ James J. Brownson Director August 29, 2001 - ------------------------ James J. Brownson /s/ Larry J. Helling Director August 29, 2001 - ------------------------ Larry J. Helling /s/ John K. Lawson Director August 29, 2001 - ------------------------ John K. Lawson /s/ Ronald G. Peterson Director August 29, 2001 - ------------------------ Ronald G. Peterson /s/ John W. Schricker Director August 29, 2001 - ------------------------ John W. Schricker 60 EX-10 3 qchelling.txt Exhibit 10.6 EMPLOYMENT AGREEMENT BETWEEN QUAD CITY BANK AND TRUST COMPANY AND LARRY HELLING THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of the 11th day of April, 2001, is between QUAD CITY BANK AND TRUST COMPANY (the "Employer") and LARRY HELLING (the "Employee"). W I T N E S S E T H: Section 1. Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. Employee agrees that if and when the necessary approvals and charters are obtained, the Employer shall become Cedar Rapids Bank and Trust Company and all references to Employer herein shall mean Cedar Rapids Bank and Trust Company and not Quad City Bank and Trust Company. Section 2. Duties. The Employee agrees to provide all services necessary, incidental or convenient as an Executive Vice President - Cedar Rapids Branch of the Employer; provided that if and when the necessary approvals and charters are obtained and the Employer becomes Cedar Rapids Bank and Trust Company, Employee agrees to provide all services necessary, incidental or convenient as President of Cedar Rapids Bank and Trust Company. The Employer shall designate the location or locations for the performance of the Employee's services. The Employer shall furnish or make available to the Employee such equipment, office space and other facilities and services as shall be adequate and necessary for the performance of his duties. Section 3. Term. The term of this Agreement shall commence on April 11, 2001 (the "Effective Date"), and shall continue for a period of two (2) years. This Agreement shall automatically extend for one (1) year on each anniversary of the Effective Date, unless terminated by either party effective as of the last day of the then current two (2) year term by written notice to that effect delivered to the other not less than ninety (90) days prior to the anniversary of such Effective Date. Section 4. Compensation. (a) The annual base compensation ("Base Compensation") of the Employee shall be One Hundred and Sixty Thousand Dollars ($160,000). Said Base Compensation shall be payable bi-weekly, in equal installments. (b) The Employee's Base Compensation shall be subject to review annually, with the first such review period to commence on June 30, 2002, and shall be maintained or increased during the term hereof in accordance with the Employer's established management compensation policies and plan. The Employee shall also be entitled to receive annual cash bonuses based upon performance which may be granted in the future in the discretion of the Employer, such cash bonuses not to exceed thirty percent (30%) of Employee's Base Compensation. (c) The Employee shall be eligible to participate in the following: "Cedar Rapids Short-term Cash Incentive Compensation Program" and "Cedar Rapids Long-term Deferred Incentive Compensation Program" (collectively referred to as the "Incentive Programs"). All references to goals, thresholds, assets, losses, earnings and similar terms under the Incentive Programs shall be based solely upon application of such terms to the Cedar Rapids branch of the Employer. The Incentive Programs shall be administered by the Compensation Committee of the Board of Directors of Quad City Holdings, Inc. (the "Compensation Committee") and the Compensation Committee shall have the authority to make all determinations in the interpretation and administration of the Incentive Programs and all decisions of the Compensation Committee shall be binding on the Employee; provided however, that the amounts paid pursuant to the Incentive Programs shall be allocated among the following eligible employees in the percentages set forth: Larry Helling forty percent (40%), Mitch McElree twenty percent (20%), Dana Nichols twenty percent (20%) and John Rodriguez twenty percent (20%) (the "Eligible Employees"). If an Eligible Employee is no longer employed by the Employer at the time any amount would otherwise be allocated and paid to such employee, then the amount allocable to such employee shall be forfeited and will not be paid to any other Eligible Employee. (i) Under the Short-Term Cash Incentive Compensation Program, with respect to the years ending June 30, 2002 through June 30, 2005, the Employer shall pay the Eligible Employees, as allocated as provided above, the aggregate amount set forth below with respect to each year if the following goals and thresholds for such year are met; provided however, that fifty percent (50%) of the aggregate amount shall be allocated to the Asset goal and fifty percent (50%) shall be allocated to the Losses/Earnings goal such that if one goal is met and the other goal is not met, fifty percent (50%) of the aggregate incentive amount shall be paid. The incentive amount payable hereunder shall be paid within ninety (90) days after the end of such year. The following schedule is for illustrative purposes and shall be modified within one hundred and twenty (120) calendar days of the Effective Date to reflect revised business plans and projections mutually agreed upon by the Employer and the Employee. Incentive Year Ending Amount Assets Losses/Earnings -------------------------------------------------------------------- June 30, 2002 $40,000 $ 96 million losses no more than $900,000 June 30, 2003 $50,000 $155 million earnings at least $555,000 June 30, 2004 $60,000 $215 million earnings at least $1,140,000 June 30, 2005 $70,000 $275 million earnings at least $2,200,000 (ii) Under the Long-term Deferred Incentive Compensation Program, with respect to years ending June 30, 2006 through June 30, 2011, the Employer shall contribute to a deferred compensation plan for the benefit of the Eligible Employees, as allocated as provided above, the aggregate amount of the "Long Term Incentive Award" for the attained level of Return on Equity Result and Ending Total Assets set forth in Exhibit A hereto. In the event of a Change of Control (as defined below), the Employer agrees to contribute the amount set forth below with respect to the year in which the Change of Control occurs and each and all subsequent years remaining, such amounts to be discounted to their present values using the prime rate of interest as of the date five (5) business days prior to the date of the Change of Control: Year Ending Amount ------------- -------- June 30, 2006 $ 60,000 June 30, 2007 $ 80,000 June 30, 2008 $100,000 June 30, 2009 $155,000 June 30, 2010 $185,000 June 30, 2011 $215,000 Section 5. Benefits. The Employer shall provide the following additional benefits to the Employee: (a) Family medical insurance with the Employee paying his cost of same consistent with the cost sharing for all other employees; (b) Reimbursement of reasonable expenses advanced by the Employee in connection with the performance of his duties hereunder, including, but not limited to, two (2) paid weeks of continuing education; (c) Payment of up to five hundred dollars ($500) per month of membership dues at each of Elmcrest County Club and Cedar Rapids Country Club (for a total maximum payment of one thousand dollars ($1,000) per month); (d) Payment of the Employee's initiation fee at Cedar Rapids Country Club, such amount to be increased ("grossed-up") for any taxes the Employee shall have as a result of such payment; (e) Payment of car allowance of $500 per month; (f) The Employee will initially be entitled to twenty-five (25) personal days which may be increased in accordance with the Employer's established policies and practices; (g) Long-term and short-term disability coverage equal to approximately 66-2/3% of compensation, subject to the terms of the Employer's insurance or other policies covering the same; (h) Participation in the Employer's 401(k)/profit sharing plan; (i) Non-qualified stock options in accordance with Quad City Holdings, Inc.'s current stock incentive plan, including without limitation such vesting requirements as are typically imposed on executives of Quad City Holdings, Inc., enabling the Employee to acquire twelve thousand (12,000) shares of Quad City Holdings, Inc. stock as of the Effective Date, with an exercise price for such options equal to the market price of such stock as of the close of business on the last business day prior to the Effective Date and, concurrently with the grant and vesting of such options, twelve thousand (12,000) tax benefit rights; (j) Stock appreciation rights in accordance with Quad City Holdings, Inc.'s current stock incentive plan, including without limitation such vesting requirements as are typically imposed on executives of Quad City Holdings, Inc., with respect to six thousand (6,000) shares of Quad City Holdings, Inc. stock, with an effective date fair market value of such stock as of the close of business on the last business day prior to the Effective Date; (k) Term life insurance of two (2) times annual compensation, and the Employee will be allowed to purchase additional life insurance of at least two (2) times annual compensation through such plan; and (l) Participation under a deferred compensation agreement under which the Employee will be permitted to annually contribute and defer up to twelve thousand dollars ($12,000) and the Employer shall make a matching contribution equal to the contribution made by the Employee up to a maximum contribution of twelve thousand dollars ($12,000). Section 6. Time Requirement. The Employee shall devote full time to his duties under this Agreement. The Employee shall be allowed to serve on outside boards of directors subject to the consent of the Employer. Section 7. Termination upon Disability or Death. In the event that illness, incapacity, injury or death of the Employee occurs during the employment term, payments based upon the Employee's then current annual Base Compensation shall continue thereafter through the last day of the one (1) year period beginning on the date of such illness, incapacity, injury or death. Payments made in the event of the Employee's illness, incapacity or injury will be reduced by any amounts received under the Employer's long-term disability program. In the event of the Employee's death during the term of this Agreement, such amounts shall be payable to the persons designated in writing by the Employee, or if none, to his estate. Section 8. Confidentiality and Loyalty. The Employee acknowledges that during the course of his employment he will produce and have access to material, records, data, trade secrets and information not generally available to the public regarding the Employer and its subsidiaries and affiliates (collectively, "Confidential Information"). Accordingly, during and subsequent to termination of this Agreement, the Employee shall hold in confidence and not directly or indirectly disclose, use, copy or make lists of any such Confidential Information, except to the extent that such information is or thereafter becomes lawfully available from public sources, or such disclosure is authorized in writing by the Employer, required by a law or any competent administrative agency or judicial authority, or otherwise as reasonably necessary or appropriate in connection with performance by the Employee of his duties hereunder. All records, files, documents and other materials or copies thereof relating to the business of Employer and its subsidiaries and affiliates which the Employee shall prepare or use, shall be and remain the sole property of the Employer, shall not be removed from the Employer's premises without its written consent, and shall be promptly returned to the Employer upon termination of the Employee's employment hereunder. The Employee agrees to abide by the Employer's reasonable policies, as in effect from time to time, respecting avoidance of interests conflicting with those of the Employer and its subsidiaries and affiliates. Section 9. Non-Competition. (a) Restrictive Covenant. The Employer and the Employee have jointly reviewed the operations of the Employer and have agreed that the primary service area of the Employer's lending and deposit-taking functions extends to an area encompassing a sixty (60) mile radius from the center of Cedar Rapids, Iowa. Therefore, as an essential ingredient of and in consideration of this Agreement and the payment of the amounts described in Sections 4 and 5, the Employee hereby agrees that, except with the express prior written consent of the Employer, for a period of two (2) years after the termination of the Employee's employment with the Employer (the "Restrictive Period"), he will not directly or indirectly compete with the business of the Employer, including, but not by way of limitation, by directly or indirectly owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of, or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Employer to terminate employment with the Employer and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates an office or other business location of: (i) a bank, savings and loan association, credit union or similar financial institution, or (ii) an insurance company or agency, investment brokerage firm or other entity or organization involved in the retail sale of investment products or the making of retail or commercial loans (any of the foregoing referred to in clauses (i) or (ii) collectively referred to as a "Financial Institution") within a sixty (60) mile radius from the center of Cedar Rapids, Iowa (the "Restrictive Covenant"). If the Employee violates the Restrictive Covenant and the Employer brings legal action for injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed to have the duration specified in this Section computed from the date the relief is granted, but reduced by the time between the period when the Restrictive Period began to run and the date of the first violation of the Restrictive Covenant by the Employee. The foregoing Restrictive Covenant shall not prohibit the Employee from owning directly or indirectly capital stock or similar securities which are listed on a securities exchange or quoted on the Nasdaq which do not represent more than one percent (1%) of the outstanding capital stock of any Financial Institution. The Employer agrees that if this Agreement is terminated as a result of (i) the Employee or the Employer being enjoined, by a court of competent jurisdiction, from performance hereunder, or (ii) the Employer fails to obtain the necessary approvals to operate a branch in Cedar Rapids, Iowa, then the Employee shall not be subject to the restrictions contained in this Section 9. (b) Remedies for Breach of Restrictive Covenant. The Employee acknowledges that the restrictions contained in this Section and Section 8 are reasonable and necessary for the protection of the legitimate business interests of the Employer, that any violation of these restrictions would cause substantial injury to the Employer and such interests, that the Employer would not have entered into this Agreement with the Employee without receiving the additional consideration offered by the Employee in binding himself to these restrictions and that such restrictions were a material inducement to the Employer to enter into this Agreement. In the event of any violation or threatened violation of these restrictions, the Employer, in addition to and not in limitation of, any other rights, remedies or damages available to the Employer under this Agreement or otherwise at law or in equity, shall be entitled to preliminary and permanent injunctive relief to prevent or restrain any such violation by the Employee and any and all persons directly or indirectly acting for or with him, as the case may be. Section 10. Severance. (a) If the Employee is involuntarily terminated without Cause (as defined below), a severance payment will be made equal to six (6) months of Base Compensation. Such payment shall be made in a lump sum within fifteen (15) days of termination or in equal installments over the six (6) month period, at the Employer's option. If a Change of Control (as defined below) occurs and the Employee elects within six (6) months thereafter to terminate his employment, a severance payment will be made within fifteen (15) days of termination equal to two (2) years of Base Compensation plus the amount set forth in Section 4(c)(ii) related to a Change of Control. (b) For purposes of this Section, the term "Change of Control" shall mean the following: (1) The consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of thirty-three percent (33%) or more of the combined voting power of the then outstanding voting securities of Quad City Holdings, Inc.; or (2) The individuals who, as of the date hereof, are members of the board of directors of Quad City Holdings, Inc. (the "Board") cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the stockholders, of any new director was approved by a vote of a majority of the Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Board; or (3) consummation of: (A) a merger or consolidation of Quad City Holdings, Inc. if the stockholders, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the entity resulting from such merger or consolidation, in substantially the same proportion as their ownership of the combined voting power of the voting securities outstanding immediately before such merger or consolidation; or (B) a complete liquidation or dissolution or the sale or other disposition of all or substantially all of the assets of the Employer or Quad City Holdings, Inc. (c) Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because thirty-three percent (33%) or more of the combined voting power of the then outstanding securities of either the Employer or Quad City Holdings, Inc. is acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders in the same proportion as their ownership of stock immediately prior to such acquisition. (d) It is the intention of the Employer and the Employee that no portion of any payment under this Agreement, or payments to or for the benefit of the Employee under any other agreement or plan, be deemed to be an "Excess Parachute Payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or its successors. It is agreed that the present value of and payments to or for the benefit of the Employee in the nature of compensation, receipt of which is contingent on the Change of Control of the Employer, and to which Section 280G of the Code applies (in the aggregate "Total Payments") shall not exceed an amount equal to one dollar less than the maximum amount which the Employer may pay without loss of deduction under Section 280G(a) of the Code. Present value for purposes of this Agreement shall be calculated in accordance with Section 280G(d)(4) of the Code. Within sixty (60) days following the earlier of: (1) the giving of the notice of termination; or (2) the giving of notice by the Employer to the Employee of its belief that there is a payment or benefit due the Employee which will result in an Excess Parachute Payment as defined in Section 280G of the Code, the Employee and the Employer, at the Employer's expense, shall obtain the opinion of such legal counsel and certified public accountants as the Employee may choose (notwithstanding the fact that such persons have acted or may also be acting as the legal counsel or certified public accountants for the Employer), which opinions need not be unqualified, which sets forth: (1) the amount of the annual base compensation of the Employee; (2) the present value of Total Payments; and (3) the amount and present value of any Excess Parachute Payments. In the event that such opinions determine that there would be an Excess Parachute Payment, the payment hereunder or any other payment determined by such counsel to be includable in Total Payments shall be modified, reduced or eliminated as specified by the Employee in writing delivered to the Employer within thirty (30) days of his receipt of such opinions or, if the Employee fails to so notify the Employer, then as the Employer shall reasonably determine, so that under the bases of calculation set forth in such opinions there will be no Excess Parachute Payment. The provisions of this subparagraph, including the calculations, notices and opinions provided for herein shall be based upon the conclusive presumption that: (1) the compensation and benefits provided for in Sections 4 and 5 hereof; and (2) any other compensation earned by the Employee pursuant to the Employer's compensation programs which would have been paid in any event, are reasonable compensation for services rendered, even though the timing of such payment is triggered by the Change of Control; provided, however, that in the event such legal counsel so requests in connection with the opinion required by this subparagraph, the Employee and the Employer shall obtain, at the Employer's expense, and the legal counsel may rely on in providing the opinion, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Employee. In the event that the provisions of Sections 280G and 4999 of the Code are repealed without succession, this subparagraph shall be of no further force or effect. (e) If the Employer is not in compliance with any minimum capital requirements applicable to it or if the payments required under this Section would cause the Employer's capital to be reduced below any such minimum capital requirements, such payments shall be deferred until such time as the Employer is in capital compliance. At the election of the Employee, which election is to made within thirty (30) days of the Employee's termination, such payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the Employee's termination. In the event that no election is made, payment to the Employee will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the Employee obtains other employment following the termination of employment by the Employer. Section 11. Termination for Cause. This Agreement may be terminated for cause as hereinafter defined. "Cause" for termination will exist if (a) the Employee commits a material breach of a material representation or warranty set forth in this Agreement; (b) the Employee dies or suffers a disability which leaves him unable as a result of physical or mental incapacity, substantially to perform his duties hereunder for a period of six (6) consecutive months; (c) Employee engages in one or more unsafe and unsound business practices or material violations of a law or regulation applicable to the Employer, any repeated violations of a policy of the Employer after being warned in writing by the Employer's Board of Directors (the "Employer Board") not to violate such policy or any single violation of a policy of the Employer if such violation materially and adversely affects the business or affairs of the Employer or a direction or order of the Employer Board; (d) the Employee engages in a breach of fiduciary duty or act of dishonesty involving the affairs of the Employer; (e) the Employee commits a material breach of his obligations under this Agreement; or (f) the willful or negligent failure of the Employee to perform his duties hereunder in any material respect, or with the degree of skill, care or competence which the Employer Board should reasonably expect given the Employee's age, experience and compensation level. The Employee shall be entitled to at least 30 days' prior written notice of the Employer's intention to terminate his employment for any cause (except termination pursuant to subsection (a) above or the Employee's death) specifying the grounds for such termination, a reasonable opportunity to cure any conduct or act, if curable, alleged as grounds for such termination, and a reasonable opportunity to present to the Employer Board his position regarding any dispute relating to the existence of such cause. Section 12. Indemnification. (a) The Employer, at its expense, shall provide the Employee (including his heirs, personal representatives, executors and administrators) for the term of this Agreement with coverage under a standard directors' and officers' liability insurance policy. (b) In addition to the insurance coverage provided for in this Section, the Employer shall hold harmless and indemnify the Employee (and his heirs, executors and administrators) to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been an officer of the Employer (whether or not he continues to be an officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements, such indemnification to include any action, suit or proceeding related to the Employee leaving a prior employer and becoming employed by the Employer unless, and in which case the Employer does not agree to hold harmless and indemnify the Employee, liability, either equitable or legal, is imposed on the Employer or the Employee and such liability is imposed in material part as a result of the Employee's failure to disclose, as of the Effective Date, any fact or action related thereto or the Employee's material malfeasance or misfeasance in connection with or related to his leaving his prior employer. (c) In the event the Employee becomes a party, or is threatened to be made a party, to any action, suit or proceeding for which the Employer has agreed to provide insurance coverage or indemnification under this Section, the Employer shall, to the full extent permitted under applicable law, advance all expenses (including reasonable attorneys' fees, judgments, fines and amounts paid in settlement (collectively "Expenses")) incurred by the Employee in connection with the investigation, defense, settlement or appeal of any threatened, pending or completed action, suit or proceeding, subject to receipt by the Employer of a written undertaking from the Employee: (1) to reimburse the Employer for all Expenses actually paid by the Employer to or on behalf of the Employee in the event it shall be ultimately determined that the Employee is not entitled to indemnification by the Employer for such Expenses; and (2) to assign to the Employer all rights of the Employee to indemnification, under any policy of directors' and officers' liability insurance or otherwise, to the extent of the amount of Expenses actually paid by the Employer to or on behalf of the Employee. Section 13. Regulatory Suspension and Termination. (a) If the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the Employer's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, the Employer's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Employer shall (A) pay the Employee all of the compensation withheld while their contract obligations were suspended and (B) reinstate any of the obligations, which were suspended. (b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Employer's affairs by an order issued under Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (c) If the Employer is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations of the Employer under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution by the Federal Deposit Insurance Corporation (the "FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Employer under the authority contained in Section 13(c) (12 U.S.C. ss. 1823(c)) of the Federal Deposit Insurance Act, as amended, or when the Employer is determined by the FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) (12 U.S.C. ss. 1828(k)) of the Federal Deposit Insurance Act as amended, and any regulations promulgated thereunder. Section 14. General Provisions and Representations. (a) The Employee represents and warrants that he is not subject to a binding non-competition agreement that would prevent him, for any period of time, from providing the services contemplated by this Agreement. (b) This Agreement supersedes all prior agreements and understandings between the parties relating to the subject matter of this Agreement. It binds and benefits the parties and their successors in interest, heirs, beneficiaries, legal representatives and assigns. (c) This Agreement is governed by and construed in accordance with the laws of the State of Iowa. (d) No amendment or modification of this Agreement is effective unless made in writing and signed by each party. (e) This Agreement may be signed in several counterparts, each of which will be an original and all of which will constitute one agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above set forth. QUAD CITY BANK AND TRUST COMPANY By: /s/ Michael A. Bauer /s/ Larry J. Helling ----------------------------------------- -------------------- MICHAEL A. BAUER LARRY J. HELLING Title: President EX-10 4 greatamerleas.txt Exhibit 10.7 GREATAMERICA BUILDING LEASE AGREEMENT This LEASE AGREEMENT, made as of this _______ day of ___________________, 2001, between 3001 L.L.C. ("Landlord"), and Quad City Bank and Trust Company ("Tenant"). WITNESSETH, THAT 1. PREMISES: Landlord, subject to the terms and conditions hereof, hereby leases to Tenant certain premises ("Premises") as designated on the floor plan attached hereto as Exhibit A, containing approximately 1,649 square feet of Rentable Area on the 1st floor and 6,220 square feet of Rentable Area on the 2nd floor, all located in the building at 625 First Street, S.E block., Cedar Rapids, Iowa ("Building"), which Building contains approximately 140,484 square feet of Rentable Area. The square footage of the Premises has been calculated by Landlord's architect in accordance with the Standard Method For Measuring Floor Area In Office Buildings (ANSI/BOMA Z65.1-1996) The Building, the land underlying and contiguous thereto and all improvements thereon are hereinafter referred to as the project ("Project"). 2.1 TERM: Tenant takes the Premises from Landlord, upon the terms and conditions herein contained for a term ("Term") commencing on the date upon which the latest of the following events shall have occurred: A) Landlord's obligations under Section 7H of this Lease are complete, subject only to Punch List Items; B) Landlord has obtained a Certificate of Occupancy (permanent or temporary) for the Premises; and C) Landlord's Architect has delivered to Tenant a written certificate that such conditions for Substantial Completion of the Leasehold Improvements have been met, subject only to a list of Punch List Items. Punch List Items ("Punch List Items") means details of construction, decoration and mechanical adjustment as to the base building work or the Leasehold Improvements which are minor in character and do not materially interfere with Tenant's use of the Premises. Unless extended as provided for below, the Term shall expire on the last day of the sixtieth full calendar month following the Commencement Date. 2.2. RENEWAL OPTION: Tenant shall have the right to renew this Lease for Two Five (5)-year periods. This option may only be exercised by written notice to Landlord delivered no later than One (1) year prior to the expiration of the Term. 3. MONTHLY BASE RENT: Tenant agrees to pay to Landlord during the Term a monthly Base Rent (the "Base Rent") equal to one-twelfth of the annual rental rate of $12.50 per square foot of Rentable Area payable on the first day of each month in advance, without deduction or setoff of any kind, to Landlord and delivered to Landlord's managing agent, Ryan Properties, Inc., 700 International Centre, 900 Second Avenue South, Minneapolis, Minnesota 55402, or at such other place as may from time to time be designated by Landlord. Base Rent during each extended Term (if applicable) shall be the greater of 1)market rent ("Market Rent") or 2)the base rent being paid at the end of the existing term. "Market Rent" means the monthly base rent that a landlord would receive if it were then to rent comparable premises, taking into consideration the then condition of the premises and normal concessions for a comparably sized tenant, including construction allowances, rent abatements and other concessions and financial terms. 4. USE: Tenant shall use the Premises only as a full service banking facility and shall not use the Premises for any other use or purpose without the prior written consent of Landlord. 5. OPERATING COSTS: Tenant shall, for the entire Term, pay to Landlord as an item of additional rent, without any setoff or deduction therefrom, its Proportionate Share of costs ("Operating Costs") which Landlord may incur in owning, maintaining and operating the Project during each calendar year of the Term. "Proportionate Share" is defined as the decimal equivalent of a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Rentable Area of the Building. For calendar year 2001, the Operating Cost estimate is $8.40 per Rentable Area. "Operating Costs" are defined to include all expenses and costs (but not specific costs which are separately billed to and paid by individual tenants) of every kind and nature which the Landlord shall pay or become obligated to pay because of or in connection with the ownership and operation of the Project and supporting facilities of the Project, including but not limited to all real estate taxes and annual installments of special or other assessments payable with respect to the Project, and all other taxes, service payments in lieu of taxes, excises, levies, fees or charges, general and special, ordinary and extraordinary, of any kind, which are assessed, levied, charged, confirmed or imposed by any public authority upon the Project, its operations or rent provided for in this Lease; contest of any such taxes, including attorney's fees; management fees, insurance premiums, utility costs, janitorial costs, security costs, costs of wages, maintenance costs (relating to the Project and adjacent land including sidewalks, skyways, landscaping and parking or service areas, common areas, service contracts, equipment and supplies) and all other costs of any nature whatsoever which for federal tax purposes may be expensed rather than capitalized, but exclusive only of leasing commissions, depreciation, costs of leasehold improvements and payments of principal and interest on any mortgages, deeds of trusts, or other security devices covering the Project. Operating Costs shall also include the yearly amortization of capital costs incurred by the Landlord for improvements or structural repairs to the Project required to comply with any change in the laws, rules or regulations of any governmental authority having jurisdiction, or for purposes of reducing Operating Costs, which costs shall be amortized over the useful life of such improvements or repairs, as reasonably estimated by the Landlord or by the managing agent for Landlord. As soon as reasonably practicable prior to the commencement of each calendar year during the Term, Landlord shall furnish to Tenant an estimate of Operating Costs for the ensuing calendar year and Tenant's Proportionate Share thereof. Tenant shall pay, as additional rent hereunder together with each installment of Base Rent, one-twelfth (1/12th) of its estimated annual Proportionate Share of Operating Costs. No later than Ninety (90) days after the end of each calendar year during the Term, Landlord shall furnish to Tenant a statement of the actual Operating Costs for the previous calendar year, including Tenant's Proportionate Share of Operating Costs, and within thirty (30) days thereafter Tenant shall pay to Landlord, or Landlord shall credit to the next rent payments due Landlord from Tenant, as the case may be, any difference between the actual Operating Costs and the estimated Operating Costs paid by Tenant. Tenant's Proportionate Share of Operating Costs for the years in which this Lease commences and terminates shall be prorated by multiplying the actual Operating Costs by a fraction the numerator of which is the number of days of that year in the Term and the denominator of which is 365. Notwithstanding any other provision herein to the contrary, it is agreed that in the event the Project is not fully occupied at any time during the Term, an adjustment shall be made in computing the Operating Costs for such year so that the Operating Costs shall be computed for such year as though the Project had been fully occupied during such year (including, for real estate tax purposes, as if fully occupied and assessed as a completed Project). For a period of one year following Tenant's receipt of Landlord's statement of actual Operating Costs, Landlord shall keep available for Tenant's inspection copies of all supporting statements relating to Operating Costs. During this period Tenant may audit Landlord's Operating Costs records upon reasonable notice to Landlord. The audit must be performed during regular business hours in the offices where Landlord maintains its accounting records. Within ten (10) business days after the date of the audit, Tenant will provide Landlord a copy of the audit. Tenant shall not have the right to audit while in default. No subtenant will have the right to audit under this provision. An assignee, approved by Landlord, may have the right to audit as provided herein, however, such right shall only apply to the assignee's term of occupancy in the Premises pursuant to the Lease. In the event a discrepancy of seven percent (7%) or more is found in favor of Tenant, Landlord shall pay the cost of such audit. 6. ADDITIONAL TAXES: Tenant shall pay as additional rent to Landlord, together with each installment of Base Rent, the amount of any gross receipts tax, sales tax or similar tax, or any tax imposed in lieu of real property taxes (but excluding therefrom any income tax), or arising out of ownership, payable or which will be payable by Landlord, by reason of the receipt of the Base Rent and adjustments thereto. 7. OBLIGATIONS OF LANDLORD: So long as Tenant shall perform each and every covenant to be performed by Tenant hereunder, Landlord agrees that Tenant shall quietly enjoy the Premises in accord with the provisions hereof and that Landlord shall: A) Furnish heat and air conditioning to provide an environment that in Landlord's reasonable judgment is comfortable for occupancy of the Premises under normal business operations and in accordance with any applicable regulations daily from 8:00 A.M. to 6:00 P.M. (Saturdays after 1:00 P.M., Sundays and holidays excepted). If heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord, at the request of Tenant, shall install supplementary air conditioning equipment in the Premises, if such installation is deemed practical in the sole judgment of Landlord, and the cost of any such equipment, together with the cost of installation, operation and maintenance thereof (including all utility costs incurred in connection therewith) shall be paid by Tenant to Landlord as additional rent, together with each monthly installment of Base Rent, at such rates as are determined by Landlord. Any such equipment will be owned by Landlord. B) Provide passenger elevator service in common with others at all times. C) Provide janitorial service in and about the Premises (Saturdays, Sundays and holidays excepted). Additional janitorial services will be a direct expense billable to Tenant. Landlord will reduce Tenant's Operating Cost share if Tenant contracts for its own janitorial services. All charges, additions, or deletions shall be provided in advance upon a thirty (30) day written request from Tenant to Landlord. D) Keep the foundations, the exterior walls and the roof of the Building in good repair, ordinary wear and tear excepted; provided, however, if the need for such repairs is directly or indirectly attributable to or results from any activity being conducted within the Premises, Tenant agrees to reimburse Landlord for all costs and expenses incurred by Landlord with respect to such repairs. Landlord shall commence any repairs it is required to do hereunder as soon as reasonably practicable after receiving written notice from Tenant of the necessity for such repairs, but in no event shall Landlord be required to make any other repairs. Landlord's obligations hereunder shall be subject to the provisions of Sections 9 and 10. E) Provide water for drinking, lavatory and toilet purposes drawn through fixtures installed by Landlord at such points of supply provided for general use of other tenants in the Building. F) Provide interior window covering of a venetian or similar blind for exterior windows as part of the Tenant's Leasehold Improvements. Tenant, at its own expense, and with Landlord's prior written consent may install drapes or other window coverings to the inside of said blinds (and if installed shall maintain them in an attractive and safe condition); provided, however, in the sole discretion of Landlord they are in harmony with the exterior and interior appearance of the Building and create no safety or fire hazard. G) Furnish Tenant with Twenty (20) keys or access cards for each corridor door entering the Premises, and additional keys or access cards at a charge by Landlord on an order signed by Tenant. All such keys or access cards shall remain the property of Landlord. Except as provided in Subparagraph (J) below no additional locks shall be allowed on any door of the Premises without Landlord's written consent, and Tenant shall not make or permit to be made any duplicate keys, except those furnished by Landlord. Upon termination of this Lease, Tenant shall surrender to Landlord at the address then provided for the payment of rent all access cards and keys to the Premises, and give to Landlord the combination of all locks for safes, safe cabinets and vault doors, if any, in the Premises. H) Make and install or provide for the installation of Tenant's leasehold improvements in accordance with the plans and specifications, terms and conditions set forth in Exhibit B. Except as specifically provided for in this Lease, Landlord shall have no obligation to repair, improve, redecorate or remodel the Premises after occupancy. Without limiting the obligations of Landlord pursuant to the materials attached as Exhibit B, Landlord shall, in a good and workmanlike manner, perform or cause to be performed the work and installation contemplated by the final plans, including any work and installation reasonably inferable therefrom and the obtaining of all necessary permits and approvals from applicable governmental and quasi-governmental authorities (such work and installation, "Landlord's Work"). Landlord shall notify Tenant when Tenant's Leasehold Improvements have been substantially completed, and Tenant shall thereafter promptly inspect the Premises and furnish to Landlord a statement that the Premises have been completed subject to certain enumerated items (the "Punch List"). All items on the Punch List shall be completed in a diligent manner after the date of Substantial Completion. Landlord shall permit Tenant and/or its agents, representatives or employees to enter the Premises prior to the Commencement Date for any purpose consistent with the terms of this Lease. Landlord shall assign to Tenant any warranties relating to those portions or elements of the Premises for which Tenant is responsible for repair and maintenance hereunder. Landlord's obligation under this Section shall not exceed Twenty-Five Dollars ($25.00) per square foot of Rentable Area. Any cost in excess of $25.00 per square foot Rentable Area shall be the obligation of Tenant. It is understood that Landlord does not warrant that any of the services and utilities referred to above will be free from interruption from causes beyond the reasonable control of Landlord. Such interruption of service or utilities shall never be deemed an eviction or disturbance of Tenant's use and possession of the Premises or any part thereof or render Landlord liable to Tenant for damages by abatement of rent or otherwise or relieve Tenant from performance of Tenant's obligations under this Lease. I) Landlord and Tenant agree to enter into a separate agreement allowing Tenant to install necessary communications and security equipment on the rooftop of the Building. J) Landlord shall allow Tenant to install, maintain and repair additional security devices, including locks and card access in the Premises as long as those additions are kept within the Building's master system and upon advance written notice to the Landlord. Any default of Tenant's obligations under such agreement shall be considered a default under the terms of this Lease. K) Landlord shall provide adequate exterior space for Tenant's signage, which signage shall be approved by Landlord and maintained by Tenant. Tenant and Landlord agree to work in a good faith effort with Landlord's Architect to design such signage to be in keeping with the first class quality of the Building. L) Landlord and Tenant shall enter into a separate agreement allowing for the installation of an ATM in the south Building parking lot and a Night Depository with 24-hour access in the first floor interior common area space that is architecturally compatible with the Building and in a location approved by the Landlord. Any default of Tenant's obligations under such agreement shall be considered a default under the terms of this Lease. 8. COVENANTS OF TENANT: Tenant agrees that it shall: A) Observe such governmental ordinances, laws and regulations and such rules and regulations as from time to time may be put in effect by Landlord, or Landlord's designated managing agent, for the general safety, comfort and convenience of Landlord, occupants and tenants of the Project, including, without limitation, Project signage and graphics standards, use of designated common areas and other Project areas, security measures and similar matters. B) Give Landlord and Landlord's managing agent access to the Premises at any time during emergencies and at all reasonable times and accompanied by representative of Tenant, without charge or diminution of rent, to enable Landlord to examine or exhibit the same and to make such inspections, repairs, additions and alterations as Landlord deems necessary or may be required to make hereunder. C) Keep the Premises in good order and condition. Tenant shall be responsible for payment of all costs incurred by Landlord in replacing all interior broken glass with glass of the same quality, save only glass broken by All Risk insurance coverage; and Tenant shall commit no waste on the Premises. D) Pay for all replacement electric lamps and ballasts used in the Premises. E) Upon the termination of this Lease in any manner whatsoever, remove Tenant's goods and effects and those of any other person claiming under Tenant, and quit and deliver up the Premises to Landlord peaceably and quietly in as good order and condition as the same are in at the commencement of the Term or thereafter were put in by Landlord or Tenant, reasonable use and wear excepted. Goods and effects not removed by Tenant at the termination of this Lease, however terminated, shall be considered abandoned, and Landlord may dispose of the same as it deems expedient at Tenant's expense. Tenant shall be responsible for payment of all costs incurred by Landlord for any restoration of the Premises needed by virtue of the removal of Tenant's goods and effects whether removed by Tenant or Landlord. F) Not assign this Lease, unless assigned to a financial affiliate of Tenant, or sublet all or any part of the Premises voluntarily, involuntarily or by operation of law, or through change in the ownership of Tenant if Tenant is a corporation or a partnership, without first obtaining Landlord's written consent thereto. Landlord's consent will not be unreasonably withheld provided that (i) the occupancy of any such assignee or sublessee is not inconsistent with the character of the Building; (ii) such assignee or sublessee shall assume in writing the performance of the covenants and obligations of Tenant hereunder; (iii) a fully executed copy of any such assignment or sublease shall be immediately delivered to Landlord but the making of such assignment or sublease shall not be deemed to release Tenant from the payment and performance of any of its obligations under this Lease; (iv) Tenant shall promptly disclose and pay to Landlord as additional rent hereunder any rent or other payments pursuant to any sublease which exceed the amounts payable hereunder and any other consideration paid, or to be paid, by reason of the assignment or sublease; and (v) such assignment or subletting is approved by any mortgagee holding a mortgage covering the Premises which reserves such right unto the mortgagee. Notwithstanding the foregoing, if Tenant wishes to assign this Lease or sublet all or any part of the Premises to a named third party, Tenant shall first offer, in writing, to assign or sublet (as the case may be) to Landlord on the same terms and conditions and for the same Base Rent and additional rent as provided in this Lease. Any such offer by Tenant shall be deemed to have been rejected by Landlord unless within ten (10) days from receipt thereof, Landlord delivers to Tenant written notice of acceptance of Tenant's offer. G) Not place signs on or about the Premises or the Project without first obtaining Landlord's written consent thereto. H) Not overload, damage or deface the Premises or the Project or do any act which may make void or voidable any insurance on the Premises or the Project, or which may render an increased or extra premium payable for insurance. I) Not install asbestos or any asbestos containing material within the Premises or the Project and not make any alterations or additions to the Premises without the prior written consent of the Landlord and until payment and completion bonds therefore have been approved by Landlord. All alterations, additions or improvements (including carpeting or other floor covering) which may be made by either of the parties hereto upon the Premises, except movable office furniture and equipment, shall at Landlord's election, be the property of Landlord and shall remain upon and be surrendered with the Premises, as a part thereof, at the termination of this Lease. J) Keep the Premises and the Project free from any mechanics', materialmen's, contractors' or other liens arising from, or any claims for damages growing out of, any work performed, materials furnished or obligations incurred by or on behalf of Tenant. Tenant shall indemnify and hold harmless Landlord from and against any such lien, claim or action thereon, and reimburse Landlord promptly upon demand therefore by Landlord for costs of suit and reasonable attorneys' fees incurred by Landlord in connection with any such lien, claim or action. K) Maintain at its expense at all times during the Term (i) a policy or policies of public liability insurance with respect to the Premises and the business of Tenant, with limits of not less than $1,000,000.00 combined single limited; and (ii) a policy or policies of All Risk coverage insuring Tenant's leasehold improvements, trade fixtures and other personal property for the full insurable value thereof. All such insurance policies shall be placed with companies qualified to do business in the State of Iowa, provide for at least thirty (30) days prior written notice to Landlord before cancellation or amendment, name Landlord as an additional insured thereon. Current, endorsed copies thereof shall be filed with Landlord prior to Tenant's occupancy of the Premises and at all time thereafter during the Term. L) Not install, operate or permit any vending machines or coin-operated devices upon the Premises without Landlord's prior written consent. M) Pay the cost of all utilities, limited to desktop electrical and Premises lighting, supplied to or used in Premises at rates prevailing for Tenant's class of use as established by the company providing the applicable utility service. N) Tenant's obligations under this Section 8 to do or not to do a specified act shall extend to and include Tenant's obligation for all conduct of Tenant's employees, agents and invitees. 9. AMERICANS WITH DISABILITIES ACT: The parties agree that the liabilities and obligations of Landlord and Tenant under that certain federal statute commonly known as the Americans With Disabilities Act as well as the regulations and accessibility guidelines promulgated thereunder as each of the foregoing is supplemented or amended from time to time (collectively, the "ADA") shall be apportioned as follows: A) If any of the common areas of the Project, including, but not limited to, exterior and interior routes of ingress and egress, off-street parking and all rules and regulations applicable to the Premises, the Building or the Project, fails to comply with the ADA, such nonconformity shall be promptly made to comply by Landlord. Landlord shall also cause its manager of the Building and the Project (the "Manager") to comply with the ADA in its operation of the Building and the Project. B) From and after the commencement date of the Lease, Tenant covenants and agrees to conduct its operations within the Premises in compliance with the ADA. If any of the Premises fails to comply with the ADA, such nonconformity shall be promptly made to comply by Tenant. In the event that Tenant elects to undertake any alterations to, for or within the Premises, including initial build-out work, Tenant agrees to cause such alterations to be performed in compliance with the ADA. C) Tenant acknowledges and agrees that, while Landlord has reviewed and approved the plans and specifications for Tenant's Leasehold Improvements, and will construct Tenant's Leasehold Improvements for Tenant, Landlord assumes no responsibility for compliance of such plans and specifications with the ADA and Landlord shall not be responsible for any alterations or additions to the Premises which may be required by the ADA. 10. CASUALTY LOSS: In case of damage to the Premises or the Project by fire or other casualty, Tenant shall give immediate written notice thereof to Landlord, who shall within sixty (60) days of such notice give notice to Tenant that: (1) Landlord elects to terminate this Lease as hereinafter provided, or (2) Landlord will cause the damage to be repaired with reasonable speed, at the expense of the Landlord, subject to delays which may arise by reason of adjustment of loss under insurance policies and for delays beyond the reasonable control of Landlord, but Landlord shall have no obligation to restore or replace any property owned by Tenant; and to the extent that the Premises are rendered untenantable, the rent shall proportionately abate, except in the event such damage resulted from or was contributed to by the act, fault or neglect of Tenant, Tenant's employees, invitees or agents, in which event there shall be no abatement of rent. If the damage shall be so extensive that the Landlord shall decide not to repair or rebuild, this Lease shall, at the option of Landlord, be terminated as of the date of such damage by written notice from Landlord to Tenant, and the rent shall be adjusted to the date of such damage and Tenant shall thereupon promptly vacate the Premises. 11. CONDEMNATION: If the entire Premises are taken under power of eminent domain (which shall include the exercise of any similar governmental power or any purchase or other acquisition in lieu thereof), this Lease shall automatically terminate as of the date of taking, which shall be the date Tenant is required to yield possession thereof to the condemning authority. If a portion of the Premises is taken under power of eminent domain, Landlord shall have the right to terminate this Lease as of the date of taking by giving written notice thereof to Tenant on or before the date of taking. If Landlord does not elect to terminate this Lease, it shall, at its own expense, restore or cause to be restored the Premises, exclusive of any improvements or other changes made therein by Tenant, to as near the condition which existed immediately prior to the date of taking as reasonably possible, and to the extent that the Premises are rendered untenantable, the rent shall proportionately abate. All damages awarded for a taking under the power of eminent domain shall belong to and be the exclusive property of Landlord, whether such damages be awarded as compensation for diminution in value of the leasehold estate hereby created or to the fee of the Premises; provided, however, that Landlord shall not be entitled to a separate award made to Tenant for the value and cost of removal of its personal property and fixtures or any relocation payment or allowance made to Tenant. 12. DELAY IN POSSESSION: If the Premises shall on the scheduled date of commencement of the Term not be ready for occupancy by the Tenant due to the possession or occupancy thereof by a person not lawfully entitled thereto, or because construction has not yet been completed, or by reason of any building operations, repair or remodeling to be done by Landlord, Landlord shall use due diligence to complete such construction, building operations, repair or remodeling and to deliver possession of the Premises to Tenant. Landlord, using such due diligence, shall not in any way be liable for failure to obtain possession of the Premises for Tenant or to timely complete such construction, building operations, repair or remodeling, but the Base Rent and Additional Rent (as defined in Section 31 below) payable by Tenant hereunder shall abate until the Premises shall, on Landlord's part, be ready for the occupancy of Tenant, this Lease remaining in all other respects in full force and effect and the Term not thereby extended. 13. LIABILITY AND INDEMNITY: Save for its gross negligence, Landlord shall not be responsible or liable to Tenant for any loss or damage (i) that may be occasioned by or through the acts or omissions of persons occupying any part of the Project or any persons transacting any business in or about the Project or persons present in or about the Project for any other purpose, or (ii) for any loss or damage resulting to Tenant or its property from burst, stopped or leaking water, sewer, sprinkler or steam pipes or plumbing fixtures or from any failure of or defect in any electric line, circuit or facility. Tenant shall defend, indemnify and save Landlord harmless from and against all liabilities, damages, claims, costs, charges, judgments and expenses, including, but not limited to, reasonable attorneys' fees, which may be imposed upon or incurred or paid by or asserted against Landlord, the Premises or any interest therein or in the Project by reason of or in connection with any use, non-use, possession or operation of the Premises, or any part thereof, any negligent or tortious act on the part of Tenant or any of its agents, contractors, servants, employees, licensees or invitees, any accident, injury, death or damage to any person or property occurring in, on or about the Premises or any part thereof, and any failure on the part of Tenant to perform any of the terms or conditions of this Lease provided, however, that nothing contained in this paragraph shall be deemed to require Tenant to indemnify Landlord with respect to any gross negligence or tortuous act committed by Landlord or to any extent prohibited by law. 14. HAZARDOUS SUBSTANCES: Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Project any such materials or substances except to use in the ordinary course of Tenant's business, and then only after written notice is given to Landlord of the identity of such substances or materials. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et. seq., and applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges if such requirement applies to the Premises. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the Premises. In all events, Tenant shall indemnify Landlord in the manner elsewhere provided in this Lease from any release of hazardous materials on the Premises occurring while Tenant is in possession, or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the Term. 15. DEFAULT: Tenant hereby agrees that in case Tenant shall default in making any payment due hereunder or in performing any of the other agreements, terms and conditions of this Lease, or if any proceeding is commenced by or against Tenant in bankruptcy or for appointment of a receiver, or if Tenant becomes insolvent or makes a general assignment for the benefit of creditors, then, in any such event, Landlord, in addition to all other rights and remedies available to Landlord, by law or by other provisions hereof, may, with process of law, re-enter immediately into the Premises and remove all persons and property therefrom, and, at Landlord's option, annul and cancel this Lease as to all future rights of Tenant, and Tenant hereby expressly waives the service of any notice in writing of intention to re-enter as aforesaid. Tenant further agrees that in case of any such termination or re-entry the obligations of Landlord hereunder shall cease but the obligation of Tenant to pay Base Rent, Additional Rent (as defined in Section 31 below) and other sums which may become due hereunder shall continue for the then unexpired portion of the Term, and that Tenant will indemnify the Landlord against all loss of rents and other damage which Landlord may incur by reason of such termination or re-entry, including, but not limited to, costs of restoring and repairing the Premises and putting the same into rentable condition, costs of renting the Premises to another tenant, loss or diminution of rents and other damage which Landlord may incur by reason of such termination or re-entry, and all reasonable attorneys' fees and expenses incurred in enforcing any of the terms of this Lease. Neither acceptance of rent by Landlord, with or without knowledge of breach, nor failure of Landlord to take action on account of any breach hereof or to enforce its rights hereunder shall be deemed a waiver of any breach, and absent written notice or consent, said breach shall be a continuing one. 16. NOTICES: All bills, statements, notices or communications which Landlord may desire or be required to give to Tenant shall be deemed sufficiently given or rendered if in writing and either delivered to Tenant personally or sent by registered or certified mail, return receipt requested, addressed to Tenant at the Building, and the time of rendition thereof or the giving of such notice or communication shall be deemed to be the time when the same is personally delivered to Tenant or deposited in the mail as herein provided. Any notice or the return of any access cards, keys, or otherwise to be given from Tenant to Landlord must be similarly delivered to Landlord's managing agent personally or sent by registered or certified mail, return receipt requested, addressed to Landlord at the address where the last previous rental hereunder was payable, or in the case of subsequent change upon notice given, to the latest address furnished. 17. HOLDING OVER: Should Tenant continue to occupy the Premises after expiration or termination for any reason of the Term or any renewal or renewals thereof with Landlord's written consent, such tenancy shall be from month-to-month and in no event from year-to-year or for any longer term, and shall be on all the terms and conditions hereof applicable to a month-to-month tenancy except that Base Rent shall equal two hundred percent (200%) of the Base Rent plus Tenant's Proportionate Share of Operating Costs payable at the time of such expiration or termination. Nothing herein, however, shall prevent Landlord from removing Tenant forthwith and seeking all remedies available to Landlord in law or equity. 18. SUBORDINATION: The rights of Tenant shall be and are subject and subordinate at all times to the lien of any mortgage now or hereafter in force against the Project, and Tenant shall execute such further instruments subordinating this Lease to the lien of any such mortgage as shall be requested by Landlord, including upon request an agreement by Tenant to attorn to the holder of such mortgage in return for a covenant of non-disturbance of Tenant's occupancy by such holder in the event that such holder, its successors or assigns, succeeds to the interest of Landlord. 19. ESTOPPEL CERTIFICATE: Tenant shall at any time and from time to time, within ten (10) days after written request by Landlord, execute, acknowledge and deliver to Landlord and any other parties designated by Landlord, a certificate in such form as may from time to time be provided, ratifying this Lease and certifying (a) that this Lease is in full force and effect and has not been assigned, modified or amended in any way (or, if there has been any assignment, modification or amendment, identifying the same); (b) the dates of commencement and expiration of the Lease Term, the date to which the Base Rent and additional rent payable hereunder have been paid in advance; and (c) that there are, to Tenant's knowledge, no incurred defaults on the part of Landlord or any defenses or offsets against the enforcement of this Lease by Landlord (or specifying each default, defense or offset if any are claimed). Any such statement may be furnished to and relied upon by any prospective purchaser, lessee or encumbrancer of all or any portion of the Project. 20. BINDING EFFECT: The word "Tenant", wherever used in this Lease, shall be construed to mean tenants in all cases where there is more than one tenant, and the necessary grammatical changes required to make the provisions hereof apply to corporations, partnerships or individuals, men or women, shall in all cases be assumed as though in each case fully expressed. Each provision hereof shall extend to and shall, as the case may require, bind and inure to the benefit of Landlord and Tenant and their respective heirs, legal representatives, successors and assigns, provided that this Lease shall not inure to the benefit of any assignee, heir, legal representative, transferee or successor of Tenant except upon the express written consent or election of Landlord. 21. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfer or transfers of Landlord's interest in the Premises or the Project, other than a transfer for security purposes only, the transferor shall be automatically relieved of any and all obligations and liabilities on the part of Landlord accruing from and after the date of such transfer, including, without limitation, the obligation of Landlord under Section 27 hereof to return the security deposit as provided therein following assignment or transfer thereof to such assignee of Landlord's interest, provided Landlord is current in all its obligations to Tenant. 22. INTEREST: Any amount due from Tenant to Landlord (including Additional Rent as defined in Section 31 below) which is not paid when due shall bear interest at the lesser of (i) the highest legal rate, or (ii) eighteen percent (18%) per annum from the date due until paid, provided, however, the payment of such interest shall not excuse or cure the default upon which such interest accrued. 23. EXPENSE OF ENFORCEMENT: If either party hereto be made or become a party to any litigation commenced by or against the other party involving the enforcement of any of the rights and remedies of such party, or arising on account of the default of the other party in the performance of such party's obligations hereunder, then the prevailing party in any such litigation (or the party becoming involved in such litigation because of a claim against such other party, as the case may be) shall receive from the other party all costs and reasonable attorney's fees incurred by it in relation to such litigation. 24. ACCESS; CHANGES IN PROJECT FACILITIES; NAME: All portions of the Project except the inside surfaces of all walls and doors bounding the Premises, and any space in or adjacent to the Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other Project facilities, and the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, decoration and repair, are reserved to Landlord and Landlord's managing agent. Landlord reserves the right, at any time, without incurring any liability to Tenant therefor, to make such changes in or to the Project and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, concourse, elevators, escalators, stairways and other improvements thereof, as it may deem necessary or desirable. Landlord may adopt any name for the Project and Landlord reserves the right to change the name and/or address of the Project at any time. 25. RIGHT OF LANDLORD TO PERFORM: If Tenant shall fail to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, Landlord may, but shall not be so obligated, and without waiving or releasing Tenant from any obligations of Tenant, make any such payment or perform any such other act on Tenant's part to be made or performed hereunder. Tenant shall, promptly and upon demand therefore by Landlord, reimburse Landlord for all sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the rate specified in Section 20 hereof from the date of such payment by Landlord, and Landlord shall have the same rights and remedies in the event of the failure by Tenant to pay such amounts as Landlord would have in the event of a default by Tenant in the payment of rent. 26. BROKERS: Landlord shall pay the fee or commission to Scott Olson of Skogman Realty and Chuck Ruhl of Ruhl Realtors in accordance with Landlord's separate written agreement with each. The commission shall be figured at $3.00 per square foot of Rentable Area with Skogman Realty receiving $17,705.25 and Ruhl Realtors receiving $5,901.75. Landlord and Tenant warrant and represent to each other that in the negotiating or making of this Lease neither party has dealt with any other broker or finder who might be entitled to a fee or commission for this Lease other than the parties named herein. Landlord and Tenant shall indemnify and hold the other party harmless from any claim or claims, including costs, expenses and attorney's fees incurred by the other party, or asserted by any other broker or finder for a fee or commission based upon any dealings with or statements made by the other. 27. LANDLORD'S SECURITY INTEREST: Landlord reserves (and is hereby granted) a security interest on all fixtures, equipment and personal property (tangible and intangible) now or hereafter located in or on the Premises to secure all sums due from and all obligations to be performed by Tenant hereunder, which lien and security interest may be enforced by Landlord in any manner provided by law. 28. MODIFICATIONS FOR LENDER: If, in connection with obtaining financing for the Project or the Premises, any lender shall request modifications in this Lease as a condition to such financing, Tenant shall promptly execute any instrument submitted to Tenant by Landlord containing such modifications; provided, however, that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created. 29. LIMITATION OF LIABILITY: In the event that Landlord is ever adjudged by any court to be liable to Tenant in damages, Tenant specifically agrees to look solely to Landlord's interest in the Project for the recovery of any judgment from Landlord, it being agreed that Landlord, or if Landlord is a partnership, its partners whether general or limited, or if Landlord is a corporation, its directors, officers or shareholders, shall never be personally liable for any such judgment. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successor in interest, or to maintain any other action not involving the personal liability of Landlord (or if Landlord is a partnership, its partners, whether general or limited, or if Landlord is a corporation, requiring its directors, officers or shareholders to respond in monetary damages from assets other than Landlord's interest in the Project), or to maintain any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord. 30. WAIVER OF SUBROGATION: Each of Landlord and Tenant hereby releases the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property caused by All Risk coverage casualties, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible. 31. ADDITIONAL RENT AMOUNTS: Any amounts in addition to Base Rent payable to Landlord by Tenant hereunder, including without limitation amounts payable pursuant to Sections 5, 6, 7A, 7F, 7I, 7J, 7L, 8C, 8D, 8J, 12, 13, 20, 21, 24, 27 and Exhibit B, (the "Additional Rent"), shall be an obligation of Tenant hereunder and all such Additional Rent shall be due and payable upon demand. 32. INCORPORATION OF EXHIBITS: The following exhibits to this Lease are hereby incorporated by reference for all purposes as fully as if set forth at length herein: EXHIBIT A Floor Plan of Premises EXHIBIT B Leasehold Improvements Plan and Specifications 33. FORCE MAJEURE: All of the obligations of Landlord and of Tenant under this Lease are subject to and shall be postponed for a period equal to any delay or suspension resulting from fire, strikes, acts of God, and other causes beyond the control of the party delayed in its performance hereunder, this Lease remaining in all other respects in full force and effect and the Term not thereby extended. Provided nevertheless, the unavailability of funds for payment or performance of Tenant's obligations hereunder shall not give rise to any postponement or delay in such payment or performance of Tenant's obligations hereunder. 34. GENERAL: The submission of this Lease for examination does not constitute the reservation of or an option for the Premises, and this Lease becomes effective only upon execution and delivery hereof by Landlord and Tenant. This Lease does not create the relationship of principal and agent or of partnership, joint venture or any association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of lessor and lessee. No waiver of any default of Tenant hereunder shall be implied from any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect any default other than the default specified in the express waiver and that only for the time and to the extent therein stated. Each term and each provision of this Lease performable by Tenant shall be construed to be both a covenant and a condition. The topical headings of the several paragraphs and clauses are for convenience only and do not define, limit or construe the contents of such paragraphs or clauses. All preliminary negotiations are merged into and incorporated in this Lease. This Lease can only be modified or amended by an Agreement in writing signed by the parties hereto, their successors or assigns. All provisions hereof shall be binding upon the heirs, successors and assigns of each party hereto. 35. PARKING: Landlord shall cause to be made available to Tenant, at Tenant's option, the following amounts of parking spaces ("Spaces"): A) Up to Five (5) Spaces in the parking lot located adjacent to the Building. Tenant shall pay directly to the parking facility operator ("Operator") $ 35.00 per space per month. Tenant shall pay directly to the Landlord such amounts as are from time to time agreed upon by Tenant and Landlord. B) Up to Seventeen (17) Spaces in the City of Cedar Rapids 8th Avenue Parking Lot located between 8th and 12th Avenue SE. Tenant shall pay directly to the City of Cedar Rapids $20.00 per space per month from the Commencement Date through a date determined between the City of Cedar Rapids and Tenant. Tenant shall enter a separate agreement with the City of Cedar Rapids for these Spaces. All such Spaces shall only be for the use of Tenant's employees on a non-designated, non-exclusive basis. If at any time following the commencement of this Lease, Tenant elects less than the full number of Spaces available to it, Landlord shall have no further obligation to provide additional Spaces. Landlord does not warrant that these Spaces will be free from interruption from causes beyond reasonable control of Landlord. Such interruption of Spaces shall never be deemed an eviction or disturbance of Tenant's use and possession of the Premises or any part thereof or render Landlord liable to Tenant for damages by abatement of rent or otherwise relieve Tenant from performance of Tenant's obligations under this Lease. 37. SEVERABILITY: The invalidity of any provision, clause or phrase herein contained shall not serve to render the balance of this Lease ineffective or void and the same shall be construed as if such had not been herein set forth. 38. REGULATORY APPROVAL: This Lease shall not be binding upon Tenant unless and until Tenant has received any required bank regulatory approval. If Tenant has not received such approval on or before June 6, 2001 this Lease shall be null and void. Notwithstanding any other provisions contained in this lease, in the event (a) Tenant or its successors or assignees shall become insolvent or bankrupt, or if it or their interest under this Lease shall be levied upon or sold under execution or other legal process, or (b) the depository institution then operating on the Premises is closed, or is taken over by any depository institution supervisory authority ("Authority"), Landlord may, in either such event, terminate this Lease only with the concurrence of any Receiver or Liquidator appointed by such Authority; provided, that in the event this Lease is terminated by the Receiver or Liquidator, the maximum claim of Landlord for rent, damages, or indemnity for injury resulting from the termination, rejection, or abandonment of the unexpired Lease shall by law in no event exceed an amount equal to all accrued and unpaid rent to the date of termination. 39. TERMINATION OPTION: Tenant shall have the right to terminate this Lease effective the Thirty-seventh (37th) month under the following terms: A) Tenant gives written notice to Landlord that it is exercising that right to terminate no later than 12 months prior to the termination date ("Termination Date"), and B) Tenant is not in default under the Lease at the time such termination right is exercised and at the time such termination becomes effective, and C) Tenant pays to Landlord in cash on or before the Termination Date unamortized cost of the Tenant Improvements and Lease Commissions. The Tenant Improvements and Lease Commissions will be amortized at Ten percent (10%) over the original Term of the Lease. If the foregoing conditions are met, on or before the date set forth in Tenant's notice, the Term shall expire with the same force and effect as if such date were the expiration date of the Term. IN WITNESS WHEREOF, the respective parties hereto have caused this Lease to be executed as of the day and year first above written. LANDLORD: TENANT: 3001 L.L.C. QUAD CITY BANK AND TRUST COMPANY BY: _____________________________ BY: _________________________________ ITS: _____________________________ ITS: _________________________________ DATE: _____________________________ DATE: _________________________________ EXHIBIT A FLOOR PLANS FROM OPN EXHIBIT B LEASEHOLD IMPROVEMENTS PLANS & SPECIFICATIONS Leasehold Improvements Approval Procedures: Tenant will deliver all of the plans and specifications for the Leasehold Improvements to Landlord, on or before June 15, 2001. As such plans and specifications are completed, they will be submitted to Landlord for approval. If Landlord finds that such plans and specifications do not conform with Landlord's reasonable specifications for the Building generally or do not otherwise conform with Landlord's reasonable requirements, including maximum weight and proper positions of heavy equipment, Landlord will within 10 days after such submittal, make written objections specifying in what particulars objections are made. If such objections are made, Tenant will, within 15 days after receiving Landlord's objections, make such revisions as are, in Tenant's reasonable judgment, appropriate to meet Landlord's objections and will submit such revisions to Landlord for approval in the same manner described above. If the parties cannot otherwise reconcile any disagreement, the matter may be submitted to Arbitration. If, after such plans and specifications have been approved by Landlord, Tenant desires to change them in any material manner, Tenant will submit such changes to Landlord for Landlord's approval in the same manner described above. Leasehold Improvement Proposal: Landlord will cause Landlord's Contractor to submit to Tenant on the 30th day after Landlord has approved Tenant's plans and specifications for the Leasehold Improvements (the "Bid Date") a proposal for the construction of the Leasehold Improvements. Cooperation: All work in connection with completion of the Leasehold Improvements according to the plans and specifications approved by Landlord and Tenant (including purchase of required materials and equipment) will be carried out by Landlord's Contractor, subject to the reasonable direction of Landlord. Tenant will cooperate with Landlord, Landlord's Contractor and Landlord's Architect to facilitate the efficient and expeditious completion of the Building and the Premises. Tenant will have access to the Premises during construction of the Premises by Landlord and during construction of the Leasehold Improvements. Landlord will, at its sole expense, cause to be provided elevator and hoisting services during construction of the Leasehold Improvements in a manner reasonably requested by Tenant. Landlord shall use its best efforts to control the costs of Leasehold Improvements and agrees to keep Tenant informed as to the costs of the work. In the event that it appears at any time that the cost of the Leasehold Improvement work will exceed such amount, Landlord agrees to promptly notify Tenant and work with Tenant to revise the final plans to achieve a reduction in cost if requested by Tenant. EX-12 5 qccalculation.txt Exhibit 12.1 Quad City Holdings, Inc. Calculation of earnings to fixed charges Jun-01 Jun-00 Jun-99 Jun-98 Jun-97 Jun-96 --------------------------------------------------- Earnings before income taxes .................................... 3,556 4,426 4,079 4,071 1,384 683 Add: preferred dividends on a pretax basis ...................... -- -- -- -- -- -- Add: fixed charges .............................................. 16,979 13,552 11,269 8,437 4,997 3,495 --------------------------------------------------- Earnings including interest expense on deposits (1) ............. 20,535 17,978 15,348 12,508 6,381 4,178 Less: interest expense on deposits .............................. 13,022 10,125 9,010 6,971 4,358 3,350 --------------------------------------------------- Earnings excluding interest expense on deposits (2) ............. 7,512 7,853 6,338 5,537 2,023 828 Fixed charges: Interest expense on deposits ................................. 13,022 10,125 9,010 6,971 4,358 3,350 Interest expense on borrowings ............................... 3,590 3,163 2,017 1,371 635 137 Portion of rents representative of interest factor ........... 367 264 242 95 4 8 --------------------------------------------------- Fixed charges including interest expense on deposits (3) ........ 16,979 13,552 11,269 8,437 4,997 3,495 Less interest expense on deposits ............................... 13,022 10,125 9,010 6,971 4,358 3,350 --------------------------------------------------- Fixed charges excluding interest expense on deposits (4) ........ 3,957 3,427 2,259 1,466 639 145 =================================================== Rents ........................................................... 615 451 430 176 10 20 Portion of rents representative of interest factor .............. 367 264 242 95 4 8 Ratio of earnings to fixed charges and preferred stock dividends: Excluding interest expense on deposits ( (2)/(4) ) ........... 1.90 2.29 2.81 3.78 3.17 5.71 Including interest expense on deposits ( (1)/(3) ) ........... 1.21 1.33 1.36 1.48 1.28 1.20
EX-21 6 qcexhbt21.txt Exhibit 21 - Subsidiaries of the Registrant Subsidiaries State of Incorporation - -------------------------------------------------------------------------------- Quad City Bank and Trust Company Iowa Quad City Bancard, Inc. Delaware Quad City Holdings Capital Trust I Delaware EX-23 7 qcconsent.txt INDEPENDENT AUDITOR'S CONSENT We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the Quad City Holdings, Inc. 401(k)/Profit Sharing Plan (File No. 33-77420) and Stock Option Plan (File No. 33-78024) of our report dated July 25, 2001 relating to the June 30, 2001 financial statements of Quad City Holdings, Inc. and to the reference to our Firm under the caption "Experts" contained therein. /s/ McGladrey & Pullen, LLP Davenport, Iowa August 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----