-----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, EgBMTyZSQY+7Ub6iqMdcumgZWYA9Aob40o1XHQ/PBp384FKjXEuAKWMhBEHCSqRL CZYNC0Isti/3I3k0WgSrkg== 0000743530-96-000102.txt : 19960930 0000743530-96-000102.hdr.sgml : 19960930 ACCESSION NUMBER: 0000743530-96-000102 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: NASD 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: 96635657 BUSINESS ADDRESS: STREET 1: 2118 MIDDLE ROAD STREET 2: PO BOX 395 CITY: BETTENDORF STATE: IA ZIP: 52722 BUSINESS PHONE: 3193440600 10-K 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [ x ] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee required) For the fiscal year ended June 30, 1996 [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required) For the transition period from __________________ to _____________________ Commission file number: 0-22208 Quad City Holdings, Inc. ---------------------------------------------- (Name of Small Business Issuer in Its Charter) Delaware 42-1397595 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 2118 Middle Road, Bettendorf, Iowa 52722 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (319) 344-0600 ------------------------------------------------ (Issuer s Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, $1 Par Value Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [ x ] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of regulation S-B contained in this form, and no disclosure will be contained, to the best of Issuer s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ x ] The Issuer s revenues for its most recent fiscal year were $8,245,754. The aggregate market value of the voting stock held by non-affiliates of the Issuer as of August 23, 1996 was approximately $18,950,000. As of said date, the Issuer had 1,437,824 shares of Common Stock issued and outstanding. Documents incorporated by reference: --------------------------------------------------------------- Part III of Form 10-KSB - Proxy statement for annual meeting of stockholders to be held in 1996. Transitional Small Business Disclosure Format (check one): Yes [ ] No [ x ] Part I Item 1. Description of the Business Quad City Holdings, Inc. (the "Company") was formed in February of 1993 under the laws of the state of Delaware for the purpose of becoming the bank holding company of Quad City Bank and Trust Company (the "Bank"). The Bank was capitalized on October 13, 1993 and commenced operations on January 7, 1994. The Bank is organized as an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank provides full-service commercial and consumer banking services in Bettendorf and Davenport, Iowa and adjacent communities. Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a Delaware corporation which provides merchant credit card processing services. This operation had previously been a division of the Bank since July 1994. Bancard has contracted with an independent sales organization which markets credit card services to merchants throughout the country. Currently, approximately 8,500 merchants process transactions with Bancard. The Company owns 100% of the Bank and Bancard, and in addition to such ownership invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with the Bank. The Bank competes with other commercial banks, savings banks, savings and loan institutions, credit unions and other financial service organizations in the Quad Cities market. Being established in 1994, the Bank is one of the smaller financial institutions in its market. The Bank, the Company and Bancard are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). In addition, the Bank is regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC"). The Company s principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The Bank s deposits are insured to the maximum allowable by the FDIC. The Company s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits. The Company s operating results are affected by merchant credit card fees, trust fees, deposit service charges, and other income. Operating expenses of the Company include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses and other administrative expenses. The Company s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The commercial banking business is a highly regulated business. See Appendix A for a brief summary regarding federal and state statutes and regulations, which are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks. The Company, the Bank and Bancard have a June 30th fiscal year end and employ 53 individuals. No one customer accounts for more than 10% of revenues, loans or deposits. See Appendix B for the tables and schedules which show selected comparative statistical information required pursuant to the industry guides promulgated under the Securities Act of 1993, relating to the business of the Company. Item 2. Description of Property The main offices of the Company and the Bank are in a 6,700 square foot facility which was completed in January of 1994. In March of 1994, the Bank acquired that facility, which is located at 2118 Middle Road in Bettendorf. Construction of a second full service banking facility was completed in July of 1996 to provide for the convenience of customers and to expand its market territory. The Bank also owns its portion of that facility which is located at 4500 Brady Street in Davenport. The two 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 storage and item processing. Three thousand square feet of its second floor has been leased to a professional services firm. The remaining 3,000 square feet is available for lease. Bancard leases approximately 1,700 square feet of office space in Bettendorf from an unrelated third party. Management is of the opinion that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company. The Bank has limited its investment in premises to approximately 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, interest rate and credit worthiness of the borrower. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. Item 3. Legal Proceedings The Company is not aware of any legal proceedings against it, the Bank or Bancard. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the stockholders of the Company for a vote during the fourth quarter of the fiscal year ended June 30, 1996. Part II Item 5. Market for Common Equity and Related Stockholder Matters The Company s common stock has been traded on The Nasdaq SmallCap Market since October 6, 1993. High and low sales prices, as reported on Nasdaq for each quarterly period during the two fiscal years ended June 30, 1996 and 1995 were as follows: Fiscal 1996 Fiscal 1995 Sale Price Sale Price ------------------ ---------------------- High Low High Low ------- ------- ------- ------- First quarter .......... $12 $ 9 3/4 $10 $ 9 Second quarter ......... 12 10 1/2 $10 9 1/4 Third quarter .......... 12 3/4 10 3/4 9 3/4 8 1/2 Fourth quarter ......... 13 3/4 12 10 1/2 8 3/4 No cash dividends were declared during the past fiscal year. At June 30, 1996, there were estimated to be approximately 2,200 holders of record of the Company s common stock. The Company expects that all earnings, will be retained to finance the growth of the Company, the Bank and Bancard, and that no cash dividends will be paid for the foreseeable future. If and when dividends are declared, the Company will probably be largely dependent upon dividends from the Bank and Bancard for funds to pay dividends on the common stock. Under Iowa law, the Bank will be restricted as to the maximum amount of dividends it may pay on its common stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. The Bank is a member of the Federal Reserve System. The total of all dividends declared by the Bank in a calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, the Federal Reserve Board, the Iowa Superintendent and the FDIC are authorized under certain circumstances to prohibit the payment of dividends by the Bank. In the case of the Company, further restrictions on dividends may be imposed by the Federal Reserve Board. Item 6. Management s Discussion and Analysis Results of Operations Net income for the year ended June 30, 1996 was $682,588, compared to a net loss of $373,782 for the year ended June 30, 1995. Results improved primarily because of a $1,224,743 increase in net interest income after provision for loan losses, and a $1,114,590 increase in other income. These increases were offset by a $1,282,963 increase in other expenses due primarily to the increased number of employees and higher operating costs related to the increased volume of business. A loss was reported for the period ended June 30, 1994 of $1,122,402. Because the Company was a start-up venture, there were expected losses during the pre-opening period and for the first several years of operations. Interest income increased to $6,583,467 in fiscal 1996 from $3,550,122 in fiscal 1995, a rise of $3,033,345. The rise was primarily due to greater average outstanding balances in interest bearing assets. Interest income is comprised primarily of interest income on loans (including loan fees), securities, federal funds sold and the Company s own deposits maintained at other financial institutions. Interest income should continue to grow as the loan portfolio and other assets increase, and would also increase as a result of a rise in interest rates. Interest expense increased to $3,486,380 in fiscal 1996 from $1,895,575 in fiscal 1995, an increase of $1,590,805, and represented interest paid primarily to depositors, as well as interest paid on federal funds purchased, and Federal Home Loan Bank advances. The increase in interest expense was again primarily due to greater average outstanding balances in interest bearing liabilities. Interest expense will continue to increase as deposits and Federal Home Loan Bank advances grow and would also increase as a result of a rise in interest rates. Net interest income for the years ended June 30, 1996 and June 30, 1995 amounted to $3,097,087 and $1,654,547, respectively, and represented the difference between interest income earned on earning assets and interest expense paid on interest bearing liabilities. The provision for loan losses is established based on factors such as the local and national economy and the risk associated with the loans in the portfolio. The Company s provision for loan losses was $500,397 for the year ended June 30, 1996, compared to $282,600 for the year ended June 30, 1995. The $217,797 increase in the provision for loan losses was primarily attributable to the growth in the loan portfolio during fiscal 1996. The increase maintained the Company s allowance for estimated losses on loans at 1.5% of total loans at both June 30, 1996 and June 30, 1995. Other income of $1,662,287 and $547,697 during the fiscal years 1996 and 1995, respectively, consisted of merchant credit card income, trust income, deposit service charges, the net of investment securities gains and losses and miscellaneous income. The $1,114,590 increase was primarily due to the addition of new customers and increased volume of the merchant credit card processing services at Bancard, the addition of new clients in the trust department at the Bank, the increase in demand deposit customers, and the growth in the commission income generated by the investment center. Operating expenses consisted primarily of salaries and benefits; other expense, including bank service charges and trust related expenses; professional fees, including data processing fees; and marketing and advertising expenses. Other operating expenses increased to $3,576,389 in fiscal 1996 from $2,293,426 in fiscal 1995. The $1,282,963 increase was primarily due to higher overhead expenses on the increased volume of business attained during fiscal 1996. Management will continue to attempt to contain overhead costs while maintaining optimal service levels and productivity. In fiscal 1996, salaries and benefits experienced the most significant increase of any noninterest expense component. For the twelve months ended June 30, 1996, total salaries and benefits increased to $1,973,682, or $798,808 over the June 30, 1995 total of $1,174,874. The change was primarily attributable to the increase in the Company s number of employees. In fiscal 1995, the Bank s FDIC premiums were assessed at the rate of .23% of insured deposits. On November 14, 1995, the FDIC reduced the Bank s FDIC premium to 0%. However, the Bank will continue to pay the $1,000 minimum semi-annual assessment required by federal statute. Financial Condition and Liquidity Total assets of the Company grew by $30,674,895, or 37.96%, to $111,474,977 at June 30, 1996 from $80,800,082 at June 30, 1995. The increase primarily resulted from an increase in deposits received from customers. While asset growth is expected to continue for the year ended June 30, 1997, it is likely to be at a lesser percentage rate from the increase during the past year. Cash and due from banks increased by $2,785,137, or 72.71%, to $6,615,407 at June 30, 1996 from $3,830,270 at June 30, 1995 and represented cash maintained at the Bank, and funds that the Bank and the Company had deposited in other banks in the form of demand deposits. Federal funds sold are inter-bank funds with daily liquidity. At June 30, 1996, the Bank had invested $2,728,000 in such funds. Such amount decreased by $10,222,000, or 78.93%, from $12,950,000 at June 30, 1995. This decrease was attributable to the reduction in funds received from correspondent banking customers to be reinvested in overnight deposits "as principal". In August 1995, the Company s correspondent banking department implemented an "agent" federal funds program, whereby the funds received from downstream correspondent banking customers merely pass through the Company s financial statements to upstream correspondent banks. The implementation of the "agent" program resulted in a decrease to assets (federal funds sold) and liabilities (federal funds purchased). This department provides various services to other financial institutions, including cash management services. Certificates of deposit at financial institutions increased by $1,489,154, or 37.39% to $5,472,012 at June 30, 1996 from $3,982,858 at June 30, 1995 and represented funds that the Company and its subsidiaries had deposited in other banks in the form of certificates of deposit. Management elected to invest in these deposits to earn a yield that exceeded the yield of U.S. treasury securities at comparable maturities. Pursuant to a FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", the Company transferred securities with an amortized cost of $7,992,513 and an unrealized gain of $12,030 from the held to maturity portfolio to the available for sale portfolio in December, 1995. This "one-time" transfer was made based on management s reassessment of their previous designations of securities giving consideration to liquidity needs, the management of interest rate risk and other factors. A portion of the Bank s investment securities are purchased with the intent to hold the securities until they mature. These held to maturity securities were recorded at amortized cost at both June 30, 1996 and June 30, 1995. At June 30, 1996, mortgage-backed securities and municipal securities made up the $3,156,601 balance. This was a decrease of $7,861,542, or 71.35%, from June 30, 1995, when U.S. treasury and agency securities, mortgage-backed securities and taxable municipal securities made up the $11,018,143 balance. Market values at June 30, 1996 and June 30, 1995 were $3,097,115 and $10,901,057, respectively. The decrease was primarily attributable to the "one-time" transfer described in the previous paragraph. All of the Company 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 or financing purposes. These securities were reported at fair value and increased by $15,999,757, or 106.43% to $31,032,652 at June 30, 1996 from $15,032,895 at June 30,1995. The amortized cost of such securities at June 30, 1996 and June 30, 1995 was $31,518,121 and $14,914,642, respectively. The increase was attributable to the "one-time" transfer described above, as well as the purchase of U.S. agency and other securities into the investment portfolio. The amortized cost and the weighted average rate yields for the categories of securities are summarized below. 1996 1995 ------------------------- --------------------------- Amortized Average Amortized Average Cost Yield Cost Yield ----------- ------------ ----------- -------------- Securities held to maturity: U.S. treasury securities . $ 0 0.000 $ 8,000,218 4.640% U.S. agency securities ... 0 0.000 500,000 7.100 Mortgage-backed securities 2,560,793 5.983 2,318,460 5.962 Municipal securities ..... 595,808 6.657 199,465 7.456 ----------- ----------- Totals .............. $ 3,156,601 $11,018,143 =========== =========== Securities available for sale: U.S. treasury securities . $14,504,449 5.920 $ 6,016,543 7.032% U.S. agency securities ... 12,612,166 6.222 5,477,243 7.407 Mortgage-backed securities 2,851,340 6.737 3,092,266 7.490 Other securities ......... 1,550,166 Variable 328,590 Variable ----------- ----------- Totals .............. $31,518,121 $14,914,642 =========== ===========
Loans receivable increased by $25,302,143, or 80.30%, to $56,809,720 at June 30, 1996 from $31,507,577 at June 30, 1995. The totals represented loans made by the Bank and also loan participations the Company had purchased from the Bank, on loans that exceeded the Bank s legal lending limit. As of June 30, 1996, the Bank s legal lending limit was $1,725,000. The Company has received approval from the Federal Reserve Board to grant loans and to participate in loans with the Bank. 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. During the fiscal year ended 1996, the Bank originated $41,276,181 of loans and received repayments of $15,853,666. The Company s allowance for estimated losses on loans was $852,500 at June 30, 1996 or 1.5% of total loans, compared to $472,475 or 1.5% at June 30, 1995. Although management believes that the allowance for estimated losses on loans at June 30, 1996 was at a level that is adequate to absorb losses on existing loans, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional contributions to its provision for loan losses in the future. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. At June 30, 1996, past due loans 30 days or more amounted to $864,368. At June 30, 1995, past due loans 30 days or more amounted to $87,574. Past due loans as a percentage of gross loans receivable at June 30, 1996 and June 30, 1995 was 1.52% and 0.28%, respectively. The Company anticipated an increase in this category in fiscal 1996 from the prior year. At June 30, 1995, much of the loan portfolio had been on the books for a relatively short time period, thus an increase in past due loans was likely as the portfolio matured. Over one third of the past due total at June 30, 1996, has subsequently been repaid and the remainder has been or is in the process of renegotiation. The Company intends to closely monitor these loans and does not anticipate any material losses. The Company experienced charge-offs of $120,372 during the fiscal 1996 year compared to $1,725 during the fiscal 1995 year. The fiscal 1996 charge-offs were comprised primarily of a single $400,000 commercial loan that was not fully realized upon liquidation of the borrower. The Company charged off all of the uncollected balance at June 30, 1996 and still holds stock in the parent company of the borrower. The ultimate realization of this collateral is unknown, therefore the Company has placed no value on the stock. Premises and equipment increased by $2,729,199 to $4,531,038 at June 30, 1996 from $1,801,839 at June 30, 1995. The increase resulted primarily from the Bank paying the developer its accumulated construction costs of the new Davenport banking location. Additional information regarding the composition of this account and related accumulated depreciation is described in footnote 4 to the consolidated financial statements. Accrued interest receivable on loans, securities and interest-bearing cash accounts increased to $1,121,268 at June 30, 1996 from $685,880 at June 30, 1995. The increase was primarily due to greater average outstanding balances in interest bearing assets. Other assets at June 30, 1996 and June 30, 1995 consisted primarily of miscellaneous receivables, prepaid expenses and accrued trust department income, and totaled $860,779 and $463,095, respectively. The increase was attributable to the increased volume of business and the related prepaid expenses associated with the pace of growth at the Bank and Bancard. Deposits grew to $92,918,118 at June 30, 1996 from $61,097,686 at June 30,1995, for an increase of $31,820,432, or 52.08%. The increase consisted of a $20,746,932 increase in demand, NOW, money market and savings accounts and a $11,073,500 increase in time deposit accounts. Federal funds purchased representing inter-bank funds received from other banks decreased by $6,021,072 to $1,190,000 at June 30, 1996 from $7,211,072 at June 30, 1995. This decrease was attributable to the reduction in funds received from correspondent banking customers to be reinvested in overnight deposits "as principal". Federal Home Loan Bank ("FHLB") advances increased to $3,411,470 at June 30, 1996 from $0 at June 30, 1995. The Bank is a member of the FHLB of Des Moines. As of June 30, 1996, the Bank held $1,249,700 of FHLB stock. As a result of its membership in the FHLB, the Bank has the ability to borrow funds for short-or long-term purposes under a variety of programs. Other borrowings increased to $1,000,000 at June 30, 1996 from $0 at June 30, 1995. Other borrowings consist of the amount outstanding on a $1,500,000 revolving credit note, which is secured by all the outstanding stock of the Bank. The borrowed funds were utilized to provide additional capital to the Bank to maintain the required 9% leverage ratio. Other liabilities grew to $1,286,783 at June 30, 1996 from $901,584 at June 30, 1995 for an increase of $385,199 or 42.72%. Other liabilities consisted primarily of accrued interest payable on deposit accounts, accrued expenses and accounts payable. The increase was primarily attributable to the greater average outstanding balances in interest bearing liabilities. Stockholders equity increased slightly to $11,668,606 at June 30, 1996 from $11,589,740 at June 30, 1995. Such increase was the combination of the net income offset by an increase in the unrealized losses on securities available for sale. Common stock of $1,437,824 at June 30, 1996 and June 30, 1995 represented 1,437,824 shares at $1.00 par value of the Company s common stock. The accumulated deficit decreased by $682,588 to $1,048,165 at June 30, 1996 from $1,730,753 at June 30, 1995. The accumulated deficit was comprised of pre-opening expenses, start-up expenses for the Bank, and prior net losses incurred, offset by the current fiscal year net income. The Company expected to experience start-up losses for the first several years of operation. In anticipation of continued asset growth, the Company has decided to conduct a preferred stock offering. The Company desires to raise at least $7.5 million. Liquidity For banks, liquidity represents the ability to meet both withdrawals from deposits and the funding of loans. The assets that provide for liquidity are cash, federal funds sold, and short term loans and securities. Liquidity needs are influenced by economic conditions, interest rates and competition. Securities that are available for sale in the Company s portfolio can be readily converted to cash if necessary. Management believes that current liquidity levels are sufficient to meet future demands. Net cash inflows from operating activities provided cash of $836,093 for the year ended June 30, 1996 and used cash of $185,902 for the year ended June 30, 1995. The improvement in cash flow during the year resulted primarily from improved earnings. Net cash outflows from investing activities totaled $28,261,786 for the year ended June 30, 1996, compared to cash outflows of $39,379,019 for the year ended June 30, 1995. The net outflows of cash were largely associated with the growth in the loan portfolio combined with the purchases of available for sale securities. Cash inflows from financing activities totaled $30,210,830 for the year ended June 30, 1996, compared to cash inflows of $41,281,203 for the year ended June 30, 1995. The components of the net cash inflows were the growth of deposit accounts, as well as the increase in other borrowings and FHLB advances. Impact of Inflation and Changing Prices Unlike most industries, essentially all of the assets and liabilities of a bank are monetary in nature. As such, the level of prices has less of an effect than do interest rates. Prices and interest rates do not always move in the same direction. The Company s financial statements and notes are generally prepared in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Impact of New Accounting Standards The Financial Accounting Standards Board has issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which becomes effective for years beginning after December 15, 1995. The Statement generally requires long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. Management believes that adoption of this Statement will not have a material effect on the Company s financial statements. The Financial Accounting Standards Board has issued Statement No. 123 "Accounting for Stock Based Compensation" which becomes effective for years beginning after December 15, 1995. This Statement establishes a fair value based method for stock-based compensation plans. Management believes that adoption of this Statement will not have a material effect on the Company s financial statements. The Financial Accounting Standards Board has issued Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which becomes effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Management believes that adoption of this Statement will not have a material effect on the Company s financial statements. Item 7. Financial statements QUAD CITY HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor's Report Consolidated Balance Sheets at June 30, 1996 and 1995 Consolidated Statements of Income for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Stockholders Equity for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements McGLADREY & PULLEN, LLP Certified Public Accountants and Consultants Independent Auditor s Report To the Board of Directors and Stockholders Quad City Holdings, Inc. Bettendorf, Iowa We have audited the accompanying consolidated balance sheets of Quad City Holdings, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders equity, and cash flows for the years ended June 30, 1996, 1995 and 1994. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quad City Holdings, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for the years ended June 30, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. /s/ McGLADREY & PULLEN, LLP Davenport, Iowa July 26, 1996 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1995 1996 1995 ------------- ------------- ASSETS Cash and due from banks .................................................................. $ 6,615,407 $ 3,830,270 Federal funds sold ....................................................................... 2,728,000 12,950,000 Certificates of deposit at financial institutions ........................................ 5,472,012 3,982,858 Securities held to maturity, at amortized cost (Note 2) .................................. 3,156,601 11,018,143 Securities available for sale, at fair value (Note 2) .................................... 31,032,652 15,032,895 ------------- ------------- Total securities .................................................................... 34,189,253 26,051,038 ------------- ------------- Loans receivable (Note 3) ................................................................ 56,809,720 31,507,577 Less: Allowance for estimated losses on loans (Note 3) ................................... (852,500) (472,475) ------------- ------------- Net loans receivable ................................................................ 55,957,220 31,035,102 ------------- ------------- Premises and equipment, net (Note 4) ..................................................... 4,531,038 1,801,839 Accrued interest receivable .............................................................. 1,121,268 685,880 Other assets ............................................................................. 860,779 463,095 ------------- ------------- Total assets ..................................................................... $ 111,474,977 $ 80,800,082 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing ................................................................... $ 15,730,265 $ 5,628,526 Interest-bearing ...................................................................... 77,187,853 55,469,160 ------------- ------------- Total deposits (Note 5) ............................................................. 92,918,118 61,097,686 ------------- ------------- Federal funds purchased .................................................................. 1,190,000 7,211,072 Federal Home Loan Bank advances (Note 6) ................................................. 3,411,470 0 Other borrowings (Note 7) ................................................................ 1,000,000 0 Other liabilities ........................................................................ 1,286,783 901,584 ------------- ------------- Total liabilities ................................................................ 99,806,371 69,210,342 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' EQUITY (Note 11) Preferred stock, $1 par value; shares authorized 250,000; shares issued none ............. 0 0 Common stock, $1 par value; shares authorized 2,500,000; shares issued and outstanding 1,437,824 .............................................................. 1,437,824 1,437,824 Additional paid-in capital ............................................................... 11,764,416 11,764,416 Retained earnings (deficit) .............................................................. (1,048,165) (1,730,753) ------------- ------------- 12,154,075 11,471,487 Unrealized gains (losses) on securities available for sale, net .......................... (485,469) 118,253 ------------- ------------- Total stockholders' equity ....................................................... 11,668,606 11,589,740 ------------- ------------- Total liabilities and stockholders' equity ....................................... $ 111,474,977 $ 80,800,082 ============= =============
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 1996, 1995 and 1994 1996 1995 1994 ----------- ----------- ----------- Interest income: Interest and fees on loans ............................................ $ 3,972,856 $ 1,974,150 $ 213,036 Interest and dividends on securities .................................. 1,868,976 1,052,557 408,255 Interest on federal funds sold ........................................ 382,226 423,292 90,987 Other interest ........................................................ 359,409 100,123 24,816 ----------- ----------- ----------- Total interest income ............................................ 6,583,467 3,550,122 737,094 ----------- ----------- ----------- Interest expense: Interest on deposits (Note 5) ........................................ 3,349,548 1,792,850 253,513 Interest on other borrowings ......................................... 136,832 102,725 0 ----------- ----------- ----------- Total interest expense ........................................... 3,486,380 1,895,575 253,513 ----------- ----------- ----------- Net interest income .............................................. 3,097,087 1,654,547 483,581 Provision for loan losses (Note 3) ........................................ 500,397 282,600 191,500 ----------- ----------- ----------- Net interest income after provision for loan losses .............. 2,596,690 1,371,947 292,081 ----------- ----------- ----------- Other income (loss): Merchant credit card, net of processing fees .......................... 1,007,830 306,051 0 Trust department ...................................................... 355,360 149,218 26,918 Deposit service fees .................................................. 147,678 73,016 8,784 Investment securities gains (losses), net ............................. 22,272 (16,656) (70,532) Other ................................................................. 129,147 36,068 33,723 ----------- ----------- ----------- Total other income (loss) ........................................ 1,662,287 547,697 (1,107) ----------- ----------- ----------- Other expenses: Salaries and benefits ................................................. 1,973,682 1,174,874 723,099 Professional and data processing fees ................................. 282,640 192,556 155,439 Advertising and marketing ............................................. 189,761 98,584 122,533 Occupancy and equipment expense ....................................... 289,230 209,468 100,500 Stationery and supplies ............................................... 100,672 58,585 75,854 Provision for merchant credit card losses ............................. 126,805 126,831 0 Insurance ............................................................. 86,291 136,015 57,279 Postage and telephone ................................................. 117,741 55,630 31,559 Unrealized loss on securities held for sale ........................... 0 0 150,693 Other ................................................................. 409,567 240,883 147,113 ----------- ----------- ----------- Total other expenses ............................................. 3,576,389 2,293,426 1,564,069 ----------- ----------- ----------- Income (loss) before cumulative effect of a change in accounting principle ................................................. 682,588 (373,782) (1,273,095) Cumulative effect of a change in accounting principle (Note 1) ............. 0 0 150,693 ----------- ----------- ----------- Net income (loss) ................................................ $ 682,588 $ (373,782) $(1,122,402) =========== =========== =========== Before cumulative effect of a change in accounting principle ................................................. 0.47 (0.26) (1.23) Cumulative effect of a change in accounting principle ...................... 0.00 0.00 0.15 ----------- ----------- ----------- Net income (loss) ................................................ $ 0.47 $ (0.26) $ (1.08) =========== =========== ===========
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 1996, 1995 and 1994 Securities Unrealized Gains (Losses) Additional Retained On Securities Common Paid-In Earnings Available For Stock Capital (Deficit) Sale, Net Total ----------- ----------- ----------- -------------- ------------ Balance, June 30, 1993 $ 75,000 $ 630,313 $ (234,569) $ 0 $ 470,744 Proceeds from sale of 1,200,000 shares of common stock, net of stock offering costs 1,200,000 9,803,851 0 0 0 Proceeds from sale of 162,824 shares of common stock, net of stock offering costs 162,824 1,330,252 0 0 1,493,076 Unrealized (losses) on securities available for sale, net 0 0 0 (150,693) (150,693) Net (loss) 0 0 (1,122,402) 0 (1,122,402) ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1994 $ 1,437,824 $11,764,416 $(1,356,971) $ (150,693) $11,694,576 Change in unrealized gains on securities available for sale, net 0 0 0 268,946 268,946 Net (loss) 0 0 (373,782) 0 (373,782) ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1995 $ 1,437,824 $11,764,416 $(1,730,753) $ 118,253 $11,589,740 Change in unrealized gains (losses) on securities available for sale, net 0 0 0 (603,722) (603,722) Net income 0 0 682,588 0 682,588 ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1996 $ 1,437,824 $11,764,416 $(1,048,165) $ (485,469) $11,668,606 =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 1996, 1995 and 1994 1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ........................................................ $ 682,588 $ (373,782) $ (1,122,402) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .......................................... 143,173 107,313 41,973 Provision for loan losses .............................................. 500,397 282,600 191,500 Provision for merchant credit card losses .............................. 126,805 126,831 0 Amortization of premiums (accretion of discounts) on securities, net ... (16,920) 8,108 42,351 Federal Home Loan Bank stock dividends ................................. (3,000) 0 0 Realized loss on securities held for sale .............................. 0 0 70,532 Realized (gains) losses on securities available for sale ............... (22,272) 16,656 0 (Increase) in accrued interest receivable .............................. (435,388) (450,468) (201,302) (Increase) in other assets ............................................. (397,684) (437,544) (14,377) Increase in other liabilities .......................................... 258,394 534,384 131,418 ------------ ------------ ------------ Net cash provided by (used in) operating activities ................. $ 836,093 $ (185,902) $ (860,307) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in federal funds sold ............................ 10,222,000 (8,250,000) (4,700,000) Net (increase) in certificates of deposits at financial institutions ..... (1,489,154) (2,128,005) (1,854,853) Net loans originated ..................................................... (25,422,515) (18,741,741) (12,767,461) Purchase of securities held to maturity .................................. (2,873,782) (500,000) (10,677,625) Purchase of securities available for sale ................................ (18,947,247) (10,297,885) 0 Purchase of securities held for sale ..................................... 0 0 (8,121,736) Proceeds from maturity of securities ..................................... 4,000,000 0 0 Proceeds from calls/paydowns on securities ............................... 4,483,584 387,271 538,630 Proceeds from sale of securities available for sale ...................... 4,637,700 338,600 0 Proceeds from sale of securities held for sale ........................... 0 0 2,262,313 Purchase of premises and equipment ....................................... (2,872,372) (187,259) (1,763,866) ------------ ------------ ------------ Net cash (used in) investing activities ............................. $(28,261,786) $(39,379,019) $(37,084,598) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ................................... 0 0 12,496,927 Decrease in deferred registration costs .................................. 0 0 45,600 Net increase (decrease) in federal funds purchased ....................... (6,021,072) 7,211,072 0 Net increase in time certificates of deposit accounts .................... 11,073,500 19,370,853 15,156,786 Net increase in non-time deposit accounts ................................ 20,746,932 14,699,278 11,870,769 Net increase in other borrowings ......................................... 1,000,000 0 0 Net increase in Federal Home Loan Bank advances .......................... 3,411,470 0 0 ------------ ------------ ------------ Net cash provided by financing activities ........................... $ 30,210,830 $ 41,281,203 $ 39,570,082 ------------ ------------ ------------ Net increase in cash and due from banks ............................. 2,785,137 1,716,282 1,625,177 Cash and due from banks, beginning .................................. 3,830,270 2,113,988 488,811 ------------ ------------ ------------ Cash and due from banks, ending ..................................... $ 6,615,407 $ 3,830,270 $ 2,113,988 ============ ============ ============ Supplemental disclosure of cash flow information, cash payments for: Interest ................................................................. $ 3,384,353 $ 1,513,310 $ 143,760 ============ ============ ============ Supplemental schedule of noncash investing and financing activities: Change in unrealized gains (losses) on securities available for sale, net $ (603,722) $ 268,946 $ (150,693) ============ ============ ============ Investment securities transferred from held to maturity portfolio to available for sale portfoilio, at fair value ......................... $ 8,004,543 $ 0 $ 0 ============ ============ ============1 See Notes to Consolidated Financial Statements
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies Nature of business: Quad City Holdings, Inc. (the "Company") is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (the "Bank") and Quad City Bancard, Inc. ("Bancard"). The Bank is a commercial bank that serves the Quad Cities area, is chartered and regulated by the state of Iowa, is insured and subject to regulation by the Federal Deposit Insurance Corporation and is a member of and regulated by the Federal Reserve System. Bancard is an entity formed in April, 1995 to conduct the Company s merchant credit card operation. This activity was previously conducted by the Bank. 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. Principals of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and Bancard. 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, amounts due from banks and interest-bearing balances with other banks. Cash flows from loans originated by the Bank, deposits, and federal funds purchased and sold are reported net. Investment securities: Effective June 30, 1994, the Company adopted FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115") and classified investments as held to maturity or available for sale. There were no investments held for trading purposes at June 30, 1996, 1995 or 1994. Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in stockholders equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Note 1. Continued The cumulative effect of implementing FAS 115 at June 30, 1994 , was to report investment securities previously reported as held for sale to available for sale, with unrealized losses of $150,693 at June 30, 1994 as a separate component of stockholders equity and as a cumulative effect on the statement of income. Pursuant to a FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", the Company transferred at fair value $8,004,543 of investment securities from held to maturity to available for sale in December 1995. Loans and allowance for loan losses: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. The allowance for loan losses is maintained at the level considered adequate by management of the Company and the Bank to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance, the Company and the Bank make continuous evaluations of the loan portfolio and related off-balance sheet commitments, and consider current economic conditions and other factors that may effect a borrower s ability to repay. In accordance with FASB Statement No. 114 "Accounting by Creditors for Impairment of a Loan," loans are considered impaired when, based on current information and events, it is probable the Company and the Bank will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to an impaired loan is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan s effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Company and the Bank recognize interest income on impaired loans on an accrual basis. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives. Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Note 1. Continued Trust assets: Trust assets held by the Bank in fiduciary, agency or custody capacities for its customers, other than cash on deposit at the Bank, are not included in the accompanying consolidated balance sheets since such items are not assets of the Bank. Per share data: Earnings per common share are determined by dividing net income by the weighted average number of common shares outstanding during the year. Note 2. Investment Securities The amortized cost and fair value of investment securities at June 30, 1996 and 1995 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ------------ ------------ June 30, 1996 Securities held to maturity: Mortgage-backed securities ................ $ 2,560,793 $ 2,513 $ (48,911) $ 2,514,395 Municipal securities ...................... 582,720 595,808 1,355 (14,443) ------------ ------------ ------------ ------------ Totals ............................... $ 3,156,601 $ 3,868 $ (63,354) $ 3,097,115 ============ ============ ============ ============ Securities available for sale: U.S. treasury securities .................. $ 14,504,449 $ 42,191 $ (156,912) $ 14,389,728 U.S. agency securities .................... 12,612,166 8,759 (355,026) 12,265,899 Mortgage-backed securities ................ 2,851,340 12,930 (20,365) 2,843,905 Other securities .......................... 1,550,166 9,079 (26,125) 1,533,120 ------------ ------------ ------------ ------------ Totals ............................... $ 31,518,121 $ 72,959 $ (558,428) $ 31,032,652 ============ ============ ============ ============ June 30, 1995 Securities held to maturity: U.S. treasury securities ..................... $ 8,000,218 $ 0 $ (78,031) $ 7,922,187 U.S. agency securities ....................... 500,000 0 0 500,000 Mortgage-backed securities ................... 2,318,460 0 (44,810) 2,273,650 Taxable municipal securities ................. 199,465 5,755 0 205,220 ----------- ------------- ------------- ------------ Totals .................................. $11,018,143 $ 5,755 $ (122,841) $ 10,901,057 =========== ============= ============= ============ Securities available for sale: U.S. treasury securities ..................... $ 6,016,543 $ 124,114 $ (24,875) $ 6,115,782 U.S. agency securities ....................... 5,477,243 53,225 0 5,530,468 Mortgage-backed securities ................... 3,092,266 10,889 (48,325) 3,054,830 Other securities.............................. 328,590 3,225 0 331,815 ----------- ------------- ------------- ------------ Totals .................................. $14,914,642 $ 191,453 $ (73,200) $ 15,032,895 =========== ============= ============= ============
Note 2. Continued All sales of securities during the years ended June 30, 1996, 1995 and 1994 were from securities identified as available for sale or held for sale. Information on proceeds received, as well as the gains and losses from the sales of those securities is as follows: 1996 1995 1994 ---------- ---------- ---------- Proceeds from sales of securities ....... $4,637,700 $ 338,600 $2,262,313 Gross losses from sales of securities ... 18,848 18,793 70,532 Gross gains from sales of securities .... 41,120 2,137 0 The amortized cost and fair value of securities at June 30, 1996 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay with or without call or prepayment penalties. Amortized Cost Fair Value ----------- ----------- Securities held to maturity Due in one year or less .................... $ 250,284 $ 246,953 Due after one year through five years ...... 2,660,112 2,616,007 Due after five years ....................... 246,205 234,155 ----------- ----------- Totals ................................ $ 3,156,601 $ 3,097,115 =========== =========== Securities available for sale Due in one year or less .................... $ 3,182,415 $ 3,157,782 Due after one year through five years ...... 24,536,423 24,210,421 Due after five years ....................... 2,249,117 2,131,329 Marketable equity securities ............... 1,550,166 1,533,120 ----------- ----------- Totals ................. $31,518,121 $31,032,652 =========== =========== At June 30, 1996 and 1995, investment securities with a carrying value and a fair value of $16,503,665 and $16,239,844, and $5,771,440 and $5,773,203, respectively, were pledged on public deposits and for other purposes as required or permitted by law. The Company transferred securities with an amortized cost of $7,992,513 and an unrealized gain of $12,030 from the held to maturity portfolio to the available for sale portfolio in December, 1995, 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 3. Loans Receivable The composition of the loan portfolio at June 30, 1996 and 1995 is presented as follows: 1996 1995 ------------ ------------ Commercial .................................. $ 40,338,645 $ 24,748,659 Real estate 9,011,608 2,879,530 Installment and other consumer 7,459,467 3,879,388 ------------ ------------ Total loans 56,809,720 31,507,577 Less allowance for estimated losses on loans (852,500) (472,475) ------------ ------------ Net loans ............................. $ 55,957,220 $ 31,035,102 ============ ============ There were no nonaccrual loans at June 30, 1996 or 1995. Note 3. Continued Changes in the allowance for estimated losses on loans for the years ended June 30, 1996, 1995 and 1994 are presented as follows: 1996 1995 1994 --------- --------- --------- Balance, beginning .......................... $ 472,475 $ 191,500 $ 0 Provisions charged to expense ............ 500,397 282,600 191,500 Loans charged off ........................ (120,372) (1,725) 0 Recoveries on loans previously charged off 0 100 0 --------- --------- --------- Balance, ending ............................. $ 852,500 $ 472,475 $ 191,500 ========= ========= ========= Impaired loans were not material at June 30, 1996. 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 ending June 30, 1996 and 1995 is as follows: 1996 1995 ----------- ----------- Balance, beginning ................... $ 859,020 $ 1,171,899 Advances .......................... 262,319 390,104 Repayments ........................ (575,198) (235,250) ----------- ----------- Balance, ending ..................... $ 1,013,874 $ 859,020 =========== =========== Note 4. Premises and Equipment The following summarizes the components of premises and equipment at June 30, 1996 and 1995: 1996 1995 ----------- ----------- Land ......................................... $ 200,000 $ 200,000 Building and construction in progress ........ 3,456,818 1,031,608 Furniture & equipment......................... 1,165,137 719,517 ----------- ----------- Total premises and equipment ............ 4,821,955 1,951,125 Less accumulated depreciation ................ (290,917) (149,286) ----------- ----------- Total premises and equipment, net ....... $ 4,531,038 $ 1,801,839 =========== =========== Note 5. Deposits The following summarizes the components of deposits at June 30, 1996 and 1995: 1996 1995 ----------- ----------- Demand accounts ........................ $15,730,265 $ 5,628,526 NOW accounts ........................... 9,724,779 6,668,486 Money market accounts .................. 19,882,850 13,113,801 Savings accounts ....................... 1,979,085 1,159,234 Time certificates ...................... 45,601,139 34,527,639 ----------- ----------- Total deposits ................... $92,918,118 $61,097,686 =========== =========== Note 5. Continued Included in interest bearing deposits at June 30, 1996 and 1995 were certificates of deposit totaling $13,720,210 and $9,824,217, respectively, that were $100,000 or greater. Maturities of these certificates were as follows: 1996 1995 ----------- ----------- One to three months ................................ $ 5,984,277 $ 1,914,336 Three to six months ................................ 1,931,085 1,797,359 Six to twelve months ............................... 3,494,877 3,511,243 Over twelve months ................................. 2,601,279 2,309,971 ----------- ----------- Total certificates of deposit greater than $100,000 $13,720,210 $ 9,824,217 =========== =========== Interest expense on deposits for the years ended June 30, 1996, 1995 and 1994 was as follows: 1996 1995 1994 ---------- ---------- ---------- Interest-bearing demand accounts .................... $ 188,315 $ 117,596 $ 19,087 Money market accounts ............................... 758,555 317,897 47,923 Savings accounts .................................... 39,365 24,037 3,165 Time certificates greater than or equal to 672,668 399,249 82,376 Time certificates less than $100,000 ................ 1,690,645 934,071 100,962 ---------- ---------- ---------- Total interest expense ......................... $3,349,548 $1,792,850 $ 253,513 ========== ========== ==========
Note 6. Federal Home Loan Bank Advances The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). As of June 30, 1996, the Bank held $1,249,700 of FHLB stock. Advances from the FHLB as of June 30, 1996 bear interest and are due as follows: Amount Due Interest Rate ---------- -------------- Due more than 5 years from June 30, 1996 .......... $3,411,470 5.95% to 7.08% Securities of approximately $4,973,226 as of June 30, 1996 were pledged as collateral on these advances. Note 7. Other Borrowings The Company has a revolving credit note for $1,500,000, which is secured by all the outstanding stock of the Bank. Interest is payable quarterly at the prime rate. Prime was 8.25% at June 30, 1996. At June 30, 1996, $1,000,000 was outstanding on this note. The revolving credit note expires July 1, 1998. The revolving credit note agreement contains certain covenants which place restrictions on additional debt and stipulate minimum capital and various operating ratios. The Company was in compliance with all of the covenants as of June 30, 1996. Note 8. Income Taxes The Company incurred no income tax expense or benefit for the years ended June 30, 1996, 1995 and 1994. At June 30, 1996, the Company had net operating loss carryforwards for income tax purposes of approximately $900,000, of which, if not utilized to reduce taxable income in future periods will expire in varying amounts in 2009 and 2010. Deferred tax assets arose primarily due to the net operating loss carryforwards, and have been reduced to zero through a valuation allowance, as realization of the asset is uncertain. Note 9. Employee Benefit Plan On February 1, 1994, the Company implemented a profit sharing plan, which includes a provision designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions. All employees are eligible to participate in the plan. The Company matches 100% of the first 2% of employee contributions, 50% of the next 2% of employee contributions, and 25% of the next 2% of employee contributions, up to a maximum amount of 3.5%. Additionally, the Company may, at its discretion, make additional contributions to the plan which are allocated to the accounts of participants in the plan on the basis of relative compensation. Company contributions for the years ended June 30, 1996, 1995 and 1994 were as follows: 1996 1995 1994 ------- ------- ------- Matching contribution ................ $47,233 $18,954 $ 6,080 Discretionary contribution ........... 20,000 10,000 6,000 ------- ------- ------- Total contributions ............. $67,233 $28,954 $12,080 ======= ======= ======= Note 10. Warrants and Options Warrants As part of the underwriting agreement for its initial public offering, the Company issued warrants to the underwriters for the purchase of 25,000 shares of common stock at $12.00 per share. The warrants became exercisable on October 13, 1994 (the date commencing one year from the date of the public offering) and remain exercisable for a period of four years after such date. Private placement stockholders were issued warrants as described below. Common stock of $75,000 at June 30, 1993 represented 75,000 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 $10.00 per unit) which consisted of one share of the Company s common stock and one warrant to purchase an additional share of Company common stock for $11.00, exercisable during a five year period commencing October 13, 1994 (one year after completion of the public offering). As of June 30, 1996, none of the warrants had been exercised. Stock Option Plan The Company s Board of Directors and its stockholders adopted in June, 1993 the Quad City Holdings, Inc. Stock Option Plan (the "Stock Option Plan"). Up to 100,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive stock options or non-qualified stock options granted under the Stock Option Plan. The Stock Option Plan is administered by a committee appointed by the Board of Directors (the "Committee"). The number and exercise price of options granted under the Stock Option Plan is determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for incentive stock options, or 85% of such fair market value for non-qualified stock options. The stock options vest 20% per year. The term of the options may not exceed 10 years from the date of the grant. In the case of non-qualified stock options, the Stock Option Plan provides for the granting of "Tax Benefit Rights" to certain participants at the same time as these participants are awarded non-qualified options. Each Tax Benefit Right entitles a participant to a cash payment equaling the excess of the fair market value of a share of common stock on the exercise date over the exercise price of the related option multiplied by the difference between the rate of tax on ordinary income over the rate of tax on capital gains (federal and state). Note 10. Continued Company grants for the years ended June 30, 1996, 1995, 1994 and 1993 were as follows: Number of Number of Number of Number of Shares Shares Shares Shares Date of Grant Granted Canceled Vested Unvested Option Price - --------------------------------------- ---------- ---------- ---------- --------- ------------- June 30, 1993 ......................... 50,000 0 30,000 20,000 $10.00 March 31, 1994 ........................ 25,000 0 10,000 15,000 10.25 June 30, 1994 ......................... 8,000 1,600 2,800 3,600 9.00 October 19, 1994 ...................... 4,300 180 840 3,280 9.25 January 21, 1995 ...................... 500 0 100 400 9.25 June 30, 1995 ......................... 5,500 300 1,040 4,160 10.25 September 30, 1995 .................... 600 100 0 500 11.75 June 28, 1996 ......................... 6,300 0 0 6,300 13.25 ------- ------- ------- ------- Totals ............................. 100,200 2,180 44,780 53,240 ======= ======= ======= =======
None of the options had been exercised. The Financial Accounting Standards Board has issued Statement No. 123 "Accounting for Stock Based Compensation" which becomes effective for years beginning after December 15, 1995. The Company anticipates that it will elect to continue to measure compensation cost using Opinion 25 and present the proforma disclosures required by Statement No. 123. Accordingly, adoption of this standard should have no effect on the Company s financial statements. Note 11. 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 at June 30, 1996 and 1995 with the minimum requirements for the Bank are presented below: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: -------------------- ---------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ----------- -------- ------------ --------- ------------ ---------- As of June 30, 1996: Total Capital (to Risk Weighted Assets) ....................... $11,455,003 16.9% $ 5,419,280 8.0% $ 6,774,100 10.0% Tier 1 Capital (to Risk Weighted Assets) ........................ 10,666,032 18.2% 2,349,346 4.0% 3,524,019 6.0% Tier 1 Capital (to Average Assets) ........................ 10,666,032 9.8% 4,357,929 4.0% 5,447,412 5.0% As of June 30, 1995: Total Capital (to Risk Weighted Assets ......................... 7,559,527 19.5% 3,096,580 8.0% 3,870,726 10.0% Tier 1 Capital (to Risk Weighted Assets) ........................ 7,112,852 20.8% 1,370,492 4.0% 2,055,738 6.0% Tier 1 Capital(to Average Assets). 7,112,852 9.2% 3,085,836 4.0% 3,857,295 5.0%
Note 11. Continued Federal Reserve Board policy provides that a bank holding company should not pay dividends unless (i) the dividends can be fully funded out of net income from the company s net earnings over the prior year and (ii) the prospective rate of earnings retention appears consistent with the company s (and its subsidiaries ) capital needs, asset quality and overall financial condition. In addition, the Delaware General Corporation Law restricts the Company from paying dividends except out of its surplus, or in the case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. In addition, the Bank, as a member of the Federal Reserve System, will be prohibited from paying dividends to the extent such dividends declared in any calendar year exceed the total of its net profits of that year combined with its retained net profits of the preceding two years, or are otherwise determined to be an "unsafe and unsound practice" by the Federal Reserve Board. Note 12. Commitments and Contingencies In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based upon management s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At June 30, 1996, commitments to extend credit aggregated $16,860,159 and standby letters of credit aggregated $1,428,301. At June 30, 1995, commitments to extend credit aggregated $8,321,032 and standby letters of credit aggregated $10,000. 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 guaranty to MasterCard International Incorporated, which is backed up by a performance bond in the amount of $1,000,000. At June 30, 1996, there were no pending liabilities. Note 13. Quarterly Results of Operations (Unaudited) Fiscal year ended June 30, 1996 -------------------------------------------------------- Sept. 1995 Dec. 1995 Mar. 1996 June 1996 ----------- ----------- ----------- ----------- Total interest income ......... $ 1,442,418 $ 1,534,274 $ 1,690,993 $ 1,915,782 Total interest expense 809,854 800,009 897,467 979,050 ----------- ----------- ----------- ----------- Net interest income 632,564 734,265 793,526 936,732 Provision for loan losses ..... (100,800) (153,300) (113,835) (132,462) Other income .................. 369,435 373,641 403,425 515,786 Other expense ................. (807,357) (789,828) (887,637) (1,091,567) ----------- ----------- ----------- ----------- Net income .................... $ 93,842 $ 164,778 $ 195,479 $ 228,489 =========== =========== =========== =========== Net income per share .......... $ 0.06 $ 0.11 $ 0.14 $ 0.16 =========== =========== =========== =========== Note 13. Continued Fiscal year ended June 30, 1995 -------------------------------------------------------- Sept. 1994 Dec. 1994 Mar. 1994 June 1994 ----------- ----------- ----------- ----------- Total interest income ......... $ 546,867 $ 745,118 $ 977,256 $ 1,280,881 Total interest expense ........ 259,397 376,530 515,171 744,477 ----------- ----------- ------------ ----------- Net interest income ........... 287,470 368,588 462,085 536,404 Provision for loan losses ..... (78,000) (79,400) (79,200) (46,000) Other income .................. 35,135 65,291 172,100 275,171 Other expense ................. (486,530) (459,287) (604,202) (743,407) ----------- ----------- ----------- ----------- Net income (loss) ............. $ (241,925) $ (104,808) $ (49,217) $ 22,168 =========== =========== =========== =========== Net income (loss) per share ... $ (0.17) $ (0.07) $ (0.03) $ 0.01 =========== ============ =========== ===========
Note 14. Parent Company Only Financial Statements The following is condensed financial information of Quad City Holdings, Inc. (parent company only): Condensed Balance Sheets June 30, ---------------------------- 1996 1995 ------------ ------------ Assets Cash and due from banks .......................................... $ 343,188 $ 482,549 Certificates of deposits with financial institutions ............. 0 420,035 Securities available for sale .................................... 174,671 1,283,644 Investment in Quad City Bank and Trust Company ................... 10,197,609 7,326,184 Investment in Quad City Bancard, Inc. ............................ 785,605 389,511 Loans receivable, net ............................................ 1,132,696 1,697,233 Other assets ..................................................... 135,477 58,795 ------------ ------------ Total assets ............................................. $ 12,769,246 $ 11,657,951 ============ ============ Liabilities and Stockholders' Equity Other liabilities ................................................ $ 100,640 $ 68,211 Other borrowings ................................................. 1,000,000 0 Stockholders' equity Common stock .................................................. 1,437,824 1,437,824 Additional paid-in capital .................................... 11,764,416 11,764,416 Retained earnings(deficit) .................................... (1,048,165) (1,730,753) Unrealized gains (losses) on securities available for sale, net (485,469) 118,253 ------------ ------------ Total stockholders' equity ............................... $ 11,668,606 $ 11,589,740 ------------ ------------ Total liabilities and stockholders' equity ................ $ 12,769,246 $ 11,657,951 ============ ============
Condensed Statements of Income Year Ended June 30, -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net interest income .............................................. $ 178,783 $ 339,260 $ 229,168 Provision for loan losses ........................................ 8,300 (4,900) (20,900) Investment securities gains (losses), net ........................ 26,345 2,137 (70,532) Other ............................................................ 24,000 24,002 12,307 ------------ ------------ ------------ Total income ............................................. 237,428 360,499 150,043 Expenses ......................................................... 251,606 280,824 714,323 ------------ ------------ ------------ Income (loss) before equity in undistributed loss of subsidiaries ............................................ (14,178) 79,675 (564,280) Equity in undistributed income (loss) of Quad City Bank and Trust Company ................................ 300,672 (392,968) (707,372) Equity in undistributed income (loss) of Quad City Bancard, Inc. ......................................... 396,094 (60,489) 0 ------------ ------------ ------------ Income before cumulative effect of a change in accounting principle ............................................ 682,588 (373,782) (1,271,652) Cumulative effect of a change in accounting principle ............ 0 0 149,250 ------------ ------------ ------------ Net income (loss) ........................................ $ 682,588 $ (373,782) $ (1,122,402) ============ ============ ============
Condensed Statements of Cash Flows Year Ended June 30, ----------------------------------------- 1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................................ $ 682,588 $ (373,782) $ (1,122,402) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed (income) loss of: Quad City Bank and Trust Company .......................................... (300,672) 392,968 707,372 Quad City Bancard, Inc. ................................................... (396,094) 60,489 0 Depreciation and amortization .............................................. 2,524 758 1,567 Provision for loan losses .................................................. (8,300) 4,900 20,900 Amortization of premiums and accretion of discounts on securities, net ..... 3,079 33,853 34,958 Realized (gains) losses on securities available for sale ................... (26,345) (2,137) 70,532 (Increase) decrease in accrued interest receivable ......................... 20,746 6,763 (35,814) (Increase) decrease in other assets ........................................ (30,731) (1,077) 36,996 Increase (decrease) in other liabilities ................................... 32,429 59,325 (100,065) ------------ ------------ ------------ Net cash provided by (used in) operating activities ..................... $ (20,776) $ 182,060 $ (385,956) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net loans (originated) or repaid ............................................. 572,837 (330,527) (1,392,506) Purchase of securities held for sale ......................................... 0 0 (7,771,585) Purchase of securities available for sale .................................... (117,167) (25,209) 0 Purchase of stock in Quad City Bank and Trust Company ........................ 0 0 (4,500,000) Capital infusion, Quad City Bank and Trust Company ........................... (2,099,000) (800,000) 0 Purchase of stock in Quad City Bancard, Inc. ................................. 0 (450,000) 0 Net (increase) decrease in certificate of deposits with financial institutions 420,035 486,818 (906,853) Proceeds from sales of securities held for sale .............................. 0 0 2,262,313 Proceeds from sales of securities available for sale ......................... 145,512 489,789 0 Proceeds from calls on securities ............................................ 28,419 207,225 408,346 Purchase of premises and equipment ........................................... (69,221) (21,853) (851) ------------ ------------ ------------ Net cash (used in) investing activities ................................. $ (1,118,585) $ (443,757) $(11,901,136) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in other borrowings ............................................. 1,000,000 0 0 Issuance of common stock ..................................................... 0 0 12,496,927 Decrease in deferred registration costs ...................................... 0 0 45,600 ------------ ------------ ------------ Net cash provided by financing activities ............................... $ 1,000,000 $ 0 $ 12,542,527 ------------ ------------ ------------ Net increase (decrease) in cash and due from banks ...................... (139,361) (261,697) 255,435 Cash and due from banks, beginning ...................................... 482,549 744,246 488,811 ------------ ------------ ------------ Cash and due from banks, ending ......................................... $ 343,188 $ 482,549 $ 744,246 ============ ============ ============
Note 15. Fair Value of Financial Instruments FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure 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: The carrying amounts reported in the balance sheets for cash and due from banks, federal funds sold, and certificates of deposit approximate 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 all 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: The fair value of accrued interest receivable is considered to approximate its carrying value. Deposits: The fair values disclosed for demand deposits equal their carrying amounts which represents the amount payable on demand. Fair values for time deposits are estimated using a discount cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits. Federal funds purchased: The carrying amount reported in the balance sheets for federal funds purchased approximates its fair value. Federal Home Loan Bank advances: The fair value of the Company s Federal Home Loan Bank advances is estimated using discounted cash flow analysis, based on the Company s current incremental borrowing rates for similar types of borrowing arrangements. Other borrowings: For variable rate debt, the carrying amount is a reasonable estimate of fair value. Accrued interest payable: The fair value of accrued interest payable is considered to approximate its carrying value. Commitments to extend credit: The 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, 1996 are as follows Estimated Carrying Value Fair Value -------------- ----------- Cash and due from banks ............................ $6,615,407 $ 6,615,407 Federal funds sold ................................. 2,728,000 2,728,000 Certificates of deposit at financial institutions .. 5,472,012 5,472,012 Investment securities: Held to maturity .............................. 3,156,601 3,097,115 Available for sale ............................ 31,032,652 31,032,652 Loans receivable, net .............................. 55,957,220 56,155,633 Accrued interest receivable ........................ 1,121,268 1,121,268 Deposits ........................................... 92,918,118 93,403,739 Federal funds purchased ............................ 1,190,000 1,190,000 Federal Home Loan Bank advances .................... 3,411,470 3,254,299 Other borrowings ................................... 1,000,000 1,000,000 Accrued interest payable ........................... 594,045 594,045 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The Company will file with the securities and exchange commission a definitive proxy statement no later than 120 days after the close of its fiscal year ended June 30, 1996 (the "Proxy Statement"). The information required by this item is incorporated by reference from the Proxy Statement. Item 10. Executive Compensation The information required by this item is incorporated by reference from the Proxy Statement. Item 11. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference from the Proxy Statement. Item 12. Certain Relationships and Related Transactions The information required by this item is incorporated by reference from the Proxy Statement. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits The Index to Exhibits appears at page 37 of this Report. (b) Reports on Form 8-K None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, as amended, the Issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QUAD CITY HOLDINGS, INC. Date: September 18, 1996 By: /s/ Douglas M. Hultquist ------------------------------------- Douglas M. Hultquist President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Issuer and in the capacities and on the dates indicated. Signature Title Date /s/ Michael A. Bauer Chairman of the Board September 18, 1996 - ------------------------- of Directors Michael A. Bauer /s/ Douglas M. Hultquist President, Chief Executive September 18, 1996 - ------------------------- and Financial Officer and Director Douglas M. Hultquist /s/ Richard R. Horst Director and Secretary September 18, 1996 - ------------------------- Richard R. Horst /s/ Ronald G. Peterson Director September 18, 1996 - ------------------------- Ronald G. Peterson /s/ John W. Schricker Director September 18, 1996 - ------------------------- John W. Schricker INDEX TO EXHIBITS Incorporated Herein by in Filed Sequential Exhibit No. Description Reference To Herewith Page No. - ----------- ------------------------ ------------------ -------- ---------- 3.1 Certificate of Exhibit 3.1 to the Incorporation of Quad Registration City Holdings, Inc., as Statement of Quad amended City Holdings, Inc. on Form SB-2, File No. 33-67028 3.2 Bylaws of Quad City Exhibit 3.2 to the Holdings, Inc. Registration Statement of Quad City Holdings, Inc. on Form SB-2, File No. 33-67028 4.1 Specimen Stock Exhibit 4.1 to the Certificate of Quad Registration City Holdings, Inc.(See Statement of Quad also Articles VIII, XII City Holdings, Inc. and XIII of Exhibit 3.1 on Form SB-2, File and Articles II, VI, IX No. 33-67028 and XII of Exhibit 3.2) 10.1 Quad City Holdings, Exhibit 10.1 to the Inc. Stock Option Plan Registration Statement of Quad City Holdings, Inc. on Form SB-2, File No. 33-67028 10.2 Form of Stock Option Exhibit 10.2 to the Agreement between Registration Quad City Holdings, Inc. Statement of Quad and each of Michael A. City Holdings, Inc. Bauer, Douglas M. on Form SB-2, File Hultquist and Victor J. No. 33-67028 Quinn 10.3 Employment Agreement Exhibit 10.3 to the between Quad City Registration Holdings, Inc. and Statement of Quad Michael A. Bauer dated City Holdings, Inc. May 4, 1993 on Form SB-2, File No. 33-67028 10.4 Employment Agreement Exhibit 10.4 to the between Quad City Registration Holdings, Inc. and Statement of Quad Michael A. Bauer dated City Holdings, Inc. July 1, 1993 on Form SB-2, File No. 33-67028 10.5 Employment Agreement Exhibit 10.5 to the between Quad City Registration Holdings, Inc. and Statement of Quad Douglas M. Hultquist City Holdings, Inc. dated April 30, 1993 on Form SB-2, File No. 33-67028 Incorporated Herein by in Filed Sequential Exhibit No. Description Reference To Herewith Page No. - ----------- ------------------------ ------------------ -------- ---------- 10.6 Employment Agreement Exhibit 10.6 to the between Quad City Registration Holdings, Inc. and Statement of Quad Douglas M. Hultquist City Holdings, Inc. dated July 1, 1993 on Form SB-2, File No. 33-67028 13.1 Quad City Holdings, Inc. 1996 Annual Report to Stockholders is furnished for the information of the Commission and is not deemed to be "filed" as a part of this Form 10-KSB, except for portions incorporated by reference herein. 22.1 Subsidiaries of Quad Exhibit 22.1 to the City Holdings, Inc. Registration Statement of Quad City Holdings, Inc. on Form SB-2, File No. 33-67028 23.1 Consent of McGladrey and Pullen X 27.1 Financial Data Schedule X 99.1 Quad City Holdings, Inc. Proxy Statement for the 1996 Annual Meeting to be held October 23, 1996 X APPENDIX A SUPERVISION AND REGULATION Bank Holding Company Regulation Banking is a highly regulated industry. The following references to applicable federal and state statutes and regulations are brief summaries thereof which do not purport to be complete and are qualified in their entirety by reference to such statutes and regulations. 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. As the sole shareholder of the Bank, the Company is a bank holding company subject to the federal Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and as such is subject to supervision and regulation by the Federal Reserve Board. The Company is required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may examine a bank holding company and any of its subsidiaries and charge the company for the cost of such examination. Scope of Permissible Activities . The Bank Holding Company Act prohibits bank holding companies, with certain limited exceptions, from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or a bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to subsidiaries. Capital Requirements . The Federal Reserve Board monitors the capital adequacy of both banks and bank holding companies, using a combination of risk-based and leverage capital ratios. These ratios are substantially the same as the ratios which apply to banks. See "Supervision and Regulation -- Bank Regulation -- Capital Requirements." However, because they apply on a "bank only" (rather than a consolidated) basis to any bank holding company having total assets of less than $150 million, these standards do not presently apply to the Company on a consolidated basis. Acquisitions . The Bank Holding Company Act prohibits a bank holding company from acquiring, in one or more transactions, direct or indirect ownership or control of more than 5% of the voting shares of any bank or bank holding company, without prior approval of the Federal Reserve Board. The Attorney General of the United States may, within 30 days after approval of an acquisition by the Federal Reserve Board, bring an action challenging such acquisition under the federal anti-trust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Prior to September 29, 1995, the Bank Holding Company Act prohibited the Federal Reserve Board from approving any direct or indirect acquisition by a bank holding company of more than 5% of the voting shares, or of all or substantially all of the assets, of a bank located outside of the state in which the operations of the bank holding company's banking subsidiaries are principally located unless the laws of the state in which the bank to be acquired is located specifically authorized such an acquisition. Pursuant to amendments to the Bank Holding Company Act which took effect September 29, 1995, the Federal Reserve Board may now allow a bank holding company to acquire banks located in any state of the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring holding company and all of its insured depository institution affiliates. Dividends . 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. Further, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the company's bank subsidiary is classified as "undercapitalized" under the Federal Reserve Board's prompt corrective action system. See "Supervision and Regulation -- Bank Regulation -- Prompt Corrective Action." In addition, the Delaware General Corporation Law restricts the Company from paying dividends except out of its surplus, or in the case the Company has no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Finally, the Company's ability to pay dividends is dependent on the amount of dividends paid by the Bank. See "Supervision and Regulation -- Bank Regulation -- Dividends" for a discussion of dividend payments by the Bank. Imposition of Liability for Undercapitalized Subsidiaries. Federal law requires bank regulators to take "prompt corrective action" to resolve problems associated with undercapitalized insured depository institutions. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company "having control of" the undercapitalized institution "guarantees" the subsidiary's compliance with the capital restoration plan until it becomes "adequately capitalized." For purposes of this statute, the Company has control of the Bank. The aggregate liability of all companies controlling a particular institution is limited to the lesser of 5% of the institution's assets at the time it became "undercapitalized" or the amount necessary to bring the institution into compliance with applicable capital standards as of the time the bank initially fails to comply with its capital restoration plan. See "Supervision and Regulation -- Bank Regulation -- Prompt Corrective Action." Federal law grants greater powers to the bank regulators in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a capital restoration plan. Bank holding companies are also subject to the "source of strength doctrine" adopted by the Federal Reserve Board. The source of strength doctrine directs bank holding companies to "serve as a source of financial and managerial strength" to their subsidiary banks. Bank Regulation General . As an Iowa-chartered bank, the Bank is subject to supervision and examination by the Iowa Superintendent of Banking (the "Iowa Superintendent"). As a member of the Federal Reserve System, the Bank is also subject to supervision and examination by the Federal Reserve Board. The deposits of the Bank are insured by the FDIC up to the maximum amount permitted by law, thereby rendering the Bank subject to supervision and potential examination by the FDIC. Pursuant to regulations adopted by the Iowa Superintendent, the Federal Reserve Board and the FDIC, the Bank is subject to extensive activity restrictions and supervisory requirements and may be subject to enforcement action by the Iowa Superintendent, the Federal Reserve Board or the FDIC for violating applicable restrictions or supervisory requirements. Federal and state law and regulations and the supervising policies of the bank regulatory agencies regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching rights and restrictions and the safety and soundness of banking practices. Lending Limit . Under Iowa law, a state bank's lending limit is equal generally to 15% of the bank's capital, surplus, undivided profits and reserves. As of June 30, 1996, the Bank's capital surplus, undivided profits and reserves totalled $11,500,000, resulting in a general lending limit of $1,725,000. FDIC Insurance Premiums . As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The amount each institution pays for FDIC deposit insurance coverage is determined in accordance with 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 level of capital and supervisory evaluation. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Presently, BIF assessments ranged from 0% of deposits to 0.27% of deposits. BIF-member institutions which qualify for the 0% assessment category, however, still have to pay the $1000 minimum semi-annual assessment required by federal statute. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or 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. Capital Requirements . The Federal Reserve Board has adopted a system using risk-based capital adequacy guidelines to evaluate the capital adequacy of banks and bank holding companies on a consolidated basis or, in the event total consolidated bank holding company assets are less than $150 million, on a "bank only" basis. Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. In addition, the guidelines define the capital components. Total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited to 100% of "Tier 1." For bank holding companies and banks, "Tier 1" capital includes common stockholders' equity, perpetual preferred stock (subject to certain conditions) and minority interests in consolidated subsidiaries. "Tier 2" capital includes, with certain limitations, certain forms of perpetual preferred stock that do not qualify as Tier 1 Capital, as well as certain forms of maturing capital instruments and the reserve for possible loan losses. The guidelines require a minimum ratio of total capital to risk-weighted assets of 8.0% (of which at least half must be in the form of "Tier 1" capital elements). In addition to the risk-based capital requirements, the Federal Reserve Board has adopted the use of a leverage ratio as an additional tool to evaluate the capital adequacy of banks and bank holding companies. The leverage ratio is defined to be a company's "Tier 1" capital divided by its adjusted total assets. The Bank will be subject to a 9.0% leverage ratio during its first three years of operations as a condition of approval of its application for membership in the Federal Reserve System. Failure to meet applicable capital guidelines may result in institution by the Federal Reserve Board of appropriate supervisory or enforcement actions, including the issuance of a cease and desist order and/or the assessment of civil monetary penalties. During the fiscal year ended June 30, 1996, the Bank was in compliance with all applicable capital requirements. On August 2, 1995, the Federal Reserve Board published amendments to its risk-based capital standards, which are designed to take into account interest rate risk exposure. The amendments provide that a bank's exposure to declines in the economic value of its capital due to changes in interest rates will be among the factors considered by the Federal Reserve Board in evaluating a bank's capital adequacy. Management does not anticipate that this amendment will adversely affect the Bank's ability to maintain compliance with applicable capital requirements. Prompt Corrective Action . Federal law requires the Federal Reserve Board to implement a system of prompt corrective action for depository institutions which it regulates. Under the regulations adopted by the Federal Reserve Board, an institution is deemed to be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any Federal Reserve Board agreement, order or directive to meet and maintain a specific capital level or capital measure; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. In addition, federal law empowers the Federal Reserve Board to reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. The prompt corrective action regulations require a bank to file a written capital restoration plan which meets specified requirements with the Federal Reserve Board within 45 days of the date that the bank receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. The Federal Reserve Board generally must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan. Immediately upon becoming undercapitalized, in addition to filing a capital restoration plan, a bank will be (i) restricted in its ability to pay capital distributions and management fees; (ii) subject to intensive supervision by the Federal Reserve Board; (iii) subject to asset growth restrictions; and (iv) required to obtain prior approval of certain expansion proposals. The Federal Reserve Board may take a number of additional discretionary supervisory actions if it determines that any of these actions is necessary to resolve the problems of a significantly undercapitalized or critically undercapitalized bank at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. During the fiscal year ended June 30, 1996, the Bank qualified as a "well-capitalized" institution under the Federal Reserve Board's prompt corrective action regulation. Dividends. As a condition of the approval of its application to join the Federal Reserve System, the Bank has agreed that it will not declare or pay any cash dividends without prior Federal Reserve Board approval until the earlier of the completion of three years of operations, or until the Bank has achieved two consecutive "satisfactory" or better ratings after regulatory examinations. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. In addition, the 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. See also "Supervision and Regulation -- Bank Regulation - -- Prompt Corrective Action" which discusses the Federal Reserve Board's authority to restrict the ability of the Bank to pay dividends if the Bank is undercapitalized. Branching Authority . Iowa law strictly regulates the establishment of bank offices and thus may affect the Company's future plans to establish additional offices of the Bank. Under Iowa law, a state bank may not establish a bank office outside the boundaries of the counties contiguous to or cornering upon the county in which the principal place of business of the state bank is located. The number of offices a state bank may establish in a particular municipality is also limited depending upon the municipality's population. Effective June 1, 1997 (or earlier if expressly authorized by applicable state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo 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 allows individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Iowa has enacted legislation permitting interstate bank mergers beginning on June 1, 1997, subject to the condition that any Iowa bank to be acquired by an out-of-state institution have been in existence for at least five years prior to the merger. Restrictions on Transactions With Affiliates . The Company is a legal entity separate and distinct from the Bank and any other subsidiaries. Federal law restricts the ability of the Bank to lend or otherwise supply funds to the Company or any other subsidiary of the Company, by, among other things, generally limiting such transactions with any one affiliate to 10% of the Bank's capital and surplus and limiting all such transactions with all affiliates to 20% of the Bank's capital and surplus and requiring certain levels of collateral for loans to affiliates. Such affiliate transactions also must be on terms and conditions, including credit standards, that are consistent with safe and sound banking practices and that are substantially the same or at least as favorable to the Bank as those prevailing at the time for comparable transactions with unaffiliated companies. Additionally, the Bank is restricted in its ability to make loans to its (and the Company's) officers, directors and principal stockholders. Among other restrictions, the aggregate amount of the Bank's loans to such insiders is limited to the amount of its unimpaired capital and surplus. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Safety and Soundness Standards. The Federal Reserve Board has adopted guidelines establishing operational and managerial standards to promote the safety and soundness of the banks it regulates. The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution will be responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the Federal Reserve Board may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the Federal Reserve Board expect to require a compliance plan from an institution whose failure to meet one or more of the standards is of such severity that it could threaten the safe and sound operation of the institution. Failure to submit an acceptable compliance plan, or failure to adhere to a compliance plan that has been accepted by the Federal Reserve Board, would constitute grounds for further enforcement action. Monetary Policy and Economic Conditions The earnings of bank holding companies and their subsidiary banks are affected by general economic conditions and also by the fiscal and monetary policies of federal regulatory agencies, including the Federal Reserve Board. Through open market transactions, variations in the discount rate and the establishment of reserve requirements, the Federal Reserve Board exerts considerable influence over short and long term interest rates and thus the cost and availability of funds obtainable for lending or investing. While the Bank could be severely impacted by a significant increase in interest rates over a relatively short period of time, the Bank intends to manage carefully its interest rate risk. The above monetary and fiscal policies have affected the operating results of all commercial banks in the past and are expected to do so in the future. The Company cannot fully predict the nature or the extent of any effects which fiscal or monetary policies may have on its or the Bank's business and earnings. 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 Company for the periods shown. All average amounts in these tables and schedules were determined by using monthly data, which management believes provides a fair representation of the daily operations of the Company. I. Distribution of Assets, Liabilities and Stockholders' Equity A. Consolidated Average Balance Sheets June 30, 1996 and 1995 1996 1995 ------------ ------------ ASSETS Cash and due from banks ....................................... $ 4,910,046 $ 2,824,241 Federal funds sold ............................................ 6,867,750 7,794,250 Certificates of deposit at financial institutions ............. 5,453,878 1,992,132 Total securities .............................................. 31,201,706 19,565,815 Loans receivable .............................................. 44,749,454 23,451,527 Less: Allowance for estimated losses on loans ................. (685,151) (354,808) ------------ ------------ Net loans receivable ..................................... 44,064,303 23,096,719 ------------ ------------ Premises and equipment, net ................................... 2,634,978 1,743,021 Other assets .................................................. 1,839,122 705,858 ------------ ------------ Total assets .......................................... $ 96,971,783 $ 57,722,036 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest bearing demand ................................. $ 12,338,863 $ 5,262,609 Interest bearing demand .................................... 27,172,011 12,892,724 Savings .................................................... 1,515,687 797,101 Time ....................................................... 40,511,816 24,385,175 ------------ ------------ Total deposits ........................................... 81,538,377 43,337,609 ------------ ------------ Federal funds purchased ....................................... 1,236,896 2,148,839 Federal Home Loan Bank advances ............................... 1,248,101 0 Other borrowings .............................................. 83,333 0 Other liabilities ............................................. 1,134,660 755,774 ------------ ------------ Total liabilities ..................................... 85,241,367 46,242,222 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock ............................................... -- -- Common stock .................................................. 1,437,824 1,437,824 Additional paid-in capital .................................... 11,764,416 11,764,416 Retained earnings (deficit) ................................... (1,534,097) (1,620,503) ------------ ------------ 11,668,143 11,581,737 Unrealized gains (losses) on securities available for sale, net 62,273 (101,923) ------------ ------------ Total stockholders' equity ............................ 11,730,416 11,479,814 ------------ ------------ Total liabilities and stockholders' equity ............ $ 96,971,783 $ 57,722,036 ============ ============
I. Interest Rates and Interest Differential B. Analysis of Net Interest Earnings June 30, 1996 and 1995 Average Interest Amount Income/ Average Yield/ Outstanding Expense Cost of Funds ------------------------------------------- 1996 ------------------------------------------- INTEREST EARNING ASSETS Federal funds sold .............................. $ 6,867,750 $ 382,226 5.57% Certificates of deposit at financial institutions 5,453,878 359,409 6.59% Total securities (1) ............................ 31,201,706 1,868,976 5.99% Net loans receivable (3) ........................ 44,064,303 3,972,856 9.02% ----------- ----------- ------ Total interest earning assets ........... $87,587,637 $ 6,583,467 7.52% =========== =========== ====== INTEREST BEARING LIABILITIES Interest-bearing demand deposits ................ $27,172,011 $ 946,870 3.48% Savings deposits ................................ 1,515,687 39,365 2.60% Time deposits ................................... 40,511,816 2,363,313 5.83% Federal funds purchased ......................... 1,236,896 64,909 5.25% Federal Home Loan Bank advances ................. 1,248,101 70,319 5.63% Other borrowings ................................ 83,333 1,604 1.92% ----------- ----------- ------ Total interest bearing liabilities ...... $71,767,844 $ 3,486,380 4.86% =========== =========== ====== Net interest margin ............................. $ 3,097,087 3.54% =========== ====== 1995 --------------------------------------- INTEREST EARNING ASSETS Federal funds sold .............................. $ 7,794,250 $ 423,292 5.43% Certificates of deposit at financial institutions 1,992,132 100,123 5.03% Total securities (2) ............................ 19,565,815 1,052,557 5.38% Net loans receivable (3) ........................ 23,096,719 1,974,150 8.55% ----------- ----------- ------ Total interest earning assets ........... $52,448,916 $ 3,550,122 6.77% =========== =========== ====== INTEREST BEARING LIABILITIES Interest-bearing demand deposits ................ $12,892,724 $ 435,493 3.38% Savings deposits ................................ 797,101 24,037 3.02% Time deposits ................................... 24,385,175 1,333,320 5.47% Federal funds purchased ......................... 2,148,839 102,725 4.78% ----------- ----------- ------ Total interest bearing liabilities ...... $40,223,839 $ 1,895,575 4.71% =========== =========== ====== Net interest margin ............................. $ 1,654,547 3.15% =========== ======= (1)Interest earned and yields on nontaxable investment securities are stated at face rate. (2)All such securities were subject to tax. The Company owned no non-taxable securities at June 30, 1995. (3)Loan fees are not material and are included in interest income from loans receivable.
C. Analysis of Changes of Interest Income/Expense Items June 30, 1996 and 1995 Inc./(Dec.) Components From of Change(1) Prior Year Rate Volume ----------- ----------- ---------- 1996 ---------------------------------------- INTEREST EARNING ASSETS Federal funds sold .............................. $ (41,066) $ 10,284 $ (51,350) Certificates of deposit at financial institutions 259,286 39,381 219,905 Total securities (2) ............................ 816,419 130,811 685,608 Net loans receivable (4) ........................ 1,998,706 113,859 1,884,847 ----------- ----------- ----------- Total interest earning assets ........... $ 3,033,345 $ 294,335 $ 2,739,010 =========== =========== =========== INTEREST BEARING LIABILITIES Interest-bearing demand deposits ................ $ 511,377 $ 14,207 $ 497,170 Savings deposits ................................ 15,328 (3,736) 19,064 Time deposits ................................... 1,029,993 94,645 935,348 Federal funds purchased ......................... (37,816) 9,242 (47,058) Federal Home Loan Bank advances ................. 70,319 0 70,319 Other borrowings ................................ 1,604 0 1,604 ----------- ----------- ----------- Total interest bearing liabilities ...... $ 1,590,805 $ 114,358 $ 1,476,447 =========== =========== =========== 1995 ----------------------------------------- EARNING ASSETS Federal funds sold .............................. $ 332,305 $ 117,524 $ 214,781 Certificates of deposit at financial institutions 75,307 19,064 56,243 Total securities (3) ............................ 644,302 85,206 559,096 Net loans receivable (4) ........................ 1,761,114 102,041 1,659,073 ----------- ----------- ----------- Total interest earning assets ............ $ 2,813,028 $ 323,835 $ 2,489,193 =========== =========== =========== INTEREST BEARING LIABILITIES Interest-bearing demand deposits ................ $ 368,483 $ 41,158 $ 327,325 Savings deposits ................................ 20,872 3,946 16,926 Time deposits ................................... 1,149,982 130,976 1,019,006 Federal funds purchased ......................... 102,725 0 102,725 ----------- ----------- ----------- Total interest bearing liabilities ...... $ 1,642,062 $ 176,080 $ 1,465,982 =========== =========== =========== (1) The column "increase/decrease from prior year" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. (2) Interest earned and yields on nontaxable investment securities are stated at face rate. (3) All such securities were subject to tax. The Company owned no non-taxable securities at June 30, 1995. (4) Loan fees are not material and are included in interest income from loans receivable.
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES GAP ANALYSIS JUNE 30, 1996 A methodology known as a "gap analysis" measures the difference between rate sensitive assets and rate sensitive liabilities, which under the current interest rate environment, management estimates will mature or reprice in the same period. The following table sets forth management's estimate of the projected maturities and/or repricing of the Company's assets and liabilities as of June 30, 1996. In preparing the table, certificates of deposit have been entered into the analysis based on contractual maturity. This table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels. 3 Months Over 3 Months Over 1 to or Less to One Year 5 Years Over 5 Years Total ------------ ------------ ------------ ------------ ------------ INTEREST-EARNING ASSETS: Commercial loans ................. $ 22,995,471 $ 1,988,678 $ 11,712,209 $ 3,642,287 $ 40,338,645 Real estate loans ................ 903,596 3,780,131 2,144,453 2,183,428 9,011,608 Installment & other consumer loans 1,931,627 926,460 4,416,294 185,086 7,459,467 Investment securities & other .... 5,827,016 4,386,909 27,842,826 4,817,983 42,874,734 ------------ ------------ ------------ ------------ ------------ Total interest-earning assets ......................... $ 31,657,710 $ 11,082,178 $ 46,115,782 $ 10,828,784 $ 99,684,454 INTEREST-BEARING LIABILITIES: NOW accounts ..................... $ 9,724,779 $ 0 $ 0 $ 0 $ 9,724,779 Money market accounts ............ 19,882,850 0 0 0 $ 19,882,850 Savings .......................... 1,979,085 0 0 0 $ 1,979,085 Certificates ..................... 14,917,025 18,133,189 12,550,925 0 $ 45,601,139 Other ............................ 1,190,000 0 1,000,000 3,411,470 $ 5,601,470 ------------ ------------ ------------ ------------ ------------ Total Interest-Bearing Liabilities .................... $ 47,693,739 $ 18,133,189 $ 13,550,925 $ 3,411,470 $ 82,789,323 ============ ============ ============ ============ ============ Interest-Earning Assets Less Interest-Bearing Liabilities ... ($16,036,029) ($ 7,051,011) $ 32,564,857 $ 7,417,314 $ 16,895,131 ============ ============ ============ ============ ============ Cumulative Interest Rate Sensitivity ............... ($16,036,029) ($23,087,040) $ 9,477,817 $ 16,895,131 ============ ============ ============ ============ ============ Cumulative Interest Rate Gap as a Percentage of Interest Earning Assets ................. -16.09% -23.16% 9.51% 16.95% ============ ============ ============ ============ Cumulative Interest Rate Sensitivity Ratio (1) .......... 0.66 0.65 1.12 1.20 ============ ============ ============ ============ (1) Interest-earning assets divided by interest-bearing liabilities
II. A. Investment Securities. Total investments, by category, are disclosed in Footnote 2 to the consolidated financial statements found on pages 18 and 19 of this report. B. Investment Securities Maturities and Yields. The following table presents the maturity of securities held on June 30, 1996, and the weighted average rates by range of maturity: Average Amount Yield U.S. treasury securities: Within 1 year ....................................... $ 2,003,468 5.24% After 1 but within 5 years .......................... 12,500,981 6.03% ----------- ---- Total .......................................... $14,504,449 5.92% =========== ==== U.S. agency securities: After 1 but within 5 years .......................... $10,363,049 6.25% After 5 years ....................................... 2,249,117 6.11% ----------- ---- Total .......................................... $12,612,166 6.22% =========== ==== Mortgage-backed securities: Within 1 year ....................................... $ 1,429,231 6.15% After 1 but within 5 years .......................... 3,982,902 6.46% ----------- ---- Total .......................................... $ 5,412,133 6.38% =========== ==== Municipal securities: After 1 but within 5 years .......................... $ 349,603 7.01% After 5 years ....................................... 246,205 6.17% ----------- ---- Total .......................................... $ 595,808 6.66% =========== ==== Other securities with no maturity or stated face rate .... $ 1,550,166 =========== The Company does not utilize any financial instruments referred to as derivatives to manage interest rate risk. C. Investment Concentrations. As of June 30, 1996, there existed no security in the investment portfolio above (other than U.S. Government and U.S. Government agencies) that exceeded 10% of stockholders equity at that date. III. A. Types of Loans. Total loans, by category, are disclosed in Footnote 3 to the consolidated financial statements found on pages 19 and 20 of this report. B. Loan Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table presents consolidated loan maturities by yearly ranges. Also included for loans after one year are the amounts which have predetermined interest rates and floating or adjustable rates. As of June 30, 1996 Maturities After One Year -------------------------------- Due within After one but Pre-determined Adjustable one year within 5 years After 5 years Interest Rates Interest Rates ------------ -------------- ------------- -------------- -------------- Commercial .............. $ 9,952,899 $ 24,502,829 $ 5,882,917 $ 14,519,497 $ 15,866,249 Real estate ............. 1,425,533 1,058,731 6,527,344 3,242,159 4,343,916 Installment and other consumer ............. 2,152,851 5,074,066 232,550 4,590,463 716,153 ------------ ------------- ------------ ------------- ------------- Totals $ 13,531,283 $ 30,635,626 $ 12,642,811 $ 22,352,119 $ 20,926,318 ============ ============= ============ ============= =============
C. Risk Elements. 1. Nonaccrual, past due and renegotiated loans. 1996 1995 -------- -------- Loans accounted for on nonaccrual basis .......... $ 0 $ 0 Accruing loans past due 90 days or more .......... 306,774 1,678 Troubled debt restructurings 0 0 -------- -------- Total ....................................... $306,774 $ 1,678 ======== ======== 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. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. D. Other Interest Earning Assets. There are no interest bearing assets required to be disclosed here. IV. Summary of Loan Loss Experience. The following table summarizes activity in the allowance for estimated losses on loans of the Company for the fiscal years ending June 30, 1996 and June 30, 1995: 1996 1995 ------------ ------------ Average amount of loans outstanding, before allowance for estimated losses on loans ..... $ 44,749,454 $ 23,451,527 Allowance for estimated losses on loans: Balance, beginning of fiscal year ........... $ 472,475 $ 191,500 Loans charged off: Commercial ............................. (117,555) 0 Real estate ............................ 0 0 Installment and other consumer ......... (2,817) (1,725) Loan recoveries: Commercial ............................. 0 0 Real estate ............................ 0 0 Installment and other consumer 0 100 ------------ ------------ Net charge-offs ............................. (120,372) (1,625) Provision charged to expense ................ 500,397 282,600 Balance, end of fiscal year ................. $ 852,500 $ 472,475 ============ ============ Ratio of net charge-offs to average loans outstanding ................................. 0.27% 0.01% The following table presents the allowance for estimated losses on loans by type of loans and the percentage of loans in each category to total loans 1996 1995 ---------------------- ---------------------- % of Loans to % of Loans to Amount Total Loans Amount Total Loans -------- ------------- ------- ------------- Commercial and industrial .......................... $ 0 71.01% $ 0 78.55% Real estate ........................................ 0 15.86% 0 9.14% Consumer ........................................... 0 13.13% 0 12.31% Unallocated ........................................ 852,500 N/A 472,475 N/A - ---------------------------------------------------- -------- -------- -------- -------- Total ......................................... $852,500 100.00% $472,475 100.00% ======== ======== ======== ========
V. Deposits The average amount of and average rate paid for the categories of deposits for the fiscal years 1996 and 1995 are disclosed in the consolidated average balance sheets and can be found on page 3 of Appendix B. Total time deposits in amounts greater than $100,000 at June 30, 1996 by maturity are disclosed in Footnote 5 to the consolidated financial statements found on page 21 of this report. 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, 1996 and 1995. 1996 1995 -------------- -------------- Average total assets .................. $ 96,971,783 $ 57,722,036 Average equity ........................ $ 11,730,416 $ 11,479,814 Net income (loss) ..................... $ 682,588 $ (373,782) Net income (loss) per share ........... $ .47 $ (0.26) Return on average assets .............. 0.70% (0.65%) Return on average equity .............. 5.82% (3.26%) Average equity to assets ratio ........ 12.10% 19.89% VII. Short Term Borrowings No disclosure is required as the average balance of short term borrowings during the period was less than 30% of stockholders equity at June 30, 1996 and 1995. EX-13 2 September 1996 To Our Stockholders: We are pleased to present our third annual report. As you likely recall, Quad City Holdings, Inc. (QCHI) became a public company in October of 1993 with a very successful initial public offering. This report provides financial performance information for the fiscal year ended June 30, 1996. The past fiscal year saw continued growth and significant improvement in profitability. Consolidated assets grew 37% from $81 million to $111 million. Loans increased by $25 million which was an increase of 80%. Deposits were up 52% to $93 million. Perhaps the most pleasing aspect of this year s financial performance was the consistent profitability from month to month. Consolidated earnings were $683,000 for the twelve months ended June 30, 1996 or $.47 per share. The prior year loss was $374,000 or $.26 per share. Quad City Bancard, Inc. (QCBI) reported earnings of $396,000 while Quad City Bank and Trust Company (QCBT) had net income of $301,000. Both are wholly owned subsidiaries of QCHI. As you can see in the footnotes to our financial statements, profitability improved each quarter. Consolidated stockholders equity increased modestly to $11.7 million. Equity increased by the consolidated earnings of $683,000. However, this increase was mostly offset by an increase in the unrealized loss in our investment portfolio of $604,000. This was due primarily to an increase in interest rates during the year. July 1, 1996 was opening day for our permanent Davenport facility. This office has been well received by our existing and new customers. It is situated in a strategic location on North Brady Street with access off 46th Street from Brady and Welcome Way. QCBT owns one half of the commercial office structure and it appears the remainder of the building will be leased in the near future. Our Davenport operation had been housed in temporary office space since April of 1995. We charged operations with $50,000 of estimated one-time expenses in June of 1996 in connection with opening the permanent Davenport facility. The Trust Department continues to experience remarkable growth. Trust assets more than doubled during the fiscal year to $125 million. It is likely that a third trust officer will be added in the first half of the next fiscal year. Since expenses only increased modestly, net earnings improved significantly and added to the bottom line of QCBT. Residential real estate loans showed a large increase from approximately $3 million to $9 million. In addition, a number of long term fixed rate loans were sold into the secondary market from which QCBT realized an origination fee. This department will also be expanded in the coming year to handle the additional growth. The Investment Center demonstrated dramatic results in the past year. Under the direction of representative Dave Howell, commissions generated from investment transactions showed a marked increase and resulted in fee income for QCBT. Our correspondent banking department continued to process transactions for more financial institutions. This department is restructuring currently as the item-processing function has been brought in house. This resulted in the acquisition of additional equipment, but the increased volume of transactions processed should result in a fairly short time period to reach break even. Our correspondent banking officer, Kathy Francque, has managed this project. As mentioned earlier, Quad City Bancard, Inc. was the largest contributor to our bottom line. This entity, which is managed by John Schricker and Bill Brockway, now processes merchant credit card transactions for approximately 8,500 merchants across the country. QCBI contracts with an independent sales organization to solicit merchants. Aside from the strong earnings, an additional attribute of QCBI is that it requires little capital to operate, allowing the available capital to be invested in QCBT to satisfy regulatory capital requirements. Our significant growth has brought with it profitability at an earlier stage than we anticipated. In order to allow for continued growth and profitability and to satisfy regulatory requirements, QCHI will need to raise additional capital. After meeting with our advisors, we have determined that the most cost efficient manner of raising capital will be to issue a non-voting, preferred stock to institutional investors. It is our intention to raise approximately $7.5 million through this offering . We currently intend to redeem the preferred stock with the proceeds of a future common offering. This past fiscal year has seen a sharp rise in the stock market and a fairly weak year in the bond market. Interest rates are up slightly from the beginning of the year. Analysts opinions differ significantly as to the outlook in the next year, which will no doubt be influenced by the upcoming elections. QCHI stock performed well, as it rose approximately 30% during the year. Our outlook for future opportunities of our organization continues to be bright. There appears to be continuing interest by customers and potential customers in relationship banking. Consolidation continues in our industry as three of the largest mergers in history were consummated recently. These mergers are typically premised on substantial expense reductions including employee layoffs. The resulting entities must rely on streamlined operations and very structured systems. A challenge for QCHI will be to determine if our type of operation can result in the same level of returns for stockholders. We will continue to give it our best effort to prove that we can do so. As we have mentioned in prior reports, we will from time to time make decisions to invest in facilities and people that should enhance our long-term earnings, but at an expense of short-term profits. Our recent construction project in Davenport is such an example. As a measure to control costs, this annual stockholder s report consists primarily of a portion of Form 10-KSB (not including exhibits), which is a required annual filing with the U.S. Securities and Exchange Commission. Each year at this time,. we give a large thank you to our customers, employees, directors and stockholders. You all continue to support the mission of QCHI in many ways and allow us to move forward with confidence. Our style of banking is dependent on talented employees who truly care for customers. We are thankful we have been able to attract a dedicated group of employees who make our job much easier and very enjoyable. To our stockholders, we wish to say thanks for all of your support, and please make an effort to visit our two full-service facilities. /s/ Michael A. Bauer /s/ Douglas M. Hultquist - -------------------- ------------------------ Michael A. Bauer Douglas M. Hultquist Chairman President QUAD CITY HOLDINGS, INC. DIRECTORS Douglas M. Hultquist Michael A. Bauer President, Quad City Holdings, Inc. Chairman, Quad City Holdings, Inc. Chairman, Quad City Bank and Trust Company President, Quad City Bank and Trust Company Ronald G. Peterson John W. Schricker President, First State Bank of Western Illinois President, Quad City Bancard, Inc. Richard R. Horst Investment Manager, Thompson, Plumb & Associates, Inc. OFFICERS Douglas M. Hultquist Michael A. Bauer President Chairman of the Board Richard R. Horst Secretary QUAD CITY BANCARD, INC. DIRECTORS Michael A. Bauer Douglas M. Hultquist Chairman, Quad City Holdings, Inc. President, Quad City Holdings, Inc. President, Quad City Bank and Trust Company Chairman, Quad City Bank and Trust Company John W. Schricker William A. Brockway President, Quad City Bancard, Inc. Executive Vice President, Quad City Bancard, Inc. OFFICERS John W. Schricker Michael A. Bauer President Chairman of the Board William A. Brockway Douglas M. Hultquist Executive Vice President Secretary-Treasurer QUAD CITY BANK AND TRUST COMPANY DIRECTORS Michael A. Bauer Douglas M. Hultquist Chairman, Quad City Holdings, Inc. President, Quad City Holdings, Inc. President, Quad City Bank and Trust Company Chairman, Quad City Bank and Trust Company Ronald G. Peterson James J. Brownson President, First State Bank of Western Illinois President, W. E. Brownson Company Richard R. Horst Alan C. Renken Investment Manager, Thompson, Plumb & Associates, Inc. Plant Manager, Aluminum Company of America Edwin A. Maxwell Joyce E. Bawden Dr. Edwin A. Maxwell, D.O. Vice President, Bawden Printing, Inc. Marc C. Slivken Robert A. Van Vooren Dr. Marc C. Slivken, P.C. Senior Partner, Lane & Waterman Mark C. Kilmer Executive Vice President, Republic Companies OFFICERS Michael A. Bauer Douglas M. Hultquist President Chairman of the Board Victor J. Quinn Kathleen M. Francque Senior Vice President, Operations Correspondent Banking Officer Jacqueline M. Stickel Rick J. Jennings Vice President, Lending Vice President, Trust & Investments Shellee R. Showalter Julie D. Carstensen Controller Real Estate Officer Wilfred R. Hefter Thomas J. Otting Trust Officer Vice President, Business Development John C. Bradley John E. Neuberger Vice President, Lending Consumer Banking Officer Connie K. McGinn Karen S. Wolfe Consumer Lending Officer Operations and Security Officer Matt C. Stone Gus J. Pappas Internal Auditor Consumer Banking Officer QUAD CITY HOLDINGS, INC. STOCKHOLDER INFORMATION AS OF JUNE 30, 1996 Stock Listing Information Stock Transfer Agent The common stock of Quad City Holdings, Inc. is Inquiries regarding stock transfer, registration, lost traded on The Nasdaq SmallCap Market certificates or changes in name and address should under the symbol QUAD CTY be directed to the stock transfer agent and registrar by writing: Stock Prices Information Harris Trust and Savings Bank The table below shows the reported high and low Post Office Box 755 sales prices of the common stock during the two Chicago, Illinois 60690 fiscal years ending June 30, 1996 and 1995. The Attention: Shareholder Services common stock began trading on October 6, 1993. Investor Information 1996 High Low Stockholders, investors and analysts interested in ----- -------- ------- additional information may contact Douglas M. 1st Quarter $12 $ 9 3/4 Hultquist, President and Chief Financial Officer, 2nd Quarter 12 10 1/2 Quad City Holdings, Inc. 3rd Quarter 12 3/4 10 3/4 4th Quarter 13 3/4 12 Corporate Office: ----------------- Quad City Bank and Trust Company 2118 Middle Road 1995 High Low Bettendorf, Iowa 52722 ---- -------- ------- (319) 344-0600 1st Quarter $ 10 $ 9 1/4 2nd Quarter 10 9 1/4 Corporate Counsel-Chicago, Illinois 3rd Quarter 9 3/4 8 1/2 Barack, Ferrazzano, Kirschbaum & Perlman 4th Quarter 10 1/2 8 3/4 333 West Wacker Drive, Suite 2700 Chicago, Illinois 60606 Annual Meeting of Stockholders The Annual Meeting of the Stockholders of Quad City Holdings, Inc. will be held at 10:00 a.m., Corporate Counsel-Davenport, Iowa October 23, 1996 at the following location: Noyes & Gosma Jumer s Castle Lodge 400 North Main Spruce Hills Drive & Utica Ridge Road Davenport, Iowa 52801 Bettendorf, Iowa 52722 Lane & Waterman Stockholders are encouraged to attend. 220 North Main, Suite 600 Davenport, Iowa 52801 Annual Report on Form 10-KSB and Investor Information Independent Auditor Copies of the Quad City Holdings, Inc. annual report McGladrey & Pullen, LLP on Form 10-KSB and exhibits, filed with the Securities 220 North Main, Suite 900 and Exchange Commission, are available to stockholders Davenport, Iowa 52801 without charge by writing: Shellee R. Showalter, Controller Quad City Bank and Trust Co. Banking Locations Quad City Bank and Trust Company 2118 Middle Road 2118 Middle Road Bettendorf, Iowa 52722 Bettendorf, Iowa 52722 4500 Brady Street, Suite 100 Davenport, Iowa 52806
U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [ x ] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee required) For the fiscal year ended June 30, 1996 [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required) For the transition period from __________________ to _____________________ Commission file number: 0-22208 Quad City Holdings, Inc. ---------------------------------------------- (Name of Small Business Issuer in Its Charter) Delaware 42-1397595 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 2118 Middle Road, Bettendorf, Iowa 52722 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (319) 344-0600 ------------------------------------------------ (Issuer s Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, $1 Par Value Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [ x ] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of regulation S-B contained in this form, and no disclosure will be contained, to the best of Issuer s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ x ] The Issuer s revenues for its most recent fiscal year were $8,245,754. The aggregate market value of the voting stock held by non-affiliates of the Issuer as of August 23, 1996 was approximately $18,950,000. As of said date, the Issuer had 1,437,824 shares of Common Stock issued and outstanding. Documents incorporated by reference: --------------------------------------------------------------- Part III of Form 10-KSB - Proxy statement for annual meeting of stockholders to be held in 1996. Transitional Small Business Disclosure Format (check one): Yes [ ] No [ x ] Part I Item 1. Description of the Business Quad City Holdings, Inc. (the "Company") was formed in February of 1993 under the laws of the state of Delaware for the purpose of becoming the bank holding company of Quad City Bank and Trust Company (the "Bank"). The Bank was capitalized on October 13, 1993 and commenced operations on January 7, 1994. The Bank is organized as an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank provides full-service commercial and consumer banking services in Bettendorf and Davenport, Iowa and adjacent communities. Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a Delaware corporation which provides merchant credit card processing services. This operation had previously been a division of the Bank since July 1994. Bancard has contracted with an independent sales organization which markets credit card services to merchants throughout the country. Currently, approximately 8,500 merchants process transactions with Bancard. The Company owns 100% of the Bank and Bancard, and in addition to such ownership invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with the Bank. The Bank competes with other commercial banks, savings banks, savings and loan institutions, credit unions and other financial service organizations in the Quad Cities market. Being established in 1994, the Bank is one of the smaller financial institutions in its market. The Bank, the Company and Bancard are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). In addition, the Bank is regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC"). The Company s principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The Bank s deposits are insured to the maximum allowable by the FDIC. The Company s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits. The Company s operating results are affected by merchant credit card fees, trust fees, deposit service charges, and other income. Operating expenses of the Company include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses and other administrative expenses. The Company s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The commercial banking business is a highly regulated business. See Appendix A for a brief summary regarding federal and state statutes and regulations, which are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks. The Company, the Bank and Bancard have a June 30th fiscal year end and employ 53 individuals. No one customer accounts for more than 10% of revenues, loans or deposits. See Appendix B for the tables and schedules which show selected comparative statistical information required pursuant to the industry guides promulgated under the Securities Act of 1993, relating to the business of the Company. Item 2. Description of Property The main offices of the Company and the Bank are in a 6,700 square foot facility which was completed in January of 1994. In March of 1994, the Bank acquired that facility, which is located at 2118 Middle Road in Bettendorf. Construction of a second full service banking facility was completed in July of 1996 to provide for the convenience of customers and to expand its market territory. The Bank also owns its portion of that facility which is located at 4500 Brady Street in Davenport. The two 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 storage and item processing. Three thousand square feet of its second floor has been leased to a professional services firm. The remaining 3,000 square feet is available for lease. Bancard leases approximately 1,700 square feet of office space in Bettendorf from an unrelated third party. Management is of the opinion that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company. The Bank has limited its investment in premises to approximately 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, interest rate and credit worthiness of the borrower. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. Item 3. Legal Proceedings The Company is not aware of any legal proceedings against it, the Bank or Bancard. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the stockholders of the Company for a vote during the fourth quarter of the fiscal year ended June 30, 1996. Part II Item 5. Market for Common Equity and Related Stockholder Matters The Company s common stock has been traded on The Nasdaq SmallCap Market since October 6, 1993. High and low sales prices, as reported on Nasdaq for each quarterly period during the two fiscal years ended June 30, 1996 and 1995 were as follows: Fiscal 1996 Fiscal 1995 Sale Price Sale Price ------------------ ---------------------- High Low High Low ------- ------- ------- ------- First quarter .......... $12 $ 9 3/4 $10 $ 9 Second quarter ......... 12 10 1/2 $10 9 1/4 Third quarter .......... 12 3/4 10 3/4 9 3/4 8 1/2 Fourth quarter ......... 13 3/4 12 10 1/2 8 3/4 No cash dividends were declared during the past fiscal year. At June 30, 1996, there were estimated to be approximately 2,200 holders of record of the Company s common stock. The Company expects that all earnings, will be retained to finance the growth of the Company, the Bank and Bancard, and that no cash dividends will be paid for the foreseeable future. If and when dividends are declared, the Company will probably be largely dependent upon dividends from the Bank and Bancard for funds to pay dividends on the common stock. Under Iowa law, the Bank will be restricted as to the maximum amount of dividends it may pay on its common stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. The Bank is a member of the Federal Reserve System. The total of all dividends declared by the Bank in a calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, the Federal Reserve Board, the Iowa Superintendent and the FDIC are authorized under certain circumstances to prohibit the payment of dividends by the Bank. In the case of the Company, further restrictions on dividends may be imposed by the Federal Reserve Board. Item 6. Management s Discussion and Analysis Results of Operations Net income for the year ended June 30, 1996 was $682,588, compared to a net loss of $373,782 for the year ended June 30, 1995. Results improved primarily because of a $1,224,743 increase in net interest income after provision for loan losses, and a $1,114,590 increase in other income. These increases were offset by a $1,282,963 increase in other expenses due primarily to the increased number of employees and higher operating costs related to the increased volume of business. A loss was reported for the period ended June 30, 1994 of $1,122,402. Because the Company was a start-up venture, there were expected losses during the pre-opening period and for the first several years of operations. Interest income increased to $6,583,467 in fiscal 1996 from $3,550,122 in fiscal 1995, a rise of $3,033,345. The rise was primarily due to greater average outstanding balances in interest bearing assets. Interest income is comprised primarily of interest income on loans (including loan fees), securities, federal funds sold and the Company s own deposits maintained at other financial institutions. Interest income should continue to grow as the loan portfolio and other assets increase, and would also increase as a result of a rise in interest rates. Interest expense increased to $3,486,380 in fiscal 1996 from $1,895,575 in fiscal 1995, an increase of $1,590,805, and represented interest paid primarily to depositors, as well as interest paid on federal funds purchased, and Federal Home Loan Bank advances. The increase in interest expense was again primarily due to greater average outstanding balances in interest bearing liabilities. Interest expense will continue to increase as deposits and Federal Home Loan Bank advances grow and would also increase as a result of a rise in interest rates. Net interest income for the years ended June 30, 1996 and June 30, 1995 amounted to $3,097,087 and $1,654,547, respectively, and represented the difference between interest income earned on earning assets and interest expense paid on interest bearing liabilities. The provision for loan losses is established based on factors such as the local and national economy and the risk associated with the loans in the portfolio. The Company s provision for loan losses was $500,397 for the year ended June 30, 1996, compared to $282,600 for the year ended June 30, 1995. The $217,797 increase in the provision for loan losses was primarily attributable to the growth in the loan portfolio during fiscal 1996. The increase maintained the Company s allowance for estimated losses on loans at 1.5% of total loans at both June 30, 1996 and June 30, 1995. Other income of $1,662,287 and $547,697 during the fiscal years 1996 and 1995, respectively, consisted of merchant credit card income, trust income, deposit service charges, the net of investment securities gains and losses and miscellaneous income. The $1,114,590 increase was primarily due to the addition of new customers and increased volume of the merchant credit card processing services at Bancard, the addition of new clients in the trust department at the Bank, the increase in demand deposit customers, and the growth in the commission income generated by the investment center. Operating expenses consisted primarily of salaries and benefits; other expense, including bank service charges and trust related expenses; professional fees, including data processing fees; and marketing and advertising expenses. Other operating expenses increased to $3,576,389 in fiscal 1996 from $2,293,426 in fiscal 1995. The $1,282,963 increase was primarily due to higher overhead expenses on the increased volume of business attained during fiscal 1996. Management will continue to attempt to contain overhead costs while maintaining optimal service levels and productivity. In fiscal 1996, salaries and benefits experienced the most significant increase of any noninterest expense component. For the twelve months ended June 30, 1996, total salaries and benefits increased to $1,973,682, or $798,808 over the June 30, 1995 total of $1,174,874. The change was primarily attributable to the increase in the Company s number of employees. In fiscal 1995, the Bank s FDIC premiums were assessed at the rate of .23% of insured deposits. On November 14, 1995, the FDIC reduced the Bank s FDIC premium to 0%. However, the Bank will continue to pay the $1,000 minimum semi-annual assessment required by federal statute. Financial Condition and Liquidity Total assets of the Company grew by $30,674,895, or 37.96%, to $111,474,977 at June 30, 1996 from $80,800,082 at June 30, 1995. The increase primarily resulted from an increase in deposits received from customers. While asset growth is expected to continue for the year ended June 30, 1997, it is likely to be at a lesser percentage rate from the increase during the past year. Cash and due from banks increased by $2,785,137, or 72.71%, to $6,615,407 at June 30, 1996 from $3,830,270 at June 30, 1995 and represented cash maintained at the Bank, and funds that the Bank and the Company had deposited in other banks in the form of demand deposits. Federal funds sold are inter-bank funds with daily liquidity. At June 30, 1996, the Bank had invested $2,728,000 in such funds. Such amount decreased by $10,222,000, or 78.93%, from $12,950,000 at June 30, 1995. This decrease was attributable to the reduction in funds received from correspondent banking customers to be reinvested in overnight deposits "as principal". In August 1995, the Company s correspondent banking department implemented an "agent" federal funds program, whereby the funds received from downstream correspondent banking customers merely pass through the Company s financial statements to upstream correspondent banks. The implementation of the "agent" program resulted in a decrease to assets (federal funds sold) and liabilities (federal funds purchased). This department provides various services to other financial institutions, including cash management services. Certificates of deposit at financial institutions increased by $1,489,154, or 37.39% to $5,472,012 at June 30, 1996 from $3,982,858 at June 30, 1995 and represented funds that the Company and its subsidiaries had deposited in other banks in the form of certificates of deposit. Management elected to invest in these deposits to earn a yield that exceeded the yield of U.S. treasury securities at comparable maturities. Pursuant to a FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", the Company transferred securities with an amortized cost of $7,992,513 and an unrealized gain of $12,030 from the held to maturity portfolio to the available for sale portfolio in December, 1995. This "one-time" transfer was made based on management s reassessment of their previous designations of securities giving consideration to liquidity needs, the management of interest rate risk and other factors. A portion of the Bank s investment securities are purchased with the intent to hold the securities until they mature. These held to maturity securities were recorded at amortized cost at both June 30, 1996 and June 30, 1995. At June 30, 1996, mortgage-backed securities and municipal securities made up the $3,156,601 balance. This was a decrease of $7,861,542, or 71.35%, from June 30, 1995, when U.S. treasury and agency securities, mortgage-backed securities and taxable municipal securities made up the $11,018,143 balance. Market values at June 30, 1996 and June 30, 1995 were $3,097,115 and $10,901,057, respectively. The decrease was primarily attributable to the "one-time" transfer described in the previous paragraph. All of the Company 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 or financing purposes. These securities were reported at fair value and increased by $15,999,757, or 106.43% to $31,032,652 at June 30, 1996 from $15,032,895 at June 30,1995. The amortized cost of such securities at June 30, 1996 and June 30, 1995 was $31,518,121 and $14,914,642, respectively. The increase was attributable to the "one-time" transfer described above, as well as the purchase of U.S. agency and other securities into the investment portfolio. The amortized cost and the weighted average rate yields for the categories of securities are summarized below. 1996 1995 ------------------------- --------------------------- Amortized Average Amortized Average Cost Yield Cost Yield ----------- ------------ ----------- -------------- Securities held to maturity: U.S. treasury securities . $ 0 0.000 $ 8,000,218 4.640% U.S. agency securities ... 0 0.000 500,000 7.100 Mortgage-backed securities 2,560,793 5.983 2,318,460 5.962 Municipal securities ..... 595,808 6.657 199,465 7.456 ----------- ----------- Totals .............. $ 3,156,601 $11,018,143 =========== =========== Securities available for sale: U.S. treasury securities . $14,504,449 5.920 $ 6,016,543 7.032% U.S. agency securities ... 12,612,166 6.222 5,477,243 7.407 Mortgage-backed securities 2,851,340 6.737 3,092,266 7.490 Other securities ......... 1,550,166 Variable 328,590 Variable ----------- ----------- Totals .............. $31,518,121 $14,914,642 =========== ===========
Loans receivable increased by $25,302,143, or 80.30%, to $56,809,720 at June 30, 1996 from $31,507,577 at June 30, 1995. The totals represented loans made by the Bank and also loan participations the Company had purchased from the Bank, on loans that exceeded the Bank s legal lending limit. As of June 30, 1996, the Bank s legal lending limit was $1,725,000. The Company has received approval from the Federal Reserve Board to grant loans and to participate in loans with the Bank. 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. During the fiscal year ended 1996, the Bank originated $41,276,181 of loans and received repayments of $15,853,666. The Company s allowance for estimated losses on loans was $852,500 at June 30, 1996 or 1.5% of total loans, compared to $472,475 or 1.5% at June 30, 1995. Although management believes that the allowance for estimated losses on loans at June 30, 1996 was at a level that is adequate to absorb losses on existing loans, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional contributions to its provision for loan losses in the future. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. At June 30, 1996, past due loans 30 days or more amounted to $864,368. At June 30, 1995, past due loans 30 days or more amounted to $87,574. Past due loans as a percentage of gross loans receivable at June 30, 1996 and June 30, 1995 was 1.52% and 0.28%, respectively. The Company anticipated an increase in this category in fiscal 1996 from the prior year. At June 30, 1995, much of the loan portfolio had been on the books for a relatively short time period, thus an increase in past due loans was likely as the portfolio matured. Over one third of the past due total at June 30, 1996, has subsequently been repaid and the remainder has been or is in the process of renegotiation. The Company intends to closely monitor these loans and does not anticipate any material losses. The Company experienced charge-offs of $120,372 during the fiscal 1996 year compared to $1,725 during the fiscal 1995 year. The fiscal 1996 charge-offs were comprised primarily of a single $400,000 commercial loan that was not fully realized upon liquidation of the borrower. The Company charged off all of the uncollected balance at June 30, 1996 and still holds stock in the parent company of the borrower. The ultimate realization of this collateral is unknown, therefore the Company has placed no value on the stock. Premises and equipment increased by $2,729,199 to $4,531,038 at June 30, 1996 from $1,801,839 at June 30, 1995. The increase resulted primarily from the Bank paying the developer its accumulated construction costs of the new Davenport banking location. Additional information regarding the composition of this account and related accumulated depreciation is described in footnote 4 to the consolidated financial statements. Accrued interest receivable on loans, securities and interest-bearing cash accounts increased to $1,121,268 at June 30, 1996 from $685,880 at June 30, 1995. The increase was primarily due to greater average outstanding balances in interest bearing assets. Other assets at June 30, 1996 and June 30, 1995 consisted primarily of miscellaneous receivables, prepaid expenses and accrued trust department income, and totaled $860,779 and $463,095, respectively. The increase was attributable to the increased volume of business and the related prepaid expenses associated with the pace of growth at the Bank and Bancard. Deposits grew to $92,918,118 at June 30, 1996 from $61,097,686 at June 30,1995, for an increase of $31,820,432, or 52.08%. The increase consisted of a $20,746,932 increase in demand, NOW, money market and savings accounts and a $11,073,500 increase in time deposit accounts. Federal funds purchased representing inter-bank funds received from other banks decreased by $6,021,072 to $1,190,000 at June 30, 1996 from $7,211,072 at June 30, 1995. This decrease was attributable to the reduction in funds received from correspondent banking customers to be reinvested in overnight deposits "as principal". Federal Home Loan Bank ("FHLB") advances increased to $3,411,470 at June 30, 1996 from $0 at June 30, 1995. The Bank is a member of the FHLB of Des Moines. As of June 30, 1996, the Bank held $1,249,700 of FHLB stock. As a result of its membership in the FHLB, the Bank has the ability to borrow funds for short-or long-term purposes under a variety of programs. Other borrowings increased to $1,000,000 at June 30, 1996 from $0 at June 30, 1995. Other borrowings consist of the amount outstanding on a $1,500,000 revolving credit note, which is secured by all the outstanding stock of the Bank. The borrowed funds were utilized to provide additional capital to the Bank to maintain the required 9% leverage ratio. Other liabilities grew to $1,286,783 at June 30, 1996 from $901,584 at June 30, 1995 for an increase of $385,199 or 42.72%. Other liabilities consisted primarily of accrued interest payable on deposit accounts, accrued expenses and accounts payable. The increase was primarily attributable to the greater average outstanding balances in interest bearing liabilities. Stockholders equity increased slightly to $11,668,606 at June 30, 1996 from $11,589,740 at June 30, 1995. Such increase was the combination of the net income offset by an increase in the unrealized losses on securities available for sale. Common stock of $1,437,824 at June 30, 1996 and June 30, 1995 represented 1,437,824 shares at $1.00 par value of the Company s common stock. The accumulated deficit decreased by $682,588 to $1,048,165 at June 30, 1996 from $1,730,753 at June 30, 1995. The accumulated deficit was comprised of pre-opening expenses, start-up expenses for the Bank, and prior net losses incurred, offset by the current fiscal year net income. The Company expected to experience start-up losses for the first several years of operation. In anticipation of continued asset growth, the Company has decided to conduct a preferred stock offering. The Company desires to raise at least $7.5 million. Liquidity For banks, liquidity represents the ability to meet both withdrawals from deposits and the funding of loans. The assets that provide for liquidity are cash, federal funds sold, and short term loans and securities. Liquidity needs are influenced by economic conditions, interest rates and competition. Securities that are available for sale in the Company s portfolio can be readily converted to cash if necessary. Management believes that current liquidity levels are sufficient to meet future demands. Net cash inflows from operating activities provided cash of $836,093 for the year ended June 30, 1996 and used cash of $185,902 for the year ended June 30, 1995. The improvement in cash flow during the year resulted primarily from improved earnings. Net cash outflows from investing activities totaled $28,261,786 for the year ended June 30, 1996, compared to cash outflows of $39,379,019 for the year ended June 30, 1995. The net outflows of cash were largely associated with the growth in the loan portfolio combined with the purchases of available for sale securities. Cash inflows from financing activities totaled $30,210,830 for the year ended June 30, 1996, compared to cash inflows of $41,281,203 for the year ended June 30, 1995. The components of the net cash inflows were the growth of deposit accounts, as well as the increase in other borrowings and FHLB advances. Impact of Inflation and Changing Prices Unlike most industries, essentially all of the assets and liabilities of a bank are monetary in nature. As such, the level of prices has less of an effect than do interest rates. Prices and interest rates do not always move in the same direction. The Company s financial statements and notes are generally prepared in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Impact of New Accounting Standards The Financial Accounting Standards Board has issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which becomes effective for years beginning after December 15, 1995. The Statement generally requires long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. Management believes that adoption of this Statement will not have a material effect on the Company s financial statements. The Financial Accounting Standards Board has issued Statement No. 123 "Accounting for Stock Based Compensation" which becomes effective for years beginning after December 15, 1995. This Statement establishes a fair value based method for stock-based compensation plans. Management believes that adoption of this Statement will not have a material effect on the Company s financial statements. The Financial Accounting Standards Board has issued Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which becomes effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Management believes that adoption of this Statement will not have a material effect on the Company s financial statements. Item 7. Financial statements QUAD CITY HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor's Report Consolidated Balance Sheets at June 30, 1996 and 1995 Consolidated Statements of Income for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Stockholders Equity for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements McGLADREY & PULLEN, LLP Certified Public Accountants and Consultants Independent Auditor s Report To the Board of Directors and Stockholders Quad City Holdings, Inc. Bettendorf, Iowa We have audited the accompanying consolidated balance sheets of Quad City Holdings, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders equity, and cash flows for the years ended June 30, 1996, 1995 and 1994. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quad City Holdings, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for the years ended June 30, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. /s/ McGLADREY & PULLEN, LLP Davenport, Iowa July 26, 1996 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1995 1996 1995 ------------- ------------- ASSETS Cash and due from banks .................................................................. $ 6,615,407 $ 3,830,270 Federal funds sold ....................................................................... 2,728,000 12,950,000 Certificates of deposit at financial institutions ........................................ 5,472,012 3,982,858 Securities held to maturity, at amortized cost (Note 2) .................................. 3,156,601 11,018,143 Securities available for sale, at fair value (Note 2) .................................... 31,032,652 15,032,895 ------------- ------------- Total securities .................................................................... 34,189,253 26,051,038 ------------- ------------- Loans receivable (Note 3) ................................................................ 56,809,720 31,507,577 Less: Allowance for estimated losses on loans (Note 3) ................................... (852,500) (472,475) ------------- ------------- Net loans receivable ................................................................ 55,957,220 31,035,102 ------------- ------------- Premises and equipment, net (Note 4) ..................................................... 4,531,038 1,801,839 Accrued interest receivable .............................................................. 1,121,268 685,880 Other assets ............................................................................. 860,779 463,095 ------------- ------------- Total assets ..................................................................... $ 111,474,977 $ 80,800,082 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing ................................................................... $ 15,730,265 $ 5,628,526 Interest-bearing ...................................................................... 77,187,853 55,469,160 ------------- ------------- Total deposits (Note 5) ............................................................. 92,918,118 61,097,686 ------------- ------------- Federal funds purchased .................................................................. 1,190,000 7,211,072 Federal Home Loan Bank advances (Note 6) ................................................. 3,411,470 0 Other borrowings (Note 7) ................................................................ 1,000,000 0 Other liabilities ........................................................................ 1,286,783 901,584 ------------- ------------- Total liabilities ................................................................ 99,806,371 69,210,342 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' EQUITY (Note 11) Preferred stock, $1 par value; shares authorized 250,000; shares issued none ............. 0 0 Common stock, $1 par value; shares authorized 2,500,000; shares issued and outstanding 1,437,824 .............................................................. 1,437,824 1,437,824 Additional paid-in capital ............................................................... 11,764,416 11,764,416 Retained earnings (deficit) .............................................................. (1,048,165) (1,730,753) ------------- ------------- 12,154,075 11,471,487 Unrealized gains (losses) on securities available for sale, net .......................... (485,469) 118,253 ------------- ------------- Total stockholders' equity ....................................................... 11,668,606 11,589,740 ------------- ------------- Total liabilities and stockholders' equity ....................................... $ 111,474,977 $ 80,800,082 ============= =============
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 1996, 1995 and 1994 1996 1995 1994 ----------- ----------- ----------- Interest income: Interest and fees on loans ............................................ $ 3,972,856 $ 1,974,150 $ 213,036 Interest and dividends on securities .................................. 1,868,976 1,052,557 408,255 Interest on federal funds sold ........................................ 382,226 423,292 90,987 Other interest ........................................................ 359,409 100,123 24,816 ----------- ----------- ----------- Total interest income ............................................ 6,583,467 3,550,122 737,094 ----------- ----------- ----------- Interest expense: Interest on deposits (Note 5) ........................................ 3,349,548 1,792,850 253,513 Interest on other borrowings ......................................... 136,832 102,725 0 ----------- ----------- ----------- Total interest expense ........................................... 3,486,380 1,895,575 253,513 ----------- ----------- ----------- Net interest income .............................................. 3,097,087 1,654,547 483,581 Provision for loan losses (Note 3) ........................................ 500,397 282,600 191,500 ----------- ----------- ----------- Net interest income after provision for loan losses .............. 2,596,690 1,371,947 292,081 ----------- ----------- ----------- Other income (loss): Merchant credit card, net of processing fees .......................... 1,007,830 306,051 0 Trust department ...................................................... 355,360 149,218 26,918 Deposit service fees .................................................. 147,678 73,016 8,784 Investment securities gains (losses), net ............................. 22,272 (16,656) (70,532) Other ................................................................. 129,147 36,068 33,723 ----------- ----------- ----------- Total other income (loss) ........................................ 1,662,287 547,697 (1,107) ----------- ----------- ----------- Other expenses: Salaries and benefits ................................................. 1,973,682 1,174,874 723,099 Professional and data processing fees ................................. 282,640 192,556 155,439 Advertising and marketing ............................................. 189,761 98,584 122,533 Occupancy and equipment expense ....................................... 289,230 209,468 100,500 Stationery and supplies ............................................... 100,672 58,585 75,854 Provision for merchant credit card losses ............................. 126,805 126,831 0 Insurance ............................................................. 86,291 136,015 57,279 Postage and telephone ................................................. 117,741 55,630 31,559 Unrealized loss on securities held for sale ........................... 0 0 150,693 Other ................................................................. 409,567 240,883 147,113 ----------- ----------- ----------- Total other expenses ............................................. 3,576,389 2,293,426 1,564,069 ----------- ----------- ----------- Income (loss) before cumulative effect of a change in accounting principle ................................................. 682,588 (373,782) (1,273,095) Cumulative effect of a change in accounting principle (Note 1) ............. 0 0 150,693 ----------- ----------- ----------- Net income (loss) ................................................ $ 682,588 $ (373,782) $(1,122,402) =========== =========== =========== Before cumulative effect of a change in accounting principle ................................................. 0.47 (0.26) (1.23) Cumulative effect of a change in accounting principle ...................... 0.00 0.00 0.15 ----------- ----------- ----------- Net income (loss) ................................................ $ 0.47 $ (0.26) $ (1.08) =========== =========== ===========
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 1996, 1995 and 1994 Securities Unrealized Gains (Losses) Additional Retained On Securities Common Paid-In Earnings Available For Stock Capital (Deficit) Sale, Net Total ----------- ----------- ----------- -------------- ------------ Balance, June 30, 1993 $ 75,000 $ 630,313 $ (234,569) $ 0 $ 470,744 Proceeds from sale of 1,200,000 shares of common stock, net of stock offering costs 1,200,000 9,803,851 0 0 0 Proceeds from sale of 162,824 shares of common stock, net of stock offering costs 162,824 1,330,252 0 0 1,493,076 Unrealized (losses) on securities available for sale, net 0 0 0 (150,693) (150,693) Net (loss) 0 0 (1,122,402) 0 (1,122,402) ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1994 $ 1,437,824 $11,764,416 $(1,356,971) $ (150,693) $11,694,576 Change in unrealized gains on securities available for sale, net 0 0 0 268,946 268,946 Net (loss) 0 0 (373,782) 0 (373,782) ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1995 $ 1,437,824 $11,764,416 $(1,730,753) $ 118,253 $11,589,740 Change in unrealized gains (losses) on securities available for sale, net 0 0 0 (603,722) (603,722) Net income 0 0 682,588 0 682,588 ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1996 $ 1,437,824 $11,764,416 $(1,048,165) $ (485,469) $11,668,606 =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 1996, 1995 and 1994 1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ........................................................ $ 682,588 $ (373,782) $ (1,122,402) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .......................................... 143,173 107,313 41,973 Provision for loan losses .............................................. 500,397 282,600 191,500 Provision for merchant credit card losses .............................. 126,805 126,831 0 Amortization of premiums (accretion of discounts) on securities, net ... (16,920) 8,108 42,351 Federal Home Loan Bank stock dividends ................................. (3,000) 0 0 Realized loss on securities held for sale .............................. 0 0 70,532 Realized (gains) losses on securities available for sale ............... (22,272) 16,656 0 (Increase) in accrued interest receivable .............................. (435,388) (450,468) (201,302) (Increase) in other assets ............................................. (397,684) (437,544) (14,377) Increase in other liabilities .......................................... 258,394 534,384 131,418 ------------ ------------ ------------ Net cash provided by (used in) operating activities ................. $ 836,093 $ (185,902) $ (860,307) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in federal funds sold ............................ 10,222,000 (8,250,000) (4,700,000) Net (increase) in certificates of deposits at financial institutions ..... (1,489,154) (2,128,005) (1,854,853) Net loans originated ..................................................... (25,422,515) (18,741,741) (12,767,461) Purchase of securities held to maturity .................................. (2,873,782) (500,000) (10,677,625) Purchase of securities available for sale ................................ (18,947,247) (10,297,885) 0 Purchase of securities held for sale ..................................... 0 0 (8,121,736) Proceeds from maturity of securities ..................................... 4,000,000 0 0 Proceeds from calls/paydowns on securities ............................... 4,483,584 387,271 538,630 Proceeds from sale of securities available for sale ...................... 4,637,700 338,600 0 Proceeds from sale of securities held for sale ........................... 0 0 2,262,313 Purchase of premises and equipment ....................................... (2,872,372) (187,259) (1,763,866) ------------ ------------ ------------ Net cash (used in) investing activities ............................. $(28,261,786) $(39,379,019) $(37,084,598) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ................................... 0 0 12,496,927 Decrease in deferred registration costs .................................. 0 0 45,600 Net increase (decrease) in federal funds purchased ....................... (6,021,072) 7,211,072 0 Net increase in time certificates of deposit accounts .................... 11,073,500 19,370,853 15,156,786 Net increase in non-time deposit accounts ................................ 20,746,932 14,699,278 11,870,769 Net increase in other borrowings ......................................... 1,000,000 0 0 Net increase in Federal Home Loan Bank advances .......................... 3,411,470 0 0 ------------ ------------ ------------ Net cash provided by financing activities ........................... $ 30,210,830 $ 41,281,203 $ 39,570,082 ------------ ------------ ------------ Net increase in cash and due from banks ............................. 2,785,137 1,716,282 1,625,177 Cash and due from banks, beginning .................................. 3,830,270 2,113,988 488,811 ------------ ------------ ------------ Cash and due from banks, ending ..................................... $ 6,615,407 $ 3,830,270 $ 2,113,988 ============ ============ ============ Supplemental disclosure of cash flow information, cash payments for: Interest ................................................................. $ 3,384,353 $ 1,513,310 $ 143,760 ============ ============ ============ Supplemental schedule of noncash investing and financing activities: Change in unrealized gains (losses) on securities available for sale, net $ (603,722) $ 268,946 $ (150,693) ============ ============ ============ Investment securities transferred from held to maturity portfolio to available for sale portfoilio, at fair value ......................... $ 8,004,543 $ 0 $ 0 ============ ============ ============1 See Notes to Consolidated Financial Statements
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies Nature of business: Quad City Holdings, Inc. (the "Company") is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (the "Bank") and Quad City Bancard, Inc. ("Bancard"). The Bank is a commercial bank that serves the Quad Cities area, is chartered and regulated by the state of Iowa, is insured and subject to regulation by the Federal Deposit Insurance Corporation and is a member of and regulated by the Federal Reserve System. Bancard is an entity formed in April, 1995 to conduct the Company s merchant credit card operation. This activity was previously conducted by the Bank. 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. Principals of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and Bancard. 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, amounts due from banks and interest-bearing balances with other banks. Cash flows from loans originated by the Bank, deposits, and federal funds purchased and sold are reported net. Investment securities: Effective June 30, 1994, the Company adopted FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115") and classified investments as held to maturity or available for sale. There were no investments held for trading purposes at June 30, 1996, 1995 or 1994. Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in stockholders equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Note 1. Continued The cumulative effect of implementing FAS 115 at June 30, 1994 , was to report investment securities previously reported as held for sale to available for sale, with unrealized losses of $150,693 at June 30, 1994 as a separate component of stockholders equity and as a cumulative effect on the statement of income. Pursuant to a FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", the Company transferred at fair value $8,004,543 of investment securities from held to maturity to available for sale in December 1995. Loans and allowance for loan losses: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. The allowance for loan losses is maintained at the level considered adequate by management of the Company and the Bank to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance, the Company and the Bank make continuous evaluations of the loan portfolio and related off-balance sheet commitments, and consider current economic conditions and other factors that may effect a borrower s ability to repay. In accordance with FASB Statement No. 114 "Accounting by Creditors for Impairment of a Loan," loans are considered impaired when, based on current information and events, it is probable the Company and the Bank will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to an impaired loan is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan s effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Company and the Bank recognize interest income on impaired loans on an accrual basis. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives. Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Note 1. Continued Trust assets: Trust assets held by the Bank in fiduciary, agency or custody capacities for its customers, other than cash on deposit at the Bank, are not included in the accompanying consolidated balance sheets since such items are not assets of the Bank. Per share data: Earnings per common share are determined by dividing net income by the weighted average number of common shares outstanding during the year. Note 2. Investment Securities The amortized cost and fair value of investment securities at June 30, 1996 and 1995 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ------------ ------------ June 30, 1996 Securities held to maturity: Mortgage-backed securities ................ $ 2,560,793 $ 2,513 $ (48,911) $ 2,514,395 Municipal securities ...................... 582,720 595,808 1,355 (14,443) ------------ ------------ ------------ ------------ Totals ............................... $ 3,156,601 $ 3,868 $ (63,354) $ 3,097,115 ============ ============ ============ ============ Securities available for sale: U.S. treasury securities .................. $ 14,504,449 $ 42,191 $ (156,912) $ 14,389,728 U.S. agency securities .................... 12,612,166 8,759 (355,026) 12,265,899 Mortgage-backed securities ................ 2,851,340 12,930 (20,365) 2,843,905 Other securities .......................... 1,550,166 9,079 (26,125) 1,533,120 ------------ ------------ ------------ ------------ Totals ............................... $ 31,518,121 $ 72,959 $ (558,428) $ 31,032,652 ============ ============ ============ ============ June 30, 1995 Securities held to maturity: U.S. treasury securities ..................... $ 8,000,218 $ 0 $ (78,031) $ 7,922,187 U.S. agency securities ....................... 500,000 0 0 500,000 Mortgage-backed securities ................... 2,318,460 0 (44,810) 2,273,650 Taxable municipal securities ................. 199,465 5,755 0 205,220 ----------- ------------- ------------- ------------ Totals .................................. $11,018,143 $ 5,755 $ (122,841) $ 10,901,057 =========== ============= ============= ============ Securities available for sale: U.S. treasury securities ..................... $ 6,016,543 $ 124,114 $ (24,875) $ 6,115,782 U.S. agency securities ....................... 5,477,243 53,225 0 5,530,468 Mortgage-backed securities ................... 3,092,266 10,889 (48,325) 3,054,830 Other securities.............................. 328,590 3,225 0 331,815 ----------- ------------- ------------- ------------ Totals .................................. $14,914,642 $ 191,453 $ (73,200) $ 15,032,895 =========== ============= ============= ============
Note 2. Continued All sales of securities during the years ended June 30, 1996, 1995 and 1994 were from securities identified as available for sale or held for sale. Information on proceeds received, as well as the gains and losses from the sales of those securities is as follows: 1996 1995 1994 ---------- ---------- ---------- Proceeds from sales of securities ....... $4,637,700 $ 338,600 $2,262,313 Gross losses from sales of securities ... 18,848 18,793 70,532 Gross gains from sales of securities .... 41,120 2,137 0 The amortized cost and fair value of securities at June 30, 1996 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay with or without call or prepayment penalties. Amortized Cost Fair Value ----------- ----------- Securities held to maturity Due in one year or less .................... $ 250,284 $ 246,953 Due after one year through five years ...... 2,660,112 2,616,007 Due after five years ....................... 246,205 234,155 ----------- ----------- Totals ................................ $ 3,156,601 $ 3,097,115 =========== =========== Securities available for sale Due in one year or less .................... $ 3,182,415 $ 3,157,782 Due after one year through five years ...... 24,536,423 24,210,421 Due after five years ....................... 2,249,117 2,131,329 Marketable equity securities ............... 1,550,166 1,533,120 ----------- ----------- Totals ................. $31,518,121 $31,032,652 =========== =========== At June 30, 1996 and 1995, investment securities with a carrying value and a fair value of $16,503,665 and $16,239,844, and $5,771,440 and $5,773,203, respectively, were pledged on public deposits and for other purposes as required or permitted by law. The Company transferred securities with an amortized cost of $7,992,513 and an unrealized gain of $12,030 from the held to maturity portfolio to the available for sale portfolio in December, 1995, 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 3. Loans Receivable The composition of the loan portfolio at June 30, 1996 and 1995 is presented as follows: 1996 1995 ------------ ------------ Commercial .................................. $ 40,338,645 $ 24,748,659 Real estate 9,011,608 2,879,530 Installment and other consumer 7,459,467 3,879,388 ------------ ------------ Total loans 56,809,720 31,507,577 Less allowance for estimated losses on loans (852,500) (472,475) ------------ ------------ Net loans ............................. $ 55,957,220 $ 31,035,102 ============ ============ There were no nonaccrual loans at June 30, 1996 or 1995. Note 3. Continued Changes in the allowance for estimated losses on loans for the years ended June 30, 1996, 1995 and 1994 are presented as follows: 1996 1995 1994 --------- --------- --------- Balance, beginning .......................... $ 472,475 $ 191,500 $ 0 Provisions charged to expense ............ 500,397 282,600 191,500 Loans charged off ........................ (120,372) (1,725) 0 Recoveries on loans previously charged off 0 100 0 --------- --------- --------- Balance, ending ............................. $ 852,500 $ 472,475 $ 191,500 ========= ========= ========= Impaired loans were not material at June 30, 1996. 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 ending June 30, 1996 and 1995 is as follows: 1996 1995 ----------- ----------- Balance, beginning ................... $ 859,020 $ 1,171,899 Advances .......................... 262,319 390,104 Repayments ........................ (575,198) (235,250) ----------- ----------- Balance, ending ..................... $ 1,013,874 $ 859,020 =========== =========== Note 4. Premises and Equipment The following summarizes the components of premises and equipment at June 30, 1996 and 1995: 1996 1995 ----------- ----------- Land ......................................... $ 200,000 $ 200,000 Building and construction in progress ........ 3,456,818 1,031,608 Furniture & equipment......................... 1,165,137 719,517 ----------- ----------- Total premises and equipment ............ 4,821,955 1,951,125 Less accumulated depreciation ................ (290,917) (149,286) ----------- ----------- Total premises and equipment, net ....... $ 4,531,038 $ 1,801,839 =========== =========== Note 5. Deposits The following summarizes the components of deposits at June 30, 1996 and 1995: 1996 1995 ----------- ----------- Demand accounts ........................ $15,730,265 $ 5,628,526 NOW accounts ........................... 9,724,779 6,668,486 Money market accounts .................. 19,882,850 13,113,801 Savings accounts ....................... 1,979,085 1,159,234 Time certificates ...................... 45,601,139 34,527,639 ----------- ----------- Total deposits ................... $92,918,118 $61,097,686 =========== =========== Note 5. Continued Included in interest bearing deposits at June 30, 1996 and 1995 were certificates of deposit totaling $13,720,210 and $9,824,217, respectively, that were $100,000 or greater. Maturities of these certificates were as follows: 1996 1995 ----------- ----------- One to three months ................................ $ 5,984,277 $ 1,914,336 Three to six months ................................ 1,931,085 1,797,359 Six to twelve months ............................... 3,494,877 3,511,243 Over twelve months ................................. 2,601,279 2,309,971 ----------- ----------- Total certificates of deposit greater than $100,000 $13,720,210 $ 9,824,217 =========== =========== Interest expense on deposits for the years ended June 30, 1996, 1995 and 1994 was as follows: 1996 1995 1994 ---------- ---------- ---------- Interest-bearing demand accounts .................... $ 188,315 $ 117,596 $ 19,087 Money market accounts ............................... 758,555 317,897 47,923 Savings accounts .................................... 39,365 24,037 3,165 Time certificates greater than or equal to 672,668 399,249 82,376 Time certificates less than $100,000 ................ 1,690,645 934,071 100,962 ---------- ---------- ---------- Total interest expense ......................... $3,349,548 $1,792,850 $ 253,513 ========== ========== ==========
Note 6. Federal Home Loan Bank Advances The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). As of June 30, 1996, the Bank held $1,249,700 of FHLB stock. Advances from the FHLB as of June 30, 1996 bear interest and are due as follows: Amount Due Interest Rate ---------- -------------- Due more than 5 years from June 30, 1996 .......... $3,411,470 5.95% to 7.08% Securities of approximately $4,973,226 as of June 30, 1996 were pledged as collateral on these advances. Note 7. Other Borrowings The Company has a revolving credit note for $1,500,000, which is secured by all the outstanding stock of the Bank. Interest is payable quarterly at the prime rate. Prime was 8.25% at June 30, 1996. At June 30, 1996, $1,000,000 was outstanding on this note. The revolving credit note expires July 1, 1998. The revolving credit note agreement contains certain covenants which place restrictions on additional debt and stipulate minimum capital and various operating ratios. The Company was in compliance with all of the covenants as of June 30, 1996. Note 8. Income Taxes The Company incurred no income tax expense or benefit for the years ended June 30, 1996, 1995 and 1994. At June 30, 1996, the Company had net operating loss carryforwards for income tax purposes of approximately $900,000, of which, if not utilized to reduce taxable income in future periods will expire in varying amounts in 2009 and 2010. Deferred tax assets arose primarily due to the net operating loss carryforwards, and have been reduced to zero through a valuation allowance, as realization of the asset is uncertain. Note 9. Employee Benefit Plan On February 1, 1994, the Company implemented a profit sharing plan, which includes a provision designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions. All employees are eligible to participate in the plan. The Company matches 100% of the first 2% of employee contributions, 50% of the next 2% of employee contributions, and 25% of the next 2% of employee contributions, up to a maximum amount of 3.5%. Additionally, the Company may, at its discretion, make additional contributions to the plan which are allocated to the accounts of participants in the plan on the basis of relative compensation. Company contributions for the years ended June 30, 1996, 1995 and 1994 were as follows: 1996 1995 1994 ------- ------- ------- Matching contribution ................ $47,233 $18,954 $ 6,080 Discretionary contribution ........... 20,000 10,000 6,000 ------- ------- ------- Total contributions ............. $67,233 $28,954 $12,080 ======= ======= ======= Note 10. Warrants and Options Warrants As part of the underwriting agreement for its initial public offering, the Company issued warrants to the underwriters for the purchase of 25,000 shares of common stock at $12.00 per share. The warrants became exercisable on October 13, 1994 (the date commencing one year from the date of the public offering) and remain exercisable for a period of four years after such date. Private placement stockholders were issued warrants as described below. Common stock of $75,000 at June 30, 1993 represented 75,000 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 $10.00 per unit) which consisted of one share of the Company s common stock and one warrant to purchase an additional share of Company common stock for $11.00, exercisable during a five year period commencing October 13, 1994 (one year after completion of the public offering). As of June 30, 1996, none of the warrants had been exercised. Stock Option Plan The Company s Board of Directors and its stockholders adopted in June, 1993 the Quad City Holdings, Inc. Stock Option Plan (the "Stock Option Plan"). Up to 100,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive stock options or non-qualified stock options granted under the Stock Option Plan. The Stock Option Plan is administered by a committee appointed by the Board of Directors (the "Committee"). The number and exercise price of options granted under the Stock Option Plan is determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for incentive stock options, or 85% of such fair market value for non-qualified stock options. The stock options vest 20% per year. The term of the options may not exceed 10 years from the date of the grant. In the case of non-qualified stock options, the Stock Option Plan provides for the granting of "Tax Benefit Rights" to certain participants at the same time as these participants are awarded non-qualified options. Each Tax Benefit Right entitles a participant to a cash payment equaling the excess of the fair market value of a share of common stock on the exercise date over the exercise price of the related option multiplied by the difference between the rate of tax on ordinary income over the rate of tax on capital gains (federal and state). Note 10. Continued Company grants for the years ended June 30, 1996, 1995, 1994 and 1993 were as follows: Number of Number of Number of Number of Shares Shares Shares Shares Date of Grant Granted Canceled Vested Unvested Option Price - --------------------------------------- ---------- ---------- ---------- --------- ------------- June 30, 1993 ......................... 50,000 0 30,000 20,000 $10.00 March 31, 1994 ........................ 25,000 0 10,000 15,000 10.25 June 30, 1994 ......................... 8,000 1,600 2,800 3,600 9.00 October 19, 1994 ...................... 4,300 180 840 3,280 9.25 January 21, 1995 ...................... 500 0 100 400 9.25 June 30, 1995 ......................... 5,500 300 1,040 4,160 10.25 September 30, 1995 .................... 600 100 0 500 11.75 June 28, 1996 ......................... 6,300 0 0 6,300 13.25 ------- ------- ------- ------- Totals ............................. 100,200 2,180 44,780 53,240 ======= ======= ======= =======
None of the options had been exercised. The Financial Accounting Standards Board has issued Statement No. 123 "Accounting for Stock Based Compensation" which becomes effective for years beginning after December 15, 1995. The Company anticipates that it will elect to continue to measure compensation cost using Opinion 25 and present the proforma disclosures required by Statement No. 123. Accordingly, adoption of this standard should have no effect on the Company s financial statements. Note 11. 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 at June 30, 1996 and 1995 with the minimum requirements for the Bank are presented below: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: -------------------- ---------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ----------- -------- ------------ --------- ------------ ---------- As of June 30, 1996: Total Capital (to Risk Weighted Assets) ....................... $11,455,003 16.9% $ 5,419,280 8.0% $ 6,774,100 10.0% Tier 1 Capital (to Risk Weighted Assets) ........................ 10,666,032 18.2% 2,349,346 4.0% 3,524,019 6.0% Tier 1 Capital (to Average Assets) ........................ 10,666,032 9.8% 4,357,929 4.0% 5,447,412 5.0% As of June 30, 1995: Total Capital (to Risk Weighted Assets ......................... 7,559,527 19.5% 3,096,580 8.0% 3,870,726 10.0% Tier 1 Capital (to Risk Weighted Assets) ........................ 7,112,852 20.8% 1,370,492 4.0% 2,055,738 6.0% Tier 1 Capital(to Average Assets). 7,112,852 9.2% 3,085,836 4.0% 3,857,295 5.0%
Note 11. Continued Federal Reserve Board policy provides that a bank holding company should not pay dividends unless (i) the dividends can be fully funded out of net income from the company s net earnings over the prior year and (ii) the prospective rate of earnings retention appears consistent with the company s (and its subsidiaries ) capital needs, asset quality and overall financial condition. In addition, the Delaware General Corporation Law restricts the Company from paying dividends except out of its surplus, or in the case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. In addition, the Bank, as a member of the Federal Reserve System, will be prohibited from paying dividends to the extent such dividends declared in any calendar year exceed the total of its net profits of that year combined with its retained net profits of the preceding two years, or are otherwise determined to be an "unsafe and unsound practice" by the Federal Reserve Board. Note 12. Commitments and Contingencies In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based upon management s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At June 30, 1996, commitments to extend credit aggregated $16,860,159 and standby letters of credit aggregated $1,428,301. At June 30, 1995, commitments to extend credit aggregated $8,321,032 and standby letters of credit aggregated $10,000. 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 guaranty to MasterCard International Incorporated, which is backed up by a performance bond in the amount of $1,000,000. At June 30, 1996, there were no pending liabilities. Note 13. Quarterly Results of Operations (Unaudited) Fiscal year ended June 30, 1996 -------------------------------------------------------- Sept. 1995 Dec. 1995 Mar. 1996 June 1996 ----------- ----------- ----------- ----------- Total interest income ......... $ 1,442,418 $ 1,534,274 $ 1,690,993 $ 1,915,782 Total interest expense 809,854 800,009 897,467 979,050 ----------- ----------- ----------- ----------- Net interest income 632,564 734,265 793,526 936,732 Provision for loan losses ..... (100,800) (153,300) (113,835) (132,462) Other income .................. 369,435 373,641 403,425 515,786 Other expense ................. (807,357) (789,828) (887,637) (1,091,567) ----------- ----------- ----------- ----------- Net income .................... $ 93,842 $ 164,778 $ 195,479 $ 228,489 =========== =========== =========== =========== Net income per share .......... $ 0.06 $ 0.11 $ 0.14 $ 0.16 =========== =========== =========== =========== Note 13. Continued Fiscal year ended June 30, 1995 -------------------------------------------------------- Sept. 1994 Dec. 1994 Mar. 1994 June 1994 ----------- ----------- ----------- ----------- Total interest income ......... $ 546,867 $ 745,118 $ 977,256 $ 1,280,881 Total interest expense ........ 259,397 376,530 515,171 744,477 ----------- ----------- ------------ ----------- Net interest income ........... 287,470 368,588 462,085 536,404 Provision for loan losses ..... (78,000) (79,400) (79,200) (46,000) Other income .................. 35,135 65,291 172,100 275,171 Other expense ................. (486,530) (459,287) (604,202) (743,407) ----------- ----------- ----------- ----------- Net income (loss) ............. $ (241,925) $ (104,808) $ (49,217) $ 22,168 =========== =========== =========== =========== Net income (loss) per share ... $ (0.17) $ (0.07) $ (0.03) $ 0.01 =========== ============ =========== ===========
Note 14. Parent Company Only Financial Statements The following is condensed financial information of Quad City Holdings, Inc. (parent company only): Condensed Balance Sheets June 30, ---------------------------- 1996 1995 ------------ ------------ Assets Cash and due from banks .......................................... $ 343,188 $ 482,549 Certificates of deposits with financial institutions ............. 0 420,035 Securities available for sale .................................... 174,671 1,283,644 Investment in Quad City Bank and Trust Company ................... 10,197,609 7,326,184 Investment in Quad City Bancard, Inc. ............................ 785,605 389,511 Loans receivable, net ............................................ 1,132,696 1,697,233 Other assets ..................................................... 135,477 58,795 ------------ ------------ Total assets ............................................. $ 12,769,246 $ 11,657,951 ============ ============ Liabilities and Stockholders' Equity Other liabilities ................................................ $ 100,640 $ 68,211 Other borrowings ................................................. 1,000,000 0 Stockholders' equity Common stock .................................................. 1,437,824 1,437,824 Additional paid-in capital .................................... 11,764,416 11,764,416 Retained earnings(deficit) .................................... (1,048,165) (1,730,753) Unrealized gains (losses) on securities available for sale, net (485,469) 118,253 ------------ ------------ Total stockholders' equity ............................... $ 11,668,606 $ 11,589,740 ------------ ------------ Total liabilities and stockholders' equity ................ $ 12,769,246 $ 11,657,951 ============ ============
Condensed Statements of Income Year Ended June 30, -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net interest income .............................................. $ 178,783 $ 339,260 $ 229,168 Provision for loan losses ........................................ 8,300 (4,900) (20,900) Investment securities gains (losses), net ........................ 26,345 2,137 (70,532) Other ............................................................ 24,000 24,002 12,307 ------------ ------------ ------------ Total income ............................................. 237,428 360,499 150,043 Expenses ......................................................... 251,606 280,824 714,323 ------------ ------------ ------------ Income (loss) before equity in undistributed loss of subsidiaries ............................................ (14,178) 79,675 (564,280) Equity in undistributed income (loss) of Quad City Bank and Trust Company ................................ 300,672 (392,968) (707,372) Equity in undistributed income (loss) of Quad City Bancard, Inc. ......................................... 396,094 (60,489) 0 ------------ ------------ ------------ Income before cumulative effect of a change in accounting principle ............................................ 682,588 (373,782) (1,271,652) Cumulative effect of a change in accounting principle ............ 0 0 149,250 ------------ ------------ ------------ Net income (loss) ........................................ $ 682,588 $ (373,782) $ (1,122,402) ============ ============ ============
Condensed Statements of Cash Flows Year Ended June 30, ----------------------------------------- 1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................................ $ 682,588 $ (373,782) $ (1,122,402) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed (income) loss of: Quad City Bank and Trust Company .......................................... (300,672) 392,968 707,372 Quad City Bancard, Inc. ................................................... (396,094) 60,489 0 Depreciation and amortization .............................................. 2,524 758 1,567 Provision for loan losses .................................................. (8,300) 4,900 20,900 Amortization of premiums and accretion of discounts on securities, net ..... 3,079 33,853 34,958 Realized (gains) losses on securities available for sale ................... (26,345) (2,137) 70,532 (Increase) decrease in accrued interest receivable ......................... 20,746 6,763 (35,814) (Increase) decrease in other assets ........................................ (30,731) (1,077) 36,996 Increase (decrease) in other liabilities ................................... 32,429 59,325 (100,065) ------------ ------------ ------------ Net cash provided by (used in) operating activities ..................... $ (20,776) $ 182,060 $ (385,956) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net loans (originated) or repaid ............................................. 572,837 (330,527) (1,392,506) Purchase of securities held for sale ......................................... 0 0 (7,771,585) Purchase of securities available for sale .................................... (117,167) (25,209) 0 Purchase of stock in Quad City Bank and Trust Company ........................ 0 0 (4,500,000) Capital infusion, Quad City Bank and Trust Company ........................... (2,099,000) (800,000) 0 Purchase of stock in Quad City Bancard, Inc. ................................. 0 (450,000) 0 Net (increase) decrease in certificate of deposits with financial institutions 420,035 486,818 (906,853) Proceeds from sales of securities held for sale .............................. 0 0 2,262,313 Proceeds from sales of securities available for sale ......................... 145,512 489,789 0 Proceeds from calls on securities ............................................ 28,419 207,225 408,346 Purchase of premises and equipment ........................................... (69,221) (21,853) (851) ------------ ------------ ------------ Net cash (used in) investing activities ................................. $ (1,118,585) $ (443,757) $(11,901,136) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in other borrowings ............................................. 1,000,000 0 0 Issuance of common stock ..................................................... 0 0 12,496,927 Decrease in deferred registration costs ...................................... 0 0 45,600 ------------ ------------ ------------ Net cash provided by financing activities ............................... $ 1,000,000 $ 0 $ 12,542,527 ------------ ------------ ------------ Net increase (decrease) in cash and due from banks ...................... (139,361) (261,697) 255,435 Cash and due from banks, beginning ...................................... 482,549 744,246 488,811 ------------ ------------ ------------ Cash and due from banks, ending ......................................... $ 343,188 $ 482,549 $ 744,246 ============ ============ ============
Note 15. Fair Value of Financial Instruments FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure 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: The carrying amounts reported in the balance sheets for cash and due from banks, federal funds sold, and certificates of deposit approximate 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 all 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: The fair value of accrued interest receivable is considered to approximate its carrying value. Deposits: The fair values disclosed for demand deposits equal their carrying amounts which represents the amount payable on demand. Fair values for time deposits are estimated using a discount cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits. Federal funds purchased: The carrying amount reported in the balance sheets for federal funds purchased approximates its fair value. Federal Home Loan Bank advances: The fair value of the Company s Federal Home Loan Bank advances is estimated using discounted cash flow analysis, based on the Company s current incremental borrowing rates for similar types of borrowing arrangements. Other borrowings: For variable rate debt, the carrying amount is a reasonable estimate of fair value. Accrued interest payable: The fair value of accrued interest payable is considered to approximate its carrying value. Commitments to extend credit: The 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, 1996 are as follows Estimated Carrying Value Fair Value -------------- ----------- Cash and due from banks ............................ $6,615,407 $ 6,615,407 Federal funds sold ................................. 2,728,000 2,728,000 Certificates of deposit at financial institutions .. 5,472,012 5,472,012 Investment securities: Held to maturity .............................. 3,156,601 3,097,115 Available for sale ............................ 31,032,652 31,032,652 Loans receivable, net .............................. 55,957,220 56,155,633 Accrued interest receivable ........................ 1,121,268 1,121,268 Deposits ........................................... 92,918,118 93,403,739 Federal funds purchased ............................ 1,190,000 1,190,000 Federal Home Loan Bank advances .................... 3,411,470 3,254,299 Other borrowings ................................... 1,000,000 1,000,000 Accrued interest payable ........................... 594,045 594,045 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The Company will file with the securities and exchange commission a definitive proxy statement no later than 120 days after the close of its fiscal year ended June 30, 1996 (the "Proxy Statement"). The information required by this item is incorporated by reference from the Proxy Statement. Item 10. Executive Compensation The information required by this item is incorporated by reference from the Proxy Statement. Item 11. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference from the Proxy Statement. Item 12. Certain Relationships and Related Transactions The information required by this item is incorporated by reference from the Proxy Statement. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits The Index to Exhibits appears at page 37 of this Report. (b) Reports on Form 8-K None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, as amended, the Issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QUAD CITY HOLDINGS, INC. Date: September 18, 1996 By: /s/ Douglas M. Hultquist ------------------------------------- Douglas M. Hultquist President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Issuer and in the capacities and on the dates indicated. Signature Title Date /s/ Michael A. Bauer Chairman of the Board September 18, 1996 - ------------------------- of Directors Michael A. Bauer /s/ Douglas M. Hultquist President, Chief Executive September 18, 1996 - ------------------------- and Financial Officer and Director Douglas M. Hultquist /s/ Richard R. Horst Director and Secretary September 18, 1996 - ------------------------- Richard R. Horst /s/ Ronald G. Peterson Director September 18, 1996 - ------------------------- Ronald G. Peterson /s/ John W. Schricker Director September 18, 1996 - ------------------------- John W. Schricker EX-23 3 McGLADREY & PULLEN, LLP Certified Public Accountants and Consultants 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 26, 1996 relating to the June 30, 1996 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 September 27, 1996 EX-27 4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFROMATION EXTRACTED FORM THE JUNE 30, 1996 FORM 10-K OF QUAD CITY HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR JUN-30-1996 JUN-30-1996 6,615 5,472 2,728 0 31,032 3,157 3,097 56,810 853 111,475 92,918 1,190 1,287 4,411 0 0 1,438 10,231 111,475 3,973 1,869 741 6,583 3,350 3,486 3,097 500 22 3,576 683 683 0 0 683 .47 .47 3.54 0 307 0 0 472 120 0 853 853 0 853
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