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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000
Commission file number: 0-22208
QUAD CITY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 42-1397595
- - ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
3551 Seventh Street, Suite 204, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
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Common Stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of the voting common stock held by non-affiliates as
of August 22, 2000 was approximately $29,500,000. As of August 22, 2000, the
issuer had 2,274,070 shares of Common Stock outstanding.
Documents incorporated by reference:
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Part III of Form 10-K - Proxy statement for annual meeting
of stockholders to be held in 2000.
Part I
Item 1. Business
Quad City Holdings, Inc. ("Quad City") was formed in February 1993
under the laws of the state of Delaware for the purpose of becoming the bank
holding company of Quad City Bank and Trust Company (the "Bank").
The Bank was capitalized on October 13, 1993 and commenced operations
on January 7, 1994. The Bank is organized as an Iowa-chartered commercial bank
that is a member of the Federal Reserve System with depository accounts insured
by the Federal Deposit Insurance Corporation. The Bank provides full service
commercial and consumer banking, and trust and asset management services in the
Quad City area through its three offices that are located in Bettendorf and
Davenport, Iowa and in Moline, Illinois. A fourth full service location is
scheduled to open in Davenport in November 2000.
Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995,
as a Delaware corporation that provides merchant credit card processing
services. This operation had previously been a division of the Bank since July
1994. Currently, approximately 10,000 merchants process transactions with
Bancard.
On March 29, 1999, Bancard formed its own independent sales
organization ("ISO") subsidiary, Allied Merchant Services, Inc. ("Allied"),
which generates credit card processing business. Bancard owns 100% of Allied.
Quad City Holdings Capital Trust I ("Capital Trust") was formed in
April 1999 and capitalized in June 1999 in connection with the public offering
of $12 million of 9.2% trust preferred capital securities due June 30, 2029.
Quad City owns 100% of the Bank and Bancard and 100% of the common
securities of Capital Trust, and in addition to such ownership invests its
capital in stocks of financial institutions and mutual funds, as well as
participates in loans with the Bank.
Quad City operates in a highly competitive environment in the Quad
Cities area. Competitors include not only other commercial banks, credit unions,
savings banks, savings and loan institutions and mutual funds, but also,
insurance companies, finance companies, brokerage firms, investment banking
companies, and a variety of other financial services and advisory companies.
Many of these competitors are not subject to the same regulatory restrictions as
Quad City. Many of these unregulated competitors compete across geographic
boundaries and provide customers increasing access to meaningful alternatives to
banking services. These competitive trends are likely to continue. Additionally,
Quad City competes in a market with a number of much larger financial
institutions with substantially greater resources and larger lending limits. The
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
regulates Quad City and its subsidiaries. In addition, the Bank is regulated by
the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal
Deposit Insurance Corporation (the "FDIC").
Quad City's principal business consists of attracting deposits from the
public and investing those deposits in loans and securities. The deposits of the
Bank are insured to the maximum amount allowable by the FDIC. Quad City's
results of operations are dependent primarily on net interest income, which is
the difference between the interest earned on its loans and securities and the
interest paid on deposits and borrowings. Its operating results are affected by
merchant credit card fees, trust fees, deposit service charge fees, fees from
the sales of residential real estate loans and other income. Operating expenses
include employee compensation and benefits, occupancy and equipment expense,
professional and data processing fees, advertising and marketing expenses and
other administrative expenses. Quad City's operating results are also affected
by economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
The commercial banking business is a highly regulated business. See
Appendix A for a brief summary regarding federal and state statutes and
regulations, which are applicable to Quad City and its subsidiaries.
Supervision, regulation and examination of banks and bank holding companies by
bank regulatory agencies are intended primarily for the protection of depositors
rather than stockholders of bank holding companies and banks.
Quad City, the Bank, Bancard and Allied have a June 30th fiscal year
end and collectively employ 157 individuals. No one customer accounts for more
than 10% of revenues, loans or deposits.
See Appendix B for tables and schedules that show selected comparative
statistical information required pursuant to the industry guides promulgated
under the Securities Act of 1933 and 1934, relating to the business of Quad
City.
Item 2. Property
The main office of the Bank is in a 6,700 square foot facility, which
was completed in January 1994. In March 1994, the Bank acquired that facility,
which is located at 2118 Middle Road in Bettendorf.
Construction of a second full service banking facility was completed in
July 1996 to provide for the convenience of customers and to expand its market
territory. The Bank also owns its portion of that facility which is located at
4500 Brady Street in Davenport. The two-story building is in two segments that
are separated by an atrium. The Bank owns the south half of the building, while
the northern portion is owned by the developer. Each floor is 6,000 square feet.
The Bank occupies its first floor and utilizes the basement for operational
functions, item processing and storage. The entire second floor has been leased
to two professional services firms; however, in the second fiscal quarter of
2001, approximately 4,500 square feet will become available. In addition, the
residential real estate department of the Bank leases approximately 2,500 square
feet on the first floor in the north half of the building.
Renovation of a third full service banking facility was completed in
February 1998 at the historic Velie Plantation Mansion, 3551 Seventh Street,
located near the intersection of 7th Street and John Deere Road in Moline near
the Rock Island/Moline border. The building is owned by a third party limited
liability company and the Bank and Bancard are its major tenants. Quad City has
purchased a 20% interest in the company that owns the building. Bancard
relocated its operations to the lower level of the 30,000 square foot building
in late 1997. The Bank began its operations and Quad City relocated its
corporate headquarters to the first floor of the building in February 1998. In
May 2000, Quad City relocated its corporate headquarters to the second floor and
occupies approximately 2,000 square feet. The business office of a medical
clinic is sub-leasing approximately 3,500 square feet on the first floor.
In March 1999, the Bank acquired a 3,000 square foot office building
adjacent to the Davenport. The office space is utilized for various operational
and administrative functions.
Construction of a fourth full service banking facility began in early
summer of 2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City will lease
approximately 6,000 square feet on the first floor and 2,200 square feet on the
lower level of the 24,000 square foot facility. The office is expected to open
in November 2000.
Management is of the opinion that the facilities are of sound
construction, in good operating condition, are appropriately insured and are
adequately equipped for carrying on the business of Quad City.
The Bank intends to limit its investment in premises to no more than
50% of Bank capital. The Bank frequently invests in commercial real estate
mortgages. The Bank also invests in residential mortgages. The Bank has
established lending policies which include a number of underwriting factors to
be considered in making a loan including, location, loan to value ratio, cash
flow, interest rate and credit worthiness of the borrower.
No individual real estate property or mortgage amounts to 10% or more
of consolidated assets.
Item 3. Legal Proceedings
Bancard is the holder of an account receivable in the approximate
amount of $1,500,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary
of Nova Corporation (trading symbol NIS on the New York Stock Exchange.) This
receivable arises pursuant to Bancard's provision of electronic credit card
sales authorization and settlement services to PMT pursuant to a written
contract that includes PMT's obligation to indemnify Bancard for credit card
chargeback losses arising from those services. PMT has failed to timely pay
Bancard for monthly invoices, including service charges and substantial
chargeback losses, for the period of May, 2000 through September, 2000. Bancard
intends to vigorously pursue collection of this receivable. On September 25,
2000, PMT filed a lawsuit in federal court in Los Angeles, California, against
Bancard and Quad City. This lawsuit alleges tortious acts and breaches of
contract by Bancard, Quad City and others and seeks recovery from Bancard and
Quad City of not less than $3,600,000 of alleged actual damages, plus punitive
damages. Bancard and Quad City first received a copy of the complaint on
September 27, 2000 and, accordingly, have not had an opportunity to fully
evaluate the allegations contained in the complaint. However, based on a
preliminary evaluation of the complaint, Bancard and Quad City believe the
allegations to be without merit and intend to vigorously defend the suit.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the stockholders of Quad City for a
vote during the fourth quarter of the fiscal year ended June 30, 2000.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock, par value $1.00 per share ("Common Stock") of Quad
City is traded on The Nasdaq SmallCap Market under the symbol "QCHI". The stock
began trading on October 6, 1993. As of June 30, 2000, there were 2,283,920
shares of Common Stock outstanding held by approximately 2,500 holders of
record. The following table sets forth the high and low sales prices of the
Common Stock, as reported by The Nasdaq SmallCap Market, for the periods
indicated No cash dividends were declared during the periods indicated.
Fiscal 2000 Fiscal 1999
sales price sales price
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High Low High Low
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First quarter .......... $ 20.000 $ 16.500 $ 21.750 $ 18.000
Second quarter ......... 17.500 13.500 25.500 17.333
Third quarter .......... 15.250 10.250 23.500 19.125
Fourth quarter ......... 17.000 11.125 20.500 16.125
Quad City expects that all earnings will be retained to finance the
growth of Quad City, the Bank and Bancard, and that no cash dividends will be
paid in the near future. If and when dividends are declared, Quad City will
likely be largely dependent upon dividends from the Bank and Bancard for funds
to pay dividends on the common stock.
Under Iowa law, the Bank will be restricted as to the maximum amount of
dividends it may pay on its common stock. The Iowa Banking Act provides that an
Iowa bank may not pay dividends in an amount greater than its undivided profits.
The Bank is a member of the Federal Reserve System. The total of all dividends
declared by the Bank in a calendar year may not exceed the total of its net
profits of that year combined with its retained net profits of the preceding two
years. In addition, the Federal Reserve Board, the Iowa Superintendent and the
FDIC are authorized under certain circumstances to prohibit the payment of
dividends by the Bank. In the case of Quad City, further restrictions on
dividends may be imposed by the Federal Reserve Board.
Item 6. Selected Financial Data
The "Selected Consolidated Financial Data" of Quad City set forth below
is derived in part from, and should be read in conjunction with our consolidated
financial statements and the accompanying notes thereto. See Item 8 "Financial
Statements and Supplementary Data." Results for past periods are not necessarily
indicative of results to be expected for any future period.
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended June 30,
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2000 1999 1998 1997 1996
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(Dollars in thousands)
Statement of Income Data:
Interest income ....................... $ 24,079 $ 20,116 $ 15,077 $ 9,706 $ 6,529
Interest expense ...................... 13,289 11,027 8,342 4,994 3,486
Net interest income ................... 10,790 9,089 6,735 4,712 3,043
Provision for loan losses ............. 1,052 892 902 844 500
Noninterest income (1) ................ 6,154 5,561 6,148 2,807 1,716
Noninterest expenses .................. 11,467 9,679 7,910 5,291 3,576
Pre-tax net income .................... 4,425 4,079 4,071 1,384 683
Income tax expense .................... 1,680 1,614 1,678 165 --
Net income ............................ 2,745 2,465 2,393 1,219 683
Balance Sheet:
Total assets .......................... $367,622 $321,346 $250,151 $168,379 $111,475
Securities ............................ 56,129 50,258 33,276 29,589 32,831
Loans ................................. 241,853 197,977 162,975 108,365 56,810
Allowance for estimated losses on loans 3,617 2,895 2,350 1,633 853
Deposits .............................. 288,067 247,966 197,384 135,960 92,918
Stockholders' equity:
Common ........................... 20,071 18,473 16,602 13,613 11,669
Preferred ........................ -- -- 2,500 1,000 --
Key Ratios:
Return on average assets .............. 0.82 % 0.86 % 1.14 % 0.86 % 0.70 %
Return on average common equity ....... 14.17 13.69 16.40 9.85 5.82
Net interest margin ................... 3.53 3.42 3.55 3.74 3.47
Efficiency ratio (2) .................. 67.68 66.07 61.40 70.37 75.14
Nonperforming assets to total assets .. 0.20 0.51 0.51 0.27 0.28
Allowance for estimated losses on loans
to total loans ...................... 1.50 1.46 1.44 1.51 1.50
Net charge-offs to average loans ...... 0.16 0.26 0.13 0.08 0.27
Average common stockholders' equity
to average assets ................... 5.77 6.26 6.97 8.73 12.10
Average stockholders' equity
to average assets ................... 5.77 7.05 7.97 9.15 12.10
Earnings to fixed charges (3)
Excluding interest on deposits .... 2.29 x 2.81 x 3.78 x 3.17 x 5.71 x
Including interest on deposits .... 1.33 1.36 1.48 1.28 1.20
(1) Year ended June 30, 1998 noninterest income includes a pre-tax gain of
$2,168 from Bancard's restructuring of an agreement with an independent
sales organization (ISO). Year ended June 30, 1999 noninterest income
includes amortization of $732 from Bancard's restructuring of an ISO
agreement.
(2) Noninterest expenses divided by the sum of net interest income before
provision for loan losses and noninterest income.
(3) Dividends were not payable on Quad City's Series A Preferred Stock, and all
of the outstanding balance was redeemed in June 1999.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides additional information regarding our
operations for the fiscal years ended June 30, 2000, 1999 and 1998, and
financial condition for the fiscal years ended June 30, 2000 and 1999. This
discussion should be read in conjunction with "Selected Consolidated Financial
Data" and our consolidated financial statements and the accompanying notes
thereto included or incorporated by reference elsewhere in this document.
Overview
Quad City was formed in February 1993 for the purpose of organizing the
Bank. The Bank opened in January 1994 with $4.5 million in assets and grew to
$367.6 million as of June 30, 2000. Management expects continued opportunities
for growth, even though the rate of growth will probably be slower than that
experienced to date.
Quad City reported earnings of $2.7 million or $1.19 basic earnings per
share for fiscal 2000 as compared to $2.5 million and $1.08 per share for fiscal
1999 and $2.4 million and $1.09 per share for fiscal 1998. The improvement in
fiscal 2000 from fiscal 1999 was attributable to increased net interest income
and increased volumes of business for the Bank, reduced by an increase in
noninterest expenses. The improvement in fiscal 1999 from fiscal 1998 was
attributable to increased net interest income and increased volumes of business
for the Bank, reduced by a decrease in noninterest income. The decrease in
noninterest income was primarily due to the one time gain in fiscal 1998
resulting from the restructuring of Bancard's merchant broker agreement.
Quad City's results of operations are dependent primarily on net
interest income, which is the difference between the interest earned on its
loans and securities and the interest paid on deposits and borrowings. Quad
City's operating results are also affected by sources of noninterest income,
including merchant credit card fees, trust fees, deposit service charge fees,
fees from the sales of residential real estate loans and other income. Operating
expenses of Quad City include employee compensation and benefits, occupancy and
equipment expense and other administrative expenses. Quad City's operating
results are also affected by economic and competitive conditions, particularly
changes in interest rates, government policies and actions of regulatory
authorities. The majority of the Bank's loan portfolio is invested in commercial
loans. Deposits from commercial customers represent a significant funding source
as well.
The Bank has added facilities and employees to accommodate both its
historical growth and anticipated future growth. As such, overhead expenses have
had a significant impact on earnings. This trend is likely to continue as the
Bank's newest Davenport location is expected to open in November 2000. However,
the primary challenge for the Bank currently, from a profitability standpoint,
is to increase its net interest margin. Large commercial depositors and
certificate of deposit customers create a relatively high cost of funds and this
fact, along with a very competitive loan rate environment, have resulted in the
Bank's interest margin being below its national peer group. Management is
addressing this issue with alternative funding sources and pricing strategies.
During 1994, the Bank began to develop internally a merchant credit
card processing operation and in 1995 transferred this function to Bancard, a
separate subsidiary of Quad City. Bancard initially had an arrangement to
provide processing services exclusively to clients of a single ISO. This ISO was
sold in 1998, and the purchaser requested a reduction in the term of the
contract. Bancard agreed to amend the contract to reduce the term and accept a
fixed monthly processing fee of $25,000 for merchants existing at the time the
agreement was signed and a lower transaction fee for new merchants in exchange
for a payment of $2.9 million, the ability to transact business with other ISOs
and the assumption of the credit risk by the ISO. Approximately two thirds of
the income from this settlement, or $2.2 million, was reported in fiscal 1998,
with the remainder of $732,000 being recognized as an adjustment to the fixed
processing fee during fiscal 1999. Bancard terminated its processing for this
ISO in May 2000. During fiscal 2000, Bancard began processing for seven new
ISOs. However, Bancard expects its merchant credit card fee income to remain
below previous levels until such time as Bancard can develop relationships with
additional ISOs, increase volumes with existing ISOs or Allied can generate
processing business revenues comparable to those Bancard experienced prior to
termination of processing for the initial ISO. Bancard's average dollar volume
of transactions processed during fiscal 2000 was $90 million, and $58 million
was attributable to the ISO that terminated its relationship. The average dollar
volume of transactions processed during June and July 2000 was $69 million. This
reduction in processing fees and cessation of the settlement income at Bancard
is expected to adversely affect comparisons of consolidated net income in fiscal
2001 with fiscal 2000.
During fiscal 1998, the Bank expanded its presence in the mortgage
banking market by hiring several experienced loan originators and an experienced
underwriter. The Bank originates mortgage loans on personal residences and sells
the majority of these loans into the secondary market to avoid the interest rate
risk associated with long-term fixed rate financing. The Bank realizes revenue
from this mortgage banking activity from a combination of loan origination fees
and gain on sale of the loans in the secondary market. During fiscal 2000, the
Bank originated $36.8 million of real estate loans and sold $37.7 million of
loans, which resulted in gains of $439,000. The increase in interest rates
during that time caused a significant reduction in the Bank's mortgage
origination volume. In fiscal 1999 and 1998, the Bank originated $85.0 million
and $57.2 million of real estate loans and sold $87.8 million and $53.3 million
of loans, which resulted in gains of $1.0 million and $713,000, respectively.
Trust department income continues to be a significant contributor to
noninterest income, growing from approximately $1.5 million in fiscal 1999 to
$1.9 million in fiscal 2000. Income is generated primarily from fees charged
based on assets under management for corporate and personal trusts and for
custodial services. Assets under administration have grown from $506.8 at June
30, 1999 to $586.4 million at June 30, 2000. Growth in the current fiscal year
resulted primarily from new trust relationships created during the year.
Quad City's initial public offering during the fourth calendar quarter
of 1993 raised approximately $14 million. In order to provide additional capital
to support the growth of the Bank, Quad City formed a statutory business trust,
which issued $12 million of capital securities to the public for cash on June 9,
1999.
Results of Operations
Fiscal 2000 compared with fiscal 1999
Overview. Net income for fiscal 2000 was $2.7 million as compared to
net income of $2.5 million for the same period in 1999 for an increase of
$281,000 or 11%. Basic earnings per share for fiscal 2000 were $1.19 as compared
to $1.08 for fiscal 1999. The increase in net income was comprised of an
increase in net interest income after provision for loan losses of $1.5 million
and an increase in noninterest income of $594,000 reduced by an increase in
noninterest expenses of $1.8 million. The increase in noninterest income
occurred despite the fact that fiscal 1999 included $732,000 of revenue, which
was related to a one-time gain recognized by Bancard. The recognition of this
income ceased as of June 30, 1999.
Interest income. Interest income increased by $4.0 million, from $20.1
million for fiscal 1999 to $24.1 million for fiscal 2000. The 20% rise in
interest income was basically attributable to greater average outstanding
balances in interest-earning assets, principally loans receivable, and higher
interest rates.
Interest expense. Interest expense increased by $2.3 million, from
$11.0 million for fiscal 1999 to $13.3 million for fiscal 2000. The 20% increase
in interest expense was primarily attributable to greater average outstanding
balances in interest-bearing liabilities and higher interest rates.
Provision for loan losses. The provision for loan losses is established
based on factors such as the local and national economy and the risk associated
with the loans in the portfolio. Quad City had an allowance for estimated losses
on loans of approximately 1.50% of total loans at June 30, 2000 as compared to
approximately 1.46% at June 30, 1999. The provision for loan losses increased by
$160,000, from $892,000 for fiscal 1999 to $1,052,000 for fiscal 2000. For
fiscal 2000, commercial and real estate loans combined for total charge-offs of
$50,000 and total recoveries of less than $1,000. Consumer loan charge-offs and
recoveries totaled $377,000 and $96,000, respectively, for fiscal 2000. Indirect
auto loans accounted for a majority of the consumer loan charge-offs. Because
asset quality is a priority for Quad City and its subsidiaries, management has
made the decision to downscale indirect auto loan activity based on charge-off
history. The ability to grow profitably is, in part, dependent upon the ability
to maintain asset quality.
Noninterest income. Noninterest income increased by $594,000, from $5.6
million for fiscal 1999 to $6.2 million for fiscal 2000. Noninterest income for
fiscal 1999 consisted of the amortization of deferred income resulting from the
restructuring of a merchant broker agreement, income from the merchant credit
card operation, the trust department, depository service fees, gains on the sale
of residential real estate mortgage loans, and other miscellaneous fees.
Noninterest income for fiscal 2000 consisted of income from the merchant credit
card operation, the trust department, depository service fees, gains on the sale
of residential real estate mortgage loans, and other miscellaneous fees. The 11%
increase was primarily due to an increase in merchant credit card fees, and
increased trust fees received during the period, offset by the decrease in gains
on sales of loans, net and the amortization of deferred income resulting from
the restructuring of the merchant broker agreement.
During fiscal 2000, merchant credit card fees, net of processing costs,
increased by $1.0 million to $2.3 million, from $1.3 million for fiscal 1999.
The increase was due to increased volumes of credit card transactions processed
during fiscal 2000. As previously discussed, pursuant to the contract with its
largest ISO, Bancard terminated processing for it in May 2000. Recently, VISA
has enacted new capital standards that may restrict the amount of transaction
volume that Bancard is allowed to process in the future. This may have resulted
in reduced volumes even if the large ISO relationship had been retained. Given
the volume restrictions imposed by VISA, Bancard will focus on processing
transactions only for the most profitable ISO relationships.
For fiscal 2000, trust department fees increased $364,000, or 24%, to
approximately $1.9 million from $1.5 million for fiscal 1999. The increase was
primarily a reflection of the development of additional trust relationships
during the period.
Gains on sales of loans, net, were $439,000 for fiscal 2000, which
reflected a decrease of 58%, or $605,000, from $1.0 million for fiscal 1999. The
decrease resulted from higher interest rates, which created fewer home
refinances and first-time home purchases during the fiscal year.
Noninterest expenses. The main components of noninterest expenses were
primarily salaries and benefits, occupancy and equipment expenses, and
professional and data processing fees for both periods. Noninterest expenses for
fiscal 2000 were $11.5 million as compared to $9.7 million for the same period
in 1999, or an increase of $1.8 million or 18.48%.
The following table sets forth the various categories of noninterest
expenses for the years ended June 30, 2000 and 1999.
Years Ended June 30,
-------------------------------------
2000 1999 % Change
-------------------------------------
Salaries and employee benefits ......... $ 6,878,213 $ 5,801,670 18.56%
Professional and data processing fees .. 860,216 598,457 43.74
Advertising and marketing .............. 410,106 359,571 14.05
Occupancy and equipment expense ........ 1,580,911 1,453,040 8.80
Stationery and supplies ................ 324,219 267,739 21.10
Postage and telephone .................. 361,623 298,208 21.27
Other .................................. 1,052,173 900,214 16.88
-------------------------
Total noninterest expenses ...... $11,467,461 $ 9,678,899 18.48%
=========================
Salaries and benefits experienced the most significant dollar increase
of any noninterest expense component. For fiscal 2000, total salaries and
benefits increased to $6.9 million or $1.1 million over the fiscal 1999 total of
$5.8 million. The change was primarily attributable to the addition of new Bank
employees during the period. Professional and data processing fees increased
$262,000 or 44%. The increase was primarily attributable to an increase in core
and ancillary data processing fees as a result of an increase in transaction
volumes and number of customer accounts. Additionally, the Bank incurred new
ongoing expenses related to loan collection software, cash management software
and two new automated teller machines. Stationary and supplies expense increased
$56,000 or 21% and postage and telephone expense increased $63,000 or 21%. The
increases were the result of the overall increase in business volume of the
Bank.
Beginning in 1997, Quad City addressed issues related to the Year 2000
and their potential to adversely affect both Quad City's operations and ability
to provide prompt, reliable customer service. The estimated total cost of the
Year 2000 project was $175,000. This included costs to upgrade equipment
specifically for the purpose of Year 2000 compliance and various administrative
expenditures. Quad City's cost for the Year 2000 project for fiscal 2000 was
$27,000, as compared to $122,000 for fiscal 1999.
Income tax expense. The provision for income taxes was $1.7 million for
fiscal 2000 compared to $1.6 million for fiscal 1999, an increase of $66,000 or
4%. The increase was attributable to greater net income generated in fiscal 2000
compared to fiscal 1999, partially offset by a reduction in the effective tax
rate for fiscal 2000 of 38.0% versus 39.6% for fiscal 1999.
Fiscal 1999 compared with fiscal 1998
Overview. Net income for fiscal 1999 was $2.5 million as compared to
net income of $2.4 million for the same period in 1998 for a slight increase of
$72,000 or 3%. Basic earnings per share for fiscal 1999 were $1.08 as compared
to $1.09 for fiscal 1998. The increase in net income was comprised of an
increase in net interest income after provision for loan losses of $2.4 million
reduced by a decrease in noninterest income of $588,000 and an increase in
noninterest expenses of $1.8 million. The decrease in noninterest income was
primarily due to the one time gain in fiscal 1998 resulting from the
restructuring of Bancard's merchant broker agreement.
Interest income. Interest income increased by $5.0 million, from $15.1
million for fiscal 1998 to $20.1 million for fiscal 1999. The 33% rise in
interest income was primarily attributable to greater average outstanding
balances in interest-earning assets, principally loans receivable.
Interest expense. Interest expense increased by $2.7 million, from $8.3
million for fiscal 1998 to $11.0 million for fiscal 1999. The 32% increase in
interest expense was primarily attributable to greater average outstanding
balances in interest-bearing liabilities.
Provision for loan losses. The provision for loan losses is established
based on factors such as the local and national economy and the risk associated
with the loans in the portfolio. Quad City had an allowance for estimated losses
on loans of approximately 1.46% of total loans at June 30, 1999 as compared to
approximately 1.44% at June 30, 1998. The provision for loan losses decreased
slightly by $10,000, from $902,000 for fiscal 1998 to $892,000 for fiscal 1999.
The primary loan growth for fiscal 1999 was in the commercial loan portfolio, as
opposed to the consumer loan portfolio, which has historically carried a greater
degree of risk, allowing a decrease in the provision necessary for the period.
For fiscal 1999, commercial and real estate loans combined for total charge-offs
of $130,000 and total recoveries of $53,000. Consumer loan charge-offs and
recoveries totaled $349,000 and $79,000, respectively, for fiscal 1999. Indirect
auto loans accounted for a majority of the consumer loan charge-offs. Because
asset quality is a priority for Quad City and its subsidiaries, management made
the decision during fiscal 1999 to downscale indirect auto loan activity based
on charge-off history. The ability to grow profitably is, in part, dependent
upon the ability to maintain asset quality.
Noninterest income. Noninterest income decreased by $588,000, from $6.1
million for fiscal 1998 to $5.6 million for fiscal 1999. Noninterest income for
fiscal 1998 consisted of the gain on the restructuring of a merchant broker
agreement, income from the merchant credit card operation, fees from the trust
department, depository service fees, gains on the sale of residential real
estate mortgage loans, and other miscellaneous fees. Noninterest income for
fiscal 1999 consisted of the amortization of deferred income resulting from the
restructuring of a merchant broker agreement, income from the merchant credit
card operation, fees from the trust department, depository service fees, gains
on the sale of residential real estate mortgage loans, and other miscellaneous
fees. The 10% decrease was primarily due to the one time gain in fiscal 1998
resulting from the restructuring of Bancard's merchant broker agreement offset
by an increase in loan sales activity in the residential real estate department
of the Bank, increased trust fees received during the period and the recognition
of deferred income resulting from a gain on the restructuring of Bancard's
merchant broker agreement.
In June 1998, Quad City recognized $2.2 million of gross income as a
result of the amendment of the merchant broker agreement with its major ISO. The
amended agreement was for a minimum term of one year and revised a prior
agreement that was to expire in the year 2002. In consideration for the
reduction in term from four years to one year, Quad City received total
compensation of $2.9 million, of which $732,000 was deferred and recognized in
income during fiscal 1999. In the prior agreement, Quad City and the ISO had
shared both merchant servicing fees and related merchant credit risk. The
amended agreement exchanged a substantial reduction in merchant servicing income
for a like reduction in the related merchant credit risk. With the amended
agreement, Quad City receives a fixed, monthly fee of $25,000 for servicing the
merchants and was relieved of responsibility for any merchant credit risk. The
agreement terminated on May 1, 2000. In an effort to offset the reduced merchant
servicing income, Quad City has been actively pursuing other ISO relationships
and has begun processing for additional ISOs.
During fiscal 1999, merchant credit card fees, net of processing costs,
decreased by $73,000 to $1.3 million, from $1.4 million for fiscal 1998. The
reduction reflected terms of the amended merchant broker agreement. Also as a
result of the amended merchant broker agreement, Quad City recognized $732,000
of the deferred income and earned $300,000 of merchant servicing fees for fiscal
1999.
For fiscal 1999, trust department fees increased $382,000, or 34%, to
approximately $1.5 million from $1.1 million for fiscal 1998. The increase was
primarily a reflection of the development of additional trust relationships
during the period.
Gain on sales of loans, net, was $1.0 million for fiscal 1999, which
reflected an increase of 46%, or $331,000, from $713,000 for fiscal 1998. The
increase resulted from lower interest rates, which created large numbers of both
home refinances and first-time home purchases, and the subsequent sale of the
majority of these loans into the secondary market.
Noninterest expenses. The main components of noninterest expenses were
primarily salaries and benefits, occupancy and equipment expenses, and
professional and data processing fees for both periods. Noninterest expenses for
fiscal 1999 were $9.7 million as compared to $7.9 million for the same period in
1998, or an increase of $1.8 million.
The following table sets forth the various categories of noninterest
expenses for the years ended June 30, 1999 and 1998.
Years Ended June 30,
-----------------------------------
1999 1998 % Change
-----------------------------------
Salaries and employee benefits ............ $5,801,670 $4,571,126 26.92%
Professional and data processing fees ..... 598,457 504,344 18.66
Advertising and marketing ................. 359,571 238,160 50.98
Occupancy and equipment expense ........... 1,453,040 1,045,349 39.00
Stationery and supplies ................... 267,739 219,523 21.96
Provision for merchant credit card losses . 21,777 105,910 (79.44)
Postage and telephone ..................... 298,208 231,049 29.07
Other ..................................... 878,437 994,354 (11.66)
-----------------------
Total noninterest expenses ........ $9,678,899 $7,909,815 22.37%
=======================
Salaries and benefits experienced the most significant dollar increase
of any noninterest expense component. For fiscal 1999, total salaries and
benefits increased to $5.8 million or $1.2 million over the fiscal 1998 total of
$4.6 million. The change was primarily attributable to the addition of new Bank
employees during the period and increased commission expense in the residential
real estate department proportionate to the large volume of residential mortgage
loan originations and subsequent loan sales. Advertising and marketing expense
increased $121,000 or 51% and postage and telephone expense increased $67,000 or
29%. The increases were the result of the overall increase in business volume of
the Bank. For fiscal 1999, occupancy and equipment expense increased $408,000 or
39% over fiscal 1998. The increase was largely due to rent expense for the new
Moline location. The provision for merchant credit card losses during fiscal
1999 decreased $84,000 or 79% from fiscal 1998, which reflected Bancard's
amended merchant broker agreement and the resulting reduction in Bancard's
responsibility for merchant credit risk.
Income tax expense. The provision for income taxes was $1.6 million for
fiscal 1999 compared to $1.7 million for fiscal 1998, a decrease of $64,000 or
4%. The decrease was attributable to an effective tax rate of 39.6% in fiscal
1999 compared to 41.2% in fiscal 1998.
Financial Condition
Total assets of Quad City increased by $46.3 million or 14% to $367.6
million at June 30, 2000 from $321.3 million at June 30, 1999. The growth
primarily resulted from an increase in the loan portfolio funded by deposits
received from customers and short-term borrowings.
Cash and Cash Equivalent Assets. Cash and due from banks increased by
$6.6 million or 77% to $15.1 million at June 30, 2000 from $8.5 million at June
30, 1999. Cash and due from banks represented both cash maintained at the Bank,
as well as funds that the Bank and Quad City had deposited in other banks in the
form of demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. Federal
funds sold decreased by $13.0 million or 33% to $26.1 million at June 30, 2000
from $39.1 million at June 30, 1999. The decrease was attributable to Quad
City's decreased liquidity needs at the end of the fiscal year. Quad City had
made the decision in fiscal 1999 to increase its liquidity position in case Bank
customers began to withdraw funds in anticipation of cash needs associated with
the Year 2000.
Certificates of deposit at financial institutions increased by $241,000
or 2% to $12.8 million at June 30, 2000 from $12.5 million at June 30,1999. Due
to strong loan demand, the Bank has made the decision to limit its deposits in
other banks in the form of certificates of deposit.
Investments. Securities increased by $5.9 million or 12% to $56.1
million at June 30, 2000 from $50.2 million at June 30, 1999. The net increase
was the result of a number of transactions in the securities portfolio. Quad
City purchased additional securities, classified as available for sale, in the
amount of $24.7 million and classified as held to maturity, in the amount of
$50,000. This was offset by the following: paydowns of $1.4 million that were
received on mortgage-backed securities, proceeds from the sales of securities
available for sale of $5.2 million, proceeds from calls and maturities of $6.2
million, losses recognized on the sales of securities of $28,000, amortization
of premiums, net of the accretion of discounts, of $63,000, and an increase in
unrealized losses on securities available for sale, before applicable income
tax, of $1.2 million
Certain investment securities of the Bank are purchased with the intent
to hold the securities until they mature. These held to maturity securities,
comprised of municipal securities and other bonds, were recorded at amortized
cost at June 30, 2000 and June 30, 1999. The balance at June 30, 2000 was
$575,000, a decrease of $149,000 or 21%, from $724,000 at June 30, 1999. Market
values at June 30, 2000 and June 30, 1999 were $565,000 and $727,000,
respectively.
All of Quad City's and a portion of the Bank's securities are placed in
the available for sale category as the securities may be liquidated to provide
cash for operating, investing or financing purposes. These securities were
reported at fair value and increased by $6.1 million, or 12%, to $55.6 million
at June 30, 2000, from $49.5 million at June 30, 1999. The amortized cost of
such securities at June 30, 2000 and June 30, 1999 was $57.2 million and $50.0
million, respectively.
Quad City does not use any financial instruments referred to as
derivatives to manage interest rate risk and as of June 30, 2000 there existed
no security in the investment portfolio (other than U.S. government and U.S.
government agency securities) that exceeded 10% of stockholders' equity at that
date.
Loans. Loans receivable increased by $43.9 million or 22% to $241.9
million at June 30, 2000 from $198.0 million at June 30, 1999. The increase was
the result of the origination or purchase of $240.5 million of commercial
business, consumer and real estate loans, less loan charge-offs, net of
recoveries, of $330,000 and loan repayments or sales of loans of $196.3 million.
The majority of residential real estate loans originated by the Bank were sold
on the secondary market to avoid the interest rate risk associated with
long-term fixed rate loans. As of June 30, 2000, the Bank's legal lending limit
was $4.3 million.
Allowance for Loan Losses. The allowance for estimated losses on loans
was $3.6 million at June 30, 2000 compared to $2.9 million at June 30, 1999 for
an increase of $722,000 or 25%. The adequacy of the allowance for estimated
losses on loans was determined by management based on factors that included the
overall composition of the loan portfolio, types of loans, past loss experience,
loan delinquencies, potential substandard and doubtful credits, and other
factors that, in management's judgment, deserved evaluation in estimating loan
losses. The adequacy of the allowance for estimated losses on loans was
monitored by the loan review staff, and reported to management and the Board of
Directors.
Net charge-offs for the years ended June 30, 2000 and 1999, were
$330,000 and $346,000 respectively. One measure of the adequacy of the allowance
for estimated losses on loans is the ratio of the allowance to the total loan
portfolio. Provisions were made monthly to ensure that an adequate level was
maintained. The allowance for estimated losses on loans as a percentage of total
loans was 1.50 % at June 30, 2000 and 1.46% at June 30, 1999.
Although management believes that the allowance for estimated losses on
loans at June 30, 2000 was at a level adequate to absorb losses on existing
loans, there can be no assurance that such losses will not exceed the estimated
amounts or that Quad City will not be required to make additional provisions for
loan losses in the future. Asset quality is a priority for Quad City and its
subsidiaries. The ability to grow profitably is in part dependent upon the
ability to maintain that quality.
Nonperforming Assets. The policy of Quad City is to place a loan on
nonaccrual status if: (a) payment in full of interest or principal is not
expected or (b) principal or interest has been in default for a period of 90
days or more unless the obligation is both in the process of collection and well
secured. Well secured is defined as collateral with sufficient market value to
repay principal and all accrued interest. A debt is in the process of collection
if collection of the debt is proceeding in due course either through legal
action, including judgment enforcement procedures, or in appropriate
circumstances, through collection efforts not involving legal action which are
reasonably expected to result in repayment of the debt or in its restoration to
current status.
Nonaccrual loans were $383,000 at June 30, 2000 compared to $1.3
million at June 30, 1999 for a decrease of $905,000 or 70%. The decrease in
nonaccrual loans was comprised of decreases in commercial loans of $833,000 and
consumer loans of $133,000 offset by an increase in real estate loans of
$61,000. Nonaccrual loans at June 30, 2000 consisted primarily of loans that
were well collateralized and were not expected to result in material losses.
As of June 30, 2000 and 1999, past due loans of 30 days or more
amounted to $3.3 million and $4.0 million, respectively. Past due loans as a
percentage of gross loans receivable was 1.4% and 2.0% at June 30, 2000, and
1999, respectively.
Other Assets. Premises and equipment increased by $162,000 or 2% to
$7.7 million at June 30, 2000 from $7.6 million at June 30, 1999. The increase
resulted from the purchase of additional furniture, fixtures and equipment
offset by depreciation expense. Additional information regarding the composition
of this account and related accumulated depreciation is described in footnote 5
to the consolidated financial statements.
Accrued interest receivable on loans, securities and interest-bearing
cash accounts increased by $627,000 or 31% to $2.6 million at June 30, 2000 from
$2.0 million at June 30, 1999. The increase was primarily due to greater average
outstanding balances in interest-bearing assets.
Other assets increased by $2.6 million or 42% to $8.9 million at June
30, 2000 from $6.3 million at June 30, 1999. The increase consisted primarily of
the purchase of life insurance contracts on two of Quad City's executives in the
amount of $2.0 million, as well as an increase in accrued trust department fees,
miscellaneous receivables and prepaid expenses associated with the growth of
Quad City.
Deposits. Deposits increased by $40.1 million or 16% to $288.1 million
at June 30, 2000 from $248.0 million at June 30, 1999. The increase resulted
from a $9.5 million net increase in noninterest-bearing, NOW, money market and
other savings accounts and a $30.6 million net increase in certificates of
deposit. The increase was a result of periodic aggressive pricing programs for
deposits and increased marketing efforts.
Short-term Borrowings. Short-term borrowings increased $11.1 million or
114% from $9.7 million as of June 30, 1999 to $20.8 million as of June 30, 2000.
Short-term borrowings were comprised of customer repurchase agreements of $15.8
million and $9.6 million at June 30, 2000 and 1999, respectively, as well as
federal funds purchased from correspondent banks of $5.0 million and $140,000 at
June 30, 2000 and 1999, respectively.
FHLB Advances and Other Borrowings. FHLB advances decreased slightly to
$22.4 million as of June 30, 2000 from $24.6 million at June 30, 1999. As of
June 30, 2000, the Bank held $1.2 million of FHLB stock. As a result of its
membership in the FHLB of Des Moines, the Bank has the ability to borrow funds
for short-term or long-term purposes under a variety of programs.
In June 1999, Quad City issued 1,200,000 shares of trust preferred
securities through its newly formed Capital Trust subsidiary. On Quad City's
financial statements, these securities are listed as company obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
subordinated debentures and were $12,000,000 at both June 30, 2000 and 1999.
Under current regulatory guidelines, these securities are considered to be Tier
1 capital, with certain limitations that are applicable to Quad City.
Other liabilities decreased by $4.3 million or 50% to $4.3 million as
of June 30, 2000 from $8.6 million as of June 30, 1999. Other liabilities were
comprised of unpaid amounts for various products and services, and accrued but
unpaid interest on deposits. The decrease was primarily attributable to $3.8
million due to a broker for the purchase of securities available for sale at
June 30, 1999.
Stockholders' Equity. Common stock of $2.3 million as of June 30, 2000
increased by $29,000 or 1%. Exercises of stock warrants and options resulting in
the issuance of 29,165 additional shares of common stock created the increase.
Additional paid-in capital increased by $189,000 or 2% to $12.1 million
as of June 30, 2000 from $12.0 million as of June 30, 1999. The increase was due
to $108,000 received in excess of the $1.00 per share par value for shares of
common stock issued as the result of the exercise of stock warrants and options,
as well as $81,000 for the tax benefit recorded on the stock option exercises.
Retained earnings increased by $2.7 million or 60% to $7.3 million as
of June 30, 2000 from $4.6 million as of June 30, 1999. The increase reflected
net income for the year.
Accumulated other comprehensive (loss), consisting of unrealized losses
on securities available for sale, net of related income taxes, was $1.1 million
as of June 30, 2000 as compared to $332,000 as of June 30, 1999. The increase in
the loss was attributable to the decrease during the period in fair value of the
securities identified as available for sale, primarily as a result of an
increase in market interest rates.
In April 2000, Quad City announced that the board of directors approved
a stock repurchase program enabling Quad City to repurchase up to 60,000 shares
of its common stock. At June 30, 2000, Quad City had acquired 41,496 shares at a
total cost of $599,480. The weighted average cost of the shares was $14.45.
Liquidity
Liquidity measures the ability of Quad City to meet maturing
obligations and its existing commitments, to withstand fluctuations in deposit
levels, to fund its operations, and to provide for customers' credit needs. One
source of liquidity is cash and short-term assets, such as interest-bearing
deposits in other banks and federal funds sold, which totaled $54.0 million at
June 30, 2000, compared with $60.2 million at June 30, 1999. The Bank has a
variety of sources of short-term liquidity available to it, including federal
funds purchased from correspondent banks, sales of securities available for
sale, FHLB advances, lines of credit and loan participations or sales. Quad City
also generates liquidity from the regular principal payments and prepayments
made on its portfolio of loans and mortgage-backed securities.
The liquidity of Quad City is comprised of three primary
classifications: cash flows from operating activities, cash flows from investing
activities, and cash flows from financing activities. Net cash provided by
operating activities was $4.2 million for fiscal 2000 compared to $3.7 million
for fiscal 1999. Net cash used in investing activities, consisting principally
of loan funding and the purchase of securities, was $46.1 million for fiscal
2000 and $72.7 million for fiscal 1999. Net cash provided by financing
activities, consisting primarily of deposit growth and proceeds from short-term
borrowings, for fiscal 2000 was $48.5 million and for fiscal 1999 was $66.0
million, consisting primarily of deposit growth, proceeds from the issuance of
preferred securities of the subsidiary trust, and proceeds from short-term
borrowings.
Net cash provided by operating activities was $3.7 million for fiscal
1999 compared to $4.4 million of cash used, primarily for loans originated for
sale, for fiscal 1998. Net cash used in investing activities, consisting
principally of loan funding and the purchase of securities, was $72.7 million
for fiscal 1999 and $70.3 million for fiscal 1998. Net cash provided by
financing activities, consisting primarily of deposit growth, proceeds from the
issuance of preferred securities of the subsidiary trust, and proceeds from
short-term borrowings, for fiscal 1999 was $66.0 million and for fiscal 1998 was
$79.3 million, consisting principally of deposit growth and proceeds from
Federal Home Loan Bank advances.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes have
been prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Quad City's operations. Unlike industrial
companies, nearly all of the assets and liabilities of Quad City are monetary in
nature. As a result, interest rates have a greater impact on Quad City's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Forward Looking Statements
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Quad City intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe Quad City's future plans, strategies and expectations are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. Quad City's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on Quad City's
operations and future prospects include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in our market area, our
implementation of new technologies, Quad City's ability to develop and maintain
secure and reliable electronic systems and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quad City, like other financial institutions, is subject to direct and
indirect market risk. Direct market risk exists from changes in interest rates.
Quad City's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors Quad City's interest rate risk. The Asset/Liability
Committee meets quarterly to review Quad City's interest rate risk position and
profitability, and to make or recommend adjustments for consideration by the
Board of Directors. Management also reviews the Bank's securities portfolio,
formulates investment strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in the most
effective manner. Notwithstanding Quad City's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
In adjusting Quad City's asset/liability position, the Board and
management attempt to manage Quad City's interest rate risk while maintaining or
enhancing net interest margins. At times, depending on the level of general
interest rates, the relationship between long-term and short-term interest
rates, market conditions and competitive factors, the Board and management may
determine to increase Quad City's interest rate risk position somewhat in order
to increase its net interest margin. Quad City's results of operations and net
portfolio values remain vulnerable to increases in interest rates and to
fluctuations in the difference between long-term and short-term interest rates.
One approach used to quantify interest rate risk is the net portfolio
value ("NPV") analysis. In essence, this analysis calculates the difference
between the present value of liabilities and the present value of expected cash
flows from assets and off-balance-sheet contracts. The following table sets
forth, at June 30, 2000 and June 30, 1999, an analysis of Quad City's interest
rate risk as measured by the estimated changes in NPV resulting from
instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis
points).
Change in Estimated Increase (Decrease) in NPV
Interest Estimated ----------------------------------------------------------------
Rates NPV Amount Amount Percent
- - ----------------------------------------------------------------------------- -----------------------------
(Basis points) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
- - ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
+200 $28,583 $29,554 $(2,290) $(1,709) (7.42)% (5.47)%
--- 30,873 31,263
-200 31,128 31,710 255 447 0.83% 1.43%
Quad City does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, Quad
City does not intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting Quad
City. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of Quad City's
business activities.
Item 8. Financial Statements
QUAD CITY HOLDINGS, INC.
Index to Consolidated Financial Statements
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated balance sheets as of June 30, 2000 and 1999
Consolidated statements of income for the years ended June 30, 2000,
1999, and 1998
Consolidated statements of changes in stockholders' equity for the
years ended
Consolidated statements of cash flows for the years ended June 30,
2000, 1999, and 1998
Notes to consolidated financial statements
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Quad City Holdings, Inc.
Moline, Illinois
We have audited the accompanying consolidated balance sheets of Quad City
Holdings, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related
statements of income, changes in stockholders' equity, and cash flows for the
years ended June 30, 2000, 1999, and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quad City Holdings,
Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for the years ended June 30, 2000, 1999, and
1998, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
August 1, 2000
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
ASSETS 2000 1999
- - ----------------------------------------------------------------------------------------------------
Cash and due from banks ........................................... $ 15,130,357 $ 8,528,195
Federal funds sold ................................................ 26,105,000 39,125,000
Certificates of deposit at financial institutions ................. 12,776,463 12,535,193
Securities held to maturity, at amortized cost (fair value
2000 $565,237; 1999 $727,115) (Note 3) .......................... 574,988 724,415
Securities available for sale, at fair value (Note 3) ............. 55,554,062 49,533,909
------------------------------
56,129,050 50,258,324
------------------------------
Loans receivable (Note 4) ......................................... 241,852,851 197,976,692
Less allowance for estimated losses on loans (Note 4) ........... 3,617,401 2,895,457
------------------------------
238,235,450 195,081,235
------------------------------
Premises and equipment, net (Note 5) .............................. 7,715,621 7,553,616
Accrued interest receivable ....................................... 2,633,120 2,006,503
Other assets ...................................................... 8,896,554 6,258,149
------------------------------
Total assets .............................................. $ 367,621,615 $ 321,346,215
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing ........................................... $ 44,043,932 $ 35,833,094
Interest-bearing .............................................. 244,022,824 212,132,785
------------------------------
Total deposits (Note 6) ................................... 288,066,756 247,965,879
Short-term borrowings (Note 7) .................................... 20,771,724 9,685,877
Federal Home Loan Bank advances (Note 8) .......................... 22,425,398 24,605,890
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely subordinated debentures
(Note 9) ........................................................ 12,000,000 12,000,000
Other liabilities ................................................. 4,286,318 8,615,098
------------------------------
Total liabilities ................................................. 347,550,196 302,872,744
------------------------------
Commitments and Contingencies (Note 18)
Stockholders' Equity (Note 16):
Common stock, $1 par value; shares authorized 5,000,000;
shares issued and outstanding 2000 - 2,325,416 and
2,283,920, respectively; 1999 - 2,296,251 ..................... 2,325,416 2,296,251
Additional paid-in capital ...................................... 12,147,984 11,959,080
Retained earnings ............................................... 7,296,017 4,550,490
Accumulated other comprehensive (loss) .......................... (1,098,518) (332,350)
------------------------------
20,670,899 18,473,471
Less cost of common shares acquired for the treasury
2000 - 41,496 ................................................. 599,480 --
-----------------------------
Total stockholders' equity ................................ 20,071,419 18,473,471
------------------------------
Total liabilities and stockholders' equity ................ $ 367,621,615 $ 321,346,215
==============================
See Notes to Consolidated Financial Statements.
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
- - --------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ................................... $ 18,364,812 $ 15,642,235 $ 12,083,990
Interest and dividends on securities:
Taxable .................................................... 3,214,722 2,229,178 1,891,019
Nontaxable ................................................. 233,793 56,089 14,649
Interest on federal funds sold ............................... 1,488,267 1,492,173 645,929
Other interest ............................................... 777,604 696,245 440,980
-------------------------------------------
Total interest income .................................. 24,079,198 20,115,920 15,076,567
-------------------------------------------
Interest expense:
Interest on deposits ......................................... 10,125,235 9,009,724 6,971,153
Interest on company obligated mandatorily redeemable
preferred securities ....................................... 1,137,402 63,518 --
Interest on short-term and other borrowings .................. 2,025,956 1,953,444 1,370,868
-------------------------------------------
Total interest expense ................................. 13,288,593 11,026,686 8,342,021
-------------------------------------------
Net interest income .................................... 10,790,605 9,089,234 6,734,546
Provision for loan losses (Note 4) ........................... 1,051,818 891,800 901,976
-------------------------------------------
Net interest income after provision for loan losses .... 9,738,787 8,197,434 5,832,570
-------------------------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ........... 2,346,296 1,322,658 1,395,574
Trust department fees ........................................ 1,884,310 1,520,518 1,138,502
Deposit service fees ......................................... 600,219 433,056 290,721
Gains on sales of loans, net ................................. 438,799 1,043,763 713,121
Securities gains (losses), net ............................... (28,221) 3,757 8,734
Amortization of deferred income resulting from restructuring
of merchant broker agreement (Note 11) ..................... -- 732,000 --
Gain on restructuring of merchant broker agreement (Note 11) . -- -- 2,168,000
Other ........................................................ 913,013 504,699 433,765
------------------------------------------
Total noninterest income ............................... 6,154,416 5,560,451 6,148,417
------------------------------------------
Noninterest expenses:
Salaries and employee benefits ............................... 6,878,213 5,801,670 4,571,126
Professional and data processing fees ........................ 860,216 598,457 504,344
Advertising and marketing .................................... 410,106 359,571 238,160
Occupancy and equipment expense .............................. 1,580,911 1,453,040 1,045,349
Stationery and supplies ...................................... 324,219 267,739 219,523
Postage and telephone ........................................ 361,623 298,208 231,049
Other ........................................................ 1,052,173 900,214 1,100,264
------------------------------------------
Total noninterest expenses ............................. 11,467,461 9,678,899 7,909,815
------------------------------------------
Income before income taxes ............................. 4,425,742 4,078,986 4,071,172
Federal and state income taxes (Note 12) ....................... 1,680,215 1,614,165 1,677,900
------------------------------------------
Net income ............................................. $ 2,745,527 $ 2,464,821 $ 2,393,272
==========================================
Earnings per common share (Note 17):
Basic ........................................................ $ 1.19 $ 1.08 $ 1.09
Diluted ...................................................... $ 1.15 $ 1.03 $ 1.02
Weighted average common shares outstanding ................... 2,309,453 2,285,500 2,196,297
Weighted average common and common equivalent shares
outstanding ................................................ 2,385,840 2,398,525 2,353,932
See Notes to Consolidated Financial Statements.
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2000, 1999, and 1998
Accumulated
Additional Other
Preferred Common Paid-In Retained Comprehensive Treasury
Stock Stock Capital Earnings Income (Loss) Stock Total
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, year ended June 30, 1997 ...... $ 10 $1,462,824 $13,039,406 $ 171,171 $ (60,185) $ -- $14,613,226
-----------------------------------------------------------------------------------------
Comprehensive income:
Net income ........................... -- -- -- 2,393,272 -- -- 2,393,272
Other comprehensive income, net of
tax (Note 2) ....................... -- -- -- -- 72,677 -- 72,677
-----------
Comprehensive income ................... 2,465,949
-----------
Proceeds from sale of 15 shares of
preferred stock ..................... 15 -- 1,499,985 -- -- -- 1,500,000
Proceeds from issuance of 71,325 shares
of common stock as a result of
warrants and stock options exercised
(Note 14) .......................... -- 47,550 475,493 -- -- -- 523,043
-----------------------------------------------------------------------------------------
Balance, year ended June 30, 1998 .... 25 1,510,374 15,014,884 2,564,443 12,492 -- 19,102,218
-----------------------------------------------------------------------------------------
Comprehensive income:
Net income ......................... -- -- -- 2,464,821 -- -- 2,464,821
Other comprehensive (loss), net of
tax (Note 2) ..................... -- -- -- -- (344,842) -- (344,842)
------------
Comprehensive income ......... 2,119,979
------------
Stock split (3 for 2) ................ -- 760,262 (760,262) (890) -- -- (890)
Proceeds from issuance of 30,720
shares of common stock as a result
of warrants and stock options
exercised (Note 14) ................ -- 25,615 201,215 -- -- -- 226,830
Tax benefit of nonqualified stock
options exercised .................. -- -- 3,218 -- -- -- 3,218
Redemption of preferred stock (Note 15) (25) -- (2,499,975) (477,884) -- -- (2,977,884)
------------------------------------------------------------------------------------------
Balance, year ended June 30, 1999 .... -- 2,296,251 11,959,080 4,550,490 (332,350) -- 18,473,471
------------------------------------------------------------------------------------------
Comprehensive income:
Net income ......................... -- -- -- 2,745,527 -- -- 2,745,527
Other comprehensive (loss), net
of tax (Note 2) .................. -- -- -- -- (766,168) -- (766,168)
------------
Comprehensive income ................. 1,979,359
------------
Proceeds from issuance of 29,165
shares of common stock, net of
simultaneous redemptions of 8,145
shares, as a result of warrants and
stock options exercised (Note 14) .. -- 29,165 107,726 -- -- -- 136,891
Tax benefit of nonqualified stock
options exercised .................. -- -- 81,178 -- -- -- 81,178
Purchase of 41,496 shares of common
stock for the treasury ............. -- -- -- -- -- (599,480) (599,480)
-------------------------------------------------------------------------------------------
Balance, year ended June 30, 2000 .... $ -- $2,325,416 $12,147,984 $7,296,017 $(1,098,518) $(599,480) $20,071,419
===========================================================================================
See Notes to Consolidated Financial Statements.
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ....................................................... $ 2,745,527 $ 2,464,821 $ 2,393,272
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ................................................... 635,838 627,075 422,357
Provision for loan losses ...................................... 1,051,818 891,800 901,976
Deferred income taxes .......................................... (398,971) 232,262 (553,283)
Amortization of offering costs on subordinated debentures ...... 29,453 1,436 --
Amortization of premiums (accretion of discounts) on
securities, net .............................................. 62,539 38,697 (16,742)
Investment securities (gains) losses, net ...................... 28,221 (3,757) (8,734)
Loans originated for sale ...................................... (36,774,571) (85,027,675) (57,206,140)
Proceeds on sales of loans ..................................... 38,124,921 88,804,656 54,008,203
Net gains on sales of loans .................................... (438,799) (1,043,763) (713,121)
Amortization of deferred income resulting from restructuring
of merchant broker agreement ................................. -- (732,000) --
Gain on restructuring of merchant broker agreement ............. -- -- (2,168,000)
Tax benefit of nonqualified stock options exercised ............ 81,178 3,218 --
Increase in accrued interest receivable ........................ (626,617) (233,280) (398,916)
(Increase) decrease in other assets ............................ 170,192 (2,405,245) (273,402)
Increase (decrease) in other liabilities ....................... (528,780) 52,456 (766,623)
-------------------------------------------
Net cash provided by (used in) operating activities ........ 4,161,949 3,670,701 (4,379,153)
-------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold .................... 13,020,000 (16,165,000) (13,770,000)
Net increase in certificates of deposit at financial institutions (241,270) (4,169,070) (3,006,999)
Purchase of securities available for sale ........................ (23,659,480) (30,215,760) (16,444,294)
Purchase of securities held to maturity .......................... (50,000) -- (276,398)
Proceeds from calls and maturities of securities ................. 6,200,000 14,400,000 9,500,000
Proceeds from paydowns on securities ............................. 1,389,269 1,732,539 4,531,123
Proceeds from sales of securities available for sale ............. 5,191,661 280,786 14,020
Purchase of life insurance contracts ............................. (2,023,543) -- --
Increase in cash value of life insurance contracts ............... (14,640) -- --
Proceeds from restructuring of merchant broker agreement ......... -- -- 2,900,000
Net loans originated ............................................. (45,117,584) (38,080,955) (50,883,287)
Purchase of premises and equipment, net .......................... (797,843) (520,423) (2,833,936)
-------------------------------------------
Net cash used in investing activities ...................... (46,103,430) (72,737,883) (70,269,771)
-------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ................................. 40,100,877 50,581,915 61,423,769
Net increase in short-term borrowings ............................ 11,085,847 7,685,877 2,000,000
Proceeds from Federal Home Loan Bank advances .................... 8,000,000 1,480,000 25,955,000
Payments on Federal Home Loan Bank advances ...................... (10,180,492) (1,541,284) (12,065,538)
Net decrease in other borrowings ................................. -- (1,500,000) --
Proceeds from issuance of preferred securities of subsidiary trust -- 12,000,000 --
Redemption of preferred stock .................................... -- (2,977,884) --
Purchase of treasury stock ....................................... (599,480) -- --
Proceeds from issuance of preferred stock ........................ -- -- 1,500,000
Proceeds from issuance of common stock, net of simultaneous
redemptions .................................................... 136,891 225,940 523,043
--------------------------------------------
Net cash provided by financing activities .................. $ 48,543,643 $ 65,954,564 $ 79,336,274
--------------------------------------------
Net increase (decrease) in cash and due from banks ......... $ 6,602,162 $ (3,112,618) $ 4,687,350
Cash and due from banks:
Beginning ........................................................ 8,528,195 11,640,813 6,953,463
--------------------------------------------
Ending ........................................................... $ 15,130,357 $ 8,528,195 $ 11,640,813
============================================
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information, cash
payments for:
Interest ......................................................... $ 13,024,589 $ 10,735,683 $ 7,769,512
Income taxes ..................................................... 2,001,216 1,527,171 1,974,000
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on securities available for sale, net ........... (766,168) (344,842) 72,677
Investment securities transferred from held to maturity portfolio
to available for sale portfolio, at fair value ................. -- 1,030,743 --
Due to broker for purchase of securities available for sale ...... -- 3,800,000 --
See Notes to Consolidated Financial Statements.
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
Quad City Holdings, Inc. (Company) is a bank holding company providing bank
and bank related services through its subsidiaries, Quad City Bank and Trust
Company (Bank), Quad City Bancard, Inc. (Bancard), Allied Merchant Services,
Inc. (Allied), and Quad City Holdings Capital Trust I. The Bank is a
commercial bank that services the Quad Cities area, is chartered and
regulated by the state of Iowa, is insured and subject to regulation by the
Federal Deposit Insurance Corporation and is a member of and regulated by the
Federal Reserve System. Bancard is an entity formed in April 1995 to conduct
the Company's merchant credit card operation and is regulated by the Federal
Reserve System. Allied was formed in March 1999 by Bancard as a captive
independent sales organization that markets merchant credit card processing
services. Allied is a wholly-owned subsidiary of Bancard. Quad City Holdings
Capital Trust I was capitalized in June 1999 for the purpose of issuing
Company Obligated Mandatorily Redeemable Preferred Securities.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The allowance for estimated losses on loans is inherently
subjective as it requires material estimates that are susceptible to
significant change. The fair value disclosure of financial instruments is an
estimate that can be computed within a range.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and
due from banks include cash on hand and amounts due from banks. Cash flows
from federal funds sold, certificates of deposit at financial institutions,
loans, deposits, short-term borrowings, and other borrowings are treated as
net increases or decreases.
Cash and due from banks: The Bank is required by federal banking regulations
to maintain certain cash and due from bank reserves. The reserve requirement
was approximately $2,753,000 and $1,476,000 at June 30, 2000 and 1999,
respectively.
Investment securities: Investment securities held to maturity are those debt
securities that the Company has the ability and intent to hold until maturity
regardless of changes in market conditions, liquidity needs, or changes in
general economic conditions. Such securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. If the ability or intent
to hold to maturity is not present for certain specified securities, such
securities are considered available for sale as the Company intends to hold
them for an indefinite period of time but not necessarily to maturity. Any
decision to sell a security classified as available for sale would be based
on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations, and other similar
factors. Securities available for sale are carried at fair value. Unrealized
gains or losses are reported as increases or decreases in accumulated other
comprehensive income. Realized gains or losses, determined on the basis of
the cost of specific securities sold, are included in earnings.
Pursuant to SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company transferred at fair value $1,030,743 of investment
securities from held to maturity to available for sale on January 4, 1999.
Loans held for sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value
in the aggregate.
Loans and allowance for estimated losses on loans: Loans are stated at the
amount of unpaid principal, reduced by an allowance for estimated losses on
loans. The allowance for estimated losses on loans is maintained at the level
considered adequate by management of the Company and the Bank to provide for
losses that can be reasonably anticipated. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. In determining
the adequacy of the allowance, the Company and the Bank make continuous
evaluations of the loan portfolio and related off-balance-sheet commitments,
and consider current economic conditions and other factors that may affect a
borrower's ability to repay.
In accordance with FASB Statement No. 114 "Accounting for Creditors for
Impairment of a Loan", loans are considered impaired when, based on current
information and events, it is probable the Company and the Bank will not be
able to collect all amounts due. The portion of the allowance for loan losses
applicable to an impaired loan is computed based on the present value of the
estimated future cash flows of interest and principal discounted at the
loan's effective interest rate or on the fair value of the collateral for
collateral dependent loans. The entire change in present value of expected
cash flows of impaired loans is reported as bad debt expense in the same
manner in which impairment initially was recognized or as a reduction in the
amount of bad debt expense that otherwise would be reported. The Company and
the Bank recognize interest income on impaired loans on a cash basis.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit, including commitments
under credit card arrangements and standby letters of credit. Such financial
instruments are recorded when they are funded.
Transfers of financial assets: In accordance with FASB Statement No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", transfers of financial assets are accounted
for as sales, only when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method over the estimated useful lives.
Income taxes: The Company files its tax return on a consolidated basis with
its subsidiaries. The entities follow the direct reimbursement method of
accounting for income taxes under which income taxes or credits which result
from the inclusion of the subsidiaries in the consolidated tax return are
paid to or received from the parent company.
Deferred income taxes are provided under the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
net operating loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax basis. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Trust assets: Trust assets held by the Bank in a fiduciary, agency, or
custodial capacity for its customers, other than cash on deposit at the Bank,
are not included in the accompanying consolidated financial statements since
such items are not assets of the Bank.
Earnings per common share: Basic earnings per share are computed by dividing
net income by the weighted average number of common stock shares outstanding
for the respective period. Diluted earnings per share are computed by
dividing net income by the weighted average number of common stock and common
stock equivalents outstanding for the respective period.
Reclassification: Certain amounts in the prior year financial statements have
been reclassified, with no effect on net income or stockholders' equity, to
conform with current year presentation.
Note 2. Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income,
which for the Company is comprised entirely of unrealized gains and losses on
securities available for sale.
Other comprehensive income (loss) is comprised as follows:
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------
Year ended June 30, 2000:
Unrealized (losses) on securities available for sale:
Unrealized holding (losses) arising during the year ... $(1,195,285) $ (410,590) $ (784,695)
Less, reclassification adjustment for (losses)
included in net income .............................. (28,221) (9,694) (18,527)
-----------------------------------------
Other comprehensive (loss) ........................ $(1,167,064) $ (400,896) $ (766,168)
=========================================
Year ended June 30, 1999:
Unrealized gains (losses) on securities available
for sale:
Unrealized holding (losses) arising during the year ... $ (517,765) $ (175,407) $ (342,358)
Less, reclassification adjustment for gains
included in net income .............................. 3,757 1,273 2,484
-----------------------------------------
Other comprehensive (loss) ........................ $ (521,522) $ (176,680) $ (344,842)
=========================================
Year ended June 30, 1998:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year ...... $ 114,505 $ 35,827 $ 78,678
Less, reclassification adjustment for gains
included in net income .............................. 8,734 2,733 6,001
-----------------------------------------
Other comprehensive income ........................ $ 105,771 $ 33,094 $ 72,677
=========================================
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of June 30, 2000
and 1999 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------
June 30, 2000:
Securities held to maturity:
Municipal securities ....... $ 499,988 $ -- $ (8,769) $ 491,219
Other bonds ................ 75,000 -- (982) 74,018
-----------------------------------------------------------
$ 574,988 $ -- $ (9,751) $ 565,237
===========================================================
Securities available for sale:
U.S. Treasury securities ..... $ 3,000,406 $ -- $ (11,607) $ 2,988,799
U.S. agency securities ....... 40,199,557 23,275 (1,018,786) 39,204,046
Mortgage-backed securities ... 7,006,906 -- (297,413) 6,709,493
Municipal securities ......... 5,821,229 -- (300,577) 5,520,652
Trust preferred securities ... 919,495 -- (49,780) 869,715
Other securities ............. 277,925 1,474 (18,042) 261,357
-----------------------------------------------------------
$ 57,225,518 $ 24,749 $ (1,696,205) $ 55,554,062
===========================================================
June 30, 1999:
Securities held to maturity:
Municipal securities ....... $ 699,415 $ 2,115 $ -- $ 701,530
Other bonds ................ 25,000 585 -- 25,585
-----------------------------------------------------------
$ 724,415 $ 2,700 $ -- $ 727,115
===========================================================
Securities available for sale:
U.S. Treasury securities ..... $ 9,001,845 $ 47,862 $ (4,866) $ 9,044,841
U.S. agency securities ....... 29,267,483 1,267 (390,870) 28,877,880
Mortgage-backed securities ... 8,390,795 5,319 (183,867) 8,212,247
Municipal securities ......... 3,180,714 40,741 (12,139) 3,209,316
Other securities ............. 197,464 102 (7,941) 189,625
-----------------------------------------------------------
$ 50,038,301 $ 95,291 $ (599,683) $ 49,533,909
===========================================================
All sales of securities during the years ended June 30, 2000, 1999, and 1998
were from securities identified as available for sale. Information on proceeds
received, as well as the gains and losses from the sale of those securities is
as follows:
2000 1999 1998
------------------------------------
Proceeds from sales of securities ....... $5,191,661 $ 280,786 $ 14,020
Gross losses from sales of securities ... 50,587 1,717 --
Gross gains from sales of securities .... 22,366 5,474 8,734
The amortized cost and fair value of securities as of June 30, 2000 by
contractual maturity are shown below. Expected maturities of mortgage-backed
securities may differ from contractual maturities because the mortgages
underlying the mortgage-backed securities may be called or prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary. Other securities are excluded from the
maturity categories as there is no fixed maturity date.
Amortized
Cost Fair Value
---------------------------
Securities held to maturity, due after
one year through five years .................. $ 574,988 $ 565,237
===========================
Securities available for sale:
Due in one year or less ...................... $ 5,999,708 $ 5,967,050
Due after one year through five years ........ 33,325,941 32,440,980
Due after five years ......................... 10,615,038 10,175,182
---------------------------
49,940,687 48,583,212
Mortgage-backed securities ................... 7,006,906 6,709,493
Other securities ............................. 277,925 261,357
---------------------------
$57,225,518 $55,554,062
===========================
As of June 30, 2000 and 1999, investment securities with a carrying value of
$33,718,441 and $23,399,384, respectively, were pledged on public deposits and
for other purposes as required or permitted by law.
The Company transferred securities with an amortized cost of $1,029,096 and an
unrealized gain of $1,647 from the held to maturity portfolio to the available
for sale portfolio on January 4, 1999, based on management's reassessment of
their previous designations of securities giving consideration to liquidity
needs, management of interest rate risk, and other factors.
Note 4. Loans Receivable
The composition of the loan portfolio as of June 30, 2000 and 1999 is presented
as follows:
2000 1999
----------------------------
Commercial ..................................... $167,682,652 $136,206,893
Real estate .................................... 36,301,379 27,591,886
Real estate - construction ..................... 3,463,682 3,367,458
Installment and other consumer ................. 34,405,138 30,810,455
----------------------------
241,852,851 197,976,692
Less allowance for estimated losses on loans ... 3,617,401 2,895,457
----------------------------
$238,235,450 $195,081,235
============================
Real estate loans include loans held for sale with a carrying value of
$1,121,474 and $2,033,025 as of June 30, 2000 and 1999, respectively. The market
value of these loans exceeded its carrying value at those dates.
Loans on nonaccrual status amounted to $382,745 and $1,287,727 as of June 30,
2000 and 1999, respectively. Foregone interest income and cash interest
collected on nonaccrual loans was not material during the years ended June 30,
2000, 1999, and 1998.
Changes in the allowance for estimated losses on loans for the years ended June
30, 2000, 1999, and 1998 are presented as follows:
2000 1999 1998
-----------------------------------------
Balance, beginning ....................... $ 2,895,457 $ 2,349,838 $ 1,632,500
Provisions charged to expense ............ 1,051,818 891,800 901,976
Loans charged off ........................ (426,708) (478,515) (205,234)
Recoveries on loans previously charged off 96,834 132,334 20,596
----------------------------------------
Balance, ending .......................... $ 3,617,401 $ 2,895,457 $ 2,349,838
=========================================
Impaired loans were not material as of June 30, 2000 and 1999.
The loan portfolio included a concentration of loans in certain industries as of
June 30, 2000 as follows:
Industry Balance
- - --------------------------------------------------------------------------------
Commercial banks $ 12,182,901
Real estate operators and lessors 11,364,772
Retail eating establishments 8,889,778
Hospitals 4,981,975
Automotive dealers 4,932,967
Real estate developers 4,790,558
Fabricated metal products 4,439,792
Physicians 4,045,447
Generally these loans are collateralized by assets of the borrowers. The loans
are expected to be repaid from cash flows or from proceeds from the sale of
selected assets of the borrowers. Credit losses arising from lending
transactions with these entities compare favorably with the Bank's credit loss
experience on its loan portfolio as a whole.
Loans are made in the normal course of business to directors, officers, and
their related interests. The terms of these loans, including interest rates and
collateral, are similar to those prevailing for comparable transactions with
other persons. An analysis of the changes in the aggregate amount of these loans
during the years ended June 30, 2000 and 1999 was as follows:
2000 1999
--------------------------------
Balance, beginning ................... $ 5,829,187 $ 4,831,491
Advances ............................. 1,968,717 3,188,483
Repayments ........................... (879,099) (2,190,787)
--------------------------------
Balance, ending ...................... $ 6,918,805 $ 5,829,187
================================
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of June 30,
2000 and 1999:
2000 1999
----------------------------
Land ....................................... $ 630,699 $ 630,699
Buildings .................................. 5,003,570 4,634,608
Furniture and equipment .................... 4,324,866 3,955,489
----------------------------
9,959,135 9,220,796
Less accumulated depreciation .............. 2,243,514 1,667,180
----------------------------
$7,715,621 $7,553,616
============================
Certain facilities are leased under operating leases. Rental expense was
$451,097, $429,932, and $176,057 for the years ended June 30, 2000, 1999, and
1998, respectively.
Future minimum rental commitments under noncancelable leases on a fiscal year
basis were as follows as of June 30, 2000:
Year ending June 30:
2001 ............................................... $ 394,115
2002 ............................................... 427,042
2003 ............................................... 441,745
2004 ............................................... 415,526
2005 ............................................... 413,860
Thereafter ......................................... 1,042,253
----------
$3,134,541
==========
Note 6. Deposits
The aggregate amount of certificates of deposit each with a minimum denomination
of $100,000, was $50,814,599 and $37,103,749 as of June 30, 2000 and 1999,
respectively.
As of June 30, 2000, the scheduled maturities of certificates of deposit were as
follows:
Year ending June 30:
2001 ............................................... $ 140,054,716
2002 ............................................... 10,032,255
2003 ............................................... 4,113,161
2004 ............................................... 1,718,779
2005 ............................................... 339,244
-------------
$ 156,258,155
=============
Note 7. Short-Term Borrowings
Short-term borrowings as of June 30, 2000 of $20,771,724 consisted of federal
funds purchased of $5,000,000 and overnight repurchase agreements with customers
of $15,771,724. As of June 30, 1999 short-term borrowings of $9,685,877
represented federal funds purchased of $140,000 and overnight repurchase
agreements with customers of $9,545,877.
Information concerning repurchase agreements is summarized as follows as of June
30, 2000 and 1999:
2000 1999
-------------------------
Average daily balance during the year .............. $12,823,612 $ 4,248,238
Average daily interest rate during the year ........ 4.35% 4.14%
Maximum month-end balance during the year .......... 18,784,998 11,418,714
Weighted average rate as of June 30 ................ 4.63% 3.99%
Securities underlying the agreements as of June 30:
Carrying value ................................... $24,397,505 $11,934,561
Fair value ....................................... 24,397,505 11,934,561
The securities underlying the agreements as of June 30, 2000 and 1999 were under
the Company's control in safekeeping at third-party financial institutions.
Note 8. Federal Home Loan Bank Advances
The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As of
June 30, 2000 and 1999, the Bank held $1,299,100 of FHLB stock. Maturity and
interest rate information on advances from the FHLB as of June 30, 2000 and 1999
is as follows:
June 30, 2000
-------------------------
Weighted
Average
Amount Due Interest Rate
-------------------------
Maturity:
Year ending June 30:
2001 .......................................... $ 3,250,000 6.45%
2002 .......................................... 2,027,195 6.96
2003 .......................................... 5,822,799 6.33
2004 .......................................... 1,885,915 5.88
2005 .......................................... 750,000 5.90
Thereafter .................................... 8,689,489 6.03
-----------
Total FHLB advances ..................... $22,425,398 6.24
============
June 30, 1999
-------------------------
Weighted
Average
Amount Due Interest Rate
-------------------------
Maturity:
Year ending June 30:
2000 .......................................... $ 3,500,000 5.76%
2001 .......................................... 3,250,000 5.69
2002 .......................................... 2,057,063 6.96
2003 .......................................... 6,989,575 6.19
2004 .......................................... 1,953,075 5.87
Thereafter ...................................... 6,856,177 5.92
-----------
Total FHLB advances ............................. $24,605,890 6.03
===========
Advances from the FHLB are collateralized by 1-to-4 unit residential mortgages
equal to 130% of total outstanding notes. Additionally, securities with a
carrying value of approximately $4.4 million as of June 30, 2000 and $6.3
million as of June 30, 1999 were pledged as collateral on these advances.
Note 9. Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures
The Company issued all of the 1,200,000 authorized shares of Company Obligated
Mandatorily Redeemable (COMR) Preferred Securities of Quad City Holdings Capital
Trust I Holding Solely Subordinated Debentures. Distributions are paid
quarterly. Cumulative cash distributions are calculated at a 9.2% annual rate.
The Company may, at one or more times, defer interest payments on the capital
securities for up to 20 consecutive quarters, but not beyond June 30, 2029. At
the end of any deferral period, all accumulated and unpaid distributions will be
paid. The capital securities will be redeemed on June 30, 2029; however, the
Company has the option to shorten the maturity date to a date not earlier than
June 30, 2004. The redemption price is $10 per capital security plus any accrued
and unpaid distributions to the date of redemption.
Holders of the capital securities have no voting rights, are unsecured and rank
junior in priority of payment to all of the Company's indebtedness and senior to
the Company's capital stock.
The debentures are included on the balance sheet as of June 30, 2000 and 1999 as
liabilities. For regulatory purposes, approximately $7,000,000 of the capital
securities are allowed in the calculation of Tier I capital, with the remainder
allowed as Tier II capital.
The capital securities are traded on the American Stock Exchange under the
symbol "CQP.PR.A".
Note 10. Other Borrowings
The Company has a revolving credit note for $3,000,000, which is secured by all
the outstanding stock of the Bank. There was no outstanding balance on this note
as of June 30, 2000 and 1999. The revolving credit note expires on July 1, 2001.
Interest is payable quarterly at the adjusted LIBOR rate, as defined in the
credit note agreement, and varies by borrowing. As of June 30, 2000 the
borrowing rates ranged from 8.6% to 8.9% depending on the repricing interval
selected.
The revolving credit note agreement contains certain covenants that place
restrictions on additional debt and stipulate minimum capital and various
operating ratios. The Company complied with all of the covenants or they were
waived as of June 30, 2000 and 1999.
Note 11. Restructuring of Merchant Broker Agreement
In June 1998, the Company recognized $2,168,000 of income as a result of signing
a new merchant broker agreement with an ISO. The term of the new agreement was
for a minimum one-year period, and replaced a prior agreement that had an
expiration date in the year 2002. In consideration for reducing the term from
four years to a minimum of one year, the Company received total compensation of
$2,900,000. The Company recognized $732,000 and $2,168,000 of the income during
the years ended June 30, 1999 and 1998, respectively. In addition, the Company
received monthly fees of $25,000 for servicing the current merchants during the
remaining term of the agreement, which expired May 31, 2000. In future years, if
agreements with other ISOs are not established, there could be a reduction in
income. The Company has added several new ISOs during the past year and
continues to actively pursue relationships with other ISOs.
Note 12. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components
for the years ended June 30, 2000, 1999, and 1998:
Year Ended June 30,
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Current ............. $ 2,079,186 $ 1,381,903 $ 2,231,183
Deferred ............ (398,971) 232,262 (553,283)
--------------------------------------------------
$ 1,680,215 $ 1,614,165 $ 1,677,900
==================================================
A reconciliation of the expected federal income tax expense to the income tax
expense included in the consolidated statements of income was as follows for the
years ended June 30, 2000, 1999, and 1998:
Year Ended June 30,
----------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ -------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------------------
Computed "expected"
tax expense ............... $ 1,549,010 35.0% $ 1,427,645 35.0% $ 1,424,910 35.0%
Effect of graduated tax rates (44,257) (1.0) (40,790) (1.0) (40,712) (1.0)
Tax exempt income, net ...... (132,769) (3.0) (46,853) (1.1) (19,759) (0.5)
State income taxes, net of
federal benefit ........... 172,445 3.9 126,123 3.1 268,796 6.6
Other ....................... 135,786 3.1 148,040 3.6 44,665 1.1
---------------------------------------------------------------------------
$ 1,680,215 38.0% $ 1,614,165 39.6% $ 1,677,900 41.2%
===========================================================================
The net deferred tax assets included with other assets on the balance sheet
consisted of the following as of June 30, 2000 and 1999:
2000 1999
----------------------
Deferred tax assets:
Net unrealized losses on securities available for sale $ 572,938 $ 172,042
Deferred compensation ................................ 112,299 --
Loan and credit card losses .......................... 1,357,186 1,063,999
Other ................................................ 69,380 23,801
----------------------
2,111,803 1,259,842
----------------------
Deferred tax liabilities:
Premises and equipment ............................... 447,330 406,302
Investment securities accretion ...................... 29,185 27,282
Other ................................................ 34,973 25,810
----------------------
511,488 459,394
----------------------
Net deferred tax asset ......................... $1,600,315 $ 800,448
======================
The change in deferred income taxes was reflected in the financial statements as
follows for the years ended June 30, 2000, 1999, and 1998:
2000 1999 1998
------------------------------------
Provision for income taxes .............. $(398,971) $ 232,262 $(553,283)
Statement of stockholders' equity-
accumulated other comprehensive
income, unrealized gains (losses)
on securities available for sale, net . (400,896) (176,680) 33,094
------------------------------------
$(799,867) $ 55,582 $(520,189)
====================================
Note 13. Employee Benefit Plans
The Company has a profit sharing plan which includes a provision designed to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended,
to allow for participant contributions. All employees are eligible to
participate in the plan. The Company matches 100% of the first 2% of employee
contributions, 50% of the next 2% of employee contributions, and 25% of the next
2% of employee contributions, up to a maximum amount of 3.5% of an employee's
compensation. Additionally, at its discretion, the Company may make additional
contributions to the plan which are allocated to the accounts of participants in
the plan based on relative compensation. Company contributions for the years
ended June 30, 2000, 1999, and 1998 were as follows:
2000 1999 1998
------------------------------------
Matching contribution ................ $155,237 $132,835 $100,164
Discretionary contribution ........... 50,000 45,000 45,000
------------------------------------
$205,237 $177,835 $145,164
====================================
During the year ended June 30, 2000, the Company entered into deferred
compensation agreements with certain executive officers. Under the provisions of
the agreements the officers may defer compensation and the Company matches the
deferral up to certain maximums. The Company's matching contribution differs by
officer and is a maximum of either $15,000 or $20,000 annually. Interest is
computed at The Wall Street Journal prime rate, with a minimum of 8% and a
maximum of 10%. Upon retirement, the officer will receive the deferral balance
in 180 equal monthly installments. During the year ended June 30, 2000, the
Company expensed $76,860 related to the agreements. As of June 30, 2000 the
liability related to the agreements totals $76,860.
Note 14. Warrants and Stock Based Compensation
Warrants:
As part of the underwriting agreement for its initial public offering, the
Company issued warrants to the underwriters for the purchase of 37,500 shares
of common stock at $8 per share. The underwriters exercised all of the
warrants on May 6, 1997. The warrants became exercisable on October 13, 1994
(the date commencing one year from the date of the public offering) and would
have remained exercisable for a period of four years after such date.
Common stock of $75,000 as of June 30, 1993 represented 112,500 shares of the
Company's common stock issued in a private placement in 1993. Each
stockholder who purchased stock in the private placement received a unit (at
a price of $6.67 per unit) which consisted of one and one-half shares of the
Company's common stock and one and one-half warrants. Each warrant entitled
the holder to purchase an additional share of Company common stock for $7.33,
exercisable by October 13, 1999. During the years ended June 30, 2000, 1999,
and 1998 11,250, 30,000, and 71,250, respectively, of the warrants were
exercised leaving none remaining as of June 30, 2000.
Stock option and incentive plans:
The Company's Board of Directors and its stockholders adopted in June 1993
the Quad City Holdings, Inc. Stock Option Plan (Stock Option Plan). Up to
150,000 shares of common stock may be issued to employees and directors of
the Company and its subsidiaries pursuant to the exercise of incentive stock
options or nonqualified stock options granted under the Stock Option Plan.
The Company's Board of Directors adopted in November 1996 the Quad City
Holdings, Inc. 1997 Stock Incentive Plan (Stock Incentive Plan). Up to
150,000 shares of common stock may be issued to employees and directors of
the Company and its subsidiaries pursuant to the exercise of nonqualified
stock options and restricted stock granted under the Stock Incentive Plan.
The Stock Option Plan and the Stock Incentive Plan are administered by the
compensation committee appointed by the Board of Directors (Committee).
The number and exercise price of options granted under the Stock Option Plan
and the Stock Incentive Plan is determined by the Committee at the time the
option is granted. In no event can the exercise price be less than the value
of the common stock at the date of the grant for incentive stock options. All
options have a 10-year life and will vest and become exercisable from 1-to-5
years after the date of the grant. Only nonqualified stock options have been
issued to date.
In the case of nonqualified stock options, the Stock Option Plan and the
Stock Incentive Plan provide for the granting of "Tax Benefit Rights" to
certain participants at the same time as these participants are awarded
nonqualified options. Each Tax Benefit Right entitles a participant to a cash
payment equal to the excess of the fair market value of a share of common
stock on the exercise date over the exercise price of the related option
multiplied by the difference between the rate of tax on ordinary income over
the rate of tax on capital gains (federal and state).
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been
recognized for grants made to date. Had compensation cost been determined
based on the fair value method prescribed in FASB Statement No. 123, reported
net income would not have changed by a material amount, and earnings per
share would not have changed by more than 2(cent), 2(cent), and 1(cent) for
the years ended June 30, 2000, 1999, and 1998, respectively.
In determining compensation cost using the fair value method prescribed in
Statement No. 123, the value of each grant is estimated at the grant date
with the following weighted-average assumptions for grants during the years
ended June 30, 2000, 1999, and 1998: dividend rate of 0%: risk-free interest
rates based upon current rates at the date of grant (5.62% to 6.68%);
expected lives of 10 years, and expected price volatility of 15.59% to
23.11%.
A summary of the stock option plans as of June 30, 2000, 1999, and 1998 and
changes during the years ended on those dates is presented below:
2000 1999 1998
----------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------
Outstanding, beginning ........ 190,171 $ 9.36 190,887 $ 9.12 175,155 $ 7.89
Granted ..................... 25,900 14.83 8,500 18.03 19,062 20.92
Exercised ................... (26,060) 6.69 (720) 9.49 (75) 7.23
Forfeited ................... (1,006) 17.80 (8,496) 12.67 (3,255) 12.15
------- ------- -------
Outstanding, ending ........... 189,005 10.24 190,171 9.36 190,887 9.12
======= ======= =======
Exercisable, ending ........... 138,834 149,109 130,455
Weighted average fair value per
option of options granted
during the year ............. $ 7.68 $ 8.88 $ 9.72
A further summary of options outstanding as of June 30, 2000 is presented below:
Options Outstanding
------------------------------------
Options Exercisable
Weighted ----------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- - -------------------------------------------------------------------------------------
$6.00 to $6.83 110,320 3.5 years $ 6.68 110,320 $ 6.68
$7.83 to $8.83 8,655 5.9 years 8.75 7,005 8.75
$10.00 to $11.67 750 6.8 years 11.67 450 11.67
$12.69 to $13.25 11,000 9.6 years 13.07 - -
$13.33 to $13.67 21,735 7.0 years 13.67 13,335 13.66
$14.08 to $21.33 36,545 9.0 years 18.42 7,724 20.38
------- -------
189,005 138,834
======= =======
Stock appreciation rights:
Additionally, the Stock Incentive Plan allows the granting of stock
appreciation rights (SARs). SARs are rights entitling the grantee to receive
cash having a fair market value equal to the appreciation in the market value
of a stated number of shares from the date of grant. Like options, the number
and exercise price of SARs granted is determined by the Committee. The SARs
will vest 20% per year, and the term of the SAR may not exceed 10 years from
the date of the grant. As of June 30, 2000 and 1999 there were 52,050 and
39,625 SARs, respectively, outstanding, with 17,490 and 9,675, respectively,
exercisable.
Note 15. Preferred Stock
In June 1999, the Company redeemed all 25 outstanding shares of Preferred Stock
for cash of $2,977,884. The stock was senior to common stock as to dividends,
liquidation, and redemption rights, and did not confer general voting rights.
The redemption amount was equal to the sum of (i) $100,000; plus (ii) a premium
in the amount of $9,750 multiplied by a fraction, the numerator of which was the
total number of calendar days the Preferred Stock being redeemed had been
outstanding and the denominator of which was 365.
Note 16. Regulatory Capital Requirements and Restrictions on Dividends
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions' assets and off-balance-sheet
items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to average total assets ratio (leverage ratio). In
addition, regulatory agencies consider the published capital levels as minimum
levels and may require a financial institution to maintain capital at higher
levels.
The actual amounts and capital ratios as of June 30, 2000 and 1999 with the
minimum requirements for the Company and Bank are presented below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
As of June 30, 2000:
Company:
Total risk based capital $ 36,522,000 13.5% $ 21,689,000 > 8.0% $ 27,112,000 > 10.0%
--- ---
Tier 1 risk based capital 28,173,000 10.4 10,845,000 > 4.0 16,267,000 > 6.0
--- ---
Leverage ratio 28,173,000 8.1 13,988,000 > 4.0 17,485,000 > 5.0
--- ---
Bank:
Total risk based capital $ 28,363,000 10.7% $ 21,165,000 > 8.0% $ 26,457,000 > 10.0%
--- ---
Tier 1 risk based capital 25,052,000 9.5 10,583,000 > 4.0 15,874,000 > 6.0
--- ---
Leverage ratio 25,052,000 7.4 13,481,000 > 4.0 16,852,000 > 5.0
--- ---
As of June 30, 1999:
Company:
Total risk based capital $ 33,695,000 13.8% $ 19,476,000 > 8.0% $ 24,345,000 > 10.0%
--- ---
Tier 1 risk based capital 25,060,000 10.3 9,738,000 > 4.0 14,607,000 > 6.0
--- ---
Leverage ratio 25,060,000 8.0 12,523,000 > 4.0 15,603,000 > 5.0
--- ---
Bank:
Total risk based capital $ 25,139,000 11.3% $ 17,875,000 > 8.0% $ 22,344,000 > 10.0%
--- ---
Tier 1 risk based capital 22,244,000 10.0 8,938,000 > 4.0 13,406,000 > 6.0
--- ---
Leverage ratio 22,244,000 7.2 12,374,000 > 4.0 15,467,000 > 5.0
--- ---
Federal Reserve Board policy provides that a bank holding company should not pay
dividends unless (i) the dividends can be fully funded out of net income from
the company's net earnings over the prior year and (ii) the prospective rate of
earnings retention appears consistent with the company's (and its subsidiaries')
capital needs, asset quality, and overall financial condition.
In addition, the Delaware General Corporation Law restricts the Company from
paying dividends except out of its surplus, or in the case there shall be no
such surplus, out of its net profits for the fiscal year in which the dividend
is declared and/or the preceding fiscal year.
The Iowa Banking Act provides that an Iowa bank may not pay dividends in an
amount greater than its undivided profits. In addition, the Bank, as a member of
the Federal Reserve System, will be prohibited from paying dividends to the
extent such dividends declared in any calendar year exceed the total of its net
profits of that year combined with its retained net profits of the preceding two
years, or are otherwise determined to be an "unsafe and unsound practice" by the
Federal Reserve Board.
Note 17. Earnings Per Common Share
The following information was used in the computation of basic and diluted
earnings per common share for the years ended June 30, 2000, 1999, and 1998:
2000 1999 1998
----------------------------------
Basic and diluted earnings, net income ..... $2,745,527 $2,464,821 $2,393,272
==================================
Weighted average common shares outstanding . 2,309,453 2,285,500 2,196,297
Weighted average common shares issuable upon
exercise of stock options and warrants ..... 76,387 113,025 157,635
----------------------------------
Weighted average common and common
equivalent shares outstanding .............. 2,385,840 2,398,525 2,353,932
==================================
Note 18. Commitments and Contingencies
In the normal course of business, the Bank makes various commitments and incurs
certain contingent liabilities that are not presented in the accompanying
consolidated financial statements. The commitments and contingent liabilities
include various guarantees, commitments to extend credit, and standby letters of
credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based upon
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
As of June 30, 2000 and 1999, commitments to extend credit aggregated
$74,934,000 and $58,119,081, respectively. As of June 30, 2000 and 1999, standby
letters of credit aggregated $957,000 and $551,500, respectively. Management
does not expect that all of these commitments will be funded.
Bancard is subject to the risk of chargebacks from cardholders and the merchant
being incapable of refunding the amount charged back. Management attempts to
mitigate such risk by regular monitoring of merchant activity and in appropriate
cases, holding cash reserves deposited by the merchant.
The Company also has a guarantee to MasterCard International Incorporated, which
is backed up by a performance bond in the amount of $1,000,000. As of June 30,
2000 there were no significant pending liabilities.
Aside from cash on-hand and in-vault, the majority of the Company's cash is
maintained at upstream correspondent banks. The total amount of cash on deposit,
certificates of deposit, and federal funds sold exceeded federal insured limits
by $31,794,780 and $44,004,699 as of June 30, 2000 and 1999, respectively. In
the opinion of management, no material risk of loss exists due to the financial
condition of the upstream correspondent banks.
Note 19.
Quarterly Results of Operations (Unaudited)
Year Ended June 30, 2000
-------------------------------------------------
September December March June
1999 1999 2000 2000
-------------------------------------------------
Total interest income ................ $5,800,637 $5,935,251 $5,952,519 $6,390,791
Total interest expense ............... 3,102,826 3,329,541 3,299,703 3,556,523
-------------------------------------------------
Net interest income .......... 2,697,811 2,605,710 2,652,816 2,834,268
Provision for loan losses ............ 274,700 296,800 85,600 394,718
Noninterest income ................... 1,372,113 1,623,759 1,624,409 1,534,135
Noninterest expenses ................. 2,773,541 2,727,889 2,960,061 3,005,970
-------------------------------------------------
Net income before income taxes 1,021,683 1,204,780 1,231,564 967,715
Federal and state income taxes ....... 389,035 461,860 471,890 357,430
-------------------------------------------------
Net income ................... $ 632,648 $ 742,920 $ 759,674 $ 610,285
=================================================
Earnings per common share:
Basic .............................. $ 0.28 $ 0.32 $ 0.33 $ 0.26
Diluted ............................ 0.26 0.31 0.32 0.26
Year Ended June 30, 1999
-------------------------------------------------
September December March June
1998 1998 1999 1999
-------------------------------------------------
Total interest income ................ $4,785,014 $4,949,961 $4,948,755 $5,432,190
Total interest expense ............... 2,692,979 2,718,434 2,673,931 2,941,342
-------------------------------------------------
Net interest income .......... 2,092,035 2,231,527 2,274,824 2,490,848
Provision for loan losses ............ 252,000 174,200 218,200 247,400
Noninterest income ................... 1,191,066 1,329,819 1,437,189 1,602,377
Noninterest expenses ................. 2,301,829 2,376,376 2,472,977 2,527,717
-------------------------------------------------
Net income before income taxes 729,272 1,010,770 1,020,836 1,318,108
Federal and state income taxes ....... 290,451 391,314 406,889 525,511
-------------------------------------------------
Net income ................... $ 438,821 $ 619,456 $ 613,947 $ 792,597
=================================================
Earnings per common share:
Basic .............................. $ 0.19 $ 0.27 $ 0.27 $ 0.35
Diluted ............................ 0.18 0.26 0.25 0.34
Year Ended June 30, 1998
-------------------------------------------------
September December March June
1997 1997 1998 1998
-------------------------------------------------
Total interest income ................ $3,305,107 $3,617,832 $3,797,383 $4,356,245
Total interest expense ............... 1,757,272 1,963,477 2,157,917 2,463,355
-------------------------------------------------
Net interest income .......... 1,547,835 1,654,355 1,639,466 1,892,890
Provision for loan losses ............ 304,355 215,643 233,260 148,718
Noninterest income ................... 922,495 872,117 1,134,103 3,219,702
Noninterest expenses ................. 1,606,833 1,706,098 2,048,517 2,548,367
-------------------------------------------------
Net income before income taxes 559,142 604,731 491,792 2,415,507
Federal and state income taxes ....... 218,200 237,075 191,425 1,031,200
-------------------------------------------------
Net income ................... $ 340,942 $ 367,656 $ 300,367 $1,384,307
=================================================
Earnings per common share:
Basic .............................. $ 0.15 $ 0.17 $ 0.14 $ 0.63
Diluted ............................ 0.14 0.15 0.13 0.60
Note 20. Parent Company Only Financial Statements
The following is condensed financial information of Quad City Holdings, Inc.
(parent company only):
Condensed Balance Sheets
June 30,
----------------------------
ASSETS 2000 1999
- - -----------------------------------------------------------------------------------
Cash and due from banks ............................ $ 1,803,841 $ 4,911,367
Securities available for sale, at fair value ....... 1,131,073 189,625
Investment in Quad City Bank and Trust Company ..... 23,992,847 21,916,436
Investment in Quad City Bancard, Inc. .............. 2,529,026 1,432,802
Investment in Quad City Holdings Capital Trust I ... 390,432 380,000
Net loans receivable ............................... 532,443 --
Other assets ....................................... 1,895,581 1,984,519
----------------------------
Total assets ............................... $ 32,275,243 $ 30,814,749
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------
Liabilities:
COMR preferred securities of subsidiary trust .... $ 12,000,000 $ 12,000,000
Other liabilities ................................ 203,824 341,278
----------------------------
Total liabilities .......................... 12,203,824 12,341,278
----------------------------
Stockholders' Equity:
Common stock ..................................... 2,325,416 2,296,251
Additional paid-in capital ....................... 12,147,984 11,959,080
Retained earnings ................................ 7,296,017 4,550,490
Accumulated other comprehensive (loss) ........... (1,098,518) (332,350)
Less cost of common shares acquired for the
treasury ....................................... (599,480) --
----------------------------
Total stockholders' equity ................. 20,071,419 18,473,471
----------------------------
Total liabilities and stockholders' equity ......... $ 32,275,243 $ 30,814,749
============================
Condensed Statements of Income
Year Ended June 30,
------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------------------------
Total interest income .................................... $ 197,387 $ 78,763 $ 48,178
Investment securities gains, net ......................... 21,983 5,474 8,734
Equity in net income of Quad City Bank and
Trust Company .......................................... 2,808,058 2,212,931 1,208,090
Equity in net income of Quad City Bancard, Inc. .......... 596,224 564,886 1,325,992
Equity in net income of Quad City Holdings Capital Trust I 10,432 -- --
Other .................................................... 233,927 85,945 81,435
------------------------------------
Total income ..................................... 3,868,011 2,947,999 2,672,429
------------------------------------
Interest expense ......................................... 1,137,402 220,794 129,271
Other .................................................... 583,282 495,284 304,186
------------------------------------
Total expenses ................................... 1,720,684 716,078 433,457
-----------------------------------
Income before income tax benefit ................. 2,147,327 2,231,921 2,238,972
Income tax benefit ....................................... 598,200 232,900 154,300
------------------------------------
Net income ....................................... $2,745,527 $2,464,821 $2,393,272
====================================
Condensed Statements of Cash Flows
Year Ended June 30,
--------------------------------------------
2000 1999 1998
- - ---------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income ............................................. $ 2,745,527 $ 2,464,821 $ 2,393,272
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Distributions in excess of (less than) earnings of:
Quad City Bank and Trust Company ................... (2,808,058) (2,212,931) (1,208,090)
Quad City Bancard, Inc. ............................ (596,224) (564,886) 574,008
Quad City Holdings Capital Trust I ................. (10,432) -- --
Depreciation ......................................... 4,543 4,036 3,520
Provision for loan losses ............................ 6,000 (7,500) --
Investment securities gains, net ..................... (21,983) (5,474) (8,734)
Tax benefit of nonqualified stock options exercised .. 81,178 3,218 --
(Increase) decrease in accrued interest receivable ... (20,140) 4,780 749
(Increase) decrease in other assets .................. 130,943 (770,199) (605,877)
Increase (decrease) in other liabilities ............. (137,454) 220,129 (14,606)
--------------------------------------------
Net cash provided by (used in) operating
activities ....................................... (626,100) (864,006) 1,134,242
--------------------------------------------
Cash Flows from Investing Activities:
Purchase of securities available for sale .............. (1,228,400) (67,400) (5,958)
Proceeds from sale of securities available for sale .... 250,426 32,865 14,020
Capital infusion, Quad City Bank and Trust Company ..... -- (2,000,000) (3,200,000)
Capital infusion, Quad City Bancard, Inc. .............. (500,000) (500,000) --
Capital infusion, Quad City Holdings Capital Trust I .. -- (380,000) --
Net loans (originated) repaid .......................... (538,443) 510,344 (169,850)
(Purchase) disposal of premises and equipment .......... (2,420) (2,420) 10,623
--------------------------------------------
Net cash (used in) investing activities .......... (2,018,837) (2,406,611) (3,351,165)
--------------------------------------------
Cash Flows from Financing Activities:
Net (decrease) in other borrowings ..................... -- (1,500,000) --
Proceeds from issuance of preferred securities of
subsidiary trust ..................................... -- 12,000,000 --
Redemption of preferred stock .......................... -- (2,977,884) --
Purchase of treasury stock ............................. (599,480) -- --
Proceeds from issuance of preferred stock .............. -- -- 1,500,000
Proceeds from issuance of common stock, net of
simultaneous redemptions ............................... 136,891 225,940 523,043
--------------------------------------------
Net cash provided by (used in) financing activities (462,589) 7,748,056 2,023,043
--------------------------------------------
Net increase (decrease) in cash and due from banks ....... (3,107,526) 4,477,439 (193,880)
Cash and due from banks:
Beginning .............................................. 4,911,367 433,928 627,808
--------------------------------------------
Ending ................................................. $ 1,803,841 $ 4,911,367 $ 433,928
============================================
Note 21. Fair Value of Financial Instruments
FASB Statement No. 107 "Disclosures about Fair Value of Financial Instruments"
requires disclosures of fair value information about financial instruments for
which it is practicable to estimate that value. When quoted market prices are
not available, fair values are based on estimates using present value or other
techniques. Those techniques are significantly affected by the assumptions used,
including the discounted rates and estimates of future cash flows. In this
regard, fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
settlement. Some financial instruments and all nonfinancial instruments are
excluded from the disclosures. The aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of their financial instruments.
Cash and due from banks, federal funds sold, and certificates of deposit at
financial institutions: The carrying amounts reported in the balance sheets
for cash and due from banks, federal funds sold, and certificates of deposit
at financial institutions equal their fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: The fair values for variable rate loans equal their
carrying values. The fair values for all other types of loans are estimated
using discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers with similar credit
quality.
Accrued interest receivable and payable: The fair value of accrued interest
receivable and payable is equal to its carrying value.
Deposits: The fair values disclosed for demand deposits equal their carrying
amounts, which represents the amount payable on demand. Fair values for time
deposits are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on time deposits to a schedule of
aggregate expected monthly maturities on time deposits.
Short-term borrowings: The fair value for short-term borrowings is equal to
its carrying value.
Federal Home Loan Bank advances and Company obligated mandatorily redeemable
preferred securities: The fair value of the Company's Federal Home Loan Bank
advances and Company obligated mandatorily redeemable preferred securities is
estimated using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Commitments to extend credit: The fair value of these commitments is not
material.
The carrying values and estimated fair values of the Company's financial
instruments as of June 30, 2000 and 1999 are presented as follows:
2000 1999
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------------------------------------------------
Cash and due from banks .......................... $ 15,130,357 $ 15,130,357 $ 8,528,195 $ 8,528,195
Federal funds sold ............................... 26,105,000 26,105,000 39,125,000 39,125,000
Certificates of deposit at financial institutions 12,776,463 12,776,463 12,535,193 12,535,193
Investment securities:
Held to maturity ............................... 574,988 565,237 724,415 727,115
Available for sale ............................. 55,554,062 55,554,062 49,533,909 49,533,909
Loans receivable, net ............................ 238,235,450 237,441,000 195,081,235 196,217,000
Accrued interest receivable ...................... 2,633,120 2,633,120 2,006,503 2,006,503
Deposits ......................................... 288,066,756 287,771,000 247,965,879 248,312,000
Short-term borrowings ............................ 20,771,724 20,771,724 9,685,877 9,685,877
Federal Home Loan Bank advances .................. 22,425,398 22,287,000 24,605,890 24,742,000
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures ........................ 12,000,000 11,896,154 12,000,000 12,000,000
Accrued interest payable ......................... 1,852,267 1,852,267 1,588,263 1,588,263
Note 22. Business Segment Information
Selected financial information on the Company's business segments is presented
as follows for the years ended June 30, 2000, 1999, and 1998:
Year Ended June 30,
-----------------------------------------------
2000 1999 1998
-----------------------------------------------
Quad City Holdings, Inc.:
Revenue ........................................... $ 265,204 $ 48,485 $ 114,347
Net income (loss) ................................. (839,280) (312,996) (140,810)
Assets ............................................ 3,696,110 2,182,658 1,906,958
Depreciation ...................................... 4,543 4,036 3,520
Capital expenditures .............................. 2,420 2,420 --
Quad City Bank and Trust Company, excluding
Trust Department:
Revenue ........................................... 25,563,964 22,040,065 16,408,561
Net income ........................................ 2,446,654 1,881,433 947,510
Assets ............................................ 361,927,225 317,059,752 247,441,852
Depreciation ...................................... 584,872 589,287 389,177
Capital expenditures .............................. 751,653 451,535 2,870,009
Quad City Bancard, Inc.:
Revenue ........................................... 2,520,136 2,067,303 3,563,574
Net income ........................................ 674,800 564,886 1,325,992
Assets ............................................ 1,998,280 2,103,805 802,179
Depreciation ...................................... 46,423 33,752 29,660
Capital expenditures .............................. 43,770 66,468 28,786
Trust Department, Quad City Bank and Trust Company:
Revenue ........................................... 1,884,310 1,520,518 1,138,502
Net income ........................................ 463,353 331,498 260,580
Assets ............................................ N/A N/A N/A
Depreciation ...................................... N/A N/A N/A
Capital expenditures .............................. N/A N/A N/A
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant
The information required by this item is set forth under the caption
"Election of Directors" in the Proxy Statement, and is incorporated herein by
reference.
Item 11. Executive Compensation
The information required by this item is set forth under the caption
"Executive Compensation" in the Proxy Statement, and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners" in the Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the captions
"Security Ownership of Certain Beneficial Owners" and "Transactions with
Management" in the Proxy Statement, and is incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated
Financial Statements under Item 8.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they
are not applicable or the required information is shown in the
consolidated financial statements and the accompanying notes
thereto.
(b) Reports on Form 8-K
Quad City filed a current report on Form 8-K dated April 5,
2000 with the Securities and Exchange Commission on June 9,
2000.
(c) Exhibits
The Index to Exhibits appears at page xx of this report.
Appendix A
SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance of
Quad City Holdings, Inc. (the "Company") can be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statutes and regulations and the policies of
various governmental regulatory authorities, including the Iowa Superintendent
of Banking (the "Superintendent"), the Board of Governors of the Federal Reserve
System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the
"FDIC"), the Internal Revenue Service and state taxing authorities and the
Securities and Exchange Commission (the "SEC"). The effect of applicable
statutes, regulations and regulatory policies can be significant, and cannot be
predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to the Company and its subsidiaries
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply to the Company and
its subsidiaries, nor does it restate all of the requirements of the statutes,
regulations and regulatory policies that are described. As such, the following
is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
Recent Regulatory Developments
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November, 1999,
allows eligible bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Act, an eligible bank holding company that elects to
become a financial holding company may engage in any activity that the Federal
Reserve, in consultation with the Secretary of the Treasury, determines by
regulation or order is financial in nature, incidental to any such financial
activity, or complementary to any such financial activity and does not pose a
substantial risk to the safety or soundness of depository institutions or the
financial system generally. National banks are also authorized by the Act to
engage, through "financial subsidiaries," in certain activity that is
permissible for financial holding companies (as described above) and certain
activity that the Secretary of the Treasury, in consultation with the Federal
Reserve, determines is financial in nature or incidental to any such financial
activity.
Various bank regulatory agencies have begun issuing regulations as mandated by
the Act. During June 2000, all of the federal bank regulatory agencies jointly
issued regulations implementing the privacy provisions of the Act. In addition,
the Federal Reserve issued interim regulations establishing procedures for bank
holding companies to elect to become financial holding companies and listing the
financial activities permissible for financial holding companies, as well as
describing the extent to which financial holding companies may engage in
securities and merchant banking activities. The Federal Reserve has issued an
interim regulation regarding the parameters under which state member banks may
establish and maintain financial subsidiaries. At this time, it is not possible
to predict the impact the Act and its implementing regulations may have on the
Company. As of the date of this filing, the Company has not applied for or
received approval to operate as a financial holding company. In addition, the
Quad City Bank and Trust Company, a banking subsidiary of the Company (the
"Bank"), has not applied for or received approval to establish financial
subsidiaries.
The Company
General. The Company, as the sole shareholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company
Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve may require.
Investments and Activities. Under the BHCA, a bank holding company must obtain
Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating with another
bank holding company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United States
without regard to whether the acquisition is prohibited by the law of the state
in which the target bank is located. In approving interstate acquisitions,
however, the Federal Reserve is required to give effect to applicable state law
limitations on the aggregate amount of deposits that may be held by the
acquiring bank holding company and its insured depository institution affiliates
in the state in which the target bank is located (provided that those limits do
not discriminate against out-of-state depository institutions or their holding
companies) and state laws which require that the target bank have been in
existence for a minimum period of time (not to exceed five years) before being
acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
Under current regulations of the Federal Reserve, the Company and its non-bank
subsidiaries are permitted to engage in a variety of banking-related businesses,
including the operation of a thrift, sales and consumer finance, equipment
leasing, the operation of a computer service bureau (including software
development), and mortgage banking and brokerage. The BHCA generally does not
place territorial restrictions on the domestic activities of non-bank
subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring "control" of a
bank or a bank holding company without prior notice to the appropriate federal
bank regulator. "Control" is defined in certain cases as the acquisition of 10%
of the outstanding shares of a bank or a bank holding company.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships).
Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments which do not qualify as Tier 1 capital and a portion of the
company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
As of June 30, 2000, the Company had regulatory capital in excess of the Federal
Reserve's minimum requirements, with a risk-based capital ratio of 13.5% and a
leverage ratio of 8.1%.
Dividends. The Delaware General Corporation Law (the "DGCL") allows the Company
to pay dividends only out of its surplus (as defined and computed in accordance
with the provisions of the DGCL) or if the Company has no such surplus, out of
its net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Additionally, the Federal Reserve has issued a policy
statement with regard to the payment of cash dividends by bank holding
companies. The policy statement provides that a bank holding company should not
pay cash dividends which exceed its net income or which can only be funded in
ways that weaken the bank holding company's financial health, such as by
borrowing. The Federal Reserve also possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The Bank
General. The Bank is an Iowa-chartered bank, the deposit accounts of which are
insured by the FDIC's Bank Insurance Fund ("BIF"). The Bank is also a member of
the Federal Reserve System ("member bank"). As an Iowa-chartered, FDIC-insured
member bank, the Bank is subject to the examination, supervision, reporting and
enforcement requirements of the Superintendent, as the chartering authority for
Iowa banks, the Federal Reserve, as the primary federal regulator of member
banks, and the FDIC, as administrator of the BIF.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the semi-annual period ending June 30, 2000, BIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning July 1, 2000, BIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any applicable
law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Bank.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations. These FICO assessments are in addition to amounts assessed by the
FDIC for deposit insurance. Between January 1, 2000 and the final maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. During the
calendar year ended December 31, 1999, the FICO assessment rate for SAIF members
ranged between approximately 0.058% of deposits and approximately 0.061% of
deposits, while the FICO assessment rate for BIF members ranged between
approximately 0.0116% of deposits and approximately 0.0122% of deposits. During
the fiscal year ended June 30, 2000, the Bank paid FICO assessments totaling
$41,646.
Supervisory Assessments. All Iowa banks are required to pay supervisory
assessments to the Superintendent to fund the operations of the Superintendent.
During the fiscal year ended June 30, 2000, the Bank paid supervisory
assessments to the Superintendent totaling $73,910.
Capital Requirements. The Federal Reserve has established the following minimum
capital standards for state-chartered Federal Reserve System member banks, such
as the Bank: a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with a minimum
requirement of at least 4% for all others, and a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must be Tier 1 capital. For purposes of these
capital standards, Tier 1 capital and total capital consist of substantially the
same components as Tier 1 capital and total capital under the Federal Reserve's
capital guidelines for bank holding companies (see "--The Company--Capital
Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
Federal Reserve provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.
During the fiscal year ended June 30, 2000, the Bank was not required by the
Federal Reserve to increase its capital to an amount in excess of the minimum
regulatory requirement. As of June 30, 2000, the Bank exceeded its minimum
regulatory capital requirements with a leverage ratio of 7.4% and a risk-based
capital ratio of 10.7%.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution. As of June 30, 2000, the Bank was well capitalized, as defined by
Federal Reserve regulations.
Dividends. The Iowa Banking Act provides that an Iowa bank may not pay dividends
in an amount greater than its undivided profits. The Federal Reserve Act also
imposes limitations on the amount of dividends that may be paid by a state
member bank, such as the Bank. Generally, a member bank may pay dividends out of
its undivided profits, in such amounts and at such times as the bank's board of
directors deems prudent. Without prior Federal Reserve approval, however, a
state member bank may not pay dividends in any calendar year which, in the
aggregate, exceed the bank's calendar year-to-date net income plus the bank's
retained net income for the two preceding calendar years.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, the Bank exceeded
its minimum capital requirements under applicable guidelines as of June 30,
2000. As of June 30, 2000, approximately $1.9 million was available to be paid
as dividends to the Company by the Bank. Notwithstanding the availability of
funds for dividends, however, the Federal Reserve may prohibit the payment of
any dividends by the Bank if the Federal Reserve determines such payment would
constitute an unsafe or unsound practice.
Insider Transactions. The Bank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company and its subsidiaries, on
investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by the Bank to its
directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company, and to "related
interests" of such directors, officers and principal stockholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
stockholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. Iowa law strictly regulates the establishment of bank
offices. Under the Iowa Banking Act, an Iowa state bank, such as the Bank,
generally may not establish a bank office outside the boundaries of the counties
contiguous to, or cornering upon, the county in which the principal place of
business of the bank is located. Further, Iowa law prohibits an Iowa bank from
establishing de novo branches in a municipality other than the municipality in
which the bank's principal place of business is located, if another bank already
operates one or more offices in the municipality in which the de novo branch is
to be located.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), both state and national banks are allowed to establish
interstate branch networks through acquisitions of other banks, subject to
certain conditions, including certain limitations on the aggregate amount of
deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of new interstate branches
or the acquisition of individual branches of a bank in another state (rather
than the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The legislation
allowed individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting appropriate legislation prior to June 1, 1997. Iowa permits
interstate bank mergers, subject to certain restrictions, including a
prohibition against interstate mergers involving an Iowa bank that has been in
existence and continuous operation for fewer than five years. In 1997, the
Company formed a de novo Illinois bank that was merged into the Bank, resulting
in the Bank establishing a branch office in Illinois. Under Illinois law, the
Bank may continue to establish offices in Illinois to the same extent permitted
for an Illinois bank (subject to certain conditions, including certain
regulatory notice requirements).
State Bank Activities. Under federal law and FDIC regulations, FDIC insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. These restrictions have not had, and are not
currently expected to have, a material impact on the operations of the Bank.
Federal Reserve System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $44.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $44.3 million, the reserve
requirement is $1.329 million plus 10% of the aggregate amount of total
transaction accounts in excess of $44.3 million. The first $5.0 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is in compliance with the foregoing requirements.
APPENDIX B
GUIDE 3 INFORMATION
The following tables and schedules show selected comparative financial
information required by the Securities and Exchange Commission Securities Act
Guide 3, regarding the business of the Quad City Holdings, Inc. ("the Company")
for the periods shown. All average amounts in these tables and schedules were
determined by using month end data, which management believes provides a fair
representation of the daily operations of the Company.
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential.
A and B. Consolidated Average Balance Sheets and Analysis of Net Interest
Earnings
Years Ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ---------------------------- --------------------------------
Interest Average Interest Average Interest Average
Average Earned Yield Or Average Earned Yield Or Average Earned Or Yield Or
Balance Or Paid Cost Balance Or Paid Cost Balance Paid Cost
-----------------------------------------------------------------------------------------------
(Dollars in Thousands)
ASSETS
Interest earnings assets:
Federal funds sold .............. $ 27,068 $ 1,488 5.50% $ 30,224 $ 1,492 4.94% $ 11,005 $ 646 5.87%
Certificates of deposit at
financial institutions ...... 12,444 778 6.25 11,814 696 5.89 7,173 441 6.15
Investment securities (1) ....... 56,898 3,448 6.06 41,468 2,286 5.51 31,457 1,906 6.06
Net loans receivable (2) ........ 209,311 18,365 8.77 182,130 15,642 8.59 139,860 12,084 8.64
------------------- ------------------ -------------------
Total Interest earning assets 305,721 24,079 7.88 265,636 20,116 7.57 189,495 15,077 7.96
Noninterest-earning assets:
Cash and due from banks ......... $ 13,699 $ 9,431 $ 9,595
Premises and equipment .......... 7,612 7,536 6,527
Other ........................... 8,822 5,157 3,756
-------- -------- --------
Total assets .................. $335,854 $287,760 $209,373
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest-bearing demand
deposits ..................... $ 81,979 2,709 3.30% $ 75,530 2,559 3.39% $ 56,612 2,053 3.63%
Savings deposits ............... 6,112 125 2.05 4,654 93 2.00 2,954 65 2.20
Time deposits .................. 134,245 7,291 5.43 113,752 6,358 5.59 83,790 4,853 5.79
Short-term borrowings .......... 14,530 665 4.58 5,414 258 4.77 166 9 5.42
Federal Home Loan Bank advances 22,048 1,361 6.17 25,393 1,539 6.06 20,220 1,234 6.10
COMR ........................... 12,000 1,137 9.48 1,000 63 6.30 0 0 0.00
Other borrowings ............... 0 0 0.00 2,125 157 7.39 1,500 128 8.53
------------------- ------------------ -------------------
Total Interest bearing
liabilities ................. 270,914 13,288 4.90 227,868 11,027 4.84 165,242 8,342 5.05
Noninterest-bearing demand ...... 40,072 33,619 23,545
Other noninterest-bearing
liabilities .................. 5,492 5,974 3,896
Total liabilities ............. 316,479 267,461 192,683
Stockholders' equity ............ 19,376 20,299 16,690
-------- -------- --------
Total liabilities and
stockholders' equity .. $335,854 $287,760 $209,373
======== ======== ========
Net interest income ............. $ 10,791 $ 9,089 $ 6,735
======== ======= =======
Net interest spread ............. 2.98% 2.73% 2.91%
===== ===== =====
Net interest margin ............. 3.53% 3.42% 3.55%
===== ===== =====
Ratio of average interest
earning assets to
average interest-
bearing liabilities .... 112.85% 116.57% 114.68%
========= ======== ========
(1) Interest earned and yields on nontaxable investment securities are stated at
face rate.
(2) Loan fees are not material and are included in interest income from loans
receivable.
I. Interest Rates and Interest Differential.
C. Analysis of Changes of Interest Income/Interest Expense For the years ended
June 30, 2000, 1999 and 1998.
Components
Inc./(Dec.) of Change (1)
from -----------------
Prior Year Rate Volume
------------------------------
2000 vs. 1999
------------------------------
(Dollars in thousands)
INTEREST INCOME
Federal funds sold ................................................ $ (4) $ 160 $ (164)
Certificates of deposit at financial institutions ................. 81 43 38
Investment securities (2) ......................................... 1,163 246 917
Net loans receivable (3) .......................................... 2,723 344 2,379
-----------------------------
Total change in interest income ........................... $ 3,963 $ 793 $ 3,170
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................................. $ 150 $ (64) $ 214
Savings deposits .................................................. 32 2 30
Time deposits ..................................................... 933 (185) 1,118
Short-term borrowings ............................................. 407 (10) 417
Federal Home Loan Bank advances ................................... (178) 28 (206)
COMR .............................................................. 1,074 0 1,074
Other borrowings .................................................. (157) (79) (78)
-----------------------------
Total change in interest expense .......................... 2,261 $ (308) $ 2,569
-----------------------------
Total change in net interest income ............................... $ 1,702 $ 1,101 $ 601
=============================
1999 vs 1998
-----------------------------
INTEREST INCOME
Federal funds sold ................................................ $ 846 $ (118) $ 964
Certificates of deposit at financial institutions ................. 255 (19) 274
Investment securities (2) ......................................... 380 (184) 564
Net loans receivable (3) .......................................... 3,558 (73) 3,631
-----------------------------
Total change in interest income ........................... $ 5,039 $ (394) $ 5,433
-----------------------------
INTEREST EXPENSE
Interest-bearing demand deposits .................................. $ 506 $ (143) $ 649
Savings deposits .................................................. 28 (6) 34
Time deposits ..................................................... 1,505 (175) 1,680
Short-term borrowings ............................................. 249 (2) 251
Federal Home Loan Bank advances ................................... 305 (9) 314
COMR .............................................................. 63 0 63
Other borrowings .................................................. 29 (18) 47
-----------------------------
Total change in interest expense .......................... $ 2,685 $ (353) $3,038
-----------------------------
Total change in net interest income ............................... $ 2,354 $ (41) $ 2,395
=============================
(1) The column "increase/decrease from prior year" is segmented into the
changes attributable to variations in volume and the changes attributable
to changes in interest rates. The variations attributable to simultaneous
volume and rate changes have been proportionately allocated to rate and
volume.
(2) Interest earned and yields on nontaxable investment securities are stated
at face rate.
(3) Loan fees are not material and are included in interest income from loans
receivable.
II. Investment Portfolio.
A. Investment Securities
The following table presents the amortized cost and fair value of investment
securities held on June 30, 2000, 1999 and 1998.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
June 30, 2000
- - -------------
Securities held to maturity:
Municipal securities .................... $ 499,988 $ 0 $ (8,769) $ 491,219
Other bonds ............................. 75,000 0 (982) 74,018
------------------------------------------------------
Totals .............................. $ 574,988 $ 0 $ (9,751) $ 565,237
======================================================
Securities available for sale:
U.S. treasury securities ................ $ 3,000,406 $ 0 $ (11,607) $ 2,988,799
U.S. agency securities .................. 40,199,557 23,275 (1,018,786) 39,204,046
Mortgage-backed securities .............. 7,006,906 0 (297,413) 6,709,493
Municipal securities .................... 5,821,229 0 (300,577) 5,520,652
Trust preferred securities .............. 919,495 0 (49,780) 869,715
Other securities ........................ 277,925 1,474 (18,042) 261,357
------------------------------------------------------
Totals .............................. $57,225,518 $ 24,749 $(1,696,205) $55,554,062
======================================================
June 30, 1999
- - -------------
Securities held to maturity:
Municipal securities .................... 699,415 2,115 0 701,530
Other bonds ............................. 25,000 585 0 25,585
------------------------------------------------------
Totals .............................. $ 724,415 $ 2,700 $ 0 $ 727,115
======================================================
Securities available for sale:
U.S. treasury securities ................ $ 9,001,845 $ 47,862 $ (4,866) $ 9,044,841
U.S. agency securities .................. 29,267,483 1,267 (390,870) 28,877,880
Mortgage-backed securities .............. 8,390,795 5,319 (183,867) 8,212,247
Municipal securities .................... 3,180,714 40,741 (12,139) 3,209,316
Other securities ........................ 197,464 102 (7,941) 189,625
------------------------------------------------------
Totals .............................. $50,038,301 $ 95,291 $ (599,683) $49,533,909
======================================================
June 30, 1998
- - -------------
Securities held to maturity:
Mortgage-backed securities .............. $ 1,506,569 $ 0 $ (5,534) $ 1,501,035
Municipal securities .................... 848,740 1,704 (13,557) 836,887
Other bonds ............................. 25,000 776 0 25,776
------------------------------------------------------
Totals .............................. $ 2,380,309 $ 2,480 $ (19,091) $ 2,363,698
======================================================
Securities available for sale:
U.S. treasury securities ................ $17,007,239 $ 54,811 $ (3,867) $17,058,183
U.S. agency securities .................. 11,247,822 4,020 (31,050) 11,220,792
Mortgage-backed securities .............. 1,847,496 1,265 (346) 1,848,415
Municipal securities .................... 617,752 0 (11,193) 606,559
Other securities ........................ 1,500,806 6,733 (3,243) 1,504,296
------------------------------------------------------
Totals .............................. $32,221,115 $ 66,829 $ (49,699) $32,238,245
======================================================
B. Investment Securities Maturities and Yields
The following table presents the maturity of securities held on June 30, 2000
and the weighted average rates by range of maturity:
Average
Amount Yield
------------------------
U.S. treasury securities:
Within 1 year .................................. $ 3,000,406 5.40%
------------------------
Total ..................................... $ 3,000,406 5.40%
========================
U.S. agency securities:
Within 1 year .................................. $ 2,999,302 6.01%
After 1 but within 5 years ..................... 32,199,691 5.84%
After 5 but within 10 years .................... 5,000,564 7.20%
------------------------
Total ..................................... $40,199,557 6.03%
========================
Mortgage-backed securities:
Within 1 year .................................. $ 370,136 5.57%
After 1 but within 5 years ..................... 853,882 6.34%
After 5 but within 10 years .................... 1,898,279 5.81%
After 10 years ................................. 3,884,609 5.94%
------------------------
Total ..................................... $ 7,006,906 5.93%
========================
Municipal securities (1):
After 1 but within 5 years ..................... 1,626,237 5.27%
After 5 but within 10 years .................... 1,374,037 4.80%
After 10 years ................................. 3,320,943 5.05%
------------------------
Total ..................................... $ 6,321,217 5.04%
========================
Trust preferred securities:
After 10 years ................................. $ 919,495 9.43%
========================
Other bonds:
After 1 but within 5 years ..................... $ 75,000 6.50%
========================
Other securities with no maturity or stated
face rate ......................................... $ 277,925
===========
The Company does not use any financial instruments referred to as derivatives to
manage interest rate risk.
(1) Average yields on nontaxable investment securities are stated at face rate.
C. Investment Concentrations
As of June 30, 2000, there existed no security in the investment portfolio above
(other than U.S. Government and U.S. Government agencies) that exceeded 10% of
stockholders' equity at that date.
III. Loan Portfolio.
A. Types of Loans
The composition of the loan portfolio at June 30, 2000, 1999, 1998, 1997, and
1996 is presented as follows:
2000 1999 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------
Commercial ................. $ 167,682,652 $ 136,206,893 $ 99,097,297 $ 68,634,556 $ 40,338,645
Real estate - construction . 3,463,682 3,367,458 1,798,257 1,778,310 750,462
Real estate ................ 36,301,379 27,591,886 29,347,260 18,515,130 8,261,146
Installment and other
consumer ................ 34,405,138 30,810,455 32,732,322 19,437,433 7,459,467
---------------------------------------------------------------------------------
Total loans ........... 241,852,851 197,976,692 162,975,136 108,365,429 56,809,720
Less allowance for
Estimated losses on loans (3,617,401) (2,895,457) (2,349,838) (1,632,500) (852,500)
---------------------------------------------------------------------------------
Net loans ............. $ 238,235,450 $ 195,081,235 $ 160,625,298 $ 106,732,929 $ 55,957,220
=================================================================================
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents consolidated loan maturities by yearly ranges. Also
included for loans after one year are the amounts that have predetermined
interest rates and floating or adjustable rates.
Maturities After One Year
------------------------------
At June 30, 2000 Due in one Due after one Due after Predetermined Adjustable
year or less through 5 years 5 years interest rates interest rates
--------------------------------------------------------------------------
Commercial ..................... $ 59,350,274 $ 81,101,842 $ 27,230,536 $ 83,097,337 $ 25,235,041
Real estate - construction ..... 3,425,642 38,040 0 38,040 0
Real estate .................... 1,938,340 1,600,056 32,762,983 11,349,343 23,013,696
Installment and
other consumer .............. 8,411,942 24,289,347 1,703,849 23,130,431 2,862,765
-------------------------------------------------------------------------
Totals .................... $ 73,126,198 $107,029,285 $ 61,697,368 $117,615,151 $ 51,111,502
=========================================================================
C. Risk Elements
1. Nonaccrual, Past Due and Renegotiated Loans.
2000 1999 1998 1997 1996
--------------------------------------------------------------
Loans accounted for on
nonaccrual basis .. $ 382,745 $1,287,727 $1,025,761 $ 230,591 $ 0
Accruing loans past due
90 days or more .... 352,376 238,046 259,277 223,966 306,774
Other real estate owned 0 119,600 0 0 0
Troubled debt
restructurings 0 0 0 0 0
--------------------------------------------------------------
Total ............ $ 735,121 $1,645,373 $1,285,038 $ 454,557 $ 306,774
==============================================================
The policy of the Company is to place a loan on nonaccrual status if: (a)
payment in full of interest or principal is not expected, or (b) principal or
interest has been in default for a period of 90 days or more unless the
obligation is both in the process of collection and well secured. Well secured
is defined as collateral with sufficient market value to repay principal and all
accrued interest. A debt is in the process of collection if collection of the
debt is proceeding in due course either through legal action, including judgment
enforcement procedures, or in appropriate circumstances, through collection
efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in its restoration to current status.
2. Potential Problem Loans. To management's best knowledge, there are no such
significant loans that have not been disclosed in the above table.
3. Foreign Outstandings. None
4. Loan Concentrations. Loan concentrations are disclosed in the Notes to
Consolidated Financial Statements in Note 4.
D. Other Interest Bearing Assets
There are no interest bearing assets required to be disclosed here.
IV. Summary of Loan Loss Experience.
A. Analysis of the Allowance for Estimated Losses on Loans
The following table summarizes activity in the allowance for estimated
losses on loans of the Company for the fiscal years ending June 30, 2000,
1999, 1998, 1997, and 1996:
2000 1999 1998 1997 1996
------------------------------------------------------------------------
Average amount of loans outstanding,
before allowance for estimated
losses on loans ....................... $212,497,181 $184,756,698 $141,974,417 $ 81,251,090 $ 44,749,454
Allowance for estimated losses on loans:
Balance, beginning of fiscal year ........ $ 2,895,457 $ 2,349,838 $ 1,632,500 $ 852,500 $ 472,475
Charge-offs:
Commercial ......................... (43,295) (104,596) (62,763) (26,141) (117,555)
Real estate ........................ (6,822) (25,142) 0 0 0
Installment and other
consumer ........................ (376,591) (348,777) (142,471) (38,772) (2,817)
------------------------------------------------------------------------
Subtotal charge-offs ................ (426,708) (478,515) (205,234) (64,913) (120,372)
------------------------------------------------------------------------
Recoveries:
Commercial .......................... 762 53,314 13,146 266 0
Real estate ........................ 0 0 0 0 0
Installment and other consumer ..... 96,072 79,020 7,450 256 0
------------------------------------------------------------------------
Subtotal recoveries ................. 96,834 132,334 20,596 522 0
------------------------------------------------------------------------
Net charge-offs ..................... (329,874) (346,181) (184,638) (64,391) (120,372)
Provision charged to expense ............. 1,051,818 891,800 901,976 844,391 500,397
------------------------------------------------------------------------
Balance, end of fiscal year .............. $ 3,617,401 $ 2,895,457 $ 2,349,838 $ 1,632,500 $ 852,500
========================================================================
Ratio of net charge-offs to
average loans outstanding ............. 0.16% 0.19% 0.13% 0.08% 0.27%
B. Allocation of the Allowance for Estimated Losses on Loans
The following table presents the allowance for estimated losses on loans by type
of loans and the percentage of loans in each category to total loans:
% % %
Of Loans Of Loans Of Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
-------------------- --------------------- --------------------
2000 1999 1998
-------------------- --------------------- --------------------
Commercial ............................. $2,863,319 69.33% $2,164,668 68.80% $1,213,439 60.81%
Real estate - construction ............. 8,659 1.43% 8,419 1.70% 4,496 1.10%
Real estate ............................ 121,530 15.01% 102,693 13.94% 74,702 18.01%
Installment and other .................. 617,893 14.23% 578,937 15.56% 515,489 20.08%
consumer
Unallocated ............................ 6,000 N/A 49,159 N/A 541,712 N/A
-------------------- --------------------- --------------------
Total ............................. $3,617,401 100.00% $2,895,457 100.00% $2,349,838 100.00%
==================== ===================== ====================
1997 1996
-------------------- -------------------
Commercial ............................. $ 799,566 63.34% $ 0 71.01%
Real estate - construction ............. 4,446 1.64% 0 1.32%
Real estate ............................ 62,296 17.09% 0 14.54%
Installment and other .................. 387,096 17.93% 0 13.13%
Unallocated ............................ 379,096 N/A 852,500 N/A
--------------------- -------------------
Total ............................. $1,632,500 100.00% $ 852,500 100.00%
===================== ====================
V. Deposits.
The average amount of and average rate paid for the categories of deposits for
the years 2000, 1999, and 1998 are disclosed in the consolidated average balance
sheets and can be found on page 2 of Appendix B.
Included in interest bearing deposits at June 30, 2000, 1999, and 1998 were
certificates of deposit totaling $50,814,599, $37,103,749, and $31,937,377
respectively, that were $100,000 or greater. Maturities of these certificates
were as follows:
2000 1999 1998
--------------------------------------
One to three months .................... $ 24,105,269 $13,313,388 $ 8,633,273
Three to six months .................... 11,176,203 6,339,507 9,647,980
Six to twelve months ................... 11,781,428 9,901,595 10,997,407
Over twelve months ..................... 3,751,699 7,549,259 2,658,717
--------------------------------------
Total certificates of
deposit greater than $100,000 ... $50,814,599 $37,103,749 $31,937,377
======================================
VI. Return on Equity and Assets.
The following table presents the return on assets and equity and the equity to
assets ratio of the Company for the years ended June 30, 2000, 1999, and 1998.
2000 1999 1998
--------------------------------------------
Average total assets ... $335,854,396 $287,760,434 $209,373,383
Average equity ......... 19,375,865 $ 20,299,371 $ 16,690,420
Net income ............. 2,745,527 $ 2,464,821 $ 2,393,272
Return on average assets .82% .86% 1.14%
Return on average equity 14.17% 12.14% 14.34%
Average equity to
average assets ratio 5.77% 7.05% 7.97%
VII. Short Term Borrowings.
The information requested is disclosed in the Notes to Consolidated Financial
Statements in Note 7.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUAD CITY HOLDINGS, INC.
Dated: September 28, 2000 By: /s/ Douglas M. Hultquist
------ -------------------------------------
Douglas M. Hultquist
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Michael A. Bauer Chairman of the Board of Directors September 28, 2000
- - ----------------------------
Michael A. Bauer
/s/ Douglas M. Hultquist President, Chief Executive September 28, 2000
- - ---------------------------- and Financial Officer and Director
Douglas M. Hultquist
/s/ Richard R. Horst Director and Secretary September 28, 2000
- - ----------------------------
Richard R. Horst
/s/ James J. Brownson Director September 28, 2000
- - ----------------------------
James J. Brownson
/s/ Ronald G. Peterson Director September 28, 2000
Ronald G. Peterson
/s/ John W. Schricker Director September 28, 2000
- - ----------------------------
John W. Schricker
INDEX TO EXHIBITS
Incorporated
Herein by in Filed Sequential
Exhibit No. Description Reference To Herewith Page No.
- - ---------------------------------------------------------------------------------------------
3.1 Certificate of Exhibit 3.1 to the
Incorporation of Quad Registration
City Holdings, Inc., as Statement of Quad
amended City Holdings, Inc.
on Form SB-2, File
No. 33-67028
3.2 Bylaws of Quad City Exhibit 3.2 to the
Holdings, Inc. Registration
Statement of Quad
City Holdings, Inc.
on Form SB-2, File
No. 33-67028
4.1 Specimen Stock Exhibit 4.1 to the
Certificate of Quad Registration
City Holdings, Inc.(See Statement of Quad
also Articles VIII, XII City Holdings, Inc.
and XIII of Exhibit 3.1 on Form SB-2, File
and Articles II, VI, IX No. 33-67028
and XII of Exhibit 3.2)
10.1 Employment Agreement
between Quad City
Holdings, Inc., Quad
City Bank and Trust
Company and Michael
A. Bauer dated July 1,
2000 X
10.2 Employment Agreement
between Quad City
Holdings, Inc., Quad
City Bank and Trust
Company and Douglas
M. Hultquist dated
July 1, 2000 X
10.3 Executive Deferred
Compensation Agreement
between Quad City Bank
and Trust Company and
Michael A. Bauer dated
June 28, 2000 X
10.4 Executive Deferred
Compensation Agreement
between Quad City Bank
and Trust Company and
Douglas M. Hultquist
dated June 28, 2000 X
10.5 Lease Agreement between
Quad City Bank and Trust
Company and 56 Utica
L.L.C. X
Incorporated
Herein by in Filed Sequential
Exhibit No. Description Reference To Herewith Page No.
- - ---------------------------------------------------------------------------------------------
12.1 Statement re: Computation
of Ratios X
21.1 Subsidiaries of Quad
City Holdings, Inc. X
23.1 Consent of McGladrey
and Pullen X
27.1 Financial Data Schedule X