<PAGE>
Filed Pursuant to Rule 424(b)(1)
REGISTRATION NO. 333-77889
1,200,000 CAPITAL SECURITIES
QUAD CITY HOLDINGS CAPITAL TRUST I
9.20% CUMULATIVE CAPITAL SECURITIES
(LIQUIDATION AMOUNT $10 PER CAPITAL SECURITY)
GUARANTEED AS DESCRIBED IN THIS PROSPECTUS BY
QUAD CITY HOLDINGS, INC.
The capital securities represent undivided beneficial interests in
the assets of Quad City Holdings Capital Trust I. The trust will invest the
proceeds of this offering of capital securities in the 9.20% junior
subordinated debentures of Quad City Holdings, Inc.
For each of the capital securities that you own, you are entitled to
receive cumulative cash distributions at an annual rate of 9.20% on March 31,
June 30, September 30 and December 31 of each year, beginning September 30,
1999 from payments on the debentures. Payment of distributions may be
deferred at any time for up to 20 consecutive quarters. The capital
securities are effectively subordinated to all senior and subordinated
indebtedness of Quad City Holdings, Inc. and its subsidiaries. The debentures
mature and the capital securities must be redeemed on June 30, 2029. The
trust may redeem the capital securities, at a redemption price of $10 per
capital security plus accrued and unpaid distributions, at any time on or
after June 30, 2004, or earlier under certain circumstances.
The capital securities will be listed on the American Stock Exchange
under the trading symbol "CQP.Pr.A".
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WE URGE YOU TO CAREFULLY READ THE "RISK FACTORS" SECTION BEGINNING
ON PAGE 7, WHERE WE DESCRIBE SPECIFIC RISKS RELATED TO AN INVESTMENT IN THE
CAPITAL SECURITIES AND RISKS RELATING TO QUAD CITY HOLDINGS, INC., ALONG WITH
THE REMAINDER OF THIS PROSPECTUS, BEFORE YOU MAKE YOUR INVESTMENT DECISION.
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THESE SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OBLIGATIONS
OF ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER CAPITAL
SECURITY TOTAL
----------- -----------
<S> <C> <C>
Public offering price......................................................... $ 10.00 $12,000,000
Underwriting fees to be paid by Quad City Holdings, Inc....................... $ 0.50 $ 600,000
Proceeds to the trust......................................................... $ 10.00 $12,000,000
</TABLE>
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DAIN RAUSCHER WESSELS HOWE BARNES INVESTMENTS, INC.
A DIVISION OF DAIN RAUSCHER INCORPORATED
The date of this prospectus is June 4, 1999.
<PAGE>
[Map on inside cover showing bank locations]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Cautionary Statements...............................1
Summary.............................................2
Selected Consolidated Financial Data................6
Risk Factors........................................7
Use of Proceeds....................................13
Accounting Treatment...............................13
Capitalization.....................................14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................15
Business...........................................39
Management.........................................45
Description of the Trust...........................46
Description of the Capital Securities..............47
Description of the Debentures......................59
Book-Entry Issuance................................67
Description of the Guarantee.......................69
Relationship Among the Capital
Securities, the Debentures and
the Guarantee...................................71
Federal Income Tax Consequences....................72
ERISA Considerations...............................75
Underwriting.......................................76
Legal Matters......................................77
Where You Can Find Information.....................77
Experts............................................78
Incorporation of Documents
by Reference....................................78
Index to Financial Statements.....................F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER
PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. THIS PROSPECTUS IS NOT AN
OFFER TO SELL, NOR IS IT AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION IN THIS PROSPECTUS IS
COMPLETE AND ACCURATE AS OF THE DATE ON THE FRONT COVER, BUT THE INFORMATION
MAY HAVE CHANGED SINCE THAT DATE.
CAUTIONARY STATEMENTS
Statements which are not historical facts contained or incorporated
by reference in this prospectus are forward-looking statements that involve
risks and uncertainties that could cause actual results to differ from
projected results. These statements, can be identified by the use of
forward-looking terminology such as may, will, expect, anticipate, believe,
estimate, continue or comparable terminology. Factors that could cause actual
results to differ materially include the factors discussed in "Risk Factors"
as well as the continued success of Quad City's community banking strategy,
general economic conditions, economic conditions in the Quad Cities area, the
monetary policy of the Federal Reserve, changes in interest rates, changes in
inflation and changes in the state and federal regulatory regime applicable
to Quad City's operations.
1
<PAGE>
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SUMMARY
THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL
LATER IN THIS PROSPECTUS. THEREFORE, YOU SHOULD ALSO READ THE MORE DETAILED
INFORMATION SET FORTH IN THIS PROSPECTUS, OUR FINANCIAL STATEMENTS AND THE
OTHER INFORMATION THAT IS INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
UNLESS THE CONTEXT CLEARLY SUGGESTS OTHERWISE, REFERENCES IN THIS PROSPECTUS
TO "US," "WE," "QUAD CITY" OR "THE COMPANY" INCLUDE QUAD CITY HOLDINGS, INC.,
AND ITS WHOLLY OWNED SUBSIDIARIES QUAD CITY BANK AND TRUST COMPANY AND QUAD
CITY BANCARD, INC.
QUAD CITY HOLDINGS, INC.
We are a bank holding company that owns Quad City Bank & Trust
Company, a full-service commercial banking institution with three locations
in the Quad Cities area of Illinois and Iowa. The bank provides a broad range
of banking products and services, including credit, cash management, deposit,
asset management and trust products, to its targeted customer base of
individuals and small and medium-sized businesses. In addition, Quad City
Bancard, Inc. provides credit card processing services to merchants and other
commercial operations. At March 31, 1999, we had total assets of $299.8
million, loans of $191.7 million and deposits of $239.1 million.
Our company started operations in January 1994 with the goal of
building a locally-owned and managed financial institution to meet the
banking needs of individuals and small and medium-sized businesses in our
marketplace. As part of our operating strategy, we strive to offer customers
a high level of service on a consistent basis. Our growth over the past five
years has been largely a product of our ability to recruit and retain a
community-oriented management team with significant commercial banking
experience in the Quad Cites area. In addition, we have expanded and upgraded
our product offerings and added convenient banking locations in Davenport,
Iowa and Moline, Illinois to complement our original Bettendorf, Iowa
facility. Finally, we have taken advantage of the customer disruption caused
by the acquisition of a number of the area's other locally owned or locally
managed financial institutions by large regional bank holding companies. Some
of the mergers or acquisitions that have taken place in the Quad Cities area
include the Norwest acquisition of Davenport Bank and Trust, the Firstar
acquisition of First Trust and Savings Bank, the Bank One acquisition of the
First National Bank of Moline and the Mercantile acquisition of The Rock
Island Bank.
This strategy has resulted in significant growth for our company.
Our total assets have increased from $111.5 million as of June 30, 1996 to
$299.8 million as of March 31, 1999, which represents a 43% compounded annual
growth rate. This rapid growth has restrained our profitability to some
degree, as we have invested in the personnel, operational systems and
physical infrastructure required to support a much larger banking
organization. In the future, we intend to continue to pursue an aggressive
growth strategy focused on the addition of experienced banking personnel in
the Quad Cities area, while also maintaining strong asset quality and
improving our profitability. We may also add additional banking facilities,
expand into new markets or make strategic acquisitions of other financial
institutions.
The Quad Cities area includes the Illinois communities of Moline and
Rock Island and the Iowa communities of Davenport and Bettendorf. This region
has a total population in excess of 350,000 and is located approximately 180
miles west of Chicago and 170 miles east of Des Moines. It is home to
manufacturers of a wide range of industrial products, with Deere & Company,
Aluminum Company of America, J.I. Case, Oscar Mayer and the Rock Island
Arsenal among the largest employers. Wholesale and retail trade and services,
including health care, are among the region's other major industries.
Our original office is located at 2118 Middle Road in Bettendorf,
Iowa, and a second full service banking facility was opened at 4500 Brady
Street in Davenport, Iowa in July 1996. We have a third full service banking
facility at the Velie Plantation Mansion, 3551 Seventh Street, in Moline,
Illinois which was opened during the first calendar quarter of 1998. Our
principal executive offices are located at 3551 Seventh Street, Suite 100,
Moline, Illinois 61265, and our main telephone number is (309) 736-3580.
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2
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QUAD CITY HOLDINGS CAPITAL TRUST I
The trust, which is the issuer of the capital securities, is a
statutory business trust we formed under the Delaware Business Trust Act.
Upon issuance of the capital securities offered by this prospectus, the
purchasers in this offering will own all of the issued and outstanding
capital securities of the trust. In exchange for our capital contribution to
the trust, we will own all of the common securities of the trust. The trust
exists for the sole purposes of:
- issuing the capital securities to the public for cash;
- issuing the common securities to us;
- investing the proceeds from the sale of the capital and common
securities in an equivalent amount of 9.20% junior subordinated
debentures due June 30, 2029 issued by us; and
- engaging in other activities that are incidental to those
listed above.
The trust's address is 3551 Seventh Street, Suite 100, Moline,
Illinois 61265
THE OFFERING
The issuer................................ Quad City Holdings Capital Trust I
Securities that are being offered......... 1,200,000 capital securities, which
represent preferred undivided
beneficial interests in the assets
of the trust. Those assets will
consist solely of the debentures and
interest paid under the debentures.
The trust will sell the capital
securities to the public for cash.
The trust will use that cash to buy
the debentures from us.
Payment of distributions.................. If you purchase the capital
securities, you are entitled to
receive cumulative cash
distributions at a 9.20% annual
rate. Distributions will accumulate
from the date the trust issues the
capital securities and will be paid
quarterly on March 31, June 30,
September 30 and December 31 of each
year beginning September 30, 1999.
The record date for distributions on
the capital securities will be the
business day prior to the
distribution date. Please note that
we may defer the payment of cash
distributions, as more fully
described below.
Maturity.................................. The debentures will mature and the
capital securities must be redeemed
on June 30, 2029. We have the
option, however, to shorten the
maturity date to a date not earlier
than June 30, 2004. We will not
shorten the maturity date unless we
have received the prior approval of
the Board of Governors of the
Federal Reserve System, if required.
Redemption of the capital securities
is possible.......................... The trust must redeem the capital
securities when the debentures are
paid at maturity or upon any earlier
redemption of the debentures. We may
redeem all or part of the debentures
on or after June 30, 2004. In
addition, we may redeem, at any
time, all of the debentures if:
- the interest we pay on the
debentures is no longer
deductible by us for federal
tax purposes, or the trust
becomes subject to federal
income tax;
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3
<PAGE>
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- there is a change in the
Investment Company Act of 1940
that requires the trust to
register under that law; or
- there is a change in the
capital adequacy guidelines of
the Federal Reserve that
results in the capital
securities not being counted as
Tier 1 capital.
Redemption of the debentures prior
to maturity will be subject to the
prior approval of the Federal
Reserve, if required. If the capital
securities are redeemed by the
trust, you will receive the
liquidation amount of $10 per
capital security plus any accrued
and unpaid distributions to the date
of redemption. At any time, we may
also redeem the debentures to the
extent that we purchase any capital
securities.
We have the option to extend the
interest payment period............... The trust will rely solely on
payments made by us under the
debentures to pay distributions on
the capital securities. So long as
no event of default under the
debentures has occurred and is
continuing, we may, at one or more
times, defer interest payments on
the debentures for up to 20
consecutive quarters, but not beyond
June 30, 2029. If we defer interest
payments on the debentures:
- the trust will also defer
distributions on the capital
securities;
- distributions you are entitled
to will accumulate; and
- these accumulated distributions
will earn additional interest
at an annual rate of 9.20%,
compounded quarterly.
At the end of any deferral period,
we will pay to the trust all
accumulated and unpaid amounts under
the debentures. The trust will then
pay all accumulated and unpaid
distributions to you.
You will still be taxed if distributions
on the capital securities are
deferred.............................. If a deferral of payment occurs, you
will still be required to recognize
the deferred amounts as income for
United States federal income tax
purposes in advance of receiving
these amounts, even if you
are a cash basis taxpayer.
Our guarantee of payment.................. We guarantee the trust will use its
assets to pay the distributions on
the capital securities. However, the
guarantee does not apply when the
trust does not have sufficient funds
to make the payments. In this event,
your remedy is to institute a legal
proceeding directly against us for
enforcement of payments under the
debentures.
We may distribute the debentures
directly to you....................... We may, at any time, dissolve the
trust and distribute the debentures
to you, subject to the prior
approval of the Federal Reserve, if
required. If we distribute the
debentures, we will use our best
efforts to list them on a national
securities exchange or comparable
automated quotation system.
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4
<PAGE>
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How the securities will rank in right of
payment............................... Our obligations under the debentures
and the guarantee agreement are
unsecured and rank junior in
priority of payment to all of our
indebtedness and senior to our
capital stock.
Voting rights of the capital
securities............................ Except in limited circumstances,
holders of the capital securities
will have no voting rights.
American Stock Exchange symbol.......... "CQP.Pr.A"
Book-entry................................ The capital securities will be
represented by a global security
that will be deposited with and
registered in the name of The
Depository Trust Company, New York,
New York or its nominee. This means
that you will not receive a
certificate for the capital
securities.
Use of proceeds........................... We plan to use approximately $2.5
million of the net proceeds from the
sale of the capital securities to
repay the outstanding balance on our
revolving credit note and
approximately $3.0 million of the
net proceeds to redeem all of our
outstanding preferred stock,
including the redemption premium. We
plan to use any remaining net
proceeds for general corporate
purposes, including investments in
and extensions of credit to Quad
City's subsidiaries.
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5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below for, and as
of, the end of each of the fiscal years in the five year period ended June
30, 1998, are derived from our consolidated financial statements, which have
been audited by McGladrey & Pullen, LLP, independent certified public
accountants. The summary data presented below for the nine-month periods
ended March 31, 1999 and 1998, are unaudited. In our opinion, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of results as of or for the periods indicated have been
included. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the notes thereto included with
this prospectus. Results for past periods are not necessarily indicative of
results to be expected for any future period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
-------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA: (Dollars in thousands)
Interest income $ 14,684 $ 10,720 $ 15,077 $ 9,706 $ 6,529 $ 3,550 $ 737
Interest expense 8,085 5,879 8,342 4,994 3,486 1,896 254
Net interest income 6,599 4,841 6,735 4,712 3,043 1,654 483
Provision for loan losses 645 753 902 844 500 283 192
Noninterest income(1) 3,958 2,929 6,148 2,807 1,716 548 151
Other expense 7,151 5,361 7,910 5,291 3,576 2,293 1,564
Pre-tax income (loss) 2,761 1,656 4,071 1,384 683 (374) (1,122)
Income tax expense 1,089 647 1,678 165 -- -- --
Net income (loss) 1,672 1,009 2,393 1,219 683 (374) (1,122)
BALANCE SHEET:
Total assets $299,815 $230,010 $250,151 $168,379 $111,475 $ 80,800 $38,963
Securities 47,923 29,481 34,619 31,812 34,189 26,051 15,735
Loans 191,679 153,465 162,975 108,365 56,810 31,508 12,767
Allowance for loan losses 2,704 2,309 2,350 1,633 853 472 192
Deposits 239,124 185,279 197,384 135,960 92,918 61,098 27,018
Stockholders' equity:
Common 18,602 14,711 16,602 13,613 11,669 11,590 11,695
Preferred 2,500 2,500 2,500 1,000 -- -- --
KEY RATIOS:
Return on average assets(2) 0.81% 0.68% 1.14% 0.86% 0.70% (0.65)% (12.12)%
Return on average common equity(2) 12.62 9.48 16.40 9.85 5.82 (3.26) (12.21)
Net interest margin(2) 3.47 3.66 3.55 3.74 3.47 3.15 2.95
Efficiency ratio(3) 67.74 69.00 61.40 70.37 75.14 104.13 246.69
Nonperforming assets to total assets 0.56 0.65 0.51 0.27 0.28 -- --
Allowance for loan losses to total
loans 1.41 1.50 1.44 1.51 1.50 1.50 1.50
Net charge-offs/average loans 0.16 0.06 0.13 0.08 0.27 0.01 --
Average common stockholders' equity
to average assets 6.42 7.18 6.97 8.73 12.10 19.89 49.65
Average stockholders' equity to
average assets 7.33 8.19 7.97 9.15 12.10 19.89 49.65
Earnings to fixed charges:(4)
Excluding interest on deposits(5) 2.75x 2.64x 3.78x 3.17x 5.71x NA NA
Including interest on deposits(5) 1.33 1.28 1.48 1.28 1.20 NA NA
</TABLE>
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(1) Year ended June 30, 1998 noninterest income includes a pre-tax gain
of $2,168 from Bancard's restructuring of an ISO agreement. Nine
months ended March 31, 1999 noninterest income includes an
amortization of $549.
(2) The nine month ratios are annualized.
(3) Noninterest expense divided by the sum of net interest income before
provision for loan losses and noninterest income.
(4) Dividends are not payable on Quad City's Series A Preferred Stock.
(5) Earnings were inadequate to cover fixed charges in the amount of
$374 and $1,122 for the years ended June 30, 1995 and June 30, 1994,
respectively.
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6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY READ THE FOLLOWING RISK FACTORS BEFORE PURCHASING
ANY CAPITAL SECURITIES.
RISKS RELATED TO AN INVESTMENT IN THE CAPITAL SECURITIES
IF WE DO NOT MAKE INTEREST PAYMENTS UNDER THE DEBENTURES, THE TRUST WILL BE
UNABLE TO PAY DISTRIBUTIONS AND LIQUIDATION AMOUNTS AND THE GUARANTEE WILL
NOT APPLY
The ability of the trust to pay distributions and the liquidation
amount on the capital securities is solely dependent on us making the related
payments on the debentures when due. If we default on our obligation to pay
the principal or interest on the debentures, the trust will not have
sufficient funds to pay distributions or the liquidation amount on the
capital securities. In that case, you will not be able to rely on the
guarantee for payment of these amounts because the guarantee only applies if
the trust has sufficient funds to make distributions on or pay the
liquidation amount of the capital securities. In this case, you have the
right to institute legal proceedings directly against us.
TO THE EXTENT WE MUST RELY ON DIVIDENDS FROM OUR SUBSIDIARIES TO MAKE
INTEREST PAYMENTS ON THE DEBENTURES TO THE TRUST, OUR AVAILABLE CASH FLOW MAY
BE RESTRICTED
We are a holding company and substantially all of our assets are
held by our subsidiaries. Our ability to make payments on the debentures when
due will depend primarily on available cash resources at the holding company
and, as needed, dividends from the bank and other subsidiaries. Dividend
payments from the bank are subject to regulatory limitations, generally based
on current and retained earnings, imposed by the various regulatory agencies
with authority over the bank. Payments of subsidiary dividends are also
subject to regulatory restrictions if such dividends would impair the capital
of the bank. Payments of subsidiary dividends are also subject to the
subsidiary's profitability, financial condition and capital expenditures and
other cash flow requirements. No assurance can be given that the bank will be
able to pay dividends in the future.
OUR HOLDING COMPANY STRUCTURE EFFECTIVELY SUBORDINATES ANY CLAIMS AGAINST US
TO THOSE OF CREDITORS OF OUR SUBSIDIARIES
Because we are a holding company, our right to participate in any
distribution of the assets of any subsidiary upon a subsidiary's liquidation
or reorganization or otherwise, is subject to the prior claims of creditors
of that subsidiary, except to the extent that we may be recognized as a
creditor of that subsidiary. Accordingly, the debentures and the guarantee
will be effectively subordinated to all existing and future liabilities of
our subsidiaries, and you should look only to our assets for payments on the
capital securities and the debentures.
WE HAVE THE OPTION TO DEFER INTEREST PAYMENTS ON THE DEBENTURES FOR
SUBSTANTIAL PERIODS, WHICH WOULD CAUSE DISTRIBUTIONS ON THE CAPITAL
SECURITIES TO BE DEFERRED AND YOU WOULD STILL HAVE TO DECLARE THESE AMOUNTS
AS INCOME FOR TAX PURPOSES
We may, at one or more times, defer interest payments on the
debentures for up to 20 consecutive quarters. If we defer interest payments
on the debentures, the trust would defer distributions on the capital
securities during any deferral period. During a deferral period, you will be
required to recognize as income for federal income tax purposes the amount
approximately equal to the interest that accrues on your proportionate share
of the debentures held by the trust in the tax year in which that interest
accrues, even though you will not receive these amounts until a later date.
7
<PAGE>
You will also not receive the cash related to any accrued and unpaid
interest from the trust if you sell the capital securities before the end of
any deferral period. During a deferral period, accrued but unpaid
distributions will increase your tax basis in the capital securities. If you
sell the capital securities during a deferral period, your increased tax
basis will decrease the amount of any capital gain or increase the amount of
any capital loss that you may have otherwise realized on the sale. A capital
loss, except in certain limited circumstances, cannot be applied to offset
ordinary income. As a result, deferral of distributions could result in
ordinary income, and a related tax liability for the holder, and a capital
loss that may only be used to offset a capital gain.
We do not currently intend to exercise our right to defer interest
payments on the debentures. However, if we exercise our right in the future,
the market price of the capital securities is likely to fall. The capital
securities may trade at a price that does not fully reflect the value of
accrued but unpaid interest on the debentures. If you sell the capital
securities during an interest deferral period, you may not receive the same
return on investment as someone who continues to hold the capital securities.
THE DEBENTURES AND THE GUARANTEE RANK LOWER THAN OUR OTHER INDEBTEDNESS
Our obligations under the debentures and the guarantee are unsecured
and will rank junior in priority of payment to our senior and subordinate
indebtedness and senior to our capital stock. At March 31, 1999, Quad City's
senior and subordinated indebtedness totaled approximately $2.5 million,
which we expect to pay off with the proceeds of this offering. However, we
may incur additional indebtedness in the future. The issuance of the
debentures and the capital securities does not limit our ability to incur
additional indebtedness, including indebtedness that ranks senior or equal in
priority of payment to the debentures or the guarantee.
If we default on our obligation to pay principal or interest on the
debentures, the trust will not have sufficient funds to pay distributions or
the liquidation amount. Because the guarantee does not cover payments when
the trust does not have sufficient funds, you will not be able to rely upon
the guarantee for payment of these amounts. Instead, you or the property
trustee may enforce the rights of the trust under the debentures directly
against us.
WE HAVE MADE ONLY LIMITED COVENANTS IN THE INDENTURE AND THE TRUST AGREEMENT
The indenture governing the debentures and the trust agreement
governing the trust do not require us to maintain any financial ratios or
specified levels of net worth, revenues, income, cash flow or liquidity. They
also do not limit the amount of indebtedness, guarantees or other liabilities
that may be incurred by us and our subsidiaries and will not prohibit us and
our subsidiaries from creating or assuming liens on our, and our
subsidiaries', properties. Additionally, we are not precluded from entering
into any merger, sale or other change of control transaction so long as the
successor entity recognizes and assumes our liability under the debentures,
the capital securities and the guarantee. We are also not required to have
the debentures or the capital securities rated by any credit rating agency,
and if they are rated, we are not required to achieve or maintain any
particular rating.
WE MAY REDEEM THE DEBENTURES BEFORE JUNE 30, 2029
We may redeem the debentures, in whole or in part, at any time on or
after June 30, 2004 or earlier under certain circumstances. You should assume
that we will exercise our redemption option if we are able to obtain capital
at a lower cost than we must pay on the debentures or if it is otherwise in
our interest to redeem the debentures. If the debentures are redeemed, the
trust must redeem capital securities having an aggregate liquidation amount
equal to the aggregate principal amount of debentures redeemed.
WE MAY REDEEM THE DEBENTURES PRIOR TO JUNE 30, 2004 OR DISTRIBUTE THEM
DIRECTLY TO YOU IN EXCHANGE FOR YOUR CAPITAL SECURITIES IF TAX OR OTHER
REGULATORY EVENTS OCCUR
From time to time, the Clinton Administration has proposed tax law
changes that would, among other things, generally deny interest deductions to
a corporate issuer if the debt instrument has a term exceeding 15 years and
if the debt instrument is not reflected as indebtedness on the issuer's
consolidated balance sheet. Other
8
<PAGE>
proposed tax law changes would have denied interest deductions if the debt
instrument had a term exceeding 20 years. Although it is impossible to
predict future proposals, if a future proposal of this sort were to become
effective in a form applicable to already issued and outstanding securities,
we could be precluded from deducting interest on the subordinated debentures.
This would permit us to redeem the debentures and the trust to redeem the
capital securities.
Under current federal income tax law and interpretations, a
distribution of the debentures should not be a taxable event to holders of
the capital securities. If there is a change in law or in legal
interpretation, the distribution could be a taxable event to holders of the
capital securities.
THE MARKET PRICE OF THE CAPITAL SECURITIES OR THE DEBENTURES MAY GO DOWN
We cannot predict the market prices for the capital securities or
the debentures that may be distributed in exchange for capital securities
upon liquidation of the trust. The capital securities, or the debentures that
you may receive if the trust is liquidated, may trade at a discount to the
price that you paid to purchase the capital securities. As a result of our
right to defer interest payments, the market price of the capital securities
or the debentures may be more volatile than the market prices of other
securities that are not subject to these optional deferrals. In addition, the
capital securities or the debentures may trade at prices that do not fully
reflect the value of accumulated and unpaid distributions on the capital
securities or the debentures.
YOU ARE ALSO MAKING AN INVESTMENT DECISION CONCERNING THE DEBENTURES
Subject to the terms of the trust agreement, the trustees may
distribute the debentures to the capital securities holders in exchange for
their capital securities. Because you may receive debentures, you are also,
in effect, making an investment decision with regard to the debentures. You
should carefully review all of the information regarding the debentures
contained in this prospectus.
As described above, we cannot predict the market prices for the
debentures that may be distributed. Accordingly, the debentures that you
receive upon a distribution, or the capital securities you hold pending such
a distribution, may trade at a discount to the price that you paid to
purchase the capital securities. Although we have agreed to use our best
efforts to list the debentures on a national securities exchange or
comparable automated quotation system if this occurs, there can be no
assurance that the debentures will be approved for listing or that a liquid
trading market will exist for the debentures. This could also have a negative
impact on their trading price.
YOU MUST RELY ON THE PROPERTY TRUSTEE TO ENFORCE YOUR RIGHTS IF THERE IS AN
EVENT OF DEFAULT UNDER THE INDENTURE
You may not be able to directly enforce your rights against us if an
event of default under the indenture occurs. If an event of default under the
indenture occurs and is continuing, this event will also be an event of
default under the trust agreement. In that case, you would rely on the
enforcement by the property trustee of its rights as holder of the debentures
against us. The holders of a majority in liquidation amount of the capital
securities will have the right to direct the property trustee to enforce its
rights. If the property trustee does not enforce its rights following an
event of default and a request by the record holders to do so, any record
holder may take action directly against us to enforce the property trustee's
rights. If an event of default occurs under the trust agreement that is
attributable to our failure to pay interest or principal on the debentures,
or if we default under the guarantee, you may proceed directly against us.
You will not be able to exercise directly any other remedies available to the
holders of the debentures unless the property trustee fails to do so.
9
<PAGE>
THERE IS CURRENTLY NO MARKET FOR THE CAPITAL SECURITIES AND NO LIQUID MARKET
MAY DEVELOP
The capital securities will be a new issue of securities for which
there currently is no market. The capital securities will be listed on the
American Stock Exchange under the symbol "CQP.Pr.A". No assurance can be
given as to the liquidity of the trading market for the capital securities.
AS A HOLDER OF CAPITAL SECURITIES YOU HAVE LIMITED VOTING RIGHTS
Holders of capital securities have limited voting rights. Your
voting rights pertain primarily to amendments to the trust agreement. In
general, only we can replace or remove any of the trustees. However, if an
event of default under the trust agreement occurs and is continuing, the
holders of at least a majority in aggregate liquidation amount of the capital
securities may replace the property trustee and the Delaware trustee.
RISKS RELATED TO AN INVESTMENT IN QUAD CITY
WE FACE LENDING RISKS AND LIMITS ON OUR ABILITY TO LOAN MONEY
The risk of nonpayment of loans is inherent in commercial banking,
and such nonpayment, if it occurs, may have a material adverse effect on our
earnings, overall financial condition and ability to make payments on the
capital securities. Moreover, we focus on lending to small to medium sized
businesses. As a result, we may assume greater lending risks than financial
institutions that have a lesser concentration of such loans and tend to make
loans to larger companies. Additionally, we have made many of these loans
recently, so there is no significant repayment history against which we can
fully assess the adequacy of our allowance for loan losses. We could be
adversely affected by these and other risks related to our loans. Borrower
defaults resulting in losses in excess of our allowance for loan losses could
have a material adverse effect on our profitability and financial condition.
The lending limit for the bank is approximately $3.5 million.
Accordingly, the size of the loans which we can offer to potential customers
is less than the size of loans which most of our competitors with larger
lending limits are able to offer. This limit affects our ability to seek
relationships with the area's larger businesses. Through previous experience
and relationships with a number of the region's other financial institutions,
we are generally able to accommodate loan volumes in excess of our lending
limit through the sale of participations in such loans to other banks.
However, there can be no assurance that we will be successful in attracting
or maintaining customers seeking larger loans or that we will be able to
engage in participations of such loans on terms favorable to us.
OUR BUSINESS IS CONCENTRATED IN THE QUAD CITIES AREA
Substantially all of our business is from the Quad Cities area.
Unfavorable or worsening economic conditions in the Quad Cities area could
have a material adverse effect on us in a number of ways. The number of
borrowers unable to timely repay their loans could significantly increase.
There could be a decline in the value of the properties securing our loans.
Customers may reduce the amount of their deposits. Finally, there could be a
reduction in the value of assets managed by our trust department. In
addition, the region is heavily dependent on the agricultural industry, which
has a history of fluctuating economic conditions.
INTEREST RATES AND OTHER CONDITIONS IMPACT OUR RESULTS OF OPERATIONS
Our profitability is in part a function of the spread between the
interest rates earned on investments and loans and the interest rates paid on
deposits and other interest-bearing liabilities. In the early 1990s, many
banking organizations experienced historically high interest rate spreads.
More recently, interest rate spreads have generally narrowed due to changing
market conditions and competitive pricing pressure, and these circumstances
may continue.
Like most banking institutions, our net interest spread and margin
will be affected by general economic conditions and other factors, including
fiscal and monetary policies of the federal government, that influence market
interest rates and our ability to respond to changes in such rates. At any
given time, our assets and
10
<PAGE>
liabilities will be such that they are affected differently by a given change
in interest rates. As a result, an increase or decrease in rates, the length
of loan terms or the mix of adjustable and fixed rate loans in our portfolio
could have a positive or negative effect on our net income, capital and
liquidity. There can be no assurance that the positive trends or developments
discussed in this prospectus will continue or that negative trends or
developments will not have a material adverse effect on us.
OUR BANCARD OPERATION FACES OTHER RISKS AS WELL
Bancard, our credit card processing subsidiary, is subject to
certain risks which could have a negative impact on its operations, including
loss of marketing relationships, competition, credit risks and the
possibility that merchants' willingness to accept credit cards will decline.
Many of Bancard's competitors have greater financial, technological,
marketing and personnel resources than Bancard and there can be no assurance
that Bancard will be able to compete effectively with such entities.
Historically, Bancard has been dependent on a single independent
sales organization (an "ISO") to recruit merchants for Bancard's processing
operations. Merchants recruited through this ISO accounted for 94.8%, 92.6%
and 91.0% of merchant processing volumes of Bancard in fiscal 1997, fiscal
1998 and the first nine months of fiscal 1999. Late in fiscal 1998, Bancard
restructured its exclusive processing relationship with this ISO to shorten
the term of the agreement, to shift greater responsibility for credit risk to
the ISO and to lower Bancard's share of processing fees. This restructuring
had the effect of reducing gross processing income from the ISO's merchants
in the first nine months of fiscal 1999 to $548,000 from $1.0 million in the
same period in fiscal 1998. The agreement as restructured automatically
renews for one year each June 1 unless either party provides the other party
with six months notice of its intention not to renew the agreement. As
neither party gave timely notice of termination, the amended agreement is
expected to renew June 1, 1999 for the one year period ending June 1, 2000.
In the event that the ISO chooses not to renew the agreement, Bancard would
cease processing for the merchants for which it currently processes
transactions under the agreement, resulting in a negative impact to our
revenue and income. In addition, if the agreement is not renewed, Bancard
cannot compete with the ISO to provide merchant processing and settlement
services to those merchants until 2003 and would not be able to do business
with the ISO's agents for a period of two years after termination of the
agreement. Bancard may not be able to enter into new agreements with other
ISOs or recruit other merchants in numbers sufficient to replace that
business.
Bancard is also subject to credit risks. When a billing dispute
arises between a cardholder and a merchant, and if the dispute is not
resolved in favor of the merchant, the transaction is charged back to the
merchant. If Bancard is unable to collect such chargeback from the merchant's
account, and if the merchant refuses or is unable to reimburse Bancard for
the chargeback due to bankruptcy or other reasons, Bancard bears the loss for
the amount of the refund paid to the cardholder unless its agreement with the
ISO shifts that risk to the ISO. Bancard has such an agreement with its
current major ISO. Bancard, in general, handles processing for smaller, less
seasoned merchants, which may present greater risk of loss. Although Bancard
maintains a reserve against these losses, there is no assurance that it will
be adequate. Additionally, VISA and MasterCard have the ability to increase
the "interchange" rates charged to merchants for credit card transactions.
There can be no assurance that merchants will continue to accept credit cards
as payment if they feel rates are too high. Bancard is also subject to an
approval process by the VISA and MasterCard credit card associations. In the
event Bancard fails to comply with these standards, Bancard's designation as
a certified processor could be suspended or terminated. There can be no
assurance that VISA or MasterCard will maintain Bancard's registrations or
that the current VISA or MasterCard rules allowing Bancard to provide
transaction processing services will remain in effect.
WE RELY HEAVILY ON OUR MANAGEMENT
We are dependent upon the efforts and services of Douglas M.
Hultquist, Michael A. Bauer and our other senior officers. The loss of the
services of either Messrs. Hultquist or Bauer could have a material adverse
effect on our operations. Although we currently have employment agreements
with Messrs. Hultquist and Bauer, there can be
11
<PAGE>
no assurance that they will continue to be employed with us into the future.
The company is the beneficiary of a $1,000,000 life insurance policy on each
of Messrs. Hultquist and Bauer.
WE HAVE A CONTINUING NEED FOR TECHNOLOGICAL CHANGE
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. Our
future success will depend in part upon our ability to address the needs of
our customers by using technology to provide products and services that will
satisfy customer demands for convenience as well as to create additional
efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. There can be no
assurance that we will be able to effectively implement new technology-driven
products and services or be successful in marketing such products and
services to our customers.
UNCERTAINTY EXISTS WITH RESPECT TO THE YEAR 2000
The year 2000 has posed a unique set of challenges to those
industries reliant on information technology. As a result of methods employed
by early programmers, many software applications and operational programs may
be unable to distinguish the year 2000 from the year 1900. If not effectively
addressed, this problem could result in the production of inaccurate data,
or, in the worst cases, the inability of the systems to continue to function
altogether. Financial institutions are particularly vulnerable due to the
industry's dependence on electronic data processing systems. In addition, the
bank's customers may withdraw their deposits due to uncertainty of the impact
of year 2000 issues, resulting in decreased liquidity of the bank. Due to the
uncertainty inherent in the year 2000 problem, resulting primarily from the
uncertainty of the year 2000 readiness of our customers and other third
parties, we are unable to determine at this time whether the consequences of
year 2000 failures will have a material adverse impact on our financial
condition and profitability.
THERE IS STRONG COMPETITION IN THE FINANCIAL SERVICES INDUSTRY
We compete for loan and deposit customers with other banks and
thrifts located in the Quad Cities area, as well as other financial services
organizations such as brokerage firms, insurance companies and money market
mutual funds, all of whom aggressively solicit customers within our market
area by advertising through direct mail, the electronic media and other
means. Many of these competitors have been in business for many years, have
established customer bases and are substantially larger than us. Many of the
financial institutions have substantially higher lending limits than we do
and are able to offer services, including international banking services,
that we can offer only through correspondents, if at all. In addition, many
of these entities have greater capital resources than we do, and some of
these are not subject to our same degree of regulation.
OUR GROWTH STRATEGY INVOLVES RISKS THAT MAY NEGATIVELY IMPACT OUR PROFITS
We have pursued and continue to pursue an internal growth strategy,
the success of which will depend primarily on generating an increasing level
of loans and deposits at acceptable risk levels without corresponding
increases in non-interest expenses. Our expansion strategy has included the
establishment of new branches and product areas, which required significant
upfront investments in technology, personnel and site locations. There can be
no assurance that we will be successful in continuing our growth strategy and
improving or maintaining our net income by leveraging our non-interest
expenses.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION
We are subject to extensive regulation by the Federal Reserve and
the Iowa Superintendent of Banking. 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 these
entities. These governmental agencies, examine bank holding companies and
commercial banks, establish capital and other financial requirements and
approve acquisitions or other changes of control of these financial
institutions. Our ability to establish new
12
<PAGE>
facilities or make acquisitions is conditioned upon the receipt of required
regulatory approvals from the Federal Reserve and other applicable regulatory
bodies. Changes in legislation and regulations will continue to have a
significant impact on the banking industry. Although some of the legislative
and regulatory changes may benefit the bank, others will increase its costs
of doing business and assist competitors which are not subject to similar
regulation.
OUR MORTGAGE BANKING OPERATIONS CAN BE HIGHLY SENSITIVE TO OUTSIDE FACTORS
Mortgage banking operations can be highly sensitive to changes in
interest rates and other factors. Mortgage banking is an important source of
noninterest income, consisting of loan origination fees and gains on sale of
residential real estate loans to the secondary market. The bank has benefited
in recent years from a historically low level of interest rates which have
affected mortgage lending for purposes of home purchase and refinance.
Mortgage loan activity, especially refinancings, is sensitive to changes in
interest rates. Increases in interest rates may materially reduce the demand
for loans originated and sold by us. The success of the bank's real estate
department is also dependent in part upon the efforts and services of the
bank's mortgage loan originators and the relationships of these persons with
real estate agents in the community.
USE OF PROCEEDS
The trust will use the money it receives for the capital securities
to purchase debentures from us in an amount equal to the aggregate
liquidation amount of the capital securities. Depending on certain factors,
all or a portion of the capital securities may be treated as capital for bank
regulatory purposes. We plan to use approximately $2.5 million of the net
proceeds of the approximately $11.2 million we receive from the sale of the
debentures, after payment of underwriting commissions and offering expenses,
to repay the outstanding balance on a revolving credit note and approximately
$3.0 million of the net proceeds to redeem all of our outstanding preferred
stock. We plan to use the remaining net proceeds for general corporate
purposes, including, among other things, investments in and extensions of
credit to our subsidiaries as needed to support asset growth and payment of
interest on the debentures. The revolving credit note is to a third party
financial institution with a maximum principal amount of $4.5 million. The
outstanding balance on the note at March 31, 1999 was $2.5 million. The note
matures on July 1, 2000, and has a floating interest rate of LIBOR plus 200
basis points. Pending their application, we currently intend to invest the
net proceeds in government and agency securities and loan participations.
ACCOUNTING TREATMENT
The trust will be treated, for financial reporting purposes, as our
subsidiary and, accordingly, the accounts of the trust will be included in
our consolidated financial statements. The capital securities will be
presented as a separate line item in our consolidated balance sheet under the
caption "Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debentures," and appropriate
disclosures about the capital securities, the guarantee and the debentures
will be included in the notes to consolidated financial statements. For
financial reporting purposes, we will record distributions payable on the
capital securities as interest expense in our Consolidated Statement of
Operations.
Our future reports filed under the Securities Exchange Act of 1934
will include a footnote to the consolidated financial statements stating that:
- the trust is wholly-owned;
- the sole assets of the trust are the debentures and specifying the
debentures' principal amount, interest rate and maturity date;
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<PAGE>
- our obligations described in this prospectus, in the aggregate,
constitute a full, irrevocable and unconditional guarantee on a
subordinated basis by us of the obligations of the trust under the
capital securities.
CAPITALIZATION
The following table sets forth our total deposits, indebtedness and
capitalization as of March 31, 1999, on an historical basis and as adjusted
for the offering and the application of the estimated net proceeds. This data
should be read in conjunction with the "Selected Consolidated Financial Data"
and the Consolidated Financial Statements and Notes thereto, included in this
prospectus.
<TABLE>
<CAPTION>
(Dollars rounded to the nearest thousand) March 31, 1999
-----------------------------
Actual As Adjusted
------------ ------------
<S> <C> <C>
DEPOSITS:
Noninterest-bearing deposits................................ $ 35,143,000 $ 35,143,000
Interest-bearing deposits................................... 203,981,000 203,981,000
------------ ------------
Total deposits.......................................... $239,124,000 $239,124,000
------------ ------------
------------ ------------
INDEBTEDNESS:
Short-term borrowings....................................... 7,468,000 7,468,000
Federal Home Loan Bank advances............................. 25,884,000 25,884,000
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Subordinated Debentures................................... -- 12,000,000
Other borrowings............................................ 2,500,000 --
------------ ------------
Total indebtedness...................................... $ 35,852,000 $ 45,352,000
------------ ------------
------------ ------------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $1.00 par value; 250,000 shares
authorized; 25 shares issued and outstanding.............. 25 --
Common Stock, $1.00 par value; 5,000,000 shares
authorized; 2,295,876 shares issued and outstanding....... 2,296,000 2,296,000
Additional paid-in capital.................................. 14,452,000 11,952,000
Retained earnings........................................... 4,236,000 3,737,000
Accumulated other comprehensive income...................... 118,000 118,000
------------ ------------
Total stockholders' equity............................. $ 21,102,000 $ 18,103,000
------------ ------------
------------ ------------
CONSOLIDATED REGULATORY CAPITAL RATIOS:
Total capital to risk-weighted assets....................... 11.22% 16.90%
Tier 1 capital to risk-weighted assets (1).................. 9.97% 11.34%
Tier 1 capital to average tangible assets (1)............... 7.16% 8.06%
</TABLE>
- ----------
(1) The capital securities have been structured to qualify as Tier 1
capital. However, the capital securities cannot be used to constitute,
together with any outstanding cumulative preferred stock of Quad City,
more than 25% of Quad City's total Tier 1 capital. As adjusted for
this offering, Quad City's Tier 1 capital as of March 31, 1999 would
have been $23.9 million, of which $5.9 million would have been
attributable to the capital securities. Any future increases in other
elements of Quad City's Tier 1 capital, including retained earnings,
will allow Quad City to include greater portions of the capital
securities offered hereby in Tier 1 capital.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION PROVIDES ADDITIONAL INFORMATION REGARDING
OUR OPERATIONS AND FINANCIAL CONDITION FOR THE NINE MONTH PERIODS ENDED MARCH
31, 1999 AND 1998, AND EACH OF THE THREE FISCAL YEARS ENDED JUNE 30, 1998.
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED
FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
ACCOMPANYING NOTES THERETO INCLUDED OR INCORPORATED BY REFERENCE ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
Quad City was formed in February, 1993 for the purpose of organizing
the bank. The bank opened in January 1994 with $4.5 million in assets and
grew to approximately $299.8 million as of March 31, 1999. The bank 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 $1.7 million or $.73 basic earnings
per share for the first three quarters of fiscal 1999 as compared to $1.0
million and $.46 per share for the same period in fiscal 1998. This increase
resulted primarily from increased net interest income and increased volumes
of business for the bank, particularly in its mortgage and trust operations
and amortization of deferred income.
Quad City's results of operations are dependent primarily on net
interest income, which is the difference between the interest earned on its
loans and securities and the interest paid on deposits and borrowings. Quad
City's operating results are also affected by sources of non-interest income,
including merchant credit card fees, trust fees, deposit service charge fees,
fees from the sales of residential real estate loans and other income.
Operating expenses of Quad City include employee compensation and benefits,
occupancy and equipment expense and other administrative expenses. Quad
City's operating results are also affected by economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities. The majority of the bank's loan portfolio
is invested in commercial loans. Deposits from commercial customers represent
a significant funding source as well.
The bank has added facilities and employees to accommodate both its
historical growth and anticipated future growth. As such, overhead expenses
have had a significant impact on earnings. The primary challenge for the bank
currently, from a profitability standpoint, is to increase its net interest
margin. Large commercial depositors create a relatively high cost of funds
and this fact, along with a very competitive loan rate environment, have
resulted in the bank's interest margin being below its peer group. Management
is addressing this issue with alternative funding sources and pricing
strategies.
During 1994, the bank began to develop internally a merchant credit
card processing operation and in 1995 transferred this activity to Bancard, a
separate subsidiary of Quad City. Bancard initially had an arrangement to
provide processing services exclusively to clients of a single ISO. This ISO
was sold in 1998 and the purchaser requested a reduction in the term of the
contract. Bancard agreed to amend the contract to reduce the term and accept
a fixed monthly processing fee of $25,000 for existing merchants and a lower
transaction fee for new merchants in exchange for a payment of approximately
$3 million, the ability to transact business with other ISOs and the
assumption of the credit risk by the ISO. Approximately two thirds of the
income from this settlement, or $2.2 million, was reported in fiscal 1998,
with the remainder of $732,000 being recognized as an adjustment to the fixed
processing fee during fiscal 1999. Bancard's net income was $1.3 million in
fiscal 1998. For the nine months ended March 31, 1999, Bancard's net income
was $343,000. Bancard expects its merchant credit card fee income to remain
below previous levels until such time as Bancard can develop relationships
with additional ISOs or Allied Merchant Services, Inc., Bancard's newly
formed independent sales organization, can generate processing business
revenues comparable to those Bancard experienced prior to amendment of its
ISO contract. This reduction in processing fees and cessation of the
settlement income at Bancard is expected to adversely affect comparisons of
consolidated net income in fiscal 2000 with fiscal 1999.
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<PAGE>
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 the nine months ended March 31, 1999 the bank
originated $69.0 million of real estate loans and sold $71.1 million of
loans, which resulted in gains of $830,000. In fiscal 1998 and 1997, the bank
originated $57.2 million and $6.9 million of real estate loans held for sale
and sold $53.3 million and $6.0 million of these loans, which resulted in
gains of $713,000 and $44,000, respectively. Mortgage banking operations have
benefited from significant refinancing activity as a result of the relatively
low interest rate environment in which it has been operating.
Trust department income has become a significant contributor to
noninterest income, growing from approximately $356,000 in fiscal 1996 to
$1,139,000 in fiscal 1998 and to $1,115,000 during the first nine months of
fiscal 1999. Income is generated primarily from fees charged based on assets
under management for corporate and personal trusts and for custodial
services. Assets under administration have grown from $213.5 at June 30,
1997, to $293.2 at June 30, 1998 to approximately $471.8 million at March 31,
1999. Growth in the current fiscal year primarily resulted from the
establishment of a custodial relationship with one pension fund.
Quad City's initial public offering during the fourth calendar
quarter of 1993 raised approximately $14 million. In order to provide
additional capital to support the growth of the bank, Quad City put
additional financing in place in the form of a line of credit and a preferred
stock offering. The line of credit was established with a correspondent bank
for up to $4.5 million and currently has a $2.5 million balance outstanding.
There is also preferred stock outstanding with redemption preferences
totaling $3.0 million. Quad City expects to redeem all of the preferred stock
following the completion of this offering. Although Quad City intends to use
the proceeds from this offering to pay its outstanding line of credit debt
and redeem the outstanding preferred stock, it may retain this line of credit
or seek to reestablish a new line of credit in the future to provide
additional capital for the bank and other corporate purposes
NET INTEREST INCOME
Quad City's net income is derived primarily from net interest
income. Net interest income is the difference between interest income,
principally from loans and investment securities, and interest expense,
principally on borrowings and customer deposits. Changes in net interest
income result from changes in volume, net interest spread and net interest
margin. Volume refers to the average dollar levels of interest earning assets
and interest bearing liabilities. Net interest spread refers to the
difference between the average yield on interest earning assets and the
average cost of interest bearing liabilities. Net interest margin refers to
the net interest income divided by average interest earning assets and is
influenced by the level and relative mix of interest earning assets and
interest bearing liabilities.
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<PAGE>
The following tables set forth information for the periods indicated
with regard to average balances of assets and liabilities, as well as the
total dollar amounts of interest income from interest earning assets and
interest expense on interest-bearing liabilities and resultant yields or
costs, net interest income, net interest spread, net interest margin, and the
ratio of average interest-earning assets to average interest-bearing
liabilities for Quad City:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned Or Yield Or Average Earned Yield Or
Balance Paid Cost Balance Or Paid Cost
-------- --------- -------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earnings assets:
Federal funds sold $ 26,741 $ 1,044 5.21% $ 7,635 $ 305 5.33%
Certificates of deposit at financial
institutions 10,879 513 6.29 6,217 319 6.84
Investment securities (1) 39,011 1,618 5.53 31,455 1,454 6.16
Net loans receivable (2) 176,992 11,509 8.67 130,961 8,642 8.80
-------- ------- -------- -------
Total interest earning assets 253,623 14,684 7.72 176,268 10,720 8.11
Noninterest-earning assets:
Cash and due from banks 9,550 11,748
Premises and equipment 7,546 6,165
Other 4,412 3,568
-------- --------
Total assets $275,131 $197,749
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest-bearing demand deposits $ 72,111 $ 1,871 3.46% $ 54,952 $ 1,517 3.68%
Savings deposits 4,188 63 2.01 2,802 47 2.24
Time deposits 110,110 4,740 5.74 75,860 3,345 5.88
Short-term borrowings 3,682 134 4.85 -- -- --
Federal Home Loan Bank advances 24,561 1,157 6.28 18,516 872 6.28
Others borrowings 2,250 120 7.11 1,500 98 8.62
-------- ------- -------- -------
Total Interest bearing liabilities 216,902 8,085 4.97 153,630 5,879 5.10
Noninterest-bearing demand 33,359 23,861
Other noninterest-bearing liabilities 4,710 4,069
-------- --------
Total liabilities 254,971 181,560
Stockholders' equity 20,160 16,189
-------- --------
Total liabilities and stockholders'
equity $275,131 $197,749
-------- --------
-------- --------
Net interest income $ 6,599 $ 4,841
------- -------
------- -------
Net interest spread 2.75% 3.01%
----- -----
----- -----
Net interest margin 3.47% 3.66%
----- -----
----- -----
Ratio of average interest earning assets
to average interest-bearing liabilities 116.93% 114.74%
-------- --------
-------- --------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ----------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Earned Yield Or Average Earned Yield Or Average Earned Yield Or
Balance Or Paid Cost Balance Or Paid Cost Balance Or Paid Cost
-------- -------- -------- --------- -------- -------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earnings assets:
Federal funds sold $ 11,005 $ 646 5.87% $ 5,693 $ 286 5.02% $ 6,868 $ 382 5.56%
Certificates of deposit at
financial institutions 7,173 441 6.15 5,649 375 6.64 5,454 359 6.58
Investment securities (1) 31,457 1,906 6.06 34,574 2,139 6.19 31,202 1,869 5.99
Net loans receivable (2) 139,860 12,084 8.64 80,033 6,906 8.63 44,064 3,919 8.89
-------- ------- -------- ------ ------- ------
Total Interest earning assets 189,495 15,077 7.96 125,949 9,706 7.71 87,588 6,529 7.45
Noninterest-earning assets:
Cash and due from banks $ 9,595 $ 7,682 $ 4,910
Premises and equipment 6,527 5,114 2,635
Other 3,756 3,053 1,839
-------- -------- -------
Total assets $209,373 $141,798 $96,972
-------- -------- -------
-------- -------- -------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest-bearing demand deposits $ 56,612 2,053 3.63% $ 41,184 1,381 3.35% $27,172 947 3.49%
Savings deposits 2,954 65 2.20 2,322 53 2.28 1,516 39 2.57
Time deposits 83,790 4,853 5.79 52,511 2,925 5.57 40,512 2,363 5.83
Short-term borrowings 166 9 5.42 517 28 5.42 1,237 65 5.25
Federal Home Loan Bank advances 20,220 1,234 6.10 7,718 484 6.27 1,248 70 5.61
Other borrowings 1,500 128 8.53 1,417 123 8.68 83 2 2.41
-------- ------- -------- ------ ------- ------
Total Interest bearing
liabilities 165,242 8,342 5.05 105,669 4,994 4.73 71,768 3,486 4.86
Noninterest-bearing demand 23,545 19,263 12,339
Other noninterest-bearing
liabilities 3,896 3,887 1,135
-------- -------- -------
Total liabilities 192,683 128,819 85,242
Stockholders' equity 16,690 12,979 11,730
-------- -------- -------
Total liabilities and
stockholders' equity $209,373 $141,798 $96,972
-------- -------- -------
-------- -------- -------
Net interest income $ 6,735 $4,712 $3,043
------- ------ ------
------- ------ ------
Net interest spread 2.91% 2.98% 2.59%
----- ----- -----
----- ----- -----
Net interest margin 3.55% 3.74% 3.47%
----- ----- -----
----- ----- -----
Ratio of average interest earning
assets to average
interest-bearing liabilities 114.68% 119.19% 122.04%
-------- -------- -------
-------- -------- -------
</TABLE>
(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.
18
<PAGE>
The following table illustrates, for the periods indicated, the
changes in Quad City's net interest income due to changes in volume and
changes in interest rates. Changes in net interest income due to both volume
and rate have been proportionately allocated to rate and volume.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1999 VS. YEAR ENDED JUNE 30, 1998 VS.
NINE MONTHS ENDED MARCH 31, 1998 YEAR ENDED JUNE 30, 1997
----------------------------------------- ------------------------------------------
INCREASE (DECREASE) DUE TO TOTAL INCREASE (DECREASE) DUE TO TOTAL
-------------------------- INCREASE ------------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Earnings Assets:
Federal funds sold $ 746 $ (7) $ 739 $ 305 $ 55 $ 360
Certificates of deposit at
financial institutions 222 (28) 194 95 (29) 66
Investment securities (1) 325 (161) 164 (189) (44) (233)
Net loans receivable (2) 2,995 (128) 2,867 5,169 9 5,178
------ ----- ------ ------ ----- ------
Total Interest earning assets $4,288 $(324) $3,964 $5,380 $ (9) $5,371
------ ----- ------ ------ ----- ------
Interest Bearing Liabilities:
Interest bearing demand
deposits $ 450 $ (96) $ 354 $ 552 $ 120 $ 672
Savings deposits 21 (5) 16 14 (2) 12
Time deposits 1,476 (81) 1,395 1,807 121 1,928
Short-term borrowings 134 -- 134 (19) -- (19)
Federal Home Loan Bank
advances 285 -- 285 763 (13) 750
Other borrowings 41 (19) 22 7 (2) 5
------ ----- ------ ------ ----- ------
Total Interest bearing
liabilities $2,407 $(201) $2,206 $3,124 $ 224 $3,348
------ ----- ------ ------ ----- ------
Total $1,881 $(123) $1,758 $2,256 $(233) $2,023
------ ----- ------ ------ ----- ------
------ ----- ------ ------ ----- ------
<CAPTION>
YEAR ENDED JUNE 30, 1997 VS.
YEAR ENDED JUNE 30, 1996
-----------------------------------------
INCREASE (DECREASE) DUE TO TOTAL
-------------------------- INCREASE
VOLUME RATE (DECREASE)
-------------------------------------------
<S> <C> <C> <C>
Interest Earnings Assets:
Federal funds sold $ (61) $ (35) $ (96)
Certificates of deposit at
financial institutions 13 2 15
Investment securities (1) 207 63 270
Net loans receivable (2) 3,138 (151) 2,987
------ ----- ------
Total Interest earning assets $3,297 $(121) $3,176
------ ----- ------
------ ----- ------
Interest Bearing Liabilities:
Interest bearing demand
deposits $ 471 $ (37) $ 434
Savings deposits 19 (5) 14
Time deposits 672 (111) 561
Short-term borrowings (39) 2 (37)
Federal Home Loan Bank
advances 405 9 414
Other borrowings 99 22 121
------ ----- ------
Total Interest bearing
liabilities $1,627 $(120) $1,507
------ ----- ------
Total $1,670 $ (1) $1,669
------ ----- ------
------ ----- ------
</TABLE>
(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.
19
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1998
OVERVIEW. Net income for the nine-month period ended March 31, 1999
was $1.7 million as compared to net income of $1.0 million for the same
period in 1998 for an increase of $663,000 or 66%. Basic earnings per share
for the first nine months of fiscal 1999 increased to $.73 from $.46 for the
first nine months of fiscal 1998. The increase in net income was comprised of
increases in both net interest income after provision for loan losses of $1.9
million and noninterest income of $1.0 million reduced by increases in both
noninterest expenses of $1.8 million and income tax expense of $442,000. The
increase in noninterest income included $549,000 due to the amortization of
deferred income resulting from the restructuring of Bancard's merchant broker
agreement in 1998.
INTEREST INCOME. Interest income increased by $4.0 million, from
$10.7 million for the nine-month period ended March 31, 1998 to $14.7 million
for the nine-month period ended March 31, 1999. The 37% rise in interest
income was basically attributable to greater average outstanding balances in
interest earning assets, principally loans receivable.
INTEREST EXPENSE. Interest expense increased by $2.2 million, from
$5.9 million for the nine-month period ended March 31, 1998 to $8.1 million
for the nine-month period ended March 31, 1999. The 37% 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. At both March 31, 1999 and
June 30, 1998 Quad City had an allowance for estimated losses on loans of
approximately 1.4% of total loans. The provision for loan losses decreased by
$109,000, from $753,000 for the nine-month period ended March 31, 1998 to
$644,000 for the nine-month period ended March 31, 1999. The primary loan
growth for the period ended March 31, 1999 was in our commercial loan
portfolio, as opposed to our consumer loan portfolio which has historically
carried a greater degree of risk, allowing a decrease in the provision
necessary for the period. For the nine-month period ended March 31, 1999,
commercial and real estate loans combined for total charge-offs of $130,000
and total recoveries of $50,000. Consumer loan charge-offs and recoveries
totaled $262,000 and $52,000, respectively, for the nine months ended March
31, 1999. Indirect auto loans accounted for a majority of the consumer loan
charge-offs. Because asset quality is a priority for Quad City and its
subsidiaries, management has made the decision to downscale indirect auto
loan activity based on charge-off history. The ability to grow profitably is,
in part, dependent upon the ability to maintain asset quality.
NONINTEREST INCOME. Noninterest income increased by $1.0 million,
from $2.9 million for the nine month period ended March 31, 1998 to $3.9
million for the nine month period ended March 31, 1999. Noninterest income at
March 31, 1999 and 1998 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
35% increase was primarily due to increased loan sales activity in the
residential real estate department of the bank and the recognition of
$549,000 of deferred income resulting from a gain on the restructuring of
Bancard's merchant broker agreement.
In June 1998, Quad City recognized $2.2 million of gross income as a
result of the amendment of the merchant broker agreement with its current,
major ISO. The amended agreement is for a minimum term of one year and
revised a prior agreement that was to expire in the year 2002. In
consideration for the reduction in term from four years to one year, Quad
City received total compensation of $2.9 million, of which $732,000 was
deferred to be recognized in income during fiscal 1999. In the prior
agreement, Quad City and the ISO had shared both merchant servicing fees and
related merchant credit risk. The amended agreement exchanges a substantial
reduction in merchant servicing income for a like reduction in the related
merchant credit risk. With the amended agreement, Quad City receives a fixed,
monthly fee of $25,000 for servicing the current merchants
20
<PAGE>
and is relieved of responsibility for any merchant credit risk. In an effort
to offset the reduced merchant servicing income, Quad City has been actively
pursuing other ISO relationships and has recently begun processing for
additional ISOs.
During the nine months ended March 31, 1999, merchant credit card
fees, net of processing costs, decreased by $281,000 to $781,000, from $1.1
million for the nine months ended March 31, 1998. The reduction reflected
terms of the amended merchant broker agreement. Also as a result of the
amended merchant broker agreement, Quad City recognized $549,000 of the
deferred income and earned $225,000 of merchant servicing fees for the nine
months ended March 31, 1999.
For the nine months ended March 31, 1999, trust department fees
increased $289,000, or 35%, to approximately $1.1 million from $825,000 for
the nine months ended March 31, 1998. The increase was primarily a reflection
of the development of additional trust relationships during the period.
Gain on sales of loans, net was $830,000 for the nine months ended
March 31, 1999, which reflected an increase of 62%, or $318,000, from
$512,000 for the nine months ended March 31, 1998. The increase resulted from
low interest rates, which created large numbers of both home refinances and
first-time home purchases, and the subsequent sale of the majority of these
loans into the secondary market.
NONINTEREST EXPENSES. The main components of noninterest expenses
were primarily salaries and benefits, occupancy and equipment expenses, and
professional and data processing fees for both periods. Noninterest expenses
for the nine months ended March 31, 1999 were $7.2 million as compared to
$5.4 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 nine months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1999 1998 % CHANGE
----------- ---------- --------
<S> <C> <C> <C>
Salaries and employee benefits $4,325,693 $3,109,580 39.11%
Professional and data processing fees 427,061 375,337 13.78
Advertising and marketing 266,677 236,033 12.98
Occupancy and equipment expense 1,064,869 689,784 54.38
Stationery and supplies 198,884 156,163 27.36
Provision for merchant credit card losses 5,625 83,426 (93.26)
Postage and telephone 224,145 161,696 38.62
Other 638,228 549,430 16.16
---------- ----------
TOTAL NONINTEREST EXPENSES $7,151,182 $5,361,449 33.38
---------- ----------
---------- ----------
</TABLE>
Salaries and benefits experienced the most significant increase of
any noninterest expense component. For the nine months ended March 31, 1999,
total salaries and benefits increased to $4.3 million or $1.2 million over
the 1998 period total of $3.1 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. For the nine month period ended March 31, 1999, occupancy and
equipment expense increased $375,000 or 54% over the first nine months of
fiscal 1998. The increase was largely due to rent expense for the new Moline
location. Postage and telephone expense increased $62,000 or 39% and
stationery and supplies expense increased $43,000 or 27%. The increases were
the result of the overall increase in business volume of the bank. The
provision for merchant credit card losses during the first nine months of
fiscal 1999 decreased $78,000 or 93% from the first nine months of fiscal
1998, which reflected Bancard's amended merchant broker agreement and the
resulting reduction in Bancard's responsibility for merchant credit risk.
21
<PAGE>
INCOME TAX EXPENSE. The provision for income taxes was $1.1 million
for the nine-month period ended March 31, 1999 compared to $647,000 for the
nine-month period ended March 31, 1998, an increase of $442,000 or 68%. The
increase was the result of an increase in income before income taxes of $1.1
million or 67% for the nine months ending March 31, 1999 compared to the nine
months ending March 31, 1998.
FISCAL 1998 COMPARED WITH FISCAL 1997
OVERVIEW. Net income for the year ended June 30, 1998 was $2.4
million, compared to $1.2 million for the year ended June 30,1997, for an
increase of 96%. Results improved primarily because of a $2.0 million
increase in net interest income after provision for loan losses, and a $3.3
million increase in noninterest income, of which $2.2 million related to a
one-time gain on the restructuring of a merchant broker agreement. These
increases were offset by a $2.6 million increase in other expenses due
primarily to the increased number of employees and higher operating costs
related to the increased volume of business, as well as an increase in income
taxes of $1.5 million.
INTEREST INCOME. Interest income increased to $15.1 million in
fiscal 1998 from $9.7 million in fiscal 1997, an increase of $5.4 million.
The 55% rise was primarily due to greater average outstanding balances in
interest bearing assets. Interest income is comprised primarily of interest
income on loans (including loan fees), securities, federal funds sold and
Quad City's own deposits maintained at other financial institutions. Interest
income should continue to grow as the loan portfolio and other assets
increase, and would also increase as a result of a rise in interest rates.
INTEREST EXPENSE. Interest expense increased to $8.3 million in
fiscal 1998 from $5.0 million in fiscal 1997, an increase of $3.3 million, or
67%, and represented interest paid primarily to depositors, as well as
interest paid on Federal Home Loan Bank advances and federal funds purchased.
The increase in interest expense was again primarily due to greater average
outstanding balances in interest bearing liabilities. Interest expense will
continue to increase as deposits and Federal Home Loan Bank advances and
other borrowings grow and would also increase as a result of a rise in
interest rates.
Net interest income for the years ended June 30, 1998 and June 30,
1997 amounted to $6.8 million and $4.7 million, respectively, and represented
the difference between interest income earned on earning assets and interest
expense paid on interest bearing liabilities.
PROVISION FOR LOAN LOSSES. The provision for loan losses is
established based on factors such as the local and national economy and the
risk associated with the loans in the portfolio. Quad City's provision for
loan losses was $902,000 for the year ended June 30, 1998, compared to
$844,000 for the year ended June 30, 1997. The $58,000, or 7%, increase in
the provision for loan losses was primarily in response to greater growth in
the loan portfolio during fiscal 1998.
NONINTEREST INCOME. Noninterest income increased by $3.3 million, or
119%, to $6.1 million in fiscal 1998 from $2.8 million in fiscal 1997.
In June 1998, Quad City recognized $2.2 million of income as a
result of signing an amendment to a merchant broker agreement with its
principal ISO. The term of the amended agreement is for a minimum one-year
period, and revised a prior agreement that had an expiration date in the year
2002. In consideration for reducing the term from four years to one year,
Quad City received total compensation of $2.9 million. The remaining $732,000
will be recognized in income during the fiscal year ending June 30, 1999.
Additionally, Quad City will receive a monthly fee of $25,000 for servicing
the current merchants during the remaining twelve months of the agreement. In
future years, if an agreement with another ISO is not established, there
could be a significant reduction in income. It is Quad City's intent,
however, to actively pursue relationships with one or more ISOs.
22
<PAGE>
Another component of noninterest income is gains on sales of loans,
which totaled $713,000 and $44,000 in fiscal 1998 and 1997, respectively. The
$669,000 increase experienced in fiscal 1998 reflected the increased volume
of residential mortgage loans originated for sale by the bank to be sold on
the secondary market.
Trust income increased by 55% to $1.1 million in fiscal 1998 from
$736,000 in fiscal 1997. The $402,000 increase reflected the development of
new trust relationships and increased trust account balances, as well as
strong stock and bond markets.
Other noninterest income increased $162,000 in fiscal 1998 to
$434,000 from $272,000 in fiscal 1997. The 59% increase was primarily due to
the fees generated by the receipt of lease income on the second floor of the
Davenport building, the growth in the commission income generated by the
investment center and fees generated by the item processing department.
NONINTEREST EXPENSES. Concurrent with Quad City's growth,
noninterest expenses increased to $7.9 million in fiscal 1998 from $5.3
million in fiscal 1997. The $2.6 million, or 50%, increase was primarily due
to higher overhead expenses on the increased volume of business attained
during fiscal 1998.
The following table sets forth the various categories of noninterest
expenses for the years ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 % CHANGE
---------- ---------- --------
<S> <C> <C> <C>
Salaries and employee benefits $4,571,126 $2,934,758 55.76%
Professional and data processing fees 504,344 437,259 15.34
Advertising and marketing 238,160 126,061 88.92
Occupancy and equipment expense 1,045,349 654,010 59.84
Stationery and supplies 219,523 191,682 14.52
Provision for merchant credit card losses 105,910 176,476 (39.99)
Postage and telephone 231,049 168,890 36.80
Other 994,354 601,667 65.27
---------- ----------
TOTAL NONINTEREST EXPENSES $7,909,815 $5,290,803 49.50
---------- ----------
---------- ----------
</TABLE>
In fiscal 1998, salaries and employee benefits experienced the most
significant dollar increase of any noninterest expense component. For the
twelve months ended June 30,1998, total salaries and benefits increased to
$4.6 million or $1.7 million over the June 30, 1997 amount of $2.9 million.
The change was primarily attributable to the increase in the staff for the
new Moline location and increased incentive compensation based on business
volume.
In fiscal 1998, advertising and marketing expense experienced the
largest single percentage increase within the noninterest expense category.
For the twelve months ended June 30, 1998, total advertising and marketing
expense increased to $238,000 or $112,000 over the June 30, 1997 total of
$126,000. The change was primarily attributable to the promotional and
marketing efforts of Quad City's expansion to the new Moline Velie Plantation
location.
In fiscal 1998, provision for merchant credit card losses decreased
to $106,000 or $70,000 from the June 30, 1997 amount of $176,000. As
mentioned above, the decrease was primarily due to Bancard restructuring its
merchant portfolio to focus on smaller merchants with less corresponding
risk, and as a result experienced reduced losses.
INCOME TAX EXPENSE. Quad City's federal and state income tax expense
totaled $1.7 million and $165,000 in fiscal 1998 and 1997, respectively. The
$1.5 million increase was the result of higher income before
23
<PAGE>
income taxes. Additionally, during the year ended June 30, 1997, Quad City
was able to reduce its income tax expense in the first three fiscal quarters
due to pre-opening expenses and initial loss carryforwards, therefore it was
only during the fiscal fourth quarter of 1997 that income tax expense was
recorded.
FISCAL 1997 COMPARED WITH FISCAL 1996
OVERVIEW. Net income for the year ended June 30, 1997 was $1.2
million, compared to $683,000 for the year ended June 30, 1996. Results
improved primarily because of a $1.3 million increase in net interest income
after provision for loan losses, and a $1.1 million increase in noninterest
income. These increases were offset by a $1.7 million increase in other
expenses due primarily to the increased number of employees and higher
operating costs related to the increased volume of business, as well as
income taxes of $165,000.
INTEREST INCOME. Interest income increased to $9.7 million in fiscal
1997 from $6.5 million in fiscal 1996, an increase of $3.2 million. This was
primarily due to greater average outstanding balances in interest bearing
assets. Interest income is comprised primarily of interest income on loans
(including loan fees), securities, federal funds sold and Quad City's own
deposits maintained at other financial institutions. Interest income should
continue to grow as the loan portfolio and other assets increase, and would
also increase as a result of a rise in interest rates.
INTEREST EXPENSE. Interest expense increased to $5.0 million in
fiscal 1997 from $3.5 million in fiscal 1996, an increase of $1.5 million,
and represented interest paid primarily to depositors, as well as interest
paid on Federal Home Loan Bank advances and federal funds purchased. The
increase in interest expense was again primarily due to greater average
outstanding balances in interest bearing liabilities. Interest expense will
continue to increase as deposits and Federal Home Loan Bank advances and
other borrowings grow and would also increase as a result of a rise in
interest rates.
Net interest income for the years ended June 30, 1997 and June 30,
1996 amounted to $4.7 million and $3.0 million, respectively, and represented
the difference between interest income earned on earning assets and interest
expense paid on interest bearing liabilities.
PROVISION FOR LOAN LOSSES. The provision for loan losses is
established based on factors such as the local and national economy and the
risk associated with the loans in the portfolio. Quad City's provision for
loan losses was $844,000 for the year ended June 30, 1997, compared to
$500,000 for the year ended June 30, 1996. The $344,000 increase in the
provision for loan losses was primarily in response to the growth in the loan
portfolio during fiscal 1997. The increase maintained Quad City's allowance
for estimated losses on loans at 1.5% of total loans at both June 30, 1997
and June 30, 1996.
NONINTEREST INCOME. Noninterest income increased by $1.1 million to
$2.8 million in fiscal 1997 from $1.7 million in fiscal year 1996. Management
plans to place increased importance on enhancing noninterest income by
establishing a profitability steering committee during fiscal 1998.
One of the most significant components of noninterest income is net
merchant credit card income, which totaled $1.5 million and $1.0 million in
fiscal 1997 and 1996, respectively. The $524,000 growth experienced in fiscal
1997 reflects the increase of over $167 million of transactions processed, as
well as the addition of approximately 1,500 new merchants.
Trust income increased to $736,000 in fiscal 1997 from $355,000 in
fiscal 1996. The $381,000 increase reflects the development of new trust
relationships, as well as a strong stock market.
Other noninterest income increased $143,000 in fiscal 1997 to
$272,000 from $129,000 in fiscal 1997. The increase was primarily due to the
fees generated by the item-processing department, receipt of lease income on
the second floor of the Davenport building and the growth in the commission
income generated by the investment center.
24
<PAGE>
NONINTEREST EXPENSES. Other expenses consisted primarily of salaries
and benefits; bank service charges and trust related expenses; professional
fees; data processing fees; and occupancy and equipment expenses. Other
expenses increased to $5.3 million in fiscal 1997 from $3.6 million in fiscal
1996. The $1.7 million increase was primarily due to higher overhead expenses
on the increased volume of business attained during fiscal 1997.
The following table sets forth the various categories of noninterest
expenses for the years ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 % Change
---------- ---------- --------
<S> <C> <C> <C>
Salaries and employee benefits $2,934,758 $1,973,682 48.69%
Professional and data processing fees 437,259 282,640 54.71
Advertising and marketing 126,061 189,761 (33.57)
Occupancy and equipment expense 654,010 289,230 126.12
Stationery and supplies 191,682 100,672 90.40
Provision for merchant credit card losses 176,476 126,805 39.17
Postage and telephone 168,890 117,741 43.44
Other 601,667 495,858 21.34
---------- ----------
TOTAL NONINTEREST EXPENSES $5,290,803 $3,576,389 47.94
---------- ----------
---------- ----------
</TABLE>
In fiscal 1997, salaries and benefits experienced the most
significant dollar increase of any noninterest expense component. For the
twelve months ended June 30, 1997, total salaries and benefits increased to
$2.9 million or $961,000 over the June 30, 1996 total of $2.0 million. The
change was primarily attributable to the increase in Quad City's number of
employees, as well as merit and cost of living raises.
In fiscal 1997, occupancy and equipment expense experienced the
largest single percentage increase within the noninterest expense category.
For the twelve months ended June 30, 1997, total occupancy and equipment
expense increased to $654,000 or $365,000 over the June 30, 1996 total of
$289,000. The change was primarily attributable to Quad City's expansion to a
second banking facility, located in Davenport.
INCOME TAX EXPENSE. Quad City's income taxes expense was $165,000
for the year ended June 30, 1997. During fiscal 1997 the tax loss carry
forwards associated with pre-opening and initial losses had been fully
utilized, therefore during the fiscal fourth quarter, income tax expense was
recorded, but at an effective rate of 11.9%, well below the statutory rate.
FINANCIAL CONDITION
Total assets of Quad City increased by $49.6 million or 20% to
$299.8 million at March 31, 1999 from $250.2 million at June 30, 1998. Total
assets of Quad City grew by $81.8 million, or 49%, to $250.2 million at
June 30, 1998 from $168.4 million at June 30, 1997. The growth primarily
resulted from an increase in the loan portfolio funded by deposits received
from customers, FHLB advances and short term borrowings. The largest increase
in Quad City's balance sheet as of March 31, 1999, was in deposits received
from customers. This was a result of an aggressive program to attract
deposits through higher deposit pricing, increased marketing efforts and the
hiring of new personnel to staff a business development department to fund
the increase in loans.
CASH AND CASH EQUIVALENT ASSETS. Cash and due from banks decreased
by $3.2 million or 27% to $8.4 million at March 31, 1999 from $11.6 million
at June 30, 1998. Cash and due from banks increased by $4.6 million, or 66%,
to $11.6 million at June 30, 1998 from $7.0 million at June 30, 1997. 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.
25
<PAGE>
Federal funds sold are inter-bank funds with daily liquidity. At
March 31, 1999, the bank had $29.4 million invested in such funds. This
amount increased by $6.4 million or 28% from $23.0 million at June 30, 1998.
The $23.0 million, that Quad City had invested in such funds at June 30,
1998, was an increase of $13.8 million, or 150%, from $9.2 million at June 30,
1997. The increase was attributable to Quad City's increased liquidity at the
end of the fiscal year. Quad City made the decision to increase its liquidity
position in order to meet anticipated loan demand and large deposit
maturities.
Certificates of deposit at financial institutions increased by
$4.1 million or 49% to $12.5 million at March 31, 1999 from $8.4 million at
June 30, 1998 and $5.4 million at June 30, 1997. The bank continued to make
new deposits in other banks in the form of certificates of deposit.
INVESTMENTS. Securities increased by $13.3 million or 38% to
$47.9 million at March 31, 1999 from $34.6 million at June 30, 1998. The
increase was the result of a number of transactions in the securities
portfolio. Paydowns of $1.3 million were received on mortgage-backed
securities, and the amortization of premiums, net of the accretion of
discounts, was $19,000. Maturities, calls, and sales of securities occurred
in the amount of $12.6 million. These decreases were offset by the purchase
of additional securities, classified as available for sale, in the amount of
$27.1 million, and an increase in unrealized gains on securities available
for sale, before applicable income tax, of $162,000.
The following table presents the amortized cost and fair value of
investment securities held on March 31, 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Securities held to maturity:
Municipal securities $ 749,240 $ 11,853 $ -- $ 761,093
Other bonds 25,000 1,235 -- 26,235
----------- -------- --------- -----------
Total $ 774,240 $ 13,088 $ -- $ 787,328
----------- -------- --------- -----------
----------- -------- --------- -----------
Securities available for sale:
U.S. treasury securities $11,003,731 $101,628 $ -- $11,105,359
U.S. agency securities 23,785,877 131,750 (88,974) 23,828,653
Mortgage-backed securities 8,781,718 12,193 (40,150) 8,753,761
Municipal securities 1,562,918 68,000 -- 1,630,918
Other securities 1,835,315 2,512 (8,013) 1,829,814
----------- -------- --------- -----------
Total $46,969,559 $316,083 $(137,137) $47,148,505
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
The following table presents the maturity of securities held on
March 31, 1999 and the weighted average rates by range of maturity. The table
excludes $1,835,315 of securities with no maturity or stated face rate:
<TABLE>
<CAPTION>
After One Year After Five Years
Within One Year Through Five Years Through Ten Years After Ten Years Total
--------------- ------------------ ------------------ ----------------- -------
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount
------ ------- ------- ------- ------ -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. treasury securities $5,001 5.89% $ 6,003 5.61% $ -- --% $ -- --% $11,004
U.S. agency securities -- -- 19,740 5.49 4,046 5.47 -- -- 23,786
Mortgage-backed
securities -- -- 1,669 6.19 2,655 5.78 4,458 5.92 8,782
Municipal securities 250 6.80 468 6.08 899 4.34 695 5.37 2,312
Other bonds -- -- 25 6.30 -- -- -- -- 25
------ ------- ------ ------ -------
Total $5,251 $27,905 $7,600 $5,153 $45,909
------ ------- ------ ------ -------
------ ------- ------ ------ -------
</TABLE>
26
<PAGE>
Portions of the investment securities of the bank are purchased with
the intent to hold the securities until they mature. These held to maturity
securities were recorded at amortized cost at March 31, 1999, June 30, 1998
and June 30, 1997. At March 31, 1999, municipal securities and other bonds
made up the $774,000 balance. This was a decrease of $1.6 million, or 67%,
from June 30, 1998, when mortgage-backed securities, municipal securities and
other bonds made up the $2.4 million balance. Market values at March 31,
1999, June 30, 1998 and June 30, 1997 were $787,000, $2.4 million and
$2.9 million, 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 or financing purposes. These securities were
reported at fair value and increased by $14.9 million, or 46%, to
$47.1 million at March 31, 1999, from $32.2 million at June 30, 1998. The
amortized cost of such securities at March 31, 1999, June 30, 1998 and June 30,
1997 was $47.0 million, $32.2 million and $29.0 million, respectively.
The following table presents the maturity of securities held on
June 30, 1998 and the weighted average rates by range of maturity. The table
excludes $1,500,806 of securities with no maturity or stated face rate.
<TABLE>
<CAPTION>
After One Year After Five Years
Through Through
Within One Year Five Years Ten Years After Ten Years
---------------- ---------------- ----------------- ----------------
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Total
------- ------- ------- ------- ------ ------- ------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. treasury securities $9,006 5.80% $ 8,001 5.77% $ -- --% $ -- --% $17,007
U.S. agency securities 498 4.47 8,749 6.04 2,001 6.29 -- -- 11,248
Mortgage-backed securities -- -- 1,442 6.27 1,613 6.41 299 6.00 3,354
Municipal securities 150 4.23 447 6.72 869 4.76 -- -- 1,466
Other bonds -- -- 25 6.30 -- -- -- -- 25
------ ------- ------ ---- -------
Total $9,654 $18,664 $4,483 $299 $33,100
------ ------- ------ ---- -------
------ ------- ------ ---- -------
</TABLE>
Quad City does not use any financial instruments referred to as
derivatives to manage interest rate risk and as of March 31, 1999 there
existed no security in the investment portfolio (other than U.S. government
and U.S. government agencies) that exceeded 10% of stockholders' equity at
that date.
LOANS. Loans receivable increased by $28.7 million or 18% to
$191.7 million at March 31, 1999 from $163.0 million at June 30, 1998. The
increase was the result of the origination or purchase of $207.1 million of
commercial business, consumer and real estate loans, less loan charge-offs,
net of recoveries, of $290,000, and loan repayments or sales of loans of
$178.1 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.
The following table presents the composition of the loan portfolio
as of March 31, 1999:
<TABLE>
<S> <C>
Commercial $130,361,279
Real estate 29,926,782
Installment and other consumer 31,391,049
------------
TOTAL LOANS 191,679,110
Less allowance for estimated losses on loans 2,704,448
------------
NET LOANS $188,974,662
------------
------------
</TABLE>
27
<PAGE>
The following table presents consolidated maturities by yearly
ranges as of March 31, 1999. Also included for loans after one year are the
amounts that have predetermined interest rates and floating or adjustable
rates:
<TABLE>
<CAPTION>
Maturities After One Year
Due after One -------------------------------
Due in One through Due after Predetermined Adjustable
Year or Less 5 Years 5 years Interest Rates Interest Rates
------------ ------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
As of March 31, 1999:
Commercial $44,494,274 $60,155,105 $25,711,900 $ 72,987,062 $12,879,943
Real Estate 3,524,017 1,586,629 24,816,136 10,126,691 16,276,074
Installment and other
consumer 4,749,614 24,737,609 1,903,826 24,485,971 2,155,464
------------ ------------- ----------- -------------- --------------
Total $52,767,905 $86,479,343 $52,431,862 $107,599,724 $31,311,481
------------ ------------- ----------- -------------- --------------
------------ ------------- ----------- -------------- --------------
</TABLE>
Loans receivable increased by $54.6 million, or 50%, to $163.0 million
at June 30, 1998 from $108.4 million at June 30, 1997. As of June 30, 1998,
the bank's legal lending limit was $3.1 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.
During the fiscal year ended June 30, 1998, the bank originated $93.6 million
of loans and received repayments of $42.7 million.
The composition of the loan portfolio as of June 30, 1998, 1997,
1996, 1995, and 1994 was as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Commercial $ 99,097,297 $ 68,634,556 $40,338,645 $24,748,659 $10,509,745
Real estate 31,145,517 20,293,440 9,011,608 2,879,530 354,035
Installment and other
consumer 32,732,322 19,437,433 7,459,467 3,879,388 1,903,681
------------ ------------ ----------- ----------- -----------
TOTAL LOANS 162,975,136 108,365,429 56,809,720 31,507,577 12,767,461
Less allowance for loan
losses on loans 2,349,838 1,632,500 852,500 472,475 191,500
------------ ------------ ----------- ----------- -----------
NET LOANS $160,625,298 $106,732,929 $55,957,220 $31,035,102 $12,575,961
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
</TABLE>
The following table presents consolidated maturities by yearly
ranges as of June 30, 1998. Also included for loans after one year are the
amounts that have predetermined interest rates and floating or adjustable
rates.
<TABLE>
<CAPTION>
Maturities After One Year
Due after One -------------------------------
Due in One through Due after Predetermined Adjustable
Year or Less 5 Years 5 years Interest Rates Interest Rates
------------ ------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
As of June 30, 1998
Commercial $34,796,849 $42,324,290 $21,976,158 $51,814,664 $12,485,784
Real estate 2,947,680 1,300,852 26,896,985 12,245,661 15,952,176
Installment and other
consumer 5,596,595 23,762,290 3,373,437 25,440,774 1,694,953
------------ ------------- ----------- -------------- --------------
Total $43,341,124 $67,387,432 $52,246,580 $89,501,099 $30,132,913
------------ ------------- ----------- -------------- --------------
------------ ------------- ----------- -------------- --------------
</TABLE>
28
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for estimated losses on
loans was $2.7 million at March 31, 1999 compared to $2.3 million at June 30,
1998 for an increase of $355,000 or 15%. 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 nine months ended March 31, were $290,000
and $77,000 in 1999 and 1998, respectively. The increase was primarily due to
the losses resulting from auto loans purchased from dealers. The Company has
since scaled back on this type of lending. One measure of the adequacy of the
allowance for estimated losses on loans is the ratio of the allowance to the
total loan portfolio. Provisions were made monthly to ensure that an adequate
level was maintained. The allowance for estimated losses on loans as a
percentage of total loans was 1.41% at March 31, 1999 and 1.44% at June 30,
1998.
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 as of March 31, 1999.
<TABLE>
<CAPTION>
% of
Loans to
Total
Amount Loans
---------------------------
<S> <C> <C>
Commercial and industrial $2,023,749 68.00%
Real estate 95,694 15.60
Consumer 568,559 16.40
Unallocated 16,446 N/A
---------------------------
$2,704,448 100.00%
---------------------------
---------------------------
</TABLE>
29
<PAGE>
Activity in the allowance for estimated losses on loans for the nine
months ended March 31, 1999 and 1998, was as follows:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Average amount of loans outstanding, before allowance
for estimated losses on loans $179,545,525 $132,959,130
------------ ------------
Allowance for estimated losses on loans:
Balance, beginning of fiscal year $ 2,349,838 $ 1,632,500
------------ ------------
Charge-offs:
Commercial (104,596) (12,763)
Real estate (25,142) --
Installment and other consumer (262,206) (81,012)
------------ ------------
SUBTOTAL CHARGE-OFFS (391,944) (93,775)
------------ ------------
Recoveries:
Commercial 50,150 13,147
Real estate -- --
Installment and other consumer 52,004 3,893
------------ ------------
SUBTOTAL RECOVERIES 102,154 17,040
------------ ------------
Net charge-offs (289,790) (76,735)
Provision charged to expense 644,400 753,258
------------ ------------
Balance, end of period $ 2,704,448 $ 2,309,023
------------ ------------
------------ ------------
Ratio of net charge-offs to average loans outstanding 0.16% 0.06%
</TABLE>
Quad City's allowance for estimated losses on loans was $2.3 million
at June 30, 1998 or 1.44% of total loans, compared to $1.6 million or 1.51%
at June 30, 1997. Although management believes that the allowance for
estimated losses on loans at June 30, 1998 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.
The following table presents the allowance for estimated losses or
loans by type of loans and the percentage of loans in each category to total
loans as of June 30, 1998, 1997, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------- -------------------- ------------------- ------------------- -------------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
----------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $1,213,439 60.81% $ 799,566 63.34% $ -- 71.01% $ -- 78.55% $ -- 82.32%
Real estate 79,198 19.11 66,742 18.73 -- 15.86 -- 9.14 -- 2.77
Consumer 515,489 20.08 387,096 17.93 -- 13.13 -- 12.31 -- 14.91
Unallocated 541,712 N/A 379,096 N/A 852,500 N/A 472,475 N/A 191,500 N/A
----------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
TOTAL $2,349,838 100.00% $1,632,500 100.00% 852,500 100.00% 472,475 100.00% $191,500 100.00%
----------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
----------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
30
<PAGE>
Quad City experienced loan charge-offs of $205,000 during fiscal
1998 compared to $65,000 during fiscal 1997. Approximately 70% of the
charge-offs during fiscal 1998 were consumer loans, with the remainder
consisting of commercial loans. Approximately 60% of the charge-offs during
fiscal 1997 were consumer loans, and the remainder were commercial loans. At
June 30, 1997 and in prior years, much of the loan portfolio had been on the
books for a relatively short time, thus an increase in loan charge-offs was
likely as the portfolio matured. Loans charged off as a percentage of gross
loans receivable at June 30, 1998 increased to 0.13% from 0.08% at June 30,
1997.
Activity in the allowance for estimated losses on loans for the
fiscal years ended June 30, 1998, 1997, 1996, 1995, and 1994, respectively,
is presented in the following table:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding,
before allowance for estimated
losses on loans $141,974,417 $81,251,090 $44,749,454 $23,451,527 $3,433,648
Allowance for estimated losses on loans:
Balance, beginning of fiscal year $ 1,632,500 $ 852,500 $ 472,475 $ 191,500 --
------------ ----------- ----------- ----------- ----------
Charge-offs:
Commercial (62,763) (26,141) (117,555) -- --
Real estate -- -- -- -- --
Installment and other consumer (142,471) (38,772) (2,817) (1,725) --
------------ ----------- ----------- ----------- ----------
SUBTOTAL CHARGE-OFFS (205,234) (64,913) (120,372) (1,725) --
------------ ----------- ----------- ----------- ----------
Recoveries:
Commercial 13,146 266 -- -- --
Real estate
Installment and other consumer 7,450 256 -- 100 --
------------ ----------- ----------- ----------- ----------
SUBTOTAL RECOVERIES 20,596 522 -- 100 --
------------ ----------- ----------- ----------- ----------
Net charge-offs (184,638) (64,391) (120,372) (1,625) --
Provision charged to expense 901,976 844,391 500,397 282,600 191,500
------------ ----------- ----------- ----------- ----------
Balance, end of fiscal year $ 2,349,838 $ 1,632,500 $ 852,500 $ 472,475 $ 191,500
------------ ----------- ----------- ----------- ----------
------------ ----------- ----------- ----------- ----------
Ratio of net charge-offs to average
loans outstanding 0.13% 0.08% 0.27% 0.01% 0.00%
</TABLE>
NONPERFORMING ASSETS. The policy of Quad City is to place a loan on
nonaccrual status if: (a) payment in full of interest or principal is not
expected or (b) principal or interest has been in default for a period of
90 days or more unless the obligation is both in the process of collection
and well secured. Well secured is defined as collateral with sufficient
market value to repay principal and all accrued interest. A debt is in the
process of collection if collection of the debt is proceeding in due course
either through legal action, including judgment enforcement procedures, or in
appropriate circumstances, through collection efforts not involving legal
action which are reasonably expected to result in repayment of the debt or in
its restoration to current status.
Nonaccrual loans were $1.5 million at March 31, 1999 compared to
$1.0 million at June 30, 1998 for an increase of $484,000 or 47%. The
increase in nonaccrual loans was comprised of increases in commercial loans
of $422,000 and consumer loans of $100,000 offset by a decrease in real
estate loans of $38,000. A single loan accounted for 57% of the increase in
commercial loans having nonaccrual status. The maturity date of the loan
31
<PAGE>
passed, requiring that the loan be classified as nonaccrual, but monthly
payments continued to be received. Nonaccrual loans at March 31, 1999
consisted primarily of loans that were well-collateralized and were not
expected to result in material losses.
The following table presents nonaccrual, past due and renegotiated
loans and other real estate owned as of March 31, 1999:
<TABLE>
<S> <C>
Loans accounted for on nonaccrual basis $1,509,283
Accruing loans past due 90 days or more 58,709
Troubled debt restructurings --
----------
TOTAL NONPERFORMING LOANS $1,567,992
Other real estate owned 119,600
----------
TOTAL NONPERFORMING ASSETS $1,687,592
----------
</TABLE>
As of March 31, 1999 past due loans of 30 days or more amounted to
$4.1 million and as of June 30, 1998 and 1997, past due loans of 30 days or
more amounted to $2.3 million and $929,000, respectively. Quad City
anticipated an increase in the dollar amount of this category in fiscal 1998
from the prior years. As of June 30, 1997 and in prior years, much of the
loan portfolio had been on the books for a relatively short time, thus an
increase in past due loans was likely as the portfolio matured. Past due
loans as a percentage of gross loans receivable was 1.3% at March 31, 1999,
1.4% at June 30, 1998 and 0.9% at June 30, 1997.
Nonaccrual, past due and renegotiated loans are as follows as of
June 30, 1998, 1997, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Loans accounted for on
nonaccrual basis $1,025,761 $230,591 $ -- $ -- $ --
Accruing loans past due
90 days or more 259,277 223,966 306,774 1,678 --
Troubled debt restructurings -- -- -- -- --
------------ ----------- ----------- ----------- ----------
TOTAL NONPERFORMING LOANS $1,285,038 $454,557 $306,774 $1,678 $ --
Other real estate owned -- -- -- -- --
------------ ----------- ----------- ----------- ----------
TOTAL NONPERFORMING ASSETS $1,285,038 $454,557 $306,774 $1,678 $ --
------------ ----------- ----------- ----------- ----------
</TABLE>
OTHER ASSETS. Premises and equipment decreased by $248,000 or 3% to
$7.4 million at March 31, 1999 from $7.7 million at June 30, 1998. The
decrease resulted from depreciation expense offset by the purchase of
additional furniture, fixtures and equipment. Premises and equipment
increased by $2.4 million, or 46%, to $7.7 million as of June 30, 1998 from
$5.3 million as of June 30, 1997. The increase resulted primarily from the
purchase of additional furniture, fixtures and equipment for the bank and
Bancard, and leasehold improvement costs for the new Moline banking location,
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.
32
<PAGE>
Accrued interest receivable on loans, securities and
interest-bearing cash accounts increased by $284,000 or 16% to $2.1 million
at March 31, 1999 from $1.8 million at June 30, 1998. Accrued interest
receivable on loans, securities and interest-bearing cash accounts increased
to $1.8 million, or 29%, as of June 30, 1998 from $1.4 million as of June 30,
1997. The increases were primarily due to greater average outstanding
balances in interest-bearing assets.
Other assets increased by $637,000 or 25% to $3.1 million at March 31,
1999 from $2.5 million at June 30, 1998. The increase consisted primarily of
an increase in accrued trust department fees of $356,000. Other assets also
included miscellaneous receivables and prepaid expenses. Other assets as of
June 30, 1998 and June 30, 1997 totaled $2.5 million and $1.7 million,
respectively. The $798,000, or 47%, increase was attributable to the
increased volume of business and the related prepaid expenses associated with
the growth at the bank.
DEPOSITS. Deposits increased by $41.7 million or 21% to
$239.1 million at March 31, 1999 from $197.4 million at June 30, 1998. The
increase resulted from a $27.8 million net increase in noninterest bearing,
NOW, money market and other savings accounts and a $13.9 million net increase
in certificates of deposit.
The average amount of and average rate paid for deposits as of and
for the nine months ended March 31, 1999 and 1998 are disclosed in the
consolidated average balance sheets and can be found on page 18.
Included in interest-bearing deposits as of March 31, 1999 were
certificates of deposit totaling $35.8 million, that were $100,000 or
greater. Maturities of these certificates are summarized as follows:
<TABLE>
<S> <C>
One to three months $11,463,416
Three to six months 7,387,209
Six to twelve months 8,875,357
Over twelve months 8,108,547
-----------
TOTAL CERTIFICATES OF DEPOSIT
GREATER THAN $100,000 $35,834,529
-----------
-----------
</TABLE>
Deposits grew to $197.4 million as of June 30, 1998 from
$136.0 million as of June 30, 1997, for an increase of $61.4 million, or 45%.
The increase consisted of a $4.5 million increase in noninterest bearing
accounts and a $56.9 million increase in interest bearing accounts.
The increases for these periods were a result of periodic aggressive
pricing programs for deposits, increased marketing efforts and the hiring of
new personnel to staff a business development department. Management also
believes the increases were a reaction by customers to the acquisitions and
mergers of local banks by transferring their financial business to community
banks that have the ability to offer more personalized service.
The average amount of and average rate paid for deposits as of and
for the fiscal years ended June 30, 1998, 1997, and 1996 are disclosed in the
consolidated average balance sheets and can be found on page 19.
33
<PAGE>
Included in interest bearing deposits as of June 30, 1998, 1997, and
1996 were certificates of deposit totaling $31.9 million, $23.0 million,
$13.7 million, respectively, that were $100,000 or greater. Maturities of
these certificates are summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
One to three months $ 8,633,273 $10,745,903 $ 5,984,277
Three to six months 9,647,980 4,324,058 1,931,085
Six to twelve months 10,997,407 4,131,882 3,494,877
Over twelve months 2,658,717 3,776,280 2,309,971
----------- ----------- -----------
TOTAL CERTIFICATES OF DEPOSIT
GREATER THAN $100,000 $31,937,377 $22,978,123 $13,720,210
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SHORT-TERM BORROWINGS. Short-term borrowings increased $5.5 million
from $2.0 million as of June 30, 1998 to $7.5 million as of March 31, 1999.
As of June 30, 1998 short-term borrowings represented federal funds purchased
from correspondent banks. In recent months, the bank began offering
short-term repurchase agreements to some of its major customers. As of
March 31, 1999 short-term borrowings were comprised entirely of these
customer repurchase agreements.
FHLB ADVANCES AND OTHER BORROWINGS. FHLB advances increased by
$1.2 million or 5% to $25.9 million as of March 31, 1999 from $24.7 million
at June 30, 1998. As of June 30, 1998 FHLB advances had increased to
$24.7 million from $10.8 million as of June 30, 1997, for an increase of
$13.9 million, or 129%. As of June 30, 1998, 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 or long-term purposes under a
variety of programs. The increases primarily resulted as the bank used FHLB
advances for loan matching and for hedging against the possibility of rising
interest rates.
Other borrowings increased by $1.0 million or 67% to $2.5 million at
March 31, 1999 from $1.5 million as of June 30, 1998. Other borrowings were
$1.5 million as of both June 30, 1998 and 1997. Other borrowings consisted of
the amount outstanding on a revolving credit note with a third party lender,
which is secured by all the outstanding stock of the bank. On July 1, 1998,
Quad City increased the amount available under the credit note to $4.5 million
and extended the expiration date to July 1, 2000. The borrowed funds were
utilized to provide additional capital to the bank to maintain a 7.5%
aggregate capital ratio.
Other liabilities decreased by $1.8 million or 33% to $3.7 million
as of March 31, 1999 from $5.5 million as of June 30, 1998. Other liabilities
remained constant at $5.5 million at both June 30, 1998 and 1997. Other
liabilities were comprised of unpaid amounts for various products and
services, and accrued but unpaid interest on deposits.
STOCKHOLDERS' EQUITY. At both March 31, 1999 and June 30, 1998,
Quad City had 25 shares of perpetual, nonvoting, Series A preferred stock,
par value $1.00 per share, issued and outstanding. In anticipation of
continued asset growth, Quad City had privately placed these 25 shares of
preferred stock with a limited number of institutional investors at a price
of $100,000 per share, for an aggregate of $2,500,000. Additional commitments
to purchase the Series A preferred stock, evidenced by signed subscription
agreements, totaled $4.0 million at March 31, 1999. The Series A preferred
stock pays no dividends, and carries a cumulative liquidation and redemption
value equal to the original purchase price plus an annual premium of 9.75%.
At June 30, 1999, the approximate redemption value at which Quad City expects
to redeem the outstanding shares of Series A preferred stock upon the closing
of this offering for aggregate consideration is $3.0 million.
Common stock increased by $786,000 or 52% to $2.3 million as of
March 31, 1999 from $1.5 million as of June 30, 1998. The increase was caused
by (i) exercises of stock warrants and options resulting in the issuance
34
<PAGE>
of 30,345 additional shares of common stock, and (ii) a 3 for 2 stock split,
effected in the form of a stock dividend, effective November 30, 1998, which
resulted in the issuance of an additional 760,262 shares of common stock.
Additional paid-in capital decreased by $563,000 or 4% to
$14.4 million as of March 31, 1999 from $15.0 million as of June 30, 1998.
The decrease resulted from the transfer of $760,000 from additional paid-in
capital to common stock representing the issuance of additional common shares
from the 3 for 2 stock split. The decrease was offset by $197,000 received in
excess of the $1.00 per share par value for 30,345 shares of common stock
issued as the result of the exercise of stock warrants and options.
Retained earnings increased by $1.7 million or 68% to $4.2 million
as of March 31, 1999 from $2.5 million as of June 30, 1998. The increase
reflected net income for the nine months offset by an immaterial payment to
stockholders which represented the cash value of fractional shares created by
the 3 for 2 stock split.
Unrealized gains and losses on securities available for sale, net of
related income taxes, was a $118,000 gain as of March 31, 1999 as compared to
a $12,000 gain as of June 30, 1998. The increase was attributable to the
increase during the period in fair value of the securities identified as
available for sale.
Stockholders' equity increased by $2.0 million, or 10.0%, to
$21.1 million as of March 31, 1999 from $19.1 million as of June 30, 1998.
The increase resulted from the combination of the net income for the period,
the exercise of warrants held by the private placement stockholders, the
exercise of stock options, and the change in the unrealized gains on
securities available for sale.
ASSET/LIABILITY MANAGEMENT
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. The liquidity of Quad City primarily depends upon cash flows from
operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities,
consisting primarily of proceeds on loan sales, was $2.2 million for the nine
months ended March 31, 1999 compared to $8.1 million of cash used, primarily
for loans originated for sale, for the same period in 1998. Net cash used in
investing activities, consisting principally of loan funding, was $55.0 million
for the nine months ended March 31, 1999 and $44.8 million for the nine
months ended March 31, 1998. Net cash provided by financing activities,
consisting primarily of deposit growth and proceeds from short-term
borrowings, for the nine-months ended March 31, 1999 was $49.6 million and
for the same period in 1998 was $63.3 million, consisting principally of
deposit growth and proceeds from Federal Home Loan Bank advances.
Net outflows used in operating activities were $4.4 million for the
year ended June 30, 1998 compared to providing cash of $4.7 million for the
year ended June 30, 1997. The decrease of cash flow during the year resulted
primarily from an increase in loans originated for sale, but not yet sold at
the end of the fiscal year. Net cash outflows from investing activities
totaled $70.3 million for the year ended June 30, 1998, compared to cash
outflows of $55.3 million for the year ended June 30, 1997. The net outflows
of cash were largely associated with the growth in the loan portfolio. Net
cash inflows from financing activities totaled $79.3 million for the year
ended June 30, 1998, compared to cash inflows of $51.0 million for the year
ended June 30, 1997. The components of the net cash inflows were primarily
from the growth of deposit accounts as well as the increase in FHLB advances
and other borrowings.
Net cash inflows from operating activities provided cash of
$4.7 million for the year ended June 30, 1997 compared to $836,000 for the
year ended June 30, 1996. The improvement in cash flow during the year
resulted primarily from an increase in merchant accounts payable at Bancard.
Net cash outflows from investing activities totaled $55.3 million for the
year ended June 30, 1997, compared to cash outflows of $28.3 million for the
year ended June 30, 1996. The net outflows of cash were largely associated
with the growth in the loan portfolio. Net
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cash inflows from financing activities totaled $51.0 million for the year
ended June 30, 1997, compared to cash inflows of $30.2 million for the year
ended June 30, 1996. The components of the net cash inflows were primarily
from the growth of deposit accounts as well as the increase in FHLB advances
and other borrowings.
INTEREST RISK MANAGEMENT
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 periodically 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- 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- 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, 1998 and March 31, 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).
<TABLE>
<CAPTION>
Estimated Increase
Change in (Decrease) in NPV
Interest Estimated -------------------------------------------------------------------
Rates NPV Amount Amount Percent
- -------------- ------------- -------------- ------------- -------------- ------------- ----------------
(Basis points) June 30, 1998 March 31, 1999 June 30, 1998 March 31, 1999 June 30, 1998 March 31, 1999
- -------------- ------------- -------------- ------------- -------------- ------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+200 $22,717 $27,667 $(349) $(861) (1.51)% (3.02)%
--- 23,066 28,528
-200 22,742 28,868 (324) $340 (1.40)% 1.19%
</TABLE>
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.
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IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industries, essentially all of the assets and
liabilities of a bank are monetary in nature. As such, the level of prices
has less of an effect than do interest rates. Prices and interest rates do
not always move in the same direction. Quad City's financial statements and
notes are generally prepared in terms of historical dollars without
considering the changes in the relative purchasing power of money over time
due to inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" and
SFAS No. 132 "Employer's Disclosures about Pensions and Other Postretirement
Benefits". These statements are discussed in footnote 1 to the consolidated
financial statements.
YEAR 2000
The Year 2000 has posed a unique set of challenges to those
industries reliant on information technology. As a result of methods employed
by early programmers, many software applications and operational programs may
be unable to distinguish the Year 2000 from the Year 1900. If not effectively
addressed, this problem could result in the production of inaccurate data,
or, in the worst cases, the inability of the systems to continue to function
altogether. Financial institutions are particularly vulnerable due to the
industry's dependence on electronic data processing systems. In 1997, Quad
City started the process of identifying the hardware and software issues
required to be addressed to assure Year 2000 compliance. Quad City began by
assessing the issues related to the Year 2000 and the potential for those
issues to adversely affect Quad City's operations and those of its
subsidiaries.
Since that time, Quad City has established a Year 2000 committee to
deal with this issue. The committee meets with and utilizes various
representatives from key areas throughout the organization to aid in analysis
and testing. It is the mission of this committee to identify areas subject to
complications related to the Year 2000 and to initiate remedial measures
designed to eliminate any adverse effects on Quad City's operations. The
committee has identified all mission-critical software and hardware that may
be adversely affected by the Year 2000 and has requested vendors to represent
that the systems and products provided are or will be Year 2000 compliant.
Quad City licenses all software used in conducting its business from
third party vendors. None of Quad City's software has been internally
developed. Quad City has developed a comprehensive list of all software, all
hardware and all service providers used by Quad City. Every vendor has been
contacted regarding the Year 2000 issue, and Quad City continues to closely
track the progress each vendor is making in resolving the problems associated
with the issue. The vendor of the primary software in use at Quad City
released its Year 2000 compliant software in May 1998. Testing standards were
formulated and comprehensive testing is now underway with an estimated
completion date for testing of June 30, 1999. Quad City actively takes part
in a peer users group to aid the testing process. Users of the primary
software meet regularly to discuss Year 2000 testing issues and results. In
addition, Quad City continues to monitor all other major vendors of services
to Quad City for Year 2000 issues in order to avoid shortages of supplies and
services in the coming months. Quad City has not had any material delay
regarding its information systems projects as a result of the Year 2000
project.
There are four third party utilities with which Quad City has an
important relationship, i.e. Ameritech, McLeod and US West (phone service),
and MidAmerican Energy Corporation (electricity and natural gas). Quad City
has not identified any practical, long-term alternatives to relying on these
companies for basic utility services. In the event that the utilities
significantly curtail or interrupt their services to Quad City, it would have
a significant adverse effect on Quad City's ability to conduct business.
Information received from these utilities indicates that they have
significantly completed remediation and validation of their mission critical
applications.
Quad City also has tested such things as vault doors, alarm systems,
networks, etc. for Year 2000 functionality and is not aware of any
significant problems with such systems.
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Quad City's cumulative costs of the Year 2000 project through the
third quarter of fiscal 1999 were $91,000. The estimated total cost of the
Year 2000 project is $250,000. This includes costs to upgrade equipment
specifically for the purpose of Year 2000 compliance and certain
administrative expenditures. At the present time, no situations that will
require material cost expenditures to become fully compliant have been
identified. However, the Year 2000 problem is pervasive and complex and can
potentially affect any computer process. Accordingly, no assurance can be
given that Year 2000 compliance can be achieved without additional
unanticipated expenditures and uncertainties that might affect future
financial results.
It is not possible at this time to quantify the estimated future
costs due to possible business disruption caused by vendors, suppliers,
customers, or even the possible loss of electric power or phone service;
however, such costs could be substantial.
Quad City is committed to a plan for achieving compliance, focusing
not only on its own data processing systems, but also on its loan and
depository customers. The Year 2000 committee has taken steps to educate and
assist its customers with identifying their Year 2000 compliance problems, if
any. In addition, the management committee has proposed policy and procedure
changes to help identify potential risks to Quad City and to gain an
understanding of how customers are managing the risks associated with the
Year 2000. Quad City is assessing the impact, if any, of the Year 2000 risk
in its credit analysis. Quad City also utilizes loan agreements and other
legal documentation to ensure large corporate borrowers acknowledge Year 2000
compliance requirements. In connection with potential credit risk related to
the Year 2000 issue, Quad City has contacted its large commercial loan and
depository customers regarding their level of preparedness for the Year 2000.
Through these questionnaires and resulting assessments, Quad City believes
that overall credit and liquidity risk to its large corporate borrowers and
depositors is not excessive.
Quad City has developed contingency plans for various Year 2000
problems and continues to revise those plans based on testing results and
vendor notifications.
The federal banking regulators recently issued guidelines
establishing minimum safety and soundness standards for achieving Year 2000
compliance. The guidelines, which took effect October 15, 1998 and apply to
all FDIC-insured depository institutions, establish standards for developing
and managing Year 2000 project plans, testing remediation efforts and
planning for contingencies. The guidelines are based upon guidance previously
issued by the agencies under the auspices of the Federal Financial
Institutions Examination Council but are not intended to replace or supplant
the Federal Financial Institutions Examination Council guidance which will
continue to apply to all federally insured depository institutions.
The guidelines were issued under section 39 of the Federal Deposit
Insurance Act, which requires the federal banking regulators to establish
standards for the safe and sound operation of federally insured depository
institutions. Under section 39 of the Federal Deposit Insurance Act, if an
institution fails to meet any of the standards established in the guidelines,
the institution's primary federal regulator may require the institution to
submit a plan for achieving compliance. If an institution fails to submit an
acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the
regulator is required to issue an order directing the institution to cure the
deficiency. Such an order is enforceable in court in the same manner as a
cease and desist order. Until the deficiency cited in the regulator's order
is cured, the regulator may restrict the institution's rate of growth,
require the institution to increase its capital, restrict the rates the
institution pays on deposits or require the institution to take any action
the regulator deems appropriate under the circumstances. In addition to the
enforcement procedures established in section 39 of the Federal Deposit
Insurance Act, noncompliance with the standards established by the guidelines
may also be grounds for other enforcement action by the federal banking
regulators, including cease and desist orders and civil money penalty
assessments. Quad City's management believes its Year 2000 planning has been
consistent with regulatory guidelines.
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BUSINESS
GENERAL
We are a bank holding company that owns Quad City Bank & Trust
Company, a full-service commercial banking institution with three locations
in the Quad Cities area of Illinois and Iowa. The bank provides a broad range
of banking products and services, including credit, cash management, deposit,
asset management and trust products, to its targeted customer base of
individuals and small and medium-sized businesses. In addition, Quad City
Bancard, Inc. provides credit card processing services to merchants and other
commercial operations. At March 31, 1999, we had total assets of
$299.8 million, loans of $191.7 million and deposits of $239.1 million.
Our company started operations in January 1994 with the goal of
building a locally-owned and managed financial institution to meet the
banking needs of individuals and small and medium-sized businesses in our
marketplace. As part of our operating strategy, we strive to offer customers
a high level of service on a consistent basis. Our growth over the past five
years has been largely a product of our ability to recruit and retain a
community-oriented management team with significant commercial banking
experience in the Quad Cites area. In addition, we have expanded and upgraded
our product offerings and added convenient banking locations in Davenport,
Iowa and Moline, Illinois to complement our original Bettendorf, Iowa
facility. Finally, we have taken advantage of the customer disruption caused
by the acquisition of a significant number of the area's other locally owned
or locally managed financial institutions by large regional bank holding
companies.
This strategy has resulted in significant growth for our company.
Our total assets have increased from $111.5 million as of June 30, 1996 to
$299.8 million as of March 31, 1999, which represents a 43% compounded annual
growth rate. This rapid growth has restrained our profitability to some
degree, as we have invested in the personnel, operational systems and
physical infrastructure required to support a much larger banking
organization. In the future, we intend to continue to pursue an aggressive
growth strategy focused on the addition of experienced banking personnel in
the Quad Cities area, while also maintaining strong asset quality and
improving our profitability. We may also add additional banking facilities,
expand into new markets or make strategic acquisitions of other financial
institutions.
Quad City owns 100% of the bank and Bancard, and also owns a 20%
interest in Nobel Electronic Transfer, LLC, which processes credit card
transactions for Bancard, and a 20% interest in Velie Plantation Holding
Company, LLC, which owns Velie Plantation Mansion, the bank's Moline,
Illinois facility. In addition, Quad City invests its capital in stocks of
financial institutions and mutual funds. From time to time, Quad City also
participates in loans with the bank. Quad City, the bank, Bancard and Allied
Merchant Services, Inc., a subsidiary of Bancard, have fiscal years ending on
June 30th.
THE BANK
The bank engages in general full service banking within the Quad
Cities area. Deposit products include certificates of deposit, individual
retirement accounts and other time deposits, checking and other demand
deposit accounts, NOW accounts, savings accounts and money market accounts.
Loans include commercial and industrial, real estate mortgage, consumer, home
equity and lines of credit. Other products and services include credit cards,
automatic teller machines, safe deposit boxes and trust, investment and
retirement plan services. While the bank serves a variety of types of
customers, a significant portion of its deposit and non-residential loan
relationships are with small to medium size businesses. No one customer
accounts for 10% or more of loans, revenues or deposits. Quad City continues
to explore new products and services to meet the needs and demands of its
customer base and to remain competitive with other financial institutions
operating in its market area.
Construction of a banking facility commenced in June 1993 in
Bettendorf, Iowa and was completed in December of that year. Bettendorf was
selected as the initial site due to its lack of a locally chartered bank with
headquarters there at the time, its growth and its high per capita income.
Locations were added in Davenport, Iowa (1996) and Moline, Illinois (1998) to
greater capitalize on the market opportunity in the Quad Cities area.
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MARKET AREA
Quad City's primary market area is the Quad Cities area, located
approximately 180 miles west of Chicago, Illinois and 170 miles east of Des
Moines, Iowa. The Quad Cities area has a total population of over 350,000.
The region is home to manufacturers of a wide range of industrial products,
with Deere & Company, the Rock Island Arsenal, Aluminum Company of America,
J.I. Case and Oscar Mayer among the largest employers. Wholesale and retail
trade and services (including health care) are among the region's other major
employers.
GROWTH STRATEGY
Quad City seeks to grow its asset base by developing strong
community relationships which it believes will result in increased loans and
deposits. Quad City also expects to improve operating efficiency as it grows
into the infrastructure it has developed. Quad City may in the future
establish additional branches, loan production offices or other business
facilities as a means of expanding its presence in current or new market
areas. Quad City may also expand into other lines of business closely related
to banking if it believes these lines could be profitable without undue risk
to Quad City and if Quad City can be competitive.
Although not actively seeking acquisitions at this time, Quad City
intends to explore opportunities for acquisitions and expansion as they may
arise. Any interest Quad City would have in acquisitions or expansion would
most likely be focused on traditional community banks and thrifts located
within a 120 mile radius of the Quad Cities. At this time, a large number of
independent financial institutions are located within this geographic area.
It is possible, however, that as a result of consolidation within the banking
industry generally, as well as in Quad City's current market areas, Quad City
may in the future look beyond these geographic areas for acquisition
opportunities. In addition to price and terms, other factors Quad City would
consider in determining the desirability of an acquisition candidate would be
financial condition, capital and liquidity positions, earnings potential,
quality of management, market area and competitive environment.
OPERATING STRATEGY
Corporate policy, strategy and goals are established by Quad City's
board of directors for Quad City and the bank, although significant
operational latitude is provided to management of the bank. Within this
framework, the bank focuses on providing personalized services and quality
products to its customers to meet the needs of the communities that it serves.
Quad City operates its banking subsidiary as a business-oriented
community bank with full service facilities and a professional, highly
motivated staff which is active in the communities in which they are located.
Quad City focuses on long-term relationships with customers and strives to
provide individualized quality service. Officers of the bank regularly call
on customers and potential customers to maintain and develop loan, deposit
and other special service relationships. As part of its community banking
approach, Quad City encourages officers of the bank to actively participate
in community organizations. In addition, within credit and rate of return
parameters, Quad City attempts to ensure that the bank meets the credit needs
of its communities and invests in local municipal obligations.
LENDING ACTIVITIES
The bank provides a broad range of commercial and retail lending and
investment services to corporations, partnerships, individuals and government
agencies. The bank actively markets its services to qualified lending
customers. Lending officers actively solicit the business of new borrowers
entering their market areas as well as long-standing members of the local
business community. The bank has established lending policies which include a
number of underwriting factors to be considered in making a loan, including
location, loan to value ratio, cash flow, interest rate and the credit
history of the borrower.
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The bank's current lending limit is approximately $3.5 million. Its
loan portfolio is comprised primarily of loans in the areas of commercial,
residential real estate and consumer lending. As of March 31, 1999,
commercial loans made up approximately 68% of the loan portfolio, while
residential mortgages comprised approximately 16%. At the same date, consumer
lending comprised 16%. Interest income for fiscal 1998 was $15.1 million,
which was approximately 71% of total income for that period. For the nine
month period ended March 31, 1999, interest income was approximately
$14.7 million, or approximately 79% of total income for that period.
As part of the loan monitoring activity at the bank, loan review
personnel interact with senior bank management weekly. The bank's Loan Review
Committee meets on a monthly basis to review the loan portfolio. Quad City
has also instituted a separate loan review function to analyze credits of the
bank. Management has attempted to identify problem loans at an early stage
and to aggressively seek a resolution of these situations.
COMMERCIAL LOANS
The bank is an active commercial lender in the Quad Cities. The
bank's areas of emphasis include, but are not limited to, loans to
wholesalers, manufacturers, building contractors, developers, business
services companies and retailers. The bank provides a wide range of business
loans, including lines of credit for working capital and operational purposes
and term loans for the acquisition of equipment and other purposes.
Collateral for these loans generally includes accounts receivable, inventory,
equipment and real estate. In addition, the bank has taken personal
guarantees to help assure repayment. Loans may be made on an unsecured basis
if warranted by the overall financial condition of the borrower. Terms of
commercial business loans generally range from one to five years. A
significant portion of the bank's commercial business loans have floating
interest rates or reprice within one year. Commercial real estate loans are
also made. Collateral for these loans generally includes the underlying real
estate and improvements, and may include additional assets of the borrower.
RESIDENTIAL REAL ESTATE MORTGAGE LOANS
Residential mortgage lending has been a focal point of the bank as
it continues to build its real estate lending business. As a result of this
focus, the bank's real estate loan portfolio has experienced rapid growth,
increasing from approximately $350,000 at the end of the 1994 fiscal year, to
approximately $31.1 million at the end of fiscal 1998. The bank currently has
four mortgage originators.
The bank sells a significant portion of its real estate loans in the
secondary market. The bank typically sells virtually all of its fixed rate
loans. During fiscal year 1998 the bank originated $57.2 million of real
estate loans and sold $53.3 million of these loans. The bank originated
$6.9 million of real estate loans and sold $6.0 million of these loans during
fiscal 1997. This rapid growth has in part been due to the fact that
comparably low interest rates over the past few years have induced a large
number of home owners to refinance existing homes and an equally large number
of first time buyers to acquire or construct homes. The bank has historically
sold these loans to one purchaser. Generally, the bank's residential mortgage
loans conform to the underwriting requirements of Freddie Mac and Fannie Mae
to allow the bank to resell loans in the secondary market. The bank
structures most loans that will not conform to those underwriting
requirements as adjustable rate mortgages that mature in one to three years.
The bank generally retains these loans in its portfolio. Servicing rights are
not presently retained on the loans sold in the secondary market.
CONSUMER LENDING
The bank's consumer lending department provides all types of
consumer loans including motor vehicle, home improvement, home equity,
signature loans and small personal credit lines. The bank has reduced its
involvement in indirect automobile loans, and intends to actively seek to
increase its home equity loans.
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CREDIT CARD PROCESSING
Quad City Bancard, Inc., 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.
Bancard has contracted with ISOs that market credit card services to
merchants throughout the country.
Bancard focuses on small and medium size retail businesses
introduced to it through its marketing alliances with ISOs. Revenues are
generated mainly by charging a fee based on a percentage of the dollar volume
of each transaction it processes and by charging fees for related services.
As of March 31, 1999, Bancard had processing agreements covering
approximately 14,000 merchants. Approximately 91% of Bancard's processing
business for the first nine months of fiscal 1999 were provided by one ISO.
Under Bancard's agreements with its ISOs, Bancard reviews
applications from merchants for processing services obtained by the ISO and
accepts merchants which it believes possess stable business operations. When
a credit transaction is processed by Bancard, Visa or Mastercard will remit
the amount of the transaction, net of its fee, to Bancard. Bancard then
deducts its processing fee and the ISO's fee, and transfers the balance of
the funds to the merchant and pays the ISO its commission. When a billing
dispute arises between a cardholder and a merchant and is not resolved in
favor of the merchant, the transaction is charged back to the merchant. If
Bancard is unable to collect the chargeback from the merchant's account, and
if the merchant refuses or is unable due to bankruptcy or other reasons to
reimburse Bancard for the chargeback, either Bancard or the ISO bears the
loss for the amount of the refund paid to the cardholder, depending on the
terms of Bancard's agreement with the ISO. In certain cases the ISO agreement
may provide for an allocation of risk between Bancard and the ISO for
chargebacks which are uncollectible from the merchant. Bancard has such an
agreement with its current major ISO. Bancard maintains a cash reserve from
some merchants to help absorb these losses. Bancard's decision to request a
cash reserve to be established for a particular merchant is typically made
during the merchant's application process, and is based upon a review of the
nature of the merchant's business. If Bancard believes a cash reserve would
be appropriate, it will negotiate with the merchant to determine the
percentage of each transaction amount that Bancard will holdback in the cash
reserve account or will request a lump sum reserve to be placed up front.
Bancard initially had an exclusive arrangement to provide processing
services 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 the reduction in term and accepted a fixed processing fee for transactions
with existing merchants and a lower fee for transactions processed for newly
recruited merchants in exchange for a payment of approximately $3 million,
the assumption of the credit risk by the ISO and the elimination of the
exclusive nature of the agreement. Approximately two thirds of the income
from this settlement was reported in June 1998, with the remainder being
recognized as an adjustment to the fixed processing fee during fiscal 1999.
The amended agreement has a one year term that automatically renews for
successive one year terms unless either party provides the other party with
six months notice of its intention not to renew the agreement. Neither party
having given timely notice relative to termination upon expiration of the
agreement's current term expiring June 1, 1999, the agreement will renew for
a one year period ending June 1, 2000.
Bancard recently formed Allied Services as its own ISO to market
credit card services to merchants in the Quad Cities area and nationally.
Allied Services will seek to generate additional credit card processing
business for Bancard. Allied Services is currently expected to commence
marketing operations in the third calendar quarter of 1999.
TRUST SERVICES
The bank's trust department has been providing trust services to the
community since the bank's inception in 1994. Currently, the trust department
has over $470 million of assets under administration and offers a variety of
trust and investment tools for individuals and corporations. The bank
continues to target the trust department as one of its primary areas of
growth.
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The bank believes it has earned a reputation of offering trust
services of the highest quality. The department is comprised of a team of
qualified professionals that have over 200 years of financial management
experience. The individuals have specialized backgrounds in trust related
areas, such as financial law, investment management, tax and accounting. All
trust department employees have the ability to provide immediate, on-line,
real time information regarding customers' accounts.
Management's focus in the trust area is to continue to build
financial relationships within the community bank environment. Quad City
expects that the future needs of its customers may fall within broadly
defined areas such as investment management, estate administration,
retirement/financial planning and fiduciary responsibilities.
COMPETITION
Quad City encounters competition in all areas of its business. In
order to compete effectively, to develop its market base, to maintain
flexibility and to move in pace with changing economic and social conditions,
Quad City continuously refines and develops its products and services. The
principal methods of competition in the financial services industry are price
and service levels. Quad City competes for loans principally through the
range and quality of the services it provides and interest rates. Quad City
believes that its reputation in the communities it serves and personal
service philosophy enhance its ability to compete favorably in attracting and
retaining individual and business customers. Quad City actively solicits
deposit-related clients and competes for deposits by offering customers
personal attention, professional service and competitive interest rates.
The Quad Cities market area is highly competitive. There are
approximately 17 other commercial banks, 23 credit unions and 30 finance and
mortgage companies, along with other financial institutions, that currently
operate in the primary market area of the bank. In addition, many other
financial institutions based in the communities surrounding these areas also
actively compete for customers within these market areas. The bank also faces
competition from insurance companies, securities brokerage firms, money
market funds, loan production offices and other providers of financial
services.
EMPLOYEES
At March 31, 1999, Quad City employed 133 full-time equivalent
employees. New employees are selected on the basis of both technical skills
and customer service capabilities. None of Quad City's employees are covered
by a collective bargaining agreement with Quad City.
PROPERTIES
The original 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 Quad
City's market territory. The bank also owns a 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 comprises 6,000 square feet. The bank occupies the first floor of its
portion of the building and utilizes the basement for operational functions,
item processing and storage. The entire second floor has been leased to two
professional services firms. In addition, the residential real estate
department of the bank leases approximately 2,500 square feet in the north
half of the building.
Renovation of a third full banking facility was completed in
February of 1998 at the historic Velie Plantation Mansion in Moline, Illinois
at 3551 7th Street, which is near the intersection of 7th Street and John
Deere Road near the Rock Island/Moline border. The building is owned by
limited liability company and the bank and Bancard are its major tenants.
Quad City owns a 20% interest in the entity that owns the building. Bancard
relocated its operations to the lower level of the 30,000 square foot
building in late 1997. The bank
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began operations and Quad City relocated its corporate headquarters to the
first floor of the building on February 17, 1998.
In March 1999, the bank acquired a 3,000 square foot office building
adjacent to the Davenport facility at a cost of $225,000. It is expected that
improvements will be made at a cost of approximately $60,000. The office
space will be utilized for various operational and administrative functions.
SUPERVISION AND REGULATION
The discussion below updates the disclosure in Quad City's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1998 that is
incorporated by reference into this prospectus.
BRANCHING AUTHORITY
Iowa law strictly regulates the establishment of bank offices.
Generally speaking, under Iowa law, a state bank may not establish a bank
office outside the boundaries of the counties contiguous to or cornering upon
the county in which the principal place of business of the state bank is
located or in a city or town with an existing state or national bank or bank
office. These general prohibitions are subject to certain exceptions,
including one allowing banks headquartered in an urban area to establish
branches without regard to the presence of other banks' offices and one
allowing an acquiring bank to operate all offices of an acquired bank,
without regard to the presence of other banks' offices.
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 $46.5 million or less, the
reserve requirement is 3% of total transaction accounts; and for transaction
accounts aggregating in excess of $46.5 million, the reserve requirement is
$1.4 million plus 10% of the aggregate amount of total transaction accounts
in excess of $46.5 million. The first $4.9 million of otherwise reservable
balances are exempted from the reserve requirements. These reserve
requirements are subject to annual adjustment by the Federal Reserve. The
bank is in compliance with the foregoing requirements.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Quad City Holdings, Inc. are
as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael A. Bauer.................... 50 Chairman of the Board and Director
Douglas M. Hultquist................ 43 President, Chief Executive and Financial Officer, Treasurer and
Director
James J. Brownson................... 53 Director
Richard R. Horst.................... 47 Secretary and Director
Ronald G. Peterson.................. 54 Director
John W. Schricker................... 52 Director
Robert A. Van Vooren................ 65 Director
Shellee R. Showalter................ 30 Vice President and Controller of the bank
</TABLE>
There are no family relationships among any of the executive
officers and directors of Quad City.
MICHAEL A. BAUER, prior to co-founding Quad City, was employed from
1971 to 1992 by the Davenport Bank and Trust Company ("DB&T"), a bank located
in Davenport, Iowa with assets as of December 31, 1992 of approximately
$1.8 billion. In January, 1992 he was named DB&T's President and Chief
Operating Officer, while from 1989 to 1992 he served as Senior Vice President
in charge of all lending. Mr. Bauer served as Vice President in charge of
Correspondent Banking for DB&T from 1981 to 1989. Mr. Bauer has served as a
director and past President of Junior Achievement of the Quad Cities Area,
director and past President of the Illowa Council for the Boy Scouts of
America, director and past President of the Friendly House in Davenport, and
past director and Vice Chairman of United Way. He is a director of St. Ambrose
University and the Quad City Sports Center, and a director and President of
Genesis Health Services Foundation. Mr. Bauer is also a member of Crow Valley
Golf Club and Rotary Club of Davenport, a director and Vice President of the
Iowa Independent Bankers Association and a director of the Kahl Home for the
Aged and Infirm in Davenport. Along with Mr. Hultquist, Mr. Bauer received
the 1998 Ernst & Young "Entrepreneur of the Year" award for the Iowa and
Nebraska region.
DOUGLAS M. HULTQUIST is a certified public accountant and previously
served as a tax partner with two major accounting firms. He began his career
with KPMG Peat Marwick in 1977 and was named a partner in 1987. In 1991, the
Quad Cities office of KPMG Peat Marwick merged with McGladrey & Pullen.
Mr. Hultquist served as a tax partner in the Illinois Quad Cities office of
McGladrey & Pullen from 1991 until co-founding Quad City in 1993. During his
public accounting career, Mr. Hultquist specialized in bank taxation and
mergers and acquisitions. Mr. Hultquist serves on the Board of Directors of
the PGA John Deere Classic and is its Vice Chairman of Marketing and
Administration. He is a member of the Augustana College Board of Trustees and
serves on its Planned Giving Council. He recently served on the Board of
Directors of Short Hills Country Club and Junior Achievement of the Quad
Cities. Mr. Hultquist is also a member of the American Institute of CPAs, the
Iowa Society of CPAs, the Trinity Medical Center Planned Giving Council and
the Quad City Estate Planning Council. Along with Mr. Bauer, Mr. Hultquist
received the 1998 Ernst & Young "Entrepreneur of the Year" award for the Iowa
and Nebraska region.
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JAMES J. BROWNSON is the President of W.E. Brownson Co., a
manufacturers' representative agency located in Davenport, Iowa, and has been
in that position since 1978. Mr. Brownson began his career in 1967 as a staff
auditor with Arthur Young & Co., CPA's, of Chicago, Illinois. From 1969 until
1978, Mr. Brownson was employed by DB&T, where he left as Senior Vice
President and Cashier. Mr. Brownson has been director and Secretary of the
bank since October, 1993. He also serves on the National Sales Representative
Council of Crane Plastics, Columbus, Ohio, and is a past member of the
National Sales Representative Council of Dayton Rogers Manufacturing Co.,
Minneapolis, Minnesota.
RICHARD R. HORST has been a portfolio manager with Thompson, Plumb &
Associates since March, 1994. He was the Executive Vice President of
Electronic Exchange and Transfer Corporation, an on-line transaction
processing business headquartered in Rock Island, Illinois, from November,
1992 to August, 1993. From 1981 to 1992, Mr. Horst was the Senior Vice
President and Cashier of DB&T, having joined DB&T in 1980 as a correspondent
banking officer. Prior to such time he was with the Farmers Savings Bank of
Princeton, Iowa. Mr. Horst is the President of the Scott Community College
Foundation.
RONALD G. PETERSON is the President and Chief Executive Officer of
the First State Bank of Western Illinois, located in La Harpe, Illinois, and
has served in that position since 1982. Mr. Peterson is also President of
that bank's holding company, Lamoine Bancorp, Inc. In addition, he is a
member of the Board of Directors, Chairman of the State Legislative Committee
and a member of the Policy Committee of the Illinois Bankers Association.
Mr. Peterson is also a member of the American Bankers Association Community
Bankers Council. As a member of the Western Illinois Development Corporation,
he serves as President. He is also President of the LaHarpe Educational
Foundation, Treasurer of the Western Illinois University Foundation and a
member of the McDonough District Hospital Development Council.
JOHN W. SCHRICKER has been the President of Bancard since March,
1995. From April, 1994, until Bancard was organized in March, 1995, he was
the manager of the Bank's Credit Card Division. Prior to that, he was a Vice
President with Electronic Exchange and Transfer Corporation. Mr. Schricker
has served with DB&T from 1975 to 1992 as Vice President in charge of the
Credit Card Division.
ROBERT A. VAN VOOREN is a senior partner with the law firm of Lane
and Waterman, which has offices in Davenport, Iowa and Rock Island, Illinois.
Mr. Van Vooren graduated from Marquette University and the Northwestern
University School of Law. He is admitted to the Bar in both Iowa and
Illinois, and is a past President of the Iowa State Bar Association. Mr. Van
Vooren is a Fellow of the American College of Trial Lawyers and is listed in
the `Best Lawyers of America' publication. He is very active in community
affairs and has held leadership positions in many of the civic organizations
of the Quad Cities.
SHELLEE R. SHOWALTER is a certified public accountant who has been
with Quad City since April, 1994. Prior to joining Quad City, Ms. Showalter
was a Tax Staff Accountant in the Illinois Quad Cities office of McGladrey &
Pullen from May, 1991 to April, 1994. From December, 1990 to May 1991,
Ms. Showalter was a Tax Staff Accountant with KPMG Peat Marwick. Ms.
Showalter is a member of the American Institute of CPAs, the Illinois Society
of CPAs, the Executive Women's Golf Association and the Rotary Club of Rock
Island.
DESCRIPTION OF THE TRUST
The trust is a statutory business trust formed pursuant to the
Delaware Business Trust Act under a trust agreement executed by us, as
sponsor for the trust, and the trustees, and a certificate of trust filed
with the Delaware Secretary of State. The trust agreement will be amended and
restated in its entirety in the form filed as an exhibit to the registration
statement of which the prospectus is a part, as of the date the capital
securities are initially issued. The trust agreement will be qualified under
the Trust Indenture Act of 1939.
Upon issuance of the capital securities, the holders will own all of
the issued and outstanding capital securities. We will acquire common
securities in an amount equal to at least 3% of the total capital of the
trust
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and will own, directly or indirectly, all of the issued and outstanding
common securities (together with the capital securities, the "trust
securities"). The trust exists for the purposes of:
- issuing the capital securities to the public for cash;
- issuing its common securities to us in exchange for our
capitalization of the trust;
- investing the proceeds in an equivalent amount of debentures; and
- engaging in other activities that are necessary, convenient or
incidental to those listed above.
The rights of the holders of the trust securities are as set forth
in the trust agreement, the Delaware Business Trust Act and the Trust
Indenture Act. The trust agreement does not permit the incurrence by the
trust of any indebtedness for borrowed money or the making of any investment
other than in the debentures. Other than with respect to the trust
securities, Quad City has agreed to pay for all debts and obligations and all
costs and expenses of the trust, including the fees and expenses of the
trustees and any income taxes, duties and other governmental charges, and all
costs and expenses related to these charges, to which the trust may become
subject, except for United States withholding taxes that are properly
withheld.
Pursuant to the trust agreement, the number of trustees of the trust
will initially be five. Three of the trustees will be persons who are
employees or officers of or who are affiliated with Quad City (the
"administrative trustees"). The fourth trustee will be an institution that
maintains its principal place of business in the State of Delaware (the
"Delaware trustee"). Initially, First Union Trust Company, National
Association, a national banking association ("First Union"), will act as
Delaware trustee. The fifth trustee will be a financial institution that is
unaffiliated with Quad City and will serve as institutional trustee under the
trust agreement and as indenture trustee for the purposes of compliance with
the provisions of the Trust Indenture Act (the "property trustee").
Initially, First Union will also be the property trustee. For the purpose of
compliance with the provisions of the Trust Indenture Act, First Union will
also act as guarantee trustee and indenture trustee under the guarantee
agreement and the indenture. Quad City, as holder of all of the common
securities, will have the right to appoint, remove or replace any trustee
unless an event of default under the indenture shall have occurred and be
continuing, in which case only the holders of the capital securities may
remove the indenture trustee or the property trustee. The trust has a term of
approximately 35 years but may terminate earlier as provided in the trust
agreement.
The property trustee will hold the debentures for the benefit of the
holders of the trust securities and will have the power to exercise all
rights, powers and privileges under the indenture as the holder of the
debentures. In addition, the property trustee will maintain exclusive control
of a segregated noninterest-bearing "property account" to hold all payments
made in respect of the debentures for the benefit of the holders of the trust
securities. The property trustee will make payments of distributions and
payments on liquidation, redemption and otherwise to the holders of the trust
securities out of funds from the property account. The guarantee trustee will
hold the guarantee for the benefit of the holders of the capital securities.
Quad City will pay all fees and expenses related to the trust and the
offering of the capital securities, including the fees and expenses of the
trustees.
DESCRIPTION OF THE CAPITAL SECURITIES
The capital securities will be issued pursuant to the trust
agreement, which will be qualified as an indenture under the Trust Indenture
Act. First Union will act as property trustee for the capital securities
under the trust agreement for purposes of complying with the provisions of
the Trust Indenture Act. The terms of the capital securities will include
those stated in the trust agreement and those made part of the trust
agreement by the Trust Indenture Act. A form of the trust agreement has been
filed as an exhibit to the registration statement of which this prospectus
forms a part.
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<PAGE>
GENERAL
The trust agreement authorizes the administrative trustees, on
behalf of the trust, to issue the trust securities, which are comprised of
the capital securities to be sold to the public and the common securities. We
will own all of the common securities issued by the trust. The capital
securities will represent preferred undivided beneficial interests in the
assets of the trust, and the holders of the capital securities will be
entitled to a preference upon an event of default with respect to
distributions and amounts payable on redemption or liquidation over the
common securities. The trust is not permitted to issue any securities other
than the trust securities or incur any other indebtedness.
The capital securities will rank equally, and payments on the
capital securities will be made proportionally, with the common securities,
except as described under "--Subordination of Common Securities of the Trust"
below.
The property trustee will hold legal title to the debentures in
trust for the benefit of the holders of the trust securities. We guarantee
the payment of distributions out of money held by the trust, and payments
upon redemption of the capital securities or liquidation of the trust, to the
extent described under "Description of the Guarantee." The guarantee
agreement does not cover the payment of any distribution or the liquidation
amount when the trust does not have sufficient funds available to make these
payments.
DISTRIBUTIONS
SOURCE OF DISTRIBUTIONS. The funds of the trust available for
distribution to holders of the capital securities will be limited to payments
made under the debentures, which the trust will purchase with the proceeds
from the sale of the trust securities. Distributions will be paid through the
property trustee, who will hold the amounts received from our interest
payments on the debentures in the property account for the benefit of the
holders of the trust securities. If we do not make interest payments on the
debentures, the property trustee will not have funds available to pay
distributions on the capital securities.
PAYMENT OF DISTRIBUTIONS. Distributions on the capital securities
will be payable at the annual rate of 9.20% of the $10 stated liquidation
amount, payable quarterly on March 31, June 30, September 30 and December 31
of each year, to the holders of the capital securities on the relevant record
dates. The record date will be the business day immediately preceding the
relevant distribution date. The first distribution date for the capital
securities will be September 30, 1999.
Distributions will accumulate from the date of issuance, will be
cumulative and the amount payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. If the distribution date is
not a business day, then payment of the distributions will be made on the
next day that is a business day, without any additional interest or other
payment in respect of the delay. However, if the next business day is in the
next calendar year, payment of the distribution will be made on the
immediately preceding business day. "Business day" means any day other than a
Saturday, a Sunday, a day on which banking institutions in The City of New
York or Wilmington, Delaware are authorized or required by law or executive
order to remain closed or a day on which the corporate trust office of the
property trustee or the indenture trustee is closed for business.
EXTENSION PERIOD. As long as no event of default under the indenture
has occurred and is continuing, we have the right to defer the payment of
interest on the debentures at any time for a period not exceeding
20 consecutive quarters. However, no extension period may extend beyond
June 30, 2029 or end on a date other than an interest payment date, which
dates are the same as the distribution dates. If we defer the payment of
interest, quarterly distributions on the capital securities will also be
deferred during any such extension period. Any deferred distributions under
the capital securities will accumulate additional amounts at the annual rate
of 9.20%, compounded quarterly from the relevant distribution date. The term
"distributions" as used in this prospectus includes those accumulated amounts.
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During an extension period, we may not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to,
any of our capital stock (other than the reclassification of any
class of our capital stock into another class of capital stock);
- make any payment of principal, interest or premium on or repay,
repurchase or redeem any debt securities that rank equally with or
junior in interest to the debentures;
- make any guarantee payments with respect to any other guarantee by
us of any other debt securities of any of our subsidiaries if the
guarantee ranks equally with or junior to the debentures; or
- redeem, purchase or acquire less than all of the debentures or any
of the capital securities.
After the termination of any extension period and the payment of all amounts
then due, we may elect to begin a new extension period, subject to the above
requirements.
We have no current intention of exercising our right to defer
distributions on the capital securities by extending the interest payment
period on the debentures.
REDEMPTION OR EXCHANGE
GENERAL. We will have the right to redeem the debentures:
- in whole at any time, or in part from time to time, on or after
June 30, 2004;
- at any time, in whole, within 180 days following the occurrence of
a Tax Event, an Investment Company Event or a Capital Treatment
Event as defined below. Redemptions in these cases are subject to
the prior approval by the Federal Reserve, if required; or
- at any time, to the extent of any capital securities we repurchase.
MANDATORY REDEMPTION. Upon our repayment or redemption, in whole or
in part, of any debentures, whether on June 30, 2029 or earlier, the property
trustee will apply the proceeds to redeem a like amount of the trust
securities, upon not less than 30 days' nor more than 60 days' notice, at the
redemption price. The redemption price will equal 100% of the aggregate
liquidation amount of the trust securities plus accumulated but unpaid
distributions and Additional Interest (as defined below) to the date of
redemption. If less than all of the debentures are to be repaid or redeemed
on a date of redemption, then the proceeds from such repayment or redemption
will be allocated to redemption of the capital securities and the common
securities proportionally.
"ADDITIONAL INTEREST" means the additional amounts as may be
necessary to be paid by us in order that the amount of distributions then due
and payable by the trust on the outstanding trust securities will not be
reduced as a result of any additional taxes, duties and other governmental
charges to which the trust has become subject.
DISTRIBUTION OF DEBENTURES. Upon prior approval of the Federal
Reserve, if required, we will have the right at any time to dissolve, wind-up
or terminate the trust and, after satisfaction of the liabilities of
creditors of the trust as provided by applicable law, including, without
limitation, amounts due and owing the trustees of the trust, cause the
debentures to be distributed directly to the holders of trust securities in
liquidation of the trust. See "--Liquidation Distribution Upon Termination."
After the liquidation date fixed for any distribution of debentures
in exchange for capital securities:
- those capital securities will no longer be deemed to be
outstanding;
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- any certificates representing capital securities will be deemed to
represent debentures with a principal amount equal to the
liquidation amount of those capital securities, and bearing accrued
and unpaid interest in an amount equal to the accumulated and
unpaid distributions on the capital securities until the
certificates are presented to the administrative trustees or their
agent for transfer or reissuance.
There can be no assurance as to the market prices for the capital
securities or the debentures that may be distributed if a dissolution and
liquidation of the trust were to occur. The capital securities that an
investor may purchase, or the debentures that an investor may receive on
dissolution and liquidation of the trust, may trade at a discount to the
price that the investor paid to purchase the capital securities.
REDEMPTION UPON A TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL
TREATMENT EVENT. If a Tax Event, an Investment Company Event or a Capital
Treatment Event (each as defined below) occurs, we have the right to redeem
the debentures in whole and thereby cause a mandatory redemption of the trust
securities in whole at the redemption price. If one of these events occurs
and we do not elect to redeem the debentures, or to dissolve the trust and
cause the debentures to be distributed to holders of the trust securities,
then the capital securities will remain outstanding and Additional Interest
may be payable on the debentures. See "Description of Debentures--Redemption
or Exchange."
"Tax Event" means the receipt by the trust and us of an opinion of
counsel experienced in such matters stating that there is more than an
insubstantial risk that:
- interest payable by us on the debentures is not, or within 90 days
of the date of the opinion will not be, deductible by us, in whole
or in part, for federal income tax purposes;
- the trust is, or will be within 90 days after the date of the
opinion, subject to federal income tax with respect to income
received or accrued on the debentures; or
- the trust is, or will be within 90 days after the date of opinion,
subject to more than an immaterial amount of other taxes, duties,
assessments or other governmental charges,
as a result of any amendment to any tax laws or regulations.
"Investment Company Event" means the receipt by the trust and us of
an opinion of counsel experienced in such matters to the effect that the
trust is or will be considered an "investment company" that is required to be
registered under the Investment Company Act, as a result of the occurrence of
a change in law or regulation or a change in interpretation or application of
law or regulation.
"Capital Treatment Event" means the receipt by the trust and us of
an opinion of counsel experienced in such matters to the effect that there is
more than an insubstantial risk of impairment of our ability to treat the
capital securities as Tier 1 capital for purposes of the current capital
adequacy guidelines of the Federal Reserve, as a result of any amendment to
any laws or any regulations.
For all of the events described above, Quad City or the trust must
request and receive an opinion with regard to the event within a reasonable
period of time we became aware of the possible occurrence of an event of this
kind.
REDEMPTION PROCEDURES
Capital securities may be redeemed at the redemption price with the
applicable proceeds from our contemporaneous redemption of the debentures.
Redemptions of the capital securities will be made and the redemption price
will be payable on each date of redemption only to the extent that the trust
has funds available for the payment of the redemption price. See
"--Subordination of Common Securities."
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Notice of any redemption will be mailed at least 30 days but not
more than 60 days before the date of redemption to each holder of trust
securities to be redeemed at its registered address. Unless we default in
payment of the redemption price on the debentures, interest will cease to
accumulate on the debentures called for redemption on and after the date of
redemption.
If the trust gives notice of redemption of its trust securities,
then the property trustee, to the extent funds are available, will
irrevocably deposit with the depositary for the trust securities funds
sufficient to pay the aggregate redemption price and will give the depositary
for the trust securities irrevocable instructions and authority to pay the
redemption price to the holders upon surrender of their certificates
evidencing the trust securities. See "Book-Entry Issuance." If the capital
securities are no longer in book-entry form, the property trustee, to the
extent funds are available, will deposit with the designated paying agent for
such capital securities funds sufficient to pay the aggregate redemption
price and will give the paying agent irrevocable instructions and authority
to pay the redemption price to the holders upon surrender of their
certificates evidencing the capital securities. Notwithstanding the
foregoing, distributions payable on or prior to the date of redemption for
any trust securities called for redemption will be payable to the holders of
the trust securities on the relevant record dates for the related
distribution dates.
If notice of redemption has been given and we have deposited funds
as required, then on the date of the deposit all rights of the holders of the
trust securities called for redemption will cease, except the right to
receive the redemption price, but without interest on such redemption price
after the date of redemption. The trust securities will also cease to be
outstanding on the date of the deposit. If any date fixed for redemption of
trust securities is not a business day, then payment of the redemption price
payable on that date will be made on the next day that is a business day
without any additional interest or other payment in respect of the delay.
However, if the next business day is in the next succeeding calendar year,
payment of the interest will be made on the immediately preceding business
day.
If payment of the redemption price in respect of trust securities
called for redemption is improperly withheld or refused and not paid by the
trust, or by us pursuant to the guarantee, distributions on the trust
securities will continue to accumulate at the applicable rate from the date
of redemption originally established by the trust for the trust securities to
the date the redemption price is actually paid. In this case, the actual
payment date will be considered the date fixed for redemption for purposes of
calculating the redemption price. See "Description of the Guarantee."
Subject to applicable law, and if we are not exercising our right to
defer interest payments on the debentures, we may, at any time, purchase
outstanding capital securities.
Payment of the redemption price on the capital securities and any
distribution of debentures to holders of capital securities will be made to
the applicable recordholders as they appear on the register for the capital
securities on the relevant record date. The record date will be the business
day immediately preceding the date of redemption or liquidation date, as
applicable.
If less than all of the trust securities are to be redeemed, then
the aggregate liquidation amount of the trust securities to be redeemed will
be allocated proportionately to those trust securities based upon the
relative liquidation amounts. The particular capital securities to be
redeemed will be selected by the property trustee from the outstanding
capital securities not previously called for redemption by a method the
property trustee deems fair and appropriate. This method may provide for the
redemption of portions equal to $10 or an integral multiple of $10 of the
liquidation amount of the capital securities. The property trustee will
promptly notify the registrar for the capital securities in writing of the
capital securities selected for redemption and, in the case of any capital
securities selected for partial redemption, the liquidation amount to be
redeemed. For all purposes of the trust agreement, unless the context
otherwise requires, all provisions relating to the redemption of capital
securities will relate to the portion of the aggregate liquidation amount of
capital securities which has been or is to be redeemed.
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SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, the
capital securities and common securities will be made based on the
liquidation amount of these securities. However, if an event of default under
the indenture has occurred and is continuing, no distributions on or
redemption of the common securities may be made. Further, no payments may be
made on the common securities unless payment in full in cash of all
accumulated and unpaid distributions (including Additional Interest, if any
is required) on all of the outstanding capital securities for all
distribution periods terminating on or before that time, or in the case of
payment of the redemption price, payment of the full amount of the redemption
price on all of the outstanding capital securities then called for
redemption, has been made or provided. All funds available to the property
trustee will first be applied to the payment in full in cash of all
distributions (including Additional Interest, if any is required) on, or the
redemption price of, the capital securities then due and payable.
In the case of the occurrence and continuance of any event of
default under the trust agreement resulting from an event of default under
the indenture, Quad City, as holder of the common securities, will be deemed
to have waived any right to act with respect to that event of default under
the trust agreement until the effect of the event of default has been cured,
waived or otherwise eliminated. Until the event of default under the trust
agreement has been so cured, waived or otherwise eliminated, the property
trustee will act solely on behalf of the holders of the capital securities
and not on our behalf, and only the holders of the capital securities will
have the right to direct the property trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
We will have the right at any time to dissolve, wind-up or terminate
the trust and cause the debentures to be distributed to the holders of the
capital securities. This right is subject, however, to us receiving approval
of the Federal Reserve, if required.
In addition, the trust will automatically terminate upon expiration
of its term and will terminate earlier on the first to occur of:
- Quad City's bankruptcy, dissolution or liquidation;
- the distribution of a like amount of the debentures to the holders
of its trust securities, if Quad City has given written direction
to the property trustee to terminate the trust;
- redemption of all of the capital securities as described under
"--Redemption or Exchange--Mandatory Redemption;" or
- the entry of an order for the dissolution of the trust by a court
of competent jurisdiction.
With the exception of a redemption as described under "--Redemption
or Exchange--Mandatory Redemption," if an early termination occurs, the trust
will be liquidated by the administrative trustees as expeditiously as they
determine to be possible. After satisfaction of liabilities to creditors of
the trust as provided by applicable law, the trustees will distribute to the
holders of trust securities debentures:
- in an aggregate stated principal amount equal to the aggregate
stated liquidation amount of the capital securities;
- with an interest rate identical to the distribution rate on the
capital securities; and
- with accrued and unpaid interest equal to accumulated and unpaid
distributions on the capital securities.
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However, if the property trustee determines that the distribution is
not practical, then the holders will be entitled to receive a proportionate
amount of the liquidation distribution. The liquidation distribution will be
the amount equal to the aggregate of the liquidation amount plus accumulated
and unpaid distributions to the date of payment. If the liquidation
distribution can be paid only in part because the trust has insufficient
assets available to pay in full the aggregate liquidation distribution, then
the amounts payable directly by the trust on the trust securities will be
paid to us, as the holder of the common securities, and the holders of the
capital securities on a proportional basis based on liquidation amounts.
However, if an event of default under the indenture has occurred and is
continuing, the capital securities will have a priority over the common
securities. See "--Subordination of Common Securities."
Under current United States federal income tax law and interpretations
and assuming that the trust is treated as a grantor trust, as is expected, a
distribution of the debentures should not be a taxable event to holders of
the capital securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or another circumstance, however, the distribution
could be a taxable event to holders of the capital securities. See "Federal
Income Tax Consequences--Receipt of Debentures or Cash Upon Liquidation of
the Trust." If we do not elect to redeem the debentures prior to maturity or
to liquidate the trust and distribute the debentures to holders of the
capital securities, the capital securities will remain outstanding until the
repayment of the debentures.
If we elect to dissolve the trust and thus cause the debentures to
be distributed to holders of the capital securities in liquidation of the
trust, we will continue to have the right to shorten the maturity of the
debentures. See "Description of the Debentures--General."
LIQUIDATION VALUE
The amount of the liquidation distribution payable on the capital
securities in the event of any liquidation of the trust is $10 per capital
security plus accumulated and unpaid distributions to the date of payment,
which may be in the form of a distribution of debentures having a liquidation
value and accrued interest of an equal amount. See "--Liquidation
Distribution Upon Termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default
under the trust agreement with respect to the capital securities:
- the occurrence of an event of default under the indenture (see
"Description of the Debentures--Debenture Events of Default");
- a default by the trust in the payment of any distribution when it
becomes due and payable, and continuation of the default for a
period of 30 days;
- a default by the trust in the payment of any redemption price of
any of the trust securities when it becomes due and payable;
- a default in the performance, or breach, in any material respect,
of any covenant or warranty of the trustees in the trust agreement,
other than those defaults covered in the previous two points, and
continuation of the default or breach for a period of 60 days after
there has been given, by registered or certified mail, to the
trustee(s) by the holders of at least 25% in aggregate liquidation
amount of the outstanding capital securities, a written notice
specifying the default or breach and requiring it to be remedied
and stating that the notice is a "Notice of Default" under the
trust agreement; or
- the occurrence of events of bankruptcy or insolvency with respect
to the property trustee and our failure to appoint a successor
property trustee within 60 days.
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Within five business days after the occurrence of any event of
default actually known to the property trustee, the property trustee will
transmit notice of the event of default to the holders of the capital
securities, the administrative trustees and to us, unless the event of
default has been cured or waived. Quad City and the administrative trustees
are required to file annually with the property trustee a certificate as to
whether or not they are in compliance with all the conditions and covenants
applicable to them under the trust agreement.
If an event of default under the indenture has occurred and is
continuing, the capital securities will have preference over the common
securities upon termination of the trust. See "--Subordination of Common
Securities" and "--Liquidation Distribution Upon Termination." The existence
of an event of default under the trust agreement does not entitle the holders
of capital securities to accelerate the maturity thereof, unless the event of
default is caused by the occurrence of an event of default under the
indenture and both the indenture trustee and holders of at least 25% in
principal amount of the debentures fail to accelerate the maturity thereof.
REMOVAL OF THE TRUSTEES
Unless an event of default under the indenture has occurred and is
continuing, any trustee may be removed at any time by us. If an event of
default under the indenture has occurred and is continuing, only the holders
of a majority in liquidation amount of the outstanding capital securities may
remove the property trustee or the Delaware trustee. The holders of the
capital securities have no right to vote to appoint, remove or replace the
administrative trustees. These rights are vested exclusively with us as the
holder of the common securities. No resignation or removal of a trustee and
no appointment of a successor trustee will be effective until the successor
trustee accepts the appointment in accordance with the trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default under the indenture has occurred and is
continuing, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the trust property
may at the time be located, we will have the power to appoint at any time or
times, and upon written request of the property trustee will appoint, one or
more persons or entity either (1) to act as a co-trustee, jointly with the
property trustee, of all or any part of the trust property, or (2) to act as
separate trustee of any trust property. In either case these trustees will
have the powers that may be provided in the instrument of appointment, and
will have vested in them any property, title, right or power deemed necessary
or desirable, subject to the provisions of the trust agreement. In case an
event of default under the indenture has occurred and is continuing, the
property trustee alone will have power to make the appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Generally, any person or successor to any of the trustees may be a
successor trustee to any of the trustees, including a successor resulting
from a merger or consolidation. However, any successor trustee must meet all
of the qualifications and eligibility standards to act as a trustee.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. The trust may, at our request, with the consent of the
administrative trustees and without the consent of the holders of the capital
securities, the property trustee or the Delaware trustee, undertake a
transaction listed above if the following conditions are met:
- the successor entity either (a) expressly assumes all of the
obligations of the trust with respect to the capital securities, or
(b) substitutes for the capital securities other securities having
substantially the same terms as the capital securities (referred to
as "successor securities") so long as the successor securities rank
the same in priority as the capital securities with respect to
distributions and payments upon liquidation, redemption and
otherwise;
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- Quad City expressly appoints a trustee of the successor entity
possessing substantially the same powers and duties as the property
trustee in its capacity as the holder of the debentures;
- the successor securities are listed or will be listed upon
notification of issuance, on any national securities exchange or
other organization on which the capital securities are then listed,
if any;
- the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the capital securities (including
any successor securities) in any material respect;
- the successor entity has a purpose substantially identical to that
of the trust;
- prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, Quad City has received an opinion
from independent counsel to the effect that (a) any transaction of
this kind does not adversely affect the rights, preferences and
privileges of the holders of the capital securities (including any
successor securities) in any material respect, and (b) following
the transaction, neither the trust nor the successor entity will be
required to register as an "investment company" under the
Investment Company Act; and
- we own all of the common securities of the successor entity and
guarantee the obligations of the successor entity under the
successor securities at least to the extent provided by the
guarantee.
Notwithstanding the foregoing, the trust may not, except with the consent of
holders of 100% in liquidation amount of the capital securities, enter into
any transaction of this kind or permit any other person to consolidate,
amalgamate, merge with or into, or replace it if the transaction would cause
the trust or the successor entity to be classified as other than a grantor
trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee--Amendments and Assignment" and as otherwise required by the Trust
Indenture Act and the trust agreement, the holders of the capital securities
will have no voting rights.
The trust agreement may be amended from time to time by us and the
trustees, without the consent of the holders of the capital securities, in
the following circumstances:
- with respect to acceptance of appointment by a successor trustee;
- to cure any ambiguity, correct or supplement any provisions in the
trust agreement that may be inconsistent with any other provision,
or to make any other provisions with respect to matters or
questions arising under the trust agreement, as long as the
amendment is not inconsistent with the other provisions of the
trust agreement and does have a material adverse effect on the
interests of any holder of trust securities; or
- to modify, eliminate or add to any provisions of the trust
agreement if necessary to ensure that the trust will be classified
for federal income tax purposes as a grantor trust at all times
that any trust securities are outstanding or to ensure that the
trust will not be required to register as an "investment company"
under the Investment Company Act.
With the consent of the holders of a majority of the aggregate
liquidation amount of the outstanding trust securities, Quad City and the
trustees may amend the trust agreement if the trustees receive an opinion of
counsel to the effect that the amendment or the exercise of any power granted
to the trustees in accordance with the amendment will not affect the trust's
status as a grantor trust for federal income tax purposes or the trust's
exemption from status as an "investment company" under the Investment Company
Act. However, without the
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consent of each holder of trust securities, the trust agreement may not be
amended to (a) change the amount or timing of any distribution on the trust
securities or otherwise adversely affect the amount of any distribution
required to be made in respect of the trust securities as of a specified
date, or (b) restrict the right of a holder of trust securities to institute
suit for the enforcement of the payment on or after that date.
As long as the property trustee holds any debentures, the trustees
will not:
- direct the time, method and place of conducting any proceeding for
any remedy available to the indenture trustee, or executing any
trust or power conferred on the property trustee with respect to
the debentures;
- waive any past default that is waivable under the indenture;
- exercise any right to rescind or annul a declaration that the
principal of all the debentures will be due and payable; or
- consent to any amendment, modification or termination of the
indenture or the debentures, where the consent is required, without
obtaining the prior approval of the holders of a majority in
aggregate liquidation amount of all outstanding trust securities.
However, where a consent under the indenture requires the consent
of each holder of the affected debentures, no consent will be given
by the property trustee without the prior consent of each holder of
the trust securities.
The trustees may not revoke any action previously authorized or approved by a
vote of the holders of the trust securities except by subsequent vote of the
holders of the trust securities. The property trustee will notify each holder
of trust securities of any notice of default with respect to the debentures.
In addition to obtaining the foregoing approvals of the holders of the trust
securities, prior to taking any of the foregoing actions the trustees must
obtain an opinion of counsel experienced in these matters to the effect that
the trust will not be classified as an association taxable as a corporation
for federal income tax purposes on account of the action.
Any required approval of holders of trust securities may be given at
a meeting of holders of the trust securities convened for the purpose or
pursuant to written consent. The property trustee will cause a notice of any
meeting at which holders of the trust securities are entitled to vote, or of
any matter upon which action by written consent of the holders is to be
taken, to be given to each holder of record of trust securities.
No vote or consent of the holders of capital securities will be
required for the trust to redeem and cancel its capital securities in
accordance with the trust agreement.
Notwithstanding the fact that holders of capital securities are
entitled to vote or consent under any of the circumstances described above,
any of the capital securities that are owned by Quad City, the trustees or
any affiliate of Quad City or any trustee, will, for purposes of the vote or
consent, be treated as if they were not outstanding.
GLOBAL CAPITAL SECURITIES
The capital securities will be represented by one or more global
capital securities registered in the name of The Depository Trust Company,
New York, New York ("DTC") or its nominee. A global capital security is a
security representing interests of more than one beneficial holder.
Beneficial interests in the global capital securities will be shown on, and
transfers will be effected only through, records maintained by participants.
Participants are brokers, dealers, or others with accounts with DTC. Except
as described below, capital securities in definitive form will not be issued
in exchange for the global capital securities. See "Book-Entry Issuance."
No global capital security may be exchanged for capital securities
registered in the names of persons other than DTC or its nominee unless:
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- DTC notifies the indenture trustee that it is unwilling or unable
to continue as a depositary for the global capital security and we
are unable to locate a qualified successor depositary;
- we execute and deliver to the indenture trustee a written order
stating that we elect to terminate the book-entry system through
DTC; or
- there shall have occurred and be continuing an event of default
under the indenture.
Any global capital security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for definitive certificates registered in the
names as DTC shall direct. It is expected that the instructions will be based
upon directions received by DTC with respect to ownership of beneficial
interests in the global capital security. If capital securities are issued in
definitive form, the capital securities will be in denominations of $10 and
integral multiples of $10 and may be transferred or exchanged at the offices
described below.
Unless and until it is exchanged in whole or in part for the
individual capital securities represented thereby, a global capital security
may not be transferred except as a whole by DTC to a nominee of DTC, by a
nominee of DTC to DTC or another nominee of DTC or by DTC or any nominee to a
successor depositary or any nominee of the successor.
Payments on global capital securities will be made to DTC, as the
depositary for the global capital securities. If the capital securities are
issued in definitive form, distributions will be payable, the transfer of the
capital securities will be registrable, and capital securities will be
exchangeable, for capital securities of other denominations of a like
aggregate liquidation amount, at the corporate office of the property
trustee, or at the offices of any paying agent or transfer agent appointed by
the administrative trustees. However, payment of any distribution may be made
at the option of the administrative trustees by check mailed to the address
of record of the persons entitled to the distribution or by wire transfer. In
addition, if the capital securities are issued in definitive form, the record
dates for payment of distributions will be the 15th day of the month in which
the relevant distribution date occurs. For a description of the terms of DTC
arrangements relating to payments, transfers, voting rights, redemptions and
other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of one or more global capital securities, and the
deposit of the global capital security with or on behalf of DTC or its
nominee, DTC or its nominee will credit, on its book-entry registration and
transfer system, the respective aggregate liquidation amounts of the
individual capital securities represented by the global capital security to
the accounts of persons that have accounts with DTC. These accounts shall be
designated by the dealers, underwriters or agents with respect to the capital
securities. Ownership of beneficial interests in a global capital security
will be limited to persons or entities with an account with DTC or who may
hold interest through any person or entity with an account that may hold
interests through participants. With respect to interests of any person or
entity with an account with DTC, ownership of beneficial interests in a
global capital security will be shown on, and the transfer of that ownership
will be effected only through, records maintained by the applicable
depositary or its nominee. With respect to persons or entities who hold
interest in a global capital security through a participant, the interest and
any transfer of the interest will be shown on the participant's records. The
laws of some states require that certain purchasers of securities take
physical delivery of these securities in definitive form. These laws may
impair the ability to transfer beneficial interests in a global capital
security.
So long as DTC or another depositary, or its nominee, is the
registered owner of the global capital security, the depositary or the
nominee, as the case may be, will be considered the sole owner or holder of
the capital securities represented by the global capital security for all
purposes under the trust agreement. Except as described in this prospectus,
owners of beneficial interests in a global capital security will not be
entitled to have any of the individual capital securities represented by the
global capital security registered in their names, will not receive or be
entitled to receive physical delivery of any the capital securities in
definitive form and will not be considered the owners or holders of the
capital securities under the trust agreement.
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None of us, the property trustee, any paying agent or the securities
registrar for the capital securities will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the global capital security
representing the capital securities or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of
the liquidation amount or distributions in respect of a global capital
security, immediately will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the
aggregate liquidation amount of the global capital security as shown on the
records of DTC or its nominee. We also expect that payments by participants
to owners of beneficial interests in the global capital security held through
the participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name." The payments will be
the responsibility of the participants. See "Book-Entry Issuance."
PAYMENT AND PAYING AGENCY
Payments in respect of the capital securities shall be made to DTC,
which shall credit the relevant accounts of participants on the applicable
distribution dates, or, if any of the capital securities are not held by DTC,
the payments shall be made by check mailed to the address of the holder as
listed on the register of holders of the capital securities. The paying agent
for the capital securities will initially be the property trustee and any
co-paying agent chosen by the property trustee and acceptable to Quad City
and the administrative trustees. The paying agent for the capital securities
may resign as paying agent upon 30 days' written notice to the administrative
trustees, the property trustee and us. If the property trustee no longer is
the paying agent for the capital securities, the administrative trustees will
appoint a successor to act as paying agent. The successor must be a bank or
trust company acceptable to Quad City and the property trustee.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as the registrar and the transfer
agent for the capital securities. Registration of transfers of capital
securities will be effected without charge by or on behalf of the trust, but
upon payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. The trust and its registrar and
transfer agent will not be required to register or cause to be registered the
transfer of capital securities after they have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee, until the occurrence and continuance of an
event of default under the trust agreement, undertakes to perform only the
duties set forth in the trust agreement. After an event of default under the
trust agreement, the property trustee must exercise the same degree of care
and skill as a prudent person exercises or uses in the conduct of its own
affairs. Subject to this provision, the property trustee is under no
obligation to exercise any of the powers vested in it by the trust agreement
at the request of any holder of capital securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might
be incurred. If no event of default under the trust agreement has occurred
and is continuing and the property trustee is required to decide between
alternative causes of action, construe ambiguous provisions in the trust
agreement or is unsure of the application of any provision of the trust
agreement, and the matter is not one on which holders of capital securities
are entitled to vote upon, then the property trustee will take the action
directed in writing by us. If the property trustee is not so directed, then
it will take the action it deems advisable and in the best interests of the
holders of the trust securities and will have no liability except for its own
bad faith, negligence or willful misconduct.
MISCELLANEOUS
The administrative trustees are authorized and directed to conduct
the affairs of and to operate the trust in such a way that:
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- the trust will not be deemed to be an "investment company" required
to be registered under the Investment Company Act;
- the trust will not be classified as an association taxable as a
corporation for federal income tax purposes; and
- the debentures will be treated as indebtedness of Quad City for
federal income tax purposes.
In this regard, Quad City and the administrative trustees are authorized to
take any action not inconsistent with applicable law, the certificate of
trust or the trust agreement, that Quad City and the administrative trustees
determine to be necessary or desirable for these purposes.
Holders of the capital securities have no preemptive or similar
rights. The trust agreement and the capital securities will be governed by
Delaware law.
DESCRIPTION OF THE DEBENTURES
Concurrently with the issuance of the capital securities, the trust
will invest the proceeds from the sale of the trust securities in the
debentures issued by us. The debentures will be issued as unsecured debt
under the indenture between us and First Union, as trustee (the "indenture
trustee"). The indenture will be qualified under the Trust Indenture Act.
The following discussion is subject to, and is qualified in its
entirety by reference to, the indenture and to the Trust Indenture Act. We
urge prospective investors to read the form of the indenture, which is filed
as an exhibit to the registration statement of which this prospectus forms a
part.
GENERAL
The debentures will be limited in aggregate principal amount to
$12.38 million, this amount being the sum of the aggregate stated liquidation
amounts of the trust securities. The debentures will bear interest at the
annual rate of 9.20% of the principal amount. The interest will be payable
quarterly on March 31, June 30, September 30 and December 31 of each year,
beginning September 30, 1999, to the person in whose name each debenture is
registered at the close of business on the business day immediately preceding
the day interest is due. It is anticipated that, until the liquidation, if
any, of the trust, the debentures will be held in the name of the property
trustee in trust for the benefit of the holders of the trust securities.
The amount of interest payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months. If any date on which
interest is payable on the debentures is not a business day, then payment of
interest will be made on the next day that is a business day without any
additional interest or other payment in respect of the delay. However, if the
next business day is in the next calendar year, payment of the interest will
be made on the immediately preceding business day. Accrued interest that is
not paid on the applicable interest payment date will bear additional
interest on the amount due at the annual rate of 9.20%, compounded quarterly.
The term "interest," includes quarterly interest payments, interest on
quarterly interest payments not paid on the applicable interest payment date
and additional interest, as applicable.
The debentures will mature on June 30, 2029, the stated maturity
date. We may shorten this date once at any time to any date not earlier than
June 30, 2004, subject to the prior approval of the Federal Reserve, if
required.
We will give notice to the indenture trustee and the holders of the
debentures, no more than 180 days and no less than 90 days prior to the
effectiveness of any change in the stated maturity date. We will not have the
right to redeem the debentures from the trust until after June 30, 2004,
except if a Tax Event, an Investment
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Company Event or a Capital Treatment Event has occurred, or to the extent we
have repurchased capital securities.
The debentures will be unsecured and will rank junior to all of our
senior and subordinate indebtedness. Because we are a holding company, our
right to participate in any distribution of assets of any of our
subsidiaries, upon any subsidiary's liquidation or reorganization or
otherwise, and thus the ability of holders of the debentures to benefit
indirectly from any distribution by a subsidiary, is subject to the prior
claim of creditors of the subsidiary, except to the extent that we may be
recognized as a creditor of the subsidiary. The debentures will, therefore,
be effectively subordinated to all existing and future liabilities of our
subsidiaries, and holders of debentures should look only to our assets for
payment. The indenture does not limit our ability to incur or issue secured
or unsecured senior and junior debt. See "--Subordination."
The indenture does not contain provisions that afford holders of the
debentures protection in the event of a highly leveraged transaction or other
similar transaction involving Quad City, nor does it require us to maintain
or achieve any financial performance levels or to obtain or maintain any
credit rating on the debentures.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
As long as no event of default under the indenture has occurred and
is continuing, we have the right under the indenture to defer the payment of
interest on the debentures at any time for a period not exceeding
20 consecutive quarters. However, no extension period may extend beyond the
stated maturity of the debentures or end on a date other than a date interest
is normally due. At the end of an extension period, we must pay all interest
then accrued and unpaid, together with interest thereon at the annual rate of
9.20% compounded quarterly. During an extension period, interest will
continue to accrue and holders of debentures, or the holders of capital
securities if they are then outstanding, will be required to accrue and
recognize as income for federal income tax purposes the accrued but unpaid
interest amounts in the year in which such amounts accrued. See "Federal
Income Tax Consequences--Interest Payment Period and Original Issue Discount."
During an extension period, we may not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to,
any of our capital stock;
- make any payment of principal, interest or premium on, or repay,
repurchase or redeem any debt securities that rank equally with or
junior to the debentures or make any guarantee payments with
respect to any other guarantee by us of any other debt securities
of any of our subsidiaries if the guarantee ranks equally with or
junior to the debentures; or
- redeem, purchase or acquire less than all of the debentures or any
of the capital securities.
However, we may reclassify any class of our capital stock into another class
of capital stock during an extension period.
Prior to the termination of any extension period, so long as no
event of default under the indenture is continuing, we may further defer the
payment of interest subject to the above stated requirements. Upon the
termination of any extension period and the payment of all amounts then due,
we may elect to begin a new extension period at any time. We have no present
intention of exercising our right to defer payments of interest on the
debentures.
We must give the property trustee, the administrative trustees and
the indenture trustee notice of our election of an extension period at least
two business days prior to the earlier of (a) the next date on which
distributions on the trust securities would have been payable except for the
election to begin an extension period, or (b) the date we are required to
give notice of the record date, or the date the distributions are payable, to
the
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American Stock Exchange, or other applicable self-regulatory organization, or
to holders of the capital securities, but in any event at least one business
day prior to the record date.
Subject to the foregoing, there is no limitation on the number of
times that we may elect to begin an extension period.
ADDITIONAL SUMS TO BE PAID AS A RESULT OF ADDITIONAL TAXES
If the trust is required to pay any additional taxes, duties or
other governmental charges as a result of the occurrence of a Tax Event, we
will pay as additional amounts on the debentures any amounts which may be
required so that the net amounts received and retained by the trust after
paying any additional taxes, duties or other governmental charges will not be
less than the amounts the trust would have received had the additional taxes,
duties or other governmental charges not been imposed.
REDEMPTION OR EXCHANGE
Subject to prior approval of the Federal Reserve, if required, we
may redeem the debentures prior to maturity:
- on or after June 30, 2004, in whole at any time or in part from
time to time;
- in whole at any time within 180 days following the occurrence of a
Tax Event, an Investment Company Event or a Capital Treatment
Event;
- at any time, to the extent of any capital securities we repurchase.
In each case we will pay a redemption price equal to the accrued and unpaid
interest on the debentures so redeemed to the date fixed for redemption, plus
100% of the principal amount of the debentures.
Notice of any redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each holder of debentures to
be redeemed at its registered address. Redemption of less than all
outstanding debentures shall be effected proportionately, by lot or in any
other manner deemed to be fair by the indenture trustee. Unless we default in
payment of the redemption price for the debentures, on and after the
redemption date interest shall cease to accrue on the debentures or portions
thereof called for redemption.
The debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Capital
Securities--Liquidation Distribution Upon Termination," under certain
circumstances and with the Federal Reserve's approval, the debentures may be
distributed to the holders of the capital securities in liquidation of the
trust after satisfaction of liabilities to creditors of the trust. If this
occurs, we will use our reasonable efforts to list the debentures on the
American Stock Exchange or other stock exchange or national quotation
service, on which the capital securities are then listed, if any. There can
be no assurance as to the market price of any debentures that may be
distributed to the holders of capital securities.
RESTRICTIONS ON PAYMENTS
We are restricted from making certain payments (as described below)
if at that time:
- an event of default is continuing under the indenture;
- we are in default with respect to our obligations under the
guarantee; or
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- we have given notice of our election to extend an interest payment
period with respect to the debentures and the notice has not been
rescinded or the extension period is continuing.
If any of the above events have occurred, we will not:
- declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to,
any of our capital stock;
- make any payment of principal, interest or premium on, or repay or
repurchase or redeem any of our debt securities that rank equally
with or junior to the debentures;
- make any guarantee payments with respect to any guarantee by us of
the debt securities of any of our subsidiaries if the guarantee
ranks equally with or junior to the debentures (other than payments
under the guarantee); or
- redeem, purchase or acquire less than all of the debentures or any
of the capital securities.
However, we may reclassify any class of our capital stock into another class
of capital stock during any of the above events.
SUBORDINATION
Under the indenture, the debentures are subordinated and junior in
right of payment to all of our senior and subordinated debt. Upon any payment
or distribution of assets to creditors upon any liquidation, dissolution,
winding up, reorganization, assignment for the benefit of creditors,
marshaling of assets or any bankruptcy, insolvency, debt restructuring or
similar proceedings in connection with any insolvency or bankruptcy
proceedings of Quad City, the holders of senior and subordinated debt will
first be entitled to receive payment in full of principal (and premium, if
any) and interest before the holders of debentures will be entitled to
receive or retain any payment in respect of the debentures.
In the event of the acceleration of the maturity of any debentures,
the holders of all or our senior and subordinated debt outstanding at the
time of the acceleration will also be entitled to first receive payment in
full of all amounts due, including any amounts due upon acceleration, before
the holders of the debentures will be entitled to receive or retain any
payment in respect of the principal of or interest on the debentures.
No payments of principal or interest in respect of the debentures
may be made if there has occurred and is continuing a default in any payment
with respect to any of our senior or subordinated debt or an event of default
with respect to any of our senior or subordinated debt resulting in the
acceleration of the maturity of the debentures, or if any judicial proceeding
is pending with respect to any default.
The term "debt" means, with respect to any entity, whether recourse
is to all or a portion of the assets of an entity and whether or not
contingent:
- every obligation of the entity for money borrowed;
- every obligation of the entity evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or
businesses;
- every reimbursement obligation of the entity with respect to
letters of credit, bankers' acceptances or similar facilities
issued for the account of the entity;
- every obligation of the entity issued or assumed as the deferred
purchase price of property or services, excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business;
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- every capital lease obligation of the entity; and
- every obligation of the type referred to in the first five points
of another person and all dividends of another person the payment
of which, in either case, the entity has guaranteed or is
responsible or liable, directly or indirectly, as obligor or
otherwise.
The term "senior debt" means, with respect to Quad City, the
principal of and premium and interest, including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating
to us whether or not a claim for post-petition interest is allowed in the
proceeding, on debt, whether incurred on or prior to the date of the
indenture or incurred after the date. Senior debt also includes all
indebtedness, whether incurred on or prior to the date of the indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements. However, senior debt will not be deemed to include:
- any debt where it is provided in the instrument creating the debt
that the obligations are not superior in right of payment to the
debentures or to other debt which is equal with, or subordinated
to, the debentures;
- any of our debt that when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code
of 1978, was without recourse to us;
- any debt of Quad City to any of Quad City's subsidiaries;
- any debt to any employee of Quad City;
- any debt that by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of
business to the extent that payments made to the holders of the
debt by the holders of the debentures as a result of the
subordination provisions of the indenture would be greater than
they otherwise would have been as a result of any obligation of the
holders to pay amounts over to the obligees on the trade accounts
payable or accrued liabilities arising in the ordinary course of
business as a result of subordination provisions to which the debt
is subject; and
- debt which constitutes subordinated debt.
The term "subordinated debt" means, with respect to us, the
principal of, premium and interest, including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to
Quad City whether or not the claim for post-petition interest is allowed in
the proceeding, on debt. Subordinated debt includes debt incurred on or prior
to the date of the indenture or thereafter incurred, which is by its terms
expressly provided to be junior and subordinate to other debt of ours, other
than the debentures. However, subordinated debt will not be deemed to include:
- any debt of Quad City which when incurred and without respect to
any election under section 1111(b) of the United States Bankruptcy
Code of 1978, was without recourse to us;
- any debt of Quad City to any of Quad City's subsidiaries;
- any debt to any employee of Quad City;
- any debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of
business to the extent that payments made to the holders of the
debt by the holders of the debentures as a result of the
subordination provisions of the indenture would be greater than
they otherwise would have been as a result of any obligation of the
holders to pay amounts over to the obligees on the trade accounts
payable or accrued liabilities arising in the ordinary course of
business as a result of subordination provisions to which the debt
is subject;
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- debt which constitutes senior debt; and
- any debt of Quad City under debt securities (and guarantees in
respect of these debt securities) initially issued to any trust, or
a trustee of a trust, partnership or other entity affiliated with
the Quad City that is, directly or indirectly, a financing vehicle
of Quad City in connection with the issuance by that entity of
preferred securities or other securities which are intended to
qualify for "Tier 1" capital treatment.
We expect from time to time to incur additional indebtedness, and
there is no limitation on the amount we may incur. At March 31, 1999, we had
consolidated senior debt and subordinated debt of approximately $2.5 million.
Although these amounts are expected to be repaid with a portion of the
proceeds from the sale of the debentures, additional senior or subordinated
debt can be expected to be incurred in the future.
PAYMENT AND PAYING AGENTS
Generally, payment of principal of and any interest on the
debentures will be made at the office of the indenture trustee in Wilmington,
Delaware. However, we have the option to make payment of any interest by
(a) check mailed to the address of the person entitled to payment at the
address listed in the register of holders of the debentures, or (b) transfer
to an account maintained by the person entitled thereto as specified in the
register of holders of the debentures, provided that proper transfer
instructions have been received by the regular record date. Payment of any
interest on debentures will be made to the person in whose name the debenture
is registered at the close of business on the regular record date for the
interest payment, except in the case of defaulted interest. We may at any
time designate additional paying agents for the debentures or rescind the
designation of any paying agent for the debentures. However, we will at all
times be required to maintain a paying agent in Wilmington, Delaware, and
each place of payment for the debentures.
Any moneys deposited with the indenture trustee or any paying agent
for the debentures, or then held by us in trust, for the payment of the
principal of or interest on the debentures and remaining unclaimed for two
years after the principal or interest has become due and payable, will be
repaid to us on May 31 of each year. If we hold any of this money in trust,
then it will be discharged from the trust to us and the holder of the
debenture will thereafter look, as a general unsecured creditor, only to us
for payment.
REGISTRAR AND TRANSFER AGENT
The indenture trustee will act as the registrar and the transfer
agent for the debentures. Debentures may be presented for registration of
transfer, with the form of transfer endorsed thereon, or a satisfactory
written instrument of transfer, duly executed, at the office of the
registrar. Provided that we maintain a transfer agent in Wilmington,
Delaware, we may rescind the designation of any transfer agent or approve a
change in the location through which any transfer agent acts. We may at any
time designate additional transfer agents with respect to the debentures.
In the event of any redemption, neither Quad City nor the indenture
trustee will be required to (a) issue, register the transfer of or exchange
debentures during a period beginning at the opening of business 15 days
before the day of selection for redemption of debentures and ending at the
close of business on the day of mailing of the relevant notice of redemption,
or (b) transfer or exchange any debentures so selected for redemption,
except, in the case of any debentures being redeemed in part, any portion not
to be redeemed.
MODIFICATION OF INDENTURE
Quad City and the indenture trustee may, from time to time without
the consent of the holders of the debentures, amend, waive or supplement the
indenture for purposes which do not materially adversely affect the rights of
the holders of the debentures. Other changes may be made by Quad City and the
indenture trustee with the consent of the holders of a majority in principal
amount of the outstanding debentures. However, without the consent of the
holder of each outstanding debenture affected by the proposed modification,
no modification may:
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- extend the fixed maturity of the debentures; or
- reduce the principal amount or the rate or extend the time of
payment of interest; or
- reduce the percentage of principal amount of debentures required to
amend the indenture.
As long as any of the capital securities remain outstanding, no modification
may be made that requires the consent of the holders of the debentures, no
termination of the indenture may occur, and no waiver of any event of default
under the indenture may be effective, without the prior consent of the
holders of a majority of the aggregate liquidation amount of the capital
securities.
DEBENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following
described events with respect to the debentures that has occurred and is
continuing constitutes an event of default under the indenture:
- failure for 30 days to pay any interest on the debentures, when
due, subject to deferral of any due date in the case of an
extension period;
- failure to pay any principal on the debentures when due whether at
maturity, upon redemption by declaration or otherwise;
- failure to observe or perform in any material respect other
covenants contained in the indenture for 90 days after written
notice to us from the indenture trustee or the holders of at least
25% in aggregate outstanding principal amount of the debentures; or
- our bankruptcy, insolvency or reorganization or dissolution of the
trust.
The holders of a majority of the aggregate outstanding principal
amount of the debentures have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the indenture
trustee. The indenture trustee, or the holders of at least 25% in aggregate
outstanding principal amount of the debentures, may declare the principal due
and payable immediately upon an event of default under the indenture. The
holders of a majority of the outstanding principal amount of the debentures
may annul the declaration and waive the default if the default has been cured
and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration, has been deposited with the
indenture trustee. The holders may not annul the declaration and waive a
default if the default is the non-payment of the principal of the debentures
which has become due solely by the acceleration. Should the holders of the
debentures fail to annul the declaration and waive the default, the holders
of at least 25% in aggregate liquidation amount of the capital securities
will have this right.
If an event of default under the indenture has occurred and is
continuing, the property trustee will have the right to declare the principal
of and the interest on the debentures, and any other amounts payable under
the indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to the debentures.
We are required to file annually with the indenture trustee a
certificate as to whether or not we are in compliance with all of the
conditions and covenants applicable to us under the indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE CAPITAL SECURITIES
If an event of default under the indenture has occurred and is
continuing and the event is attributable to the failure of us to pay interest
on or principal of the debentures on the payment date on which the payment is
due and payable, then a holder of capital securities may institute a direct
action against us. In connection with a direct action, we will have a right
to counter the amount of the direct action to the extent of any payment made
by us to
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the holder of capital securities with respect to the direct action. We may
not amend the indenture to remove the foregoing right to bring a direct
action without the prior written consent of all of the holders of the capital
securities. If the right to bring a direct action is removed, the trust may
become subject to the reporting obligations under the Securities Exchange Act
of 1934.
The holders of the capital securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the debentures unless there has been an event of
default under the trust agreement. See "Description of the Capital
Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
We may not consolidate with or merge into any other entity or convey
or transfer our properties and assets substantially as an entirety to any
entity, and no entity may be consolidated with or merged into Quad City or
sell, convey, transfer or otherwise dispose of its properties and assets
substantially as an entirety to Quad City, unless:
- if we consolidate with or merge into another person or convey or
transfer our properties and assets substantially as an entirety to
any person, the successor person is organized under the laws of the
United States or any State or the District of Columbia, and the
successor person expressly assumes by supplemental indenture our
obligations on the debentures, or substitutes securities having
substantially similar terms;
- immediately after giving effect, no event of default under the
indenture, and no event which, after notice or lapse of time, or
both, would become an event of default under the indenture, has
occurred and is continuing; and
- other conditions as prescribed in the indenture are met.
SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect and we will be
deemed to have satisfied and discharged the indenture when all debentures not
previously delivered to the indenture trustee for cancellation:
- have become due and payable, or
- will become due and payable at their stated maturity within one
year or are to be called for redemption within one year, and we
deposit or cause to be deposited with the indenture trustee funds,
in trust, for the purpose and in an amount sufficient to pay and
discharge the entire indebtedness on the debentures not previously
delivered to the indenture trustee for cancellation, for the
principal and interest due to the date of the deposit or to the
stated maturity or redemption date, as the case may be.
We may still be required to provide officers' certificates, opinions
of counsel and pay fees and expenses due after these events occur.
GOVERNING LAW
The indenture and the debentures will be governed by and construed
in accordance with the laws of the State of Illinois.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the
Trust Indenture Act. Subject to these provisions, the indenture trustee is
under no obligation to
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exercise any of the powers vested in it by the indenture at the request of
any holder of debentures, unless offered reasonable indemnity by the holder
against the costs, expenses and liabilities which might be incurred. The
indenture trustee is not required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties
if the indenture trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
MISCELLANEOUS
We have agreed, pursuant to the indenture, for so long as capital
securities remain outstanding:
- to maintain directly or indirectly 100% ownership of the common
securities of the trust except that certain successors that are
permitted pursuant to the indenture may succeed to our ownership of
the common securities;
- not to voluntarily terminate, wind up or liquidate the trust
without prior approval of the Federal Reserve, if required;
- to use our reasonable efforts to cause the trust (a) to remain a
business trust (and to avoid involuntary termination, winding up or
liquidation), except in connection with a distribution of
debentures, the redemption of all of the trust securities of the
trust or mergers, consolidations or amalgamations, each as
permitted by the trust agreement; and (b) to otherwise continue not
to be treated as an association taxable as a corporation or
partnership for federal income tax purposes; and
- to use our reasonable efforts to cause each holder of trust
securities to be treated as owning an individual beneficial
interest in the debentures.
BOOK-ENTRY ISSUANCE
GENERAL
DTC will act as securities depositary for the capital securities and
may act as securities depositary for all of the debentures in the event of
the distribution of the debentures to the holders of capital securities.
Except as described, the capital securities will be issued only as registered
securities in the name of Cede & Co. (DTC's nominee). One or more global
capital securities will be issued for the Capital Securities and will be
deposited with DTC.
DTC is a limited purpose trust company organized under New York
banking law, a "banking organization" within the meaning of the New York
banking law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to Section 17A of the Securities Exchange Act of
1934. DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. DTC is owned by a
number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to indirect
participants, such as securities brokers and dealers, banks and trust
companies that clear through or maintain custodial relationships with direct
participants, either directly or indirectly. The rules applicable to DTC and
its participants are on file with the SEC.
Purchases of capital securities within the DTC system must be made
by or through direct participants, which will receive a credit for the
capital securities on DTC's records. The ownership interest of each actual
purchaser of each capital security ("beneficial owner") is in turn to be
recorded on the direct and indirect
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participant's records. Beneficial owners will not receive written
confirmation from DTC of their purchases, but beneficial owners are expected
to receive written confirmations providing details of the transactions, as
well as periodic statements of their holdings, from the direct or indirect
participants through which the beneficial owners purchased capital
securities. Transfers of ownership interests in the capital securities are to
be accomplished by entries made on the books of participants acting on behalf
of beneficial owners. Beneficial owners will not receive certificates
representing their ownership interest in capital securities, except if use of
the book-entry system for the capital securities is discontinued.
DTC will have no knowledge of the actual beneficial owners of the
capital securities; DTC's records reflect only the identity of the direct
participants to whose accounts the capital securities are credited, which may
or may not be the beneficial owners. The participants will remain responsible
for keeping account of their holdings on behalf of their customers.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that we believe to be accurate, but
Quad City and the trust assume no responsibility for the accuracy thereof.
Neither Quad City nor the trust have any responsibility for the performance
by DTC or its participants of their respective obligations as described in
this prospectus or under the rules and procedures governing their respective
operations.
NOTICES AND VOTING
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered
holder of the capital securities. If less than all of the capital securities
are being redeemed, the amount to be redeemed will be determined in
accordance with the trust agreement.
Although voting with respect to the capital securities is limited to
the holders of record of the capital securities, in those instances in which
a vote is required, neither DTC nor Cede & Co. will itself consent or vote
with respect to capital securities. Under its usual procedures, DTC would
mail an omnibus proxy to the property trustee as soon as possible after the
record date. The omnibus proxy assigns Cede & Co.'s consenting or voting
rights to those direct participants to whose accounts the capital securities
are credited on the record date.
DISTRIBUTION FUNDS
The property trustee will make distribution payments on the capital
securities to DTC. DTC's practice is to credit direct participants' accounts
on the relevant payment date in accordance with their respective holdings
shown on DTC's records unless DTC has reason to believe that it will not
receive payments on the payment date. Payments by participants to beneficial
owners will be governed by standing instructions and customary practices and
will be the responsibility of the participant and not of DTC, the property
trustee, the trust or Quad City, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of distributions
to DTC is the responsibility of the property trustee, disbursement of the
payments to direct participants is the responsibility of DTC, and
disbursements of the payments to the beneficial owners is the responsibility
of direct and indirect participants.
SUCCESSOR DEPOSITARIES AND TERMINATION OF BOOK-ENTRY SYSTEM
DTC may discontinue providing its services with respect to any of
the capital securities at any time by giving reasonable notice to the
property trustee and Quad City. If no successor securities depositary is
obtained, definitive capital securities representing the capital securities
are required to be printed and delivered. We also have the option to
discontinue use of the system of book-entry transfers through DTC (or a
successor depositary). After an event of default under the indenture, the
holders of a majority in liquidation amount of capital securities
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may determine to discontinue the system of book-entry transfers through DTC.
In these events, definitive certificates for the capital securities will be
printed and delivered.
DESCRIPTION OF THE GUARANTEE
The capital securities guarantee agreement will be executed and
delivered by us concurrently with the issuance of the capital securities for
the benefit of the holders of the capital securities. The guarantee agreement
will be qualified as an indenture under the Trust Indenture Act. First Union,
the guarantee trustee, will act as trustee for purposes of complying with the
provisions of the Trust Indenture Act, and will also hold the guarantee for
the benefit of the holders of the capital securities. Prospective investors
are urged to read the form of the guarantee, which has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
GENERAL
We agree to pay in full on a subordinated basis, to the extent
described in the guarantee agreement, the guarantee payments (as defined
below) to the holders of the capital securities, as and when due, regardless
of any defense or counterclaim that the trust may have or assert other than
the defense of payment.
The following payments with respect to the capital securities are
called the "guarantee payments" and, to the extent not paid or made by the
trust and to the extent that the trust has funds available for those
distributions, will be subject to the guarantee:
- any accrued and unpaid distributions required to be paid on the
capital securities;
- with respect to any capital securities called for redemption, the
redemption price; and
- upon a voluntary or involuntary dissolution, winding up or
liquidation of the trust (other than in connection with the
distribution of debentures to the holders of capital securities or
a redemption of all of the capital securities), the lesser of:
(a) the amount of the liquidation distribution; and
(b) the amount of assets of the trust remaining available for
distribution to holders of capital securities in liquidation
of the trust.
We may satisfy our obligations to make a guarantee payment by making a direct
payment of the required amounts to the holders of the capital securities or
by causing the trust to pay the amounts to the holders.
The guarantee agreement is a guarantee, on a subordinated basis, of
the guarantee payments, but the guarantee only applies to the extent the
trust has funds available for those distributions. If we do not make interest
payments on the debentures purchased by the trust, the trust will not have
funds available to make the distributions and will not pay distributions on
the capital securities.
STATUS OF THE GUARANTEE
The guarantee constitutes our unsecured obligation that ranks junior
in right of payment to all of our senior and subordinated debt in the same
manner as the debentures. We expect to incur additional indebtedness in the
future, although we have no specific plans in this regard presently, and
neither the indenture nor the trust agreement limits the amounts of the
obligations that we may incur.
The guarantee constitutes a guarantee of payment and not of
collection. If we fail to make guarantee payments when required, holders of
capital securities may institute a legal proceeding directly against us to
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enforce their rights under the guarantee without first instituting a legal
proceeding against any other person or entity.
The guarantee will not be discharged except by payment of the
guarantee payments in full to the extent not paid by the trust or upon
distribution of the debentures to the holders of the capital securities.
Because we are a holding company, our right to participate in any
distribution of assets of any subsidiary upon the subsidiary's liquidation or
reorganization or otherwise is subject to the prior claims of creditors of
that subsidiary, except to the extent we may be recognized as a creditor of
that subsidiary. Our obligations under the guarantee, therefore, will be
effectively subordinated to all existing and future liabilities of our
subsidiaries, and claimants should look only to our assets for payments under
the guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely
affect the rights of holders of the capital securities, in which case no vote
will be required, the guarantee may be amended only with the prior approval
of the holders of a majority of the aggregate liquidation amount of the
outstanding capital securities. See "Description of the Capital
Securities--Voting Rights; Amendment of Trust Agreement."
EVENTS OF DEFAULT; REMEDIES
An event of default under the guarantee agreement will occur upon
our failure to make any required guarantee payments or to perform any other
obligations under the guarantee. The holders of a majority in aggregate
liquidation amount of the capital securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the guarantee trustee in respect of the guarantee and may direct the
exercise of any power conferred upon the guarantee trustee under the
guarantee agreement.
Any holder of capital securities may institute and prosecute a legal
proceeding directly against us to enforce its rights under the guarantee
without first instituting a legal proceeding against the trust, the guarantee
trustee or any other person or entity.
We are required to provide to the guarantee trustee annually a
certificate as to whether or not we are in compliance with all of the
conditions and covenants applicable to us under the guarantee agreement.
TERMINATION OF THE GUARANTEE
The guarantee will terminate and be of no further force and effect
upon:
- full payment of the redemption price of the capital securities;
- full payment of the amounts payable upon liquidation of the trust;
or
- distribution of the debentures to the holders of the capital
securities.
If at any time any holder of the capital securities must restore payment of
any sums paid under the capital securities or the guarantee, the guarantee
will continue to be effective or will be reinstated with respect to such
amounts.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, other than during the occurrence and
continuance of our default in performance of the guarantee, undertakes to
perform only those duties as are specifically set forth in the guarantee.
When an event of default has occurred and is continuing, the guarantee
trustee must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to
those provisions, the guarantee trustee is under no obligation to exercise
any of the powers vested in it by the guarantee
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at the request of any holder of any capital securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might
be incurred thereby.
EXPENSE AGREEMENT
We will, pursuant to the Agreement as to Expenses and Liabilities
entered into by us and the trust under the trust agreement, irrevocably and
unconditionally guarantee to each person or entity to whom the trust becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
the trust, other than obligations of the trust to pay to the holders of the
capital securities or other similar interests in the trust of the amounts due
to the holders pursuant to the terms of the capital securities or other
similar interests, as the case may be. Third party creditors of the trust may
proceed directly against us under the Expense Agreement, regardless of
whether they had notice of the expense agreement.
GOVERNING LAW
The guarantee will be governed by the laws of the State of Illinois.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
We irrevocably guarantee, as and to the extent described in this
prospectus, payments of distributions and other amounts due on the capital
securities, to the extent the trust has funds available for the payment of
these amounts. Quad City and the trust believe that, taken together, our
obligations under the debentures, the indenture, the trust agreement, the
expense agreement and the guarantee agreement provide, in the aggregate, a
full, irrevocable and unconditional guarantee, on a subordinated basis, of
payment of distributions and other amounts due on the capital securities. No
single document standing alone or operating in conjunction with fewer than
all of the other documents constitutes a guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the obligations of the trust under
the capital securities.
If and to the extent that we do not make payments on the debentures,
the trust will not pay distributions or other amounts due on the capital
securities. The guarantee does not cover payment of distributions when the
trust does not have sufficient funds to pay the distributions. In this event,
the remedy of a holder of capital securities is to institute a legal
proceeding directly against us for enforcement of payment of the
distributions to the holder. Our obligations under the guarantee are
subordinate and junior in right of payment to all of our other indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due
on the debentures, these payments will be sufficient to cover distributions
and other payments due on the capital securities, primarily because:
- the aggregate principal amount of the debentures will be equal to
the sum of the aggregate stated liquidation amount of the trust
securities;
- the interest rate and interest and other payment dates on the
debentures will match the distribution rate and distribution and
other payment dates for the capital securities;
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- we will pay for any and all costs, expenses and liabilities of the
trust, except the obligations of the trust to pay to holders of the
capital securities the amounts due to the holders pursuant to the
terms of the capital securities; and
- the trust will not engage in any activity that is not consistent
with the limited purposes of the trust.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any capital security may institute a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against the guarantee trustee, the trust or
any other person. A default or event of default under any of our senior or
subordinated debt would not constitute a default or event of default under
the trust agreement. In the event, however, of payment defaults under, or
acceleration of, our senior or subordinated debt, the subordination
provisions of the indenture provide that no payments may be made in respect
of the debentures until the obligations have been paid in full or any payment
default has been cured or waived. Failure to make required payments on the
debentures would constitute an event of default under the trust agreement.
LIMITED PURPOSE OF THE TRUST
The capital securities evidence preferred undivided beneficial
interests in the assets of the trust. The trust exists for the exclusive
purposes of issuing the trust securities, investing the proceeds thereof in
debentures and engaging in only those other activities necessary, advisable
or incidental thereto. A principal difference between the rights of a holder
of a capital security and the rights of a holder of a debenture is that a
holder of a debenture is entitled to receive from us the principal amount of
and interest accrued on debentures held, while a holder of capital securities
is entitled to receive distributions from the trust (or from us under the
guarantee) if and to the extent the trust has funds available for the payment
of the distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or
liquidation of the trust involving the liquidation of the debentures, the
holders of the capital securities will be entitled to receive, out of assets
held by the trust, the liquidation distribution in cash. See "Description of
the Capital Securities--Liquidation Distribution Upon Termination."
Upon our voluntary or involuntary liquidation or bankruptcy, the
property trustee, as holder of the debentures, would be a subordinated
creditor of ours. Therefore, the property trustee would be subordinated in
right of payment to all of our senior and subordinated debt, but is entitled
to receive payment in full of principal and interest before any of our
stockholders receive payments or distributions. Since we are the guarantor
under the guarantee and have agreed to pay for all costs, expenses and
liabilities of the trust other than the obligations of the trust to pay to
holders of the capital securities the amounts due to the holders pursuant to
the terms of the capital securities, the positions of a holder of the capital
securities and a holder of the debentures relative to our other creditors and
to our stockholders in the event of liquidation or bankruptcy are expected to
be substantially the same.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of the material federal income tax
considerations that may be relevant to the purchasers of capital securities
represents the opinion of Barack Ferrazzano Kirschbaum Perlman & Nagelberg,
counsel to Quad City and the trust insofar as it relates to matters of law
and legal conclusions. The conclusions expressed herein are based upon
current provisions of the Internal Revenue Code of 1986, regulations
thereunder and current administrative rulings and court decisions, all of
which are subject to change at any time, with
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possible retroactive effect. Subsequent changes may cause tax consequences to
vary substantially from the consequences described below. Furthermore, the
authorities on which the following summary is based are subject to various
interpretations, and it is therefore possible that the federal income tax
treatment of the purchase, ownership and disposition of capital securities
may differ from the treatment described below.
No attempt has been made in the following discussion to comment on
all federal income tax matters affecting purchasers of capital securities.
Moreover, the discussion generally focuses on holders of capital securities
who are individual citizens or residents of the United States and who acquire
capital securities on their original issue at their offering price and hold
capital securities as capital assets. The discussion has only limited
application to dealers in securities, corporations, estates, trusts or
nonresident aliens and does not address all the tax consequences that may be
relevant to holders who may be subject to special tax treatment, such as, for
example, banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies,
tax-exempt investors or persons that will hold the capital securities as a
position in a "straddle," as part of a "synthetic security" or "hedge," as
part of a "conversion transaction" or other integrated investment, or as
other than a capital asset. The following summary also does not address the
tax consequences to persons that have a functional currency other than the
U.S. dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of capital securities. Further, it does not include
any description of any alternative minimum tax consequences or the tax laws
of any state or local government or of any foreign government that may be
applicable to the capital securities. Accordingly, each prospective investor
should consult, and should rely exclusively on, the investor's own tax
advisors in analyzing the federal, state, local and foreign tax consequences
of the purchase, ownership or disposition of capital securities.
CLASSIFICATION OF THE DEBENTURES
In accordance with the opinion of Barack Ferrazzano Kirschbaum
Perlman & Nagelberg, we intend to take the position that the debentures will
be classified for federal income tax purposes as indebtedness of Quad City
under current law, and, by acceptance of a capital security, each holder
covenants to treat the debentures as indebtedness and the capital securities
as evidence of an indirect beneficial ownership interest in the debentures.
No assurance can be given, however, that this position will not be challenged
by the Internal Revenue Service or, if challenged, that it will not be
successful. The remainder of this discussion assumes that the debentures will
be classified for federal income tax purposes as indebtedness of Quad City.
CLASSIFICATION OF THE TRUST
With respect to the capital securities, Barack Ferrazzano Kirschbaum
Perlman & Nagelberg, tax counsel for Quad City and the trust, has rendered
its opinion generally to the effect that, under then current law and assuming
full compliance with the terms of the trust agreement and indenture, the
trust will be classified for federal income tax purposes as a grantor trust
and not as an association taxable as a corporation. Accordingly, for federal
income tax purposes, each holder of capital securities generally will be
treated as owning an undivided beneficial interest in the debentures, and
each holder will be required to include in its gross income any interest with
respect to the debentures at the time such interest is accrued or is
received, in accordance with the holder's method of accounting. If the
debentures were determined to be subject to the original issue discount
("OID") rules, each holder would instead be required to include in its gross
income any OID accrued with respect to its allocable share of the debentures
whether or not cash were actually distributed to the holder.
INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
United States persons (including cash basis taxpayers) that hold
debt instruments issued with OID must generally include such OID in income as
it accrues on a constant yield method even if there is not a corresponding
receipt of cash attributable to such income. A debt instrument such as the
debentures will generally be treated as issued with OID if the stated
interest on the instrument does not constitute "qualified stated interest."
Qualified stated interest is generally any one of a series of stated interest
payments on an instrument that are unconditionally payable at least annually
at a single fixed rate. In determining whether stated interest on an
instrument is unconditionally payable and thus constitutes qualified stated
interest, remote contingencies as to the timely
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payment of stated interest are ignored. In the case of the debentures, we
have concluded that the likelihood of exercising our option to defer payments
of interest is remote.
If the option to defer any payment of interest was determined not to
be "remote" or if Quad City actually exercises its option to defer the
payment of interest, the debentures would be treated as issued with OID at
the time of issuance or at the time of such exercise, as the case may be, and
all stated interest would thereafter be treated as OID as long as the
debentures remained outstanding. In such event, all of a United States
person's taxable interest income in respect of the debentures would
constitute OID that would have to be included in income on a constant yield
method before the receipt of the cash attributable to such income, regardless
of such person's method of tax accounting, and actual distributions of stated
interest would not be reported as taxable income. Consequently, a holder of
capital securities would be required to include such OID in gross income even
though Quad City would not make any actual cash payments during an Extension
Period.
The above information is based on recently promulgated Treasury
Regulations, which have not been interpreted by any court decisions or
addressed in any ruling or other pronouncements of the IRS, and it is
possible that the IRS could take a position contrary to the conclusions
herein.
Because income on the capital securities will constitute interest,
corporate holders of capital securities will not be entitled to a
dividends-received deduction with respect to any income recognized with
respect to the capital securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of capital securities other than a holder who purchased the
capital securities upon original issuance may be considered to have acquired
their undivided interests in the debentures with "market discount" or
"acquisition premium" as these phrases are defined for federal income tax
purposes. Such holders are advised to consult their tax advisors as to the
income tax consequences of the acquisition, ownership and disposition of the
capital securities.
RECEIPT OF DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under the circumstances described under "Description of the Capital
Securities--Redemption or Exchange" and "--Liquidation Distribution Upon
Termination," the debentures may be distributed to holders of capital
securities upon a liquidation of the trust. Under current federal income tax
law, such a distribution would be treated as a nontaxable event to the holder
and would result in the holder having an aggregate tax basis in the
debentures received in the liquidation equal to the holder's aggregate tax
basis in the capital securities immediately before the distribution. A
holder's holding period in debentures received in liquidation of the trust
would include the period for which the holder held the capital securities.
If, however, a Tax Event occurs which results in the trust being
treated as an association taxable as a corporation, the distribution would
likely constitute a taxable event to holders of the capital securities. Under
certain circumstances described herein, the debentures may be redeemed for
cash and the proceeds of the redemption distributed to holders in redemption
of their capital securities. Under current law, such a redemption should, to
the extent that it constitutes a complete redemption, constitute a taxable
disposition of the redeemed capital securities, and a holder for federal
income tax purposes, should recognize gain or loss as if the holder sold the
capital securities for cash.
DISPOSITION OF CAPITAL SECURITIES
A holder that sells capital securities will recognize gain or loss
equal to the difference between the amount realized on the sale of the
capital securities and the holder's adjusted tax basis in the capital
securities. A holder's adjusted tax basis in the capital securities generally
will be its initial purchase price increased by OID previously includible in
the holder's gross income to the date of disposition and decreased by
payments received on the capital securities to the date of disposition. A
gain or loss of this kind will generally be a capital gain or
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loss and will be a long-term capital gain or loss if the capital securities
have been held for more than one year at the time of sale.
The capital securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the
underlying debentures. A holder that disposes of its capital securities
between record dates for payments of distributions thereon will be required
to include accrued but unpaid interest on the debentures through the date of
disposition in income as ordinary income, and to add the amount to its
adjusted tax basis in its proportionate share of the underlying debentures
deemed disposed of. To the extent the selling price is less than the holder's
adjusted tax basis a holder will recognize a capital loss. The adjusted basis
would include, in the form of OID, all accrued but unpaid interest. Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for federal income tax purposes.
EFFECT OF POSSIBLE CHANGES IN TAX LAWS
Congress and the Clinton Administration have considered certain
proposed tax law changes in the past that would, among other things,
generally deny corporate issuers a deduction for interest in respect of
certain debt obligations if the debt obligations have a maximum term in
excess of 15 years and are not shown as indebtedness on the issuer's
applicable consolidated balance sheet. Other proposed tax law changes would
have denied interest deductions if the term was in excess of 20 years.
Although these proposed tax law changes have not been enacted into law, there
can be no assurance that tax law changes will not be reintroduced into future
legislation which, if enacted after the date hereof, may adversely affect the
federal income tax deductibility of interest payable on the debentures.
Accordingly, there can be no assurance that a Tax Event will not occur. A Tax
Event would permit us, upon approval of the Federal Reserve if then required
to cause a redemption of the capital securities before, as well as after,
June 30, 2004. See "Description of the Debentures--Redemption or Exchange"
and "Description of the Capital Securities--Redemption or
Exchange--Redemption upon a Tax Event, Investment Company Event or Capital
Treatment Event."
BACKUP WITHHOLDING AND INFORMATION REPORTING
The amount of qualified stated interest, or, if applicable, OID,
accrued on the capital securities held of record by individual citizens or
residents of the United States, or certain trusts, estates and partnerships,
will be reported to the Internal Revenue Service on Forms 1099-INT, or, where
applicable, forms 1099-OID, which forms should be mailed to the holders by
January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the capital securities may be subject to a "backup" withholding
tax (currently at 31%) unless the holder complies with certain identification
and other requirements. Any amounts withheld under the backup withholding
rules will be allowed as a credit against the holder's federal income tax
liability, provided the required information is provided to the Internal
Revenue Service.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF CAPITAL SECURITIES. HOLDERS OF CAPITAL
SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR
OTHER TAX LAWS.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement
Income Security Act of 1974, or Section 4975 of the Internal Revenue Code,
generally may purchase capital securities, subject to the investing
fiduciary's determination that the investment in capital securities satisfies
ERISA's fiduciary standards and other requirements applicable to investments
by the plan.
In any case, we and/or any of our affiliates may be considered a "party
in interest" (within the meaning of ERISA) or a "disqualified person" (within
the meaning of Section 4975 of the Internal Revenue Code) with
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respect to certain plans. These plans generally include plans maintained or
sponsored by, or contributed to by, any such persons with respect to which we
or any of our affiliates are a fiduciary or plans for which we or any of our
affiliates provide services. The acquisition and ownership of capital
securities by a plan (or by an individual retirement arrangement or other
plans described in Section 4975(e)(1) of the Internal Revenue Code) with
respect to which we or any of our affiliates are considered a party in
interest or a disqualified person may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Internal Revenue Code, unless
the capital securities are acquired pursuant to and in accordance with an
applicable exemption.
As a result, plans with respect to which we or any of our affiliates
or any of its affiliates is a party in interest or a disqualified person
should not acquire capital securities unless the capital securities are
acquired pursuant to and in accordance with an applicable exemption. Any
other plans or other entities whose assets include plan assets subject to
ERISA or Section 4975 of the Internal Revenue Code proposing to acquire
capital securities should consult with their own counsel.
UNDERWRITING
Quad City, the trust, and the underwriters named below have entered
into an underwriting agreement with respect to the capital securities. The
underwriters, and the amount of capital securities that each of them has
agreed to purchase, are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER CAPITAL SECURITIES
----------- ------------------
<S> <C>
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated..... 960,000
Howe Barnes Investments, Inc........................................ 240,000
---------
Total.......................................................... 1,200,000
---------
---------
</TABLE>
The underwriters have agreed to purchase the capital securities on a
firm-commitment basis. That means that they will purchase all of the capital
securities if they purchase any of them. If one underwriter defaults under
the underwriting agreement, the purchase commitment of the other underwriter
may be increased or the underwriting agreement may be terminated.
The underwriters have agreed to purchase the capital securities at
the price stated on the cover page of this prospectus. Because the trust will
use the proceeds from the sale of the capital securities to purchase the
debentures from us, we have agreed to pay the underwriters the following fees:
<TABLE>
<CAPTION>
Underwriting Fees
<S> <C>
Per Capital Security............. $0.50
Total............................ $600,000
</TABLE>
In addition to the underwriting fees, we estimate that we will spend
approximately $150,000 for printing, depository and trustees' fees, legal and
accounting fees, and other expenses of the offering.
The underwriters will initially offer the capital securities to the
public at the price stated on the cover page. The underwriters may offer
capital securities to selected dealers at the public-offering price less a
concession of up to $0.20 per capital security. Those dealers may reallow a
discount not in excess of $0.15 per capital security to other brokers and
dealers. After the initial offering of the capital securities, the
underwriters may change the offering price, concession, discount and other
selling terms. Quad City and the underwriters have agreed that approximately
102,850 of the capital securities will be reserved for sale to officers or
directors of, or individuals or entities affiliated with, Quad City.
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In connection with the offering, the underwriters and their
affiliates may engage in transactions, effected in accordance with Rule 104
of the SEC's Regulation M, that are intended to stabilize, maintain or
otherwise affect the market price of the capital securities. These
transactions may include transactions in which the underwriters create a
short position for their own account by selling more capital securities than
they are committed to purchase from the trust. In such a case, to cover all
or part of the short position, the underwriters may purchase capital
securities in the open market following completion of the initial offering.
The underwriters also may engage in stabilizing transactions in which they
bid for, and purchase, the capital securities at a level above that which
might otherwise prevail in the open market for the purpose of preventing or
retarding a decline in the market price of the capital securities. Any of
these transactions may result in the maintenance of a price for the capital
securities at a level above that which might otherwise prevail in the open
market. Neither Quad City nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the market price of the capital
securities. The underwriters are not required to engage in any of these
transactions. These transactions may be effected on the American Stock
Exchange, and, if commenced, may be discontinued at any time without notice.
Quad City and the trust have agreed to indemnify the underwriters
against liabilities arising from the offering of the capital securities,
including civil liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in
connection with those liabilities.
The underwriters have advised the trust that they do not intend to
confirm any sales of capital securities to any discretionary accounts. In
connection with the offer and sale of the capital securities, the
underwriters will comply with Rule 2810 under the NASD Conduct Rules. Dain
Rauscher Wessels served as the underwriter in the initial public offering of
our common stock in 1993, for which it was paid customary compensation. The
underwriters and their affiliates may be our customers, engage in
transactions with us, or perform services for us in the ordinary course of
business.
LEGAL MATTERS
Legal matters, including matters relating to federal income tax
considerations, for Quad City and the trust will be passed upon by Barack
Ferrazzano Kirschbaum Perlman & Nagelberg, Chicago, Illinois, counsel to Quad
City and the trust. Certain legal matters will be passed upon for the
underwriters by Faegre & Benson LLP, Minneapolis, Minnesota. Barack
Ferrazzano Kirschbaum Perlman & Nagelberg and Faegre & Benson LLP may rely on
the opinion of Richards, Layton & Finger, P.A. as to matters of Delaware law.
WHERE YOU CAN FIND INFORMATION
This prospectus is a part of a Registration Statement on Form S-2
filed by Quad City and the trust with the Securities and Exchange Commission
under the Securities Act, with respect to the capital securities, the
debentures and the guarantee. This prospectus does not contain all the
information set forth in the registration statement, certain parts of which
are omitted in accordance with the rules and regulations of the SEC. For
further information with respect to Quad City and the securities offered by
this prospectus, reference is made to the registration statement, including
the exhibits to the registration statement and documents incorporated by
reference. Statements contained in this prospectus concerning the provisions
of such documents are necessarily summaries of such documents and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Securities and Exchange Commission.
We file periodic reports, proxy statements and other information
with the SEC. Our filings are available to the public over the Internet at
the SEC's web site. The address of that site is http://www.sec.gov. You may
also inspect and copy these materials at the public reference facilities of
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well
as at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 75 Park
Place, Room 1400, New York, New York 10007. Copies of such material can be
obtained at prescribed
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rates from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information.
The trust is not currently subject to the information reporting
requirements of the Securities Exchange Act of 1934 and although the trust
will become subject to such requirements upon the effectiveness of the
Registration Statement, it is not expected that the trust will be required to
file separate reports under the Securities Exchange Act of 1934.
We have not included separate financial statements of the trust in
this prospectus. We do not consider that separate financial statements would
be material to holders of capital securities because we will own all of the
trust's voting securities, the trust has no independent operations and we
guarantee the payments on the capital securities to the extent described in
this prospectus.
EXPERTS
The consolidated financial statements of Quad City and its
subsidiaries included or incorporated by reference in this prospectus have
been audited by McGladrey & Pullen, LLP, independent certified public
accountants. These statements are included and incorporated by reference in
reliance upon the authority of McGladrey & Pullen, LLP as experts in
accounting and auditing.
INCORPORATION OF DOCUMENTS BY REFERENCE
We "incorporate by reference" into this prospectus the information
in documents we file with the Securities and Exchange Commission, which means
that we can disclose important information to you through those documents.
The information incorporated by reference is an important part of this
prospectus. Some information contained in this prospectus updates the
information incorporated by reference and some information that we file
subsequently with the SEC will automatically update this prospectus. We
incorporate by reference the documents listed below:
(a) our Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1998, filed with the SEC on September 28,
1998;
(b) our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, filed with the SEC on
November 16, 1998;
(c) our Form 8-K, filed with the SEC on November 24,
1998;
(d) our Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, filed with the SEC on
February 12, 1999; and
(e) our Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, filed with the SEC on May 5,
1999.
We also incorporate by reference any filings we make with the SEC
under sections 13(a) or 15(d) of the Securities Exchange Act of 1934 after
the initial filing of the registration statement that contains this
prospectus and before the time that all of the securities offered in this
prospectus are sold.
You may request a copy of these filings at no cost by contacting us
at the following address:
Quad City Holdings, Inc.
3551 7th Street, Suite 100
Moline, Illinois 61265
Attn: Shellee R. Showalter
(309) 736-3580
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORT F-2
FINANCIAL STATEMENTS
Consolidated balance sheets as of March 31, 1999 (unaudited)
and as of June 30, 1998 and 1997 (audited) F-3
Consolidated statements of income for the nine months ended March 31, 1999 and
1998 (unaudited) and for the years ended June 30, 1998, 1997, and 1996 (audited) F-4
Consolidated statements of changes in stockholders' equity for the nine months
ended March 31, 1999 (unaudited) and the years ended June 30, 1998, 1997, and
1996 (audited) F-5
Consolidated statements of cash flows for the nine months ended March 31, 1999 and
1998 (unaudited) and for the years ended June 30, 1998, 1997, and 1996 (audited) F-6
Notes to consolidated financial statements F-7 - F-31
</TABLE>
F-1
<PAGE>
[LETTERHEAD]
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, 1998 and 1997, and the related
statements of income, changes in stockholders' equity, and cash flows for the
years ended June 30, 1998, 1997, and 1996. 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 tests 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, 1998 and 1997, and the results of their
operations and their cash flows for the years ended June 30, 1998, 1997, and
1996, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Davenport, Iowa
August 7, 1998
F-2
<PAGE>
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
March 31, June 30,
1999 -------------------------------
ASSETS (Unaudited) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and due from banks $ 8,454,698 $ 11,640,813 $ 6,953,463
Federal funds sold 29,380,000 22,960,000 9,190,000
Certificates of deposit at financial institutions 12,469,754 8,366,123 5,359,124
Securities held to maturity, at amortized cost (Note 3) 774,240 2,380,309 2,914,129
Securities available for sale, at fair value (Note 3) 47,148,505 32,238,245 28,897,629
-----------------------------------------------
47,922,745 34,618,554 31,811,758
-----------------------------------------------
Loans receivable (Note 4) 191,679,110 162,975,136 108,365,429
Less allowance for estimated losses on loans (Note 4) 2,704,448 2,349,838 1,632,500
-----------------------------------------------
188,974,662 160,625,298 106,732,929
-----------------------------------------------
Premises and equipment, net (Note 5) 7,412,053 7,660,268 5,248,689
Accrued interest receivable 2,057,075 1,773,223 1,374,307
Other assets 3,144,037 2,506,710 1,708,481
-----------------------------------------------
$ 299,815,024 $ 250,150,989 $ 168,378,751
-----------------------------------------------
-----------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
- -------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing deposits $ 35,142,927 $ 26,605,138 $ 22,103,036
Interest-bearing deposits 203,981,572 170,778,826 113,857,159
-----------------------------------------------
TOTAL DEPOSITS (Note 6) 239,124,499 197,383,964 135,960,195
Short-term borrowings (Note 7) 7,467,668 2,000,000 -
Federal Home Loan Bank advances (Note 8) 25,883,714 24,667,174 10,777,712
Other borrowings (Note 9) 2,500,000 1,500,000 1,500,000
Other liabilities 3,736,789 5,497,633 5,527,618
-----------------------------------------------
278,712,670 231,048,771 153,765,525
-----------------------------------------------
Commitments and Contingencies (Note 17)
Stockholders' Equity (Note 15):
Preferred stock, $1 par value; shares authorized
250,000; shares issued and outstanding
March 31, 1999 - 25; June 30, 1998 - 25;
June 30, 1997 - 10 (Note 14) 25 25 10
Common stock, $1 par value; shares authorized
5,000,000; shares issued and outstanding
March 31, 1999 - 2,295,876; June 30, 1998 -
2,265,561; 1997 - 2,194,236 (Note 1) 2,295,876 1,510,374 1,462,824
Additional paid-in capital 14,452,187 15,014,884 13,039,406
Retained earnings 4,235,777 2,564,443 171,171
Accumulated other comprehensive income (loss) 118,489 12,492 (60,185)
-----------------------------------------------
21,102,354 19,102,218 14,613,226
-----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 299,815,024 $ 250,150,989 $ 168,378,751
-----------------------------------------------
-----------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 AND YEARS ENDED JUNE 30, 1998, 1997,
AND 1996
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1999 1998 Year Ended June 30,
--------------------------- ------------------------------------------
(Unaudited) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 11,508,963 $ 8,642,021 $ 12,083,990 $ 6,905,590 $ 3,918,817
Interest and dividends on securities 1,617,493 1,454,024 1,905,668 2,139,263 1,868,976
Interest on federal funds sold 1,044,093 305,467 645,929 286,264 382,226
Other interest 513,181 318,810 440,980 374,527 359,409
------------------------------------------------------------------------
TOTAL INTEREST INCOME 14,683,730 10,720,322 15,076,567 9,705,644 6,529,428
------------------------------------------------------------------------
Interest expense:
Interest on deposits 6,674,433 4,909,441 6,971,153 4,358,476 3,349,548
Interest on borrowings 1,410,911 969,225 1,370,868 635,392 136,832
------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 8,085,344 5,878,666 8,342,021 4,993,868 3,486,380
------------------------------------------------------------------------
NET INTEREST INCOME 6,598,386 4,841,656 6,734,546 4,711,776 3,043,048
Provision for loan losses (Note 4) 644,400 753,258 901,976 844,391 500,397
------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,953,986 4,088,398 5,832,570 3,867,385 2,542,651
------------------------------------------------------------------------
Noninterest income:
Merchant credit card fees, net of
processing costs 780,668 1,061,550 1,395,574 1,531,728 1,007,830
Trust department fees 1,114,540 825,389 1,138,502 736,461 355,360
Deposit service fees 305,551 203,143 290,721 201,163 147,678
Gains on sales of loans, net 830,113 512,387 713,121 44,441 54,039
Investment securities gains, net 1,614 8,734 8,734 21,938 22,272
Amortization of deferred income resulting from
restructuring of merchant broker agreement (Note 10) 549,000 - - - -
Gain on restructuring of merchant
broker agreement (Note 10) - - 2,168,000 - -
Other 376,588 317,512 433,765 272,023 129,147
------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 3,958,074 2,928,715 6,148,417 2,807,754 1,716,326
------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 4,325,693 3,109,580 4,571,126 2,934,758 1,973,682
Professional and data processing fees 427,061 375,337 504,344 437,259 282,640
Advertising and marketing 266,677 236,033 238,160 126,061 189,761
Occupancy and equipment expense 1,064,869 689,784 1,045,349 654,010 289,230
Stationery and supplies 198,884 156,163 219,523 191,682 100,672
Provision for merchant credit card losses 5,625 83,426 105,910 176,476 126,805
Postage and telephone 224,145 161,696 231,049 168,890 117,741
Other 638,228 549,430 994,354 601,667 495,858
------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 7,151,182 5,361,449 7,909,815 5,290,803 3,576,389
------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,760,878 1,655,664 4,071,172 1,384,336 682,588
Federal and state income taxes (Note 11) 1,088,654 646,700 1,677,900 165,000
------------------------------------------------------------------------
NET INCOME $ 1,672,224 $ 1,008,964 $ 2,393,272 $ 1,219,336 $ 682,588
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings per common share (Notes 1 and 16):
Basic $ 0.73 $ 0.46 $ 1.09 $ 0.56 $ 0.31
Diluted $ 0.69 $ 0.42 $ 1.02 $ 0.54 $ 0.31
Weighted average common shares outstanding 2,286,863 2,194,236 2,196,297 2,162,490 2,156,736
Weighted average common and common equivalent
shares outstanding 2,406,896 2,378,271 2,353,932 2,250,368 2,183,390
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 1999 AND YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, year ended June 30, 1995 $ - $ 1,437,824 $ 11,764,416 $ (1,730,753)
--------------------------------------------------------
Comprehensive income:
Net income - - - 682,588
Other comprehensive income, net of tax (Note 2) - - - -
COMPREHENSIVE INCOME
--------------------------------------------------------
Balance, year ended June 30, 1996 - 1,437,824 11,764,416 (1,048,165)
--------------------------------------------------------
Comprehensive income:
Net income - - - 1,219,336
Other comprehensive income, net of tax (Note 2)
COMPREHENSIVE INCOME - - - -
Proceeds from sale of 10 shares of preferred stock 10 - 999,990 -
Proceeds from issuance of 37,500 shares of common stock
as a result of warrants exercised (Notes 1 and 13) - 25,000 275,000 -
--------------------------------------------------------
Balance, year ended June 30, 1997 10 1,462,824 13,039,406 171,171
--------------------------------------------------------
Comprehensive income:
Net income - - - 2,393,272
Other comprehensive income, net of tax (Note 2) - - - -
COMPREHENSIVE INCOME
Proceeds from sale of 15 shares of preferred stock 15 - 1,499,985 -
Proceeds from issuance of 71,325 shares of
common stock as a result of warrants and stock
options exercised (Notes 1 and 13) - 47,550 475,493 -
--------------------------------------------------------
Balance, year ended June 30, 1998 25 1,510,374 15,014,884 2,564,443
--------------------------------------------------------
Comprehensive income:
Net income (unaudited) - - - 1,672,224
Other comprehensive income, net of tax (unaudited)
(Note 2)
- - - -
COMPREHENSIVE INCOME (UNAUDITED) - - - -
Stock split (3 for 2) (unaudited) (Note 1) - 760,262 (760,262) (890)
Proceeds from issuance of 30,345 shares of common stock
as a result of warrants and stock options exercised
(unaudited) (Notes 1 and 13) - 25,240 197,565 -
--------------------------------------------------------
Balance, nine months ended March 31, 1999 (unaudited) $ 25 $ 2,295,876 $ 14,452,187 $ 4,235,777
--------------------------------------------------------
--------------------------------------------------------
<CAPTION>
Accumulated
Other
Comprehensive
Income (Loss) Total
------------------------------
<C> <C>
Balance, year ended June 30, 1995 $ 118,253 $ 11,589,740
-----------------------------
Comprehensive income:
Net income - 682,588
Other comprehensive income, net of tax (Note 2) (603,722) (603,722)
--------------
COMPREHENSIVE INCOME 78,866
-----------------------------
Balance, year ended June 30, 1996 (485,469) 11,668,606
-----------------------------
Comprehensive income:
Net income - 1,219,336
Other comprehensive income, net of tax (Note 2) 425,284 425,284
--------------
COMPREHENSIVE INCOME 1,644,620
--------------
Proceeds from sale of 10 shares of preferred stock - 1,000,000
Proceeds from issuance of 37,500 shares of common stock
as a result of warrants exercised (Notes 1 and 13) - 300,000
-----------------------------
Balance, year ended June 30, 1997 (60,185) 14,613,226
-----------------------------
Comprehensive income:
Net income - 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 - 1,500,000
Proceeds from issuance of 71,325 shares of
common stock as a result of warrants and stock
options exercised (Notes 1 and 13) - 523,043
-----------------------------
Balance, year ended June 30, 1998 12,492 19,102,218
-----------------------------
Comprehensive income:
Net income (unaudited) - 1,672,224
Other comprehensive income, net of tax (unaudited)
(Note 2) 105,997 105,997
--------------
COMPREHENSIVE INCOME (UNAUDITED) 1,778,221
--------------
Stock split (3 for 2) (unaudited) (Note 1) - (890)
Proceeds from issuance of 30,345 shares of common stock
as a result of warrants and stock options exercised
(unaudited) (Notes 1 and 13) - 222,805
-----------------------------
Balance, nine months ended March 31, 1999 (unaudited) $ 118,489 $ 21,102,354
-----------------------------
-----------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 AND YEARS ENDED JUNE 30, 1998,
1997, AND 1996
<TABLE>
<CAPTION>
Nine Months Ended March 31,
-------------------------------------
1999 1998
------------------------------------------
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,672,224 $ 1,008,964
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 463,521 330,521
Provision for loan losses 644,400 753,258
Provision for merchant credit card losses 5,625 83,426
Amortization of premiums (accretion of
discounts) on securities, net 19,354 (14,329)
Federal Home Loan Bank stock dividends - -
Investment securities gains, net (1,614) (8,734)
Loans originated for sale (68,986,640) (38,142,945)
Proceeds on sales of loans 71,954,396 32,137,607
Net gains on sales of loans (830,113) (512,387)
Amortization of deferred income resulting from
restructuring of merchant broker agreement (549,000) -
Gains on restructuring of merchant broker agreement - -
Increase in accrued interest receivable (283,852) (376,276)
Increase in other assets (637,327) (469,927)
Increase (decrease) in other liabilities (1,285,318) (2,846,105)
------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 2,185,656 (8,056,927)
------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold (6,420,000) (3,595,000)
Net (increase) decrease in certificates of deposit at
financial institutions (4,103,631) (2,423,779)
Purchase of securities available for sale (27,114,462) (5,751,974)
Purchase of securities held to maturity - (251,413)
Proceeds from calls and maturities of securities 12,350,000 7,500,000
Proceeds from paydowns on securities 1,340,345 974,220
Proceeds from sales of securities available for sale 276,032 14,020
Proceeds from restructuring of merchant broker agreement - -
Net loans originated (31,131,407) (38,658,194)
Purchase of premises and equipment, net (215,306) (2,618,325)
------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (55,018,429) (44,810,445)
------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts 41,740,535 49,319,068
Net increase (decrease) in short-term borrowings 5,467,668 -
Proceeds from Federal Home Loan Bank advances 1,480,000 20,400,000
Payments on Federal Home Loan Bank advances (263,460) (7,936,780)
Net increase in other borrowings 1,000,000 -
Proceeds from issuance of preferred stock - 1,500,000
Proceeds from issuance of common stock 221,915 -
------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 49,646,658 63,282,288
------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS (3,186,115) 10,414,916
Cash and due from banks:
Beginning 11,640,813 6,953,463
------------------------------------------
Ending $ 8,454,698 $ 17,368,379
------------------------------------------
------------------------------------------
Supplemental Disclosure of Cash Flow Information,
cash payments for:
Interest $ 8,031,509 $ 5,495,988
Income/franchise taxes 1,234,378 1,324,000
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on securities available for sale, net 105,997 88,656
Investment securities transferred from held to maturity portfolio
to available for sale portfolio, at fair value 1,030,743 -
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,393,272 $ $1,219,336 $ $682,588
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 422,357 334,409 143,173
Provision for loan losses 901,976 844,391 500,397
Provision for merchant credit card losses 105,910 176,476 126,805
Amortization of premiums (accretion of
discounts) on securities, net (16,742) 899 (16,920)
Federal Home Loan Bank stock dividends - - (3,000)
Investment securities gains, net (8,734) (21,938) (22,272)
Loans originated for sale (57,206,140) (6,851,715) (6,371,085)
Proceeds on sales of loans 54,008,203 6,040,971 6,425,124
Net gains on sales of loans (713,121) (44,441) (54,039)
Amortization of deferred income resulting from
restructuring of merchant broker agreement - - -
Gains on restructuring of merchant broker agreement (2,168,000) - -
Increase in accrued interest receivable (398,916) (253,039) (435,388)
Increase in other assets (826,685) (847,702) (397,684)
Increase (decrease) in other liabilities (872,533) 4,064,359 258,394
--------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (4,379,153) 4,662,006 836,093
--------------------------------------------------------
Cash Flows from Investing Activities:
Net (increase) decrease in federal funds sold (13,770,000) (6,462,000) 10,222,000
Net (increase) decrease in certificates of deposit at
financial institutions (3,006,999) 112,888 (1,489,154)
Purchase of securities available for sale (16,444,294) (5,926,816) (18,947,247)
Purchase of securities held to maturity (276,398) - (2,873,782)
Proceeds from calls and maturities of securities 9,500,000 2,250,000 4,000,000
Proceeds from paydowns on securities 4,531,123 1,250,667 4,483,584
Proceeds from sales of securities available for sale 14,020 5,249,967 4,637,700
Proceeds from restructuring of merchant broker agreement 2,900,000 - -
Net loans originated (50,883,287) (50,764,915) (25,422,515)
Purchase of premises and equipment, net (2,833,936) (1,052,060) (2,872,372)
--------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (70,269,771) (55,342,269) (28,261,786)
--------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts 61,423,769 43,042,077 31,820,432
Net increase (decrease) in short-term borrowings 2,000,000 (1,190,000) (6,021,072)
Proceeds from Federal Home Loan Bank advances 25,955,000 11,961,000 7,270,000
Payments on Federal Home Loan Bank advances (12,065,538) (4,594,758) (3,858,530)
Net increase in other borrowings - 500,000 1,000,000
Proceeds from issuance of preferred stock 1,500,000 1,000,000 -
Proceeds from issuance of common stock 523,043 300,000 -
--------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 79,336,274 51,018,319 30,210,830
--------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS 4,687,350 338,056 2,785,137
Cash and due from banks:
Beginning 6,953,463 6,615,407 3,830,270
--------------------------------------------------------
Ending $ 11,640,813 $ 6,953,463 $ 6,615,407
--------------------------------------------------------
--------------------------------------------------------
Supplemental Disclosure of Cash Flow Information,
cash payments for:
Interest $ 7,769,512 $ 4,861,558 $ 3,384,353
Income/franchise taxes 1,974,000 249,000 18,500
Supplemental Schedule of Noncash Investing Activities:
Change in accumulated other comprehensive income, unrealized
gains (losses) on securities available for sale, net 72,677 425,284 (603,722)
Investment securities transferred from held to maturity portfolio
to available for sale portfolio, at fair value - - 8,004,543
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
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) and Quad City Bancard, Inc. (Bancard). 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. This activity
was previously conducted by the Bank.
SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING ESTIMATES: The preparation of financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The allowance for estimated
losses on loans is inherently subjective as it requires material
estimates that are susceptible to significant change.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. 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 includes 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.
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
(unaudited) of investment securities from held to maturity to available
for sale on January 1, 1999.
Pursuant to a Financial Accounting Standards Board (FASB) Special Report
"A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities" the Company
transferred at fair value $8,004,543 of investment securities from held
to maturity to available for sale in December 1995.
F-7
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 elevations 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.
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
custody 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.
COMMON STOCK SPLIT: On November 30, 1998 the Company issued an
additional 760,262 shares necessary to effect a 3 for 2 common stock
split. All share and per share data has been retroactively adjusted to
reflect the split.
F-8
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CURRENT ACCOUNTING DEVELOPMENT: The FASB has issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information"
which is effective for fiscal years beginning after December 15, 1997.
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
Management believes that adoption of this Statement will not have a
material effect on the consolidated financial statements.
The FASB has issued SFAS No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" which is effective for fiscal years
beginning after December 15, 1997. This Statement standardizes
employers' disclosures about pensions and other postretirement benefit
plans, requires certain additional information, and eliminates other
existing disclosures. It does not change the measurement or recognition
of these benefit plans. Management believes that adoption of this
Statement will not have a material affect on the consolidated financial
statements.
UNAUDITED FINANCIAL INFORMATION: The unaudited information reflects all
adjustments, consisting of normal recurring accruals, which are, in the
opinion of management, necessary to a fair presentation of the financial
position as of March 31, 1999 and the results of operations and cash
flows for the nine months ended March 31, 1999 and 1998. The results of
the nine month periods are not necessarily indicative of the results
which may be expected for the entire year.
NOTE 2. COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income". This Statement establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Statement requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be disclosed in the financial statements.
Comprehensive income is defined as the change in equity during a period from
transactions and other events from nonowner sources. Comprehensive income is
the total of net income and other comprehensive income, which for the Company
is comprised entirely of unrealized gains and losses on securities available
for sale.
Other comprehensive income is comprised as follows:
<TABLE>
<CAPTION>
Tax
Before Expense Net
Tax (Benefit) of Tax
-----------------------------------------------------
<S> <C> <C> <C>
NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED):
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year $ 163,430 $ 56,324 $ 107,106
Less reclassification adjustment for gains
included in net income 1,614 505 1,109
-----------------------------------------------------
OTHER COMPREHENSIVE INCOME $ 161,816 $ 55,819 $ 105,997
-----------------------------------------------------
-----------------------------------------------------
NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED):
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year $ 139,429 $ 44,772 $ 94,657
Less reclassification adjustment for gains
included in net income 8,734 2,733 6,001
-----------------------------------------------------
OTHER COMPREHENSIVE INCOME $ 130,695 $ 42,039 $ 88,656
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
F-9
<PAGE>
NOTE 2. COMPREHENSIVE INCOME (CONTINUED)
<TABLE>
<CAPTION>
Tax
Before Expense Net
Tax (Benefit) of Tax
----------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED JUNE 30, 1998:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the year $ 114,505 $ 35,827 $ 78,678
Less, reclassification adjustment for gains
included in net income 8,734 2,733 6,001
----------------------------------------------------
OTHER COMPREHENSIVE INCOME $ 105,771 $ 33,094 $ 72,677
----------------------------------------------------
----------------------------------------------------
YEAR ENDED JUNE 30, 1997:
Unrealized gains (losses) on securities available
for sale:
Unrealized holding gains arising during
the year $ 418,766 $ (21,592) $ 440,358
Less, reclassification adjustment for gains
included in net income 21,938 6,864 15,074
----------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) $ 396,828 $ (28,456) $ 425,284
----------------------------------------------------
----------------------------------------------------
YEAR ENDED JUNE 30, 1996:
Unrealized gains (losses) on securities available
for sale:
Unrealized holding (losses) arising during
the year $ (581,450) $ - $ (581,450)
Less, reclassification adjustment for gains
included in net income 22,272 - 22,272
----------------------------------------------------
OTHER COMPREHENSIVE (LOSS) $ (603,722) $ - $ (603,722)
----------------------------------------------------
----------------------------------------------------
</TABLE>
F-10
<PAGE>
NOTE 3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of March 31,
1999 and June 30, 1998, 1997, and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31, 1999 (UNAUDITED):
Securities held to maturity:
Municipal securities $ 749,240 $ 11,853 $ - $ 761,093
Other bonds 25,000 1,235 - 26,235
-------------------------------------------------------------------------------
$ 774,240 $ 13,088 $ - $ 787,328
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Securities available for sale:
U.S. treasury securities $ 11,003,731 $ 101,628 $ - $ 11,105,359
U.S. agency securities 23,785,877 131,750 (88,974) 23,828,653
Mortgage-backed securities 8,781,718 12,193 (40,150) 8,753,761
Municipal securities 1,562,918 68,000 - 1,630,918
Other securities 1,835,315 2,512 (8,013) 1,829,814
-------------------------------------------------------------------------------
$ 46,969,559 $ 316,083 $ (137,137) $ 47,148,505
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
JUNE 30, 1998:
Securities held to maturity:
Mortgage-backed securities $ 1,506,569 $ - $ (5,534) $ 1,501,035
Municipal securities 848,740 1,704 (13,557) 836,887
Other bonds 25,000 776 - 25,776
-------------------------------------------------------------------------------
$ 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 - (11,193) 606,559
Other securities 1,500,806 6,733 (3,243) 1,504,296
-------------------------------------------------------------------------------
$ 32,221,115 $ 66,829 $ (49,699) $ 32,238,245
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
3. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1997:
Securities held to maturity:
Mortgage-backed securities $ 2,317,513 $ 673 $ (15,871) $ 2,302,315
Municipal securities 596,616 1,581 (12,450) 585,747
-------------------------------------------------------------------------------
$ 2,914,129 $ 2,254 $ (28,321) $ 2,888,062
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Securities available for sale:
U.S. treasury securities $ 14,496,366 $ 45,514 $ (20,226) $ 14,521,654
U.S. agency securities 9,742,495 8,462 (120,306) 9,630,651
Mortgage-backed securities 2,357,376 9,388 (6,526) 2,360,238
Other securities 2,390,033 8,971 (13,918) 2,385,086
-------------------------------------------------------------------------------
$ 28,986,270 $ 72,335 $ (160,976) $ 28,897,629
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
JUNE 30, 1996:
Securities held to maturity:
Mortgage-backed securities $ 2,560,793 $ 2,513 $ (48,911) $ 2,514,395
Municipal securities 595,808 1,355 (14,443) 582,720
-------------------------------------------------------------------------------
$ 3,156,601 $ 3,868 $ (63,354) $ 3,097,115
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Securities available for sale:
U.S. treasury securities $ 14,504,449 $ 42,191 $ (156,912) $ 14,389,728
U.S. agency securities 12,612,166 8,759 (355,026) 12,265,899
Mortgage-backed securities 2,851,340 12,930 (20,365) 2,843,905
Other securities 1,550,166 9,079 (26,125) 1,533,120
-------------------------------------------------------------------------------
$ 31,518,121 $ 72,959 $ (558,428) $ 31,032,652
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
All sales of securities during the nine months ended March 31, 1999 and 1998
and the years ended June 30, 1998, 1997, and 1996 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:
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------------
1999 1998 Year Ended June 30,
---------------------------------- -------------------------------------------------------
(Unaudited) 1998 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Proceeds from sales of
securities $ 276,032 $ 14,020 $ 14,020 $ 5,249,967 $ 4,637,700
Gross losses from sales of
securities 1,717 - - 8,486 18,848
Gross gains from sales of
securities 3,331 8,734 8,734 30,424 41,120
</TABLE>
F-12
<PAGE>
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of securities as of June 30, 1998 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.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
-----------------------------------
<S> <C> <C>
Securities held to maturity:
Due in one year or less $ 150,000 $ 149,477
Due after one year through five years 472,434 472,256
Due after five years 251,306 240,930
Mortgage-backed securities 1,506,569 1,501,035
-----------------------------------
$ 2,380,309 $ 2,363,698
-----------------------------------
-----------------------------------
Securities available for sale:
Due in one year or less $ 9,504,013 $ 9,512,590
Due after one year through five years 16,749,829 16,768,880
Due after five years 2,618,971 2,604,064
Mortgage-backed securities 1,847,496 1,848,415
Other securities 1,500,806 1,504,296
-----------------------------------
$ 32,221,115 $ 32,238,245
-----------------------------------
-----------------------------------
</TABLE>
As of June 30, 1998 and 1997, investment securities with a carrying value of
$19,024,656 and $21,928,921, 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
$7,992,513 and an unrealized gain of $1,647 and $12,030 from the held to
maturity portfolio to the available for sale portfolio on January 1, 1999 and
in December 1995, respectively, based on management's reassessment of their
previous designations of securities giving consideration of liquidity needs,
management of interest rate risk, and other factors.
NOTE 4. LOANS RECEIVABLE
The composition of the loan portfolio as of March 31, 1999 and June 30, 1998
and 1997 is presented as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1999 ---------------------------------------
(Unaudited) 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Commercial $ 130,361,279 $ 99,097,297 $ 68,634,556
Real estate 29,926,782 31,145,517 20,293,440
Installment and other consumer 31,391,049 32,732,322 19,437,433
-------------------------------------------------------
191,679,110 162,975,136 108,365,429
Less allowance for estimated losses on loans 2,704,448 2,349,838 1,632,500
-------------------------------------------------------
$ 188,974,662 $ 160,625,298 $ 106,732,929
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
F-13
<PAGE>
NOTE 4. LOANS RECEIVABLE (CONTINUED)
Real estate loans include loans held for sale with a carrying value of
$2,628,600 (unaudited), $4,766,243, and $855,185 as of March 31, 1999 and
June 30, 1998 and 1997, respectively. The market value of these loans
exceeded its carrying value at those dates.
Loans on nonaccrual status amounted to $1,509,283 (unaudited), $1,025,761,
and $230,591 as of March 31, 1999 and June 30, 1998 and 1997, respectively.
Foregone interest income and cash interest collected on nonaccrual loans was
not material during the nine months ended March 31, 1999 and 1998 (unaudited)
and the years ended June 30, 1998, 1997, and 1996.
Changes in the allowance for estimated losses on loans for the nine months
ended March 31, 1999 and 1998 and the years ended June 30, 1998, 1997, and
1996 are presented as follows:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------------
1999 1998 Year Ended June 30,
--------------------------------- -----------------------------------------------------
(Unaudited) 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning $ 2,349,838 $ 1,632,500 $ 1,632,500 $ 852,500 $ 472,475
Provisions charged to
expense 644,400 753,258 901,976 844,391 500,397
Loans charged off (391,944) (93,775) (205,234) (64,913) (120,372)
Recoveries on loans
previously charged off 102,154 17,040 20,596 522 -
-----------------------------------------------------------------------------------------
Balance, ending $ 2,704,448 $ 2,309,023 $ 2,349,838 $ 1,632,500 $ 852,500
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
Impaired loans were not material as of March 31, 1999 (unaudited) and June
30, 1998 and 1997.
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 nine months ended March 31, 1999 and the years ended
June 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
March 31, Year Ended June 30,
1999 ------------------------------------
(Unaudited) 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 4,831,491 $ 2,027,150 $ 1,013,874
Advances 1,719,556 4,016,294 1,858,974
Repayments (1,593,121) (1,211,953) (845,698)
-------------------------------------------------------
Balance, ending $ 4,957,926 $ 4,831,491 $ 2,027,150
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
F-14
<PAGE>
NOTE 5. PREMISES AND EQUIPMENT
The following summarizes the components of premises and equipment as of March
31, 1999 and June 30, 1998 and 1997:
<TABLE>
<CAPTION>
March 31, June 30,
1999 --------------------------------------
(Unaudited) 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Land $ 554,379 $ 554,379 $ 554,379
Buildings 4,487,975 4,476,425 3,503,851
Furniture and equipment 3,873,325 3,669,569 1,808,207
------------------------------------------------------
8,915,679 8,700,373 5,866,437
Less accumulated depreciation 1,503,626 1,040,105 617,748
------------------------------------------------------
$ 7,412,053 $ 7,660,268 $ 5,248,689
------------------------------------------------------
------------------------------------------------------
</TABLE>
Certain Company facilities are leased under various operating leases. Rental
expense was $326,178 (unaudited), $72,581 (unaudited), $176,057, $9,971, and
$20,000 for the nine months ended March 31, 1999 and 1998 and the years ended
June 30, 1998, 1997, and 1996, respectively.
Future minimum rental commitments under noncancelable leases on a fiscal year
basis are as follows as of June 30, 1998:
<TABLE>
<S> <C>
1,999 $ 413,904
2,000 413,904
2,001 413,904
2,002 413,904
2,003 413,904
Thereafter 1,769,768
----------------
$ 3,839,288
----------------
----------------
</TABLE>
NOTE 6. DEPOSITS
The aggregate amount of certificates of deposit each with a minimum
denomination of $100,000, was $31,937,377 and $22,978,1123 as of June 30,
1998 and 1997, respectively.
As of March 31, 1999 and June 30, 1998 the scheduled maturities of
certificates of deposit were as follows:
<TABLE>
<CAPTION>
March 31,
1999 June 30,
(Unaudited) 1998
--------------------------------------
<S> <C> <C>
In one year or less $ 87,841,495 $ 93,224,489
After one year through two years 18,158,615 6,139,765
After two years through three years 6,783,049 2,230,003
After three years through four years 3,603,318 1,541,006
After four years 1,906,193 1,331,905
--------------------------------------
$ 118,292,670 $ 104,467,168
--------------------------------------
--------------------------------------
</TABLE>
F-15
<PAGE>
NOTE 7. SHORT-TERM BORROWINGS
Short-term borrowings as of March 31, 1999 of $7,467,668 consist of overnight
repurchase agreements with customers. As of June 30, 1998 short-term
borrowings of $2,000,000 represent federal funds purchased. There were no
short-term borrowings as of June 30, 1997.
Information concerning repurchase agreements is summarized as follows as of
March 31, 1999 (unaudited):
<TABLE>
<S> <C>
Average daily balance during the nine months $ 2,270,093
Average daily interest rate during the nine months 4.28%
Maximum month-end balance during the nine months 7,467,668
Securities underlying the agreements as of March 31, 1999:
Carrying value $ 10,031,650
Fair value 10,031,650
</TABLE>
The securities underlying the agreements as of March 31, 1999 were under the
Company's control.
ITEM 8. FEDERAL HOME LOAN BANK ADVANCES
The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As
of March 31, 1999 and June 30, 1998 the Bank held $1,299,100 (unaudited) and
$1,234,600, respectively, of FHLB stock. Maturity and interest rate
information on advances from the FHLB as of March 31, 1999 and June 30, 1998
is as follows:
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------
(Unaudited)
Amount Due Interest Rate
----------------------------------
<S> <C> <C>
2000 $ 2,000,000 5.80% to 5.95%
2001 4,750,000 5.43% to 6.02%
2002 2,064,224 6.51% to 7.06%
2003 7,029,597 5.33% to 6.44%
2004 and thereafter 10,039,893 4.88% to 7.11%
----------------
TOTAL FHLB ADVANCES $ 25,883,714
----------------
----------------
<CAPTION>
June 30, 1998
----------------------------------
Amount Due Interest Rate
----------------------------------
<S> <C> <C>
1999 $ -
2000 2,000,000 5.80% to 5.95%
2001 5,750,000 5.43% to 6.02%
2002 2,085,004 6.51% to 7.06%
2003 and thereafter 14,832,170 4.88% to 7.11%
----------------
TOTAL FHLB ADVANCES $ 24,667,174
----------------
----------------
</TABLE>
F-16
<PAGE>
NOTE 8. FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)
Advances from the FHLB are collateralized by 1 to 4 unit residential
mortgages equal to 150% of total outstanding notes. Additionally, securities
with a carrying value of approximately $8.0 million (unaudited) as of March
31, 1999 and $12.5 million as of June 30, 1998 were pledged as collateral on
these advances.
As of June 30, 1997, the Bank had advances from the FHLB totaling
$10,777,712. These advances matured in varying amounts between 1998 and 2012
and carried interest at varying rates between 5.95% and 7.11%. Securities
with a carrying value of approximately $13,434,707 as of June 30, 1997 were
pledged as collateral on these advances. As of June 30, 1997, the Bank also
had an open line of credit with the FHLB for $5,000,000, which was
collateralized by residential real estate mortgages. No amounts were
outstanding on the line of credit as of June 30, 1997. The line of credit
expired on June 26, 1998.
NOTE 9. OTHER BORROWINGS
The Company has a revolving credit note for $4,500,000, which is secured by
all the outstanding stock of the Bank. The outstanding balance on this note
as of March 31, 1999 was $2,500,000 (unaudited) and as of June 30, 1998 and
1997 was $1,500,000. The revolving credit note expired on July 1, 1998. An
amendment to the loan agreement has extended the expiration date to July 1,
2000. Interest is payable quarterly at the adjusted LIBOR rate. Adjusted
LIBOR rate is defined as a rate of interest equal to 2% per annum in excess
of the per annum rate of interest at which U.S. dollar deposits in an amount
comparable to the amount of the relevant LIBOR Loan are offered generally to
the Bank in the London Interbank Eurodollar market at 11:00 a.m. (London
time) two banking days prior to the commencement of each interest period.
The rate was 7% as of March 31, 1999.
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 as of March
31, 1999 (unaudited) and June 30, 1998 and 1997.
NOTE 10. 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 its current ISO. The term of
the new agreement is 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 one year, the Company received total
compensation of $2,900,000. The Company recognized $549,000 (unaudited) of
the income during the nine months ended March 31, 1999. The remaining
$183,000 (unaudited) will be recognized in income during the fourth quarter
of the fiscal year ending June 30, 1999. In addition, the Company will
receive monthly fees of $25,000 for servicing the current merchants during
the remaining term of the agreement. In future years, if an agreement with
another ISO is not established, there could be a significant reduction in
income. The Company is actively pursuing relationships with other ISO's.
F-17
<PAGE>
NOTE 11. FEDERAL AND STATE INCOME TAXES
Federal and state income tax expense was comprised of the following
components for the years ended June 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Current $ 2,231,183 $ 472,385 $ -
Deferred $ (553,283) $ (307,385) $ -
-----------------------------------------------------
$ 1,677,900 $ 165,000 $ -
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
A reconciliation of the expected federal income tax expense to the income tax
expense included in the statements of income was as follows for the years ended
June 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
tax expense $ 1,424,910 35.0% $ 484,517 35.0% $ 238,906 35.0%
Effect of graduated tax rates (40,712) (1.0) (13,843) (1.0) (6,826) (1.0)
Tax exempt income, net (19,759) (0.5) (3,853) (0.3) (2,115) (0.3)
State income taxes, net of
federal benefit 268,796 6.6 44,320 3.2 26,489 3.9
Change in valuation allowance - - (358,934) (25.9) (262,849) (38.5)
Other 44,665 1.1 12,793 0.9 6,395 0.9
----------------------------------------------------------------------------------------
$ 1,677,900 41.2% $ 165,000 11.9% $ - - %
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
NOTE 11. FEDERAL AND STATE INCOME TAXES (CONTINUED)
The net deferred tax assets included with other assets on the balance sheet
consisted of the following as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
Deferred tax assets:
Organization and startup costs $ 27,183 $ 80,618
Net unrealized losses on securities available for sale - 28,456
Capital loss carryforwards 13,830 12,686
Deferred income 292,800 -
Loan and credit card losses 792,127 467,755
Other 7,460 11,087
-----------------------------------
1,133,400 600,602
-----------------------------------
Deferred tax liabilities:
Accrual to cash conversion 58,818 173,747
Premises and equipment 199,035 86,167
Net unrealized gains on securities available
for sale 4,638 -
Other 14,879 4,847
-----------------------------------
277,370 264,761
-----------------------------------
NET DEFERRED TAX ASSET $ 856,030 $ 335,841
-----------------------------------
-----------------------------------
</TABLE>
The change in deferred income taxes was reflected in the financial statements as
follows for the years ended June 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes $ (553,283) $ (307,385) $ -
Statement of stockholders' equity-
accumulated other comprehensive
income, unrealized gains (losses)
on securities available for sale, net 33,094 (28,456) -
------------------------------------------------------
$ (520,189) $ (335,841) $ -
------------------------------------------------------
------------------------------------------------------
</TABLE>
F-19
<PAGE>
NOTE 12. EMPLOYEE BENEFIT PLAN
On February 1, 1994, the Company implemented a profit sharing plan, which
includes a provision designed to qualify under Section 401(k) of the Internal
Revenue Code of 1986, as amended, to allow for participant contributions.
All employees are eligible to participate in the plan. The Company matches
100% of the first 2% of employee contributions, 50% of the next 2% of
employee contributions, and 25% of the next 2% of employee contributions, up
to a maximum amount of 3.5% 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,
1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Matching contribution $100,164 $64,535 $47,233
Discretionary contribution 45,000 30,000 20,000
---------------------------------
$145,164 $94,535 $67,233
---------------------------------
---------------------------------
</TABLE>
NOTE 13. 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 during a five year period
commencing October 13, 1994 (one year after completion of the public
offering). As of June 30, 1998 71,250 of the private placement warrants
had been exercised, leaving 41,250 remaining. As of March 31, 1999
101,250 of the warrants had been exercised, leaving 11,250 remaining.
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 60,000 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).
F-20
<PAGE>
NOTE. 13. WARRANTS AND STOCK BASED COMPENSATION (CONTINUED)
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. The stock options will generally vest 20% per
year. The term of an incentive stock option may not exceed 10 years
from the date of the grant.
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 1 CENT for the nine months ended March 31, 1999 and 1998 and the
years ended June 30, 1998, 1997, and 1996.
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 nine months ended March 31, 1999 and the years ended June 30, 1998,
1997, and 1996: dividend rate of 0%: risk-free interest rates based
upon current rates at the date of grant (5.5% to 7.9%); expected lives
of 10 years, and expected price volatility of 14% to 19%.
F-21
<PAGE>
NOTE 13. WARRANTS AND STOCK BASED COMPENSATION (CONTINUED)
A summary of the stock option plans as of March 31, 1999 and June 30,
1998, 1997, and 1996 and changes during the nine months and years
ended on those dates is presented following.
<TABLE>
<CAPTION>
March 31, 1999 1998
------------------------------ ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Outstanding, beginning 190,887 $ 9.12 175,155 $ 7.89
Granted 750 20.92 19,062 20.92
Exercised (345) 20.84 (75) 18.59
Forfeited (1,247) 16.86 (3,255) 12.15
-------- ---------
Outstanding, ending 190,045 9.13 190,887 9.12
-------- ---------
-------- ---------
Exercisable, ending 139,530 130,455
Weighted average fair value per option
of options granted during the year $ 9.60 $ 9.72
<CAPTION>
1997 1996
------------------------------ ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning 147,030 $ 6.79 139,950 $ 6.64
Granted 28,650 13.51 10,350 8.75
Exercised -- -- -- --
Forfeited (525) 6.85 (3,270) 6.21
-------- ---------
Outstanding, ending 175,155 7.89 147,030 6.79
-------- ---------
-------- ---------
Exercisable, ending 96,345 67,170
Weighted average fair value per option
of options granted during the year $ 6.69 $ 4.27
</TABLE>
F-22
<PAGE>
NOTE 13. WARRANTS AND STOCK BASED COMPENSATION (CONTINUED)
A further summary of options outstanding as of June 30, 1998 is presented
following:
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.00 to $6.83 136,140 5.47 years $ 6.65 121,320 $ 6.65
$7.83 to $8.83 9,360 7.95 years 8.76 3,870 8.76
$10.00 to $11.67 1,500 8.63 years 10.83 300 10.83
$13.33 to $13.67 24,825 9.00 years 13.65 4,965 13.65
$14.09 to $21.33 19,062 9.95 years 20.92 -- --
-------- --------
190,887 130,455
-------- --------
-------- --------
</TABLE>
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, 1998
there were 33,375 SARs granted, with 3,000 currently exercisable.
NOTE 14. PREFERRED STOCK
As of March 31, 1999 and June 30, 1998 and 1997, the Company had 25
(unaudited), 25, and 10 shares, respectively, of Perpetual, Nonvoting
Preferred Stock, Series A (Preferred Stock). The Preferred Stock will
accrue no dividends, nor will it carry any stated dividend rate. After the
first anniversary of the issuance of these shares of Preferred Stock,
subject to all required regulatory approvals and upon a thirty-day notice,
the Company can redeem all outstanding Preferred Stock. The Preferred
Stock shall be redeemed for an amount per share in cash which is 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 is the total number of
calendar days the Preferred Stock being redeemed has been outstanding and
the denominator of which is 365.
All shares of Preferred Stock that have been issued are senior to common
stock as to dividends, liquidation, and redemption rights, but they do not
confer general voting rights.
F-23
<PAGE>
NOTE 15. 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 March 31, 1999 and June 30,
1998 and 1997 with the minimum requirements for the Bank are presented
below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999 (unaudited):
Total risk based capital $23,611,000 11.2% $16,836,000 > 8.0% $21,045,000 > 10.0%
- -
Tier 1 risk based capital 20,979,000 10.0 8,418,000 > 4.0 12,627,000 > 6.0
- -
Leverage ratio 20,979,000 7.2 11,712,000 > 4.0 14,640,000 > 5.0
- -
As of June 30, 1998:
Total risk based capital $20,167,000 11.8% $13,649,408 > 8.0% $17,061,760 > 10.0%
- -
Tier 1 risk based capital 18,032,000 10.6 6,823,841 > 4.0 10,235,762 > 6.0
- -
Leverage ratio 18,032,000 7.6 9,453,211 > 4.0 11,816,514 > 5.0
- -
As of June 30, 1997:
Total risk based capital $15,248,139 11.2% $10,881,812 > 8.0% $13,602,265 > 10.0%
- -
Tier 1 risk based capital 13,623,139 10.0 5,438,379 > 4.0 8,157,568 > 6.0
- -
Leverage ratio 13,623,139 8.8 6,164,316 > 4.0 7,705,395 > 5.0
- -
</TABLE>
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.
F-24
<PAGE>
NOTE 16. EARNINGS PER COMMON SHARE
The following information was used in the computation of basic and diluted
earnings per common share for the nine months ended March 31, 1999 and 1998
and the years ended June 30, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998 Year Ended June 30,
---------------------------- ----------------------------------------------
(Unaudited) 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Basic and diluted earnings,
net income $1,672,224 $1,008,964 $2,393,272 $1,219,336 $ 682,588
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Weighted average common
shares outstanding 2,286,863 2,194,236 2,196,297 2,162,490 2,156,736
Weighted average common
shares issuable upon
exercise of stock
options and warrants 120,033 184,035 157,635 87,878 26,654
----------------------------------------------------------------------------------
Weighted average common
and common equivalent
shares outstanding 2,406,896 2,378,271 2,353,932 2,250,368 2,183,390
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
NOTE 17. 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, 1998 and 1997 commitments to extend credit aggregated
$38,024,001 and $26,318,470, respectively. As of June 30, 1998 and 1997
standby letters of credit aggregated $1,278,000 and $993,000, respectively.
Management does not expect that all of these commitments will be funded.
Bancard is subject to the risk of chargebacks from cardholders and the
merchant being incapable of refunding the amount charged back. Management
attempts to mitigate such risk by regular monitoring of merchant activity and
in appropriate cases, holding cash reserves deposited by the merchant.
F-25
<PAGE>
NOTE 17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998 there were no 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 and certificates of deposit exceeded federal insured limits by
$3,767,204 and $1,091,609 as of June 30, 1998 and 1997, respectively. In the
opinion of management, no material risk of loss exists due to the financial
condition of the upstream correspondent banks.
NOTE 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1999
----------------------------------------------
September December March
1998 1998 1999
----------------------------------------------
<S> <C> <C> <C>
Total interest income $4,785,014 $4,949,961 $4,948,755
Total interest expense 2,692,979 2,718,434 2,673,931
----------------------------------------------
NET INTEREST INCOME 2,092,035 2,231,527 2,274,824
Provision for loan losses 252,000 174,200 218,200
Other income 1,191,066 1,329,819 1,437,189
Other expense 2,301,829 2,376,376 2,472,977
----------------------------------------------
NET INCOME BEFORE INCOME TAXES 729,272 1,010,770 1,020,836
Federal and state income taxes 290,451 391,314 406,889
----------------------------------------------
NET INCOME $ 438,821 $ 619,456 $ 613,947
----------------------------------------------
----------------------------------------------
Earnings per common share:
Basic $ 0.19 $ 0.27 $ 0.27
Diluted 0.18 0.26 0.25
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1998
------------------------------------------------------------------------
September December March June
1997 1997 1998 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 3,405,111 $ 3,746,132 $ 3,797,383 $ 4,127,941
Total interest expense 1,757,272 1,963,477 2,157,917 2,463,355
------------------------------------------------------------------------
NET INTEREST INCOME 1,647,839 1,782,655 1,639,466 1,664,586
Provision for loan losses (304,355) (215,643) (233,260) (148,718)
Other income 822,491 743,817 1,134,103 3,448,006
Other expense (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
</TABLE>
F-26
<PAGE>
NOTE 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30, 1997
------------------------------------------------------------------------
September December March June
1996 1996 1997 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 2,014,237 $ 2,308,760 $ 2,499,725 $ 2,882,922
Total interest expense 1,008,269 1,202,258 1,325,463 1,457,878
------------------------------------------------------------------------
NET INTEREST INCOME 1,005,968 1,106,502 1,174,262 1,425,044
Provision for loan losses (157,400) (146,325) (222,775) (317,891)
Other income 519,208 599,095 790,345 899,106
Other expense (1,108,592) (1,257,025) (1,392,010) (1,533,176)
------------------------------------------------------------------------
NET INCOME BEFORE
INCOME TAXES 259,184 302,247 349,822 473,083
Federal and state income taxes - - - 165,000
------------------------------------------------------------------------
NET INCOME $ 259,184 $ 302,247 $ 349,822 $ 308,083
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings per common share:
Basic $ 0.12 $ 0.14 $ 0.16 $ 0.14
Diluted 0.12 0.13 0.15 0.14
</TABLE>
NOTE 19. PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following is condensed financial information of Quad City Holdings, Inc.
(parent company only):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 --------------------------------
ASSETS (Unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and due from banks $ 1,459,202 $ 433,928 $ 627,808
Securities available for sale, at fair value 411,964 160,946 151,838
Investment in Quad City Bank and Trust Company 20,677,512 18,040,231 13,567,901
Investment in Quad City Bancard, Inc. 711,458 367,916 941,923
Net loans receivable - 502,844 332,994
Other assets 476,593 1,217,502 626,517
----------------------------------------------------
$ 23,736,729 $ 20,723,367 $ 16,248,981
----------------------------------------------------
----------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Liabilities:
Other borrowings $ 2,500,000 $ 1,500,000 $ 1,500,000
Other liabilities 134,375 121,149 135,755
----------------------------------------------------
2,634,375 1,621,149 1,635,755
----------------------------------------------------
Stockholders' Equity:
Preferred stock 25 25 10
Common stock 2,295,876 1,510,374 1,462,824
Additional paid-in capital 14,452,187 15,014,884 13,039,406
Retained earnings 4,235,777 2,564,443 171,171
Accumulated other comprehensive income (loss) 118,489 12,492 (60,185)
----------------------------------------------------
21,102,354 19,102,218 14,613,226
----------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
EQUITY $ 23,736,729 $ 20,723,367 $ 16,248,981
----------------------------------------------------
----------------------------------------------------
</TABLE>
F-27
<PAGE>
NOTE 19. PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------
1999 1998 Year Ended June 30,
---------------------------- ----------------------------------------------
(Unaudited) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 51,009 $ 40,121 $ 48,178 $ 84,431 $ 178,783
Investment securities gains, net 3,331 8,734 8,734 23,437 26,345
Equity in net income of Quad City Bank
and Trust Company 1,524,548 867,118 1,208,090 844,915 300,672
Equity in net income of Quad City
Bancard, Inc. 343,542 229,569 1,325,992 356,318 396,094
Other 57,390 64,666 81,435 63,516 24,000
----------------------------------------------------------------------------------
TOTAL INCOME 1,979,820 1,210,208 2,672,429 1,372,617 925,894
----------------------------------------------------------------------------------
Interest expense 120,267 97,042 129,271 122,885 1,604
Other 334,029 212,902 304,186 342,396 241,702
----------------------------------------------------------------------------------
TOTAL EXPENSES 454,296 309,944 433,457 465,281 243,306
----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX
BENEFIT 1,525,524 900,264 2,238,972 907,336 682,588
Income tax benefit 146,700 108,700 154,300 312,000 -
----------------------------------------------------------------------------------
NET INCOME $1,672,224 $1,008,964 $2,393,272 $1,219,336 $ 682,588
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
NOTE. 19. PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
1999 1998 Year Ended June 30,
--------------------------- ------------------------------------------
(Unaudited) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,672,224 $ 1,008,964 $ 2,393,272 $ 1,219,336 $ 682,588
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 (1,524,548) (867,118) (1,208,090) (844,915) (300,672)
Quad City Bancard, Inc. (343,542) (229,569) 574,008 (356,318) (396,094)
Depreciation 3,152 1,323 3,520 2,647 2,524
Provision for loan losses (7,500) - - (10,000) (8,300)
Amortization of premiums (accretion of
discounts) on securities, net - - - (5,495) 3,079
Investment securities gains, net (3,331) (8,734) (8,734) (23,437) (26,345)
Decrease in accrued interest receivable 4,780 658 749 2,676 20,746
(Increase) decrease in other assets (264,769) 585,836 (605,877) (560,689) (30,731)
Increase (decrease) in other liabilities 13,226 (39,953) (14,606) 35,115 32,429
------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (450,308) 451,407 1,134,242 (541,080) (20,776)
------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net decrease in certificates of deposit at
financial institutions - - - - 420,035
Purchase of securities available for sale (272,400) (5,958) (5,958) (49,515) (117,167)
Proceeds from sale of securities available for sale 15,721 14,020 14,020 95,691 145,512
Proceeds from paydowns on securities - - - 5,496 28,419
Capital infusion, Quad City Bank and
Trust Company - (2,200,000) (3,200,000) (2,100,000) (2,099,000)
Net loans (originated) repaid 510,344 (187,331) (169,850) 809,702 572,837
(Purchase) disposal of premises and equipment - 13,927 10,623 64,326 (69,221)
------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 253,665 (2,365,342) (3,351,165) (1,174,300) (1,118,585)
------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in other borrowings 1,000,000 - - 500,000 1,000,000
Proceeds from issuance of preferred stock - 1,500,000 1,500,000 1,000,000 -
Proceeds from issuance of common stock 221,915 - 523,043 300,000 -
------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,221,915 1,500,000 2,023,043 1,800,000 1,000,000
------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS 1,025,272 (413,935) (193,880) 84,620 (139,361)
Cash and due from banks:
Beginning 433,928 627,808 627,808 343,188 482,549
------------------------------------------------------------------------
Ending $ 1,459,200 $ 213,873 $ 433,928 $ 427,808 $ 343,188
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
F-29
<PAGE>
NOTE 20. 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 instrument
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: The fair value of accrued interest
receivable 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 discount 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: The fair value of the Company's
Federal Home Loan Bank advances is estimated using discounted cash flow
analysis, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
OTHER BORROWINGS: For variable rate debt, the carrying amount is a
reasonable estimate of fair value.
ACCRUED INTEREST PAYABLE: The fair value of accrued interest payable is
equal to its carrying value.
COMMITMENTS TO EXTEND CREDIT: The majority of the Company's commitment
agreements contain variable interest rates, therefore, the carrying
amount is a reasonable estimate of fair value.
F-30
<PAGE>
NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments as of June 30, 1998 and 1997 are presented as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 11,640,813 $ 11,640,813 $ 6,953,463 $ 6,953,463
Federal funds sold 22,960,000 22,960,000 9,190,000 9,190,000
Certificates of deposit at financial institutions 8,366,123 8,366,123 5,359,124 5,359,124
Investment securities:
Held to maturity 2,380,309 2,363,698 2,914,129 2,888,062
Available for sale 32,238,245 32,238,245 28,897,629 28,897,629
Loans receivable, net 160,625,298 162,770,000 106,732,929 108,833,000
Accrued interest receivable 1,773,223 1,773,223 1,374,307 1,374,307
Deposits 197,383,964 197,378,000 135,960,195 135,904,000
Short-term borrowings 2,000,000 2,000,000 - -
Federal Home Loan Bank advances 24,667,174 25,334,000 10,777,712 10,848,000
Other borrowings 1,500,000 1,500,000 1,500,000 1,500,000
Accrued interest payable 1,297,260 1,297,260 724,751 724,751
</TABLE>
NOTE 21. LINE OF BUSINESS INFORMATION
Selected financial information on the Company, the Bank and Bancard is
presented as follows for the nine months ended March 31, 1999 and 1998 and
the years ended June 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
----------------------------- --------------------------------------------
1999 1998 1998 1997 1996
----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Quad City Holdings, Inc.:
Revenue $ 39,482 86,521 $ 114,347 $ 147,384 $ 205,128
Net income (loss) (195,866) (87,723) (140,810) 18,103 (14,178)
Identifiable assets 3,523 5,568 6,675 20,818 87,791
Depreciation 3,152 1,323 3,520 2,647 2,524
Capital expenditures - - - - 69,221
Quad City Bank and Trust Company:
Revenue 17,263,654 12,490,782 17,547,063 10,817,617 7,007,635
Net income (loss) 1,524,548 867,118 1,208,090 84,915 300,672
Identifiable assets 7,267,653 7,406,427 7,535,319 5,108,723 4,396,962
Depreciation 436,657 307,405 389,177 315,312 131,913
Capital expenditures 168,991 2,605,109 2,870,009 1,027,073 2,780,158
Quad City Bancard, Inc.:
Revenue 1,338,668 1,071,734 3,563,574 1,548,397 1,032,991
Net income (loss) 343,542 229,569 1,325,992 356,318 396,094
Identifiable assets 140,877 124,498 118,274 119,148 46,285
Depreciation 23,712 21,793 29,660 16,450 8,736
Capital expenditures 46,315 27,143 28,786 89,313 22,993
</TABLE>
F-31
