U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-22208
Quad City Holdings, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 42-1397595
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3551 7th Street, Suite 100, Moline, Illinois 61265
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(Address of principal executive offices)
(309) 736-3580
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(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days Yes [ x ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,520,474 as of November 13, 1998
<PAGE>
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets,
September 30, 1998 & June 30, 1998
Consolidated Statements of Income,
For the Three Months Ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows,
For the Three Months Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
<PAGE>
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 1998 and June 30, 1998
<TABLE>
September 30, June 30,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,697,861 $ 11,640,813
Federal funds sold 27,150,000 22,960,000
Certificates of deposit at financial institutions 10,633,581 8,366,123
Securities held to maturity, at amortized cost 2,176,314 2,380,309
Securities available for sale, at fair value 32,237,527 32,238,245
------------ ------------
Total securities 34,413,841 34,618,554
------------ ------------
Loans receivable 176,371,793 162,975,136
Less: Allowance for estimated losses on loans (2,531,201) (2,349,838)
------------ ------------
Net loans receivable 173,840,592 160,625,298
------------ ------------
Premises and equipment, net 7,614,372 7,660,268
Accrued interest receivable 1,939,066 1,773,223
Other assets 1,485,709 2,506,710
------------ ------------
Total assets $264,775,022 $250,150,989
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 29,992,138 $ 26,605,138
Interest-bearing deposits 181,163,210 170,778,826
------------ ------------
Total deposits 211,155,348 197,383,964
------------ ------------
Federal funds purchased - - 2,000,000
Federal Home Loan Bank advances 26,082,220 24,667,174
Other borrowings 2,500,000 1,500,000
Other liabilities 5,132,060 5,497,633
------------ ------------
Total liabilities 244,869,628 231,048,771
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; shares authorized 250,000; shares
issued and outstanding 25 25 25
Common stock, $1 par value; shares authorized 2,500,000;
shares issued and outstanding September, 1998, 1,520,474;
June, 1998, 1,510,374 1,520,474 1,510,374
Additional paid-in capital 15,116,397 15,014,884
Retained earnings 3,003,264 2,564,443
------------ ------------
19,640,160 19,089,726
Accumulated other comprehensive income, unrealized gains on
securities available for sale, net 265,234 12,492
------------ ------------
Total stockholders' equity 19,905,394 19,102,218
------------ ------------
Total liabilities and stockholders' equity $264,775,022 $250,150,989
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30
<TABLE>
Three Months Ended September 30,
1998 1997
--------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans ............................. $3,713,870 $2,617,161
Interest and dividends on securities ................... 508,078 499,436
Interest on federal funds sold ......................... 403,256 89,116
Other interest ......................................... 159,810 99,394
---------- ----------
Total interest income ............................. 4,785,014 3,305,107
---------- ----------
Interest expense:
Interest on deposits .................................. 2,237,902 1,492,958
Interest on borrowings ................................ 455,077 264,314
---------- ----------
Total interest expense ............................ 2,692,979 1,757,272
---------- ----------
Net interest income ............................... 2,092,035 1,547,835
Provision for loan losses .................................. 252,000 304,355
---------- ----------
Net interest income after provision for loan losses 1,840,035 1,243,480
---------- ----------
Noninterest income:
Merchant credit card fees, net of processing costs ..... 193,627 418,734
Trust department fees .................................. 313,705 247,329
Deposit service fees ................................... 100,280 62,422
Gains on sales of loans, net ........................... 270,548 100,004
Investment securities gains, net ....................... 0 0
Gain on restructuring of merchant broker agreement ..... 183,000 0
Other .................................................. 129,906 94,006
---------- ----------
Total noninterest income .......................... 1,191,066 922,495
---------- ----------
Noninterest expenses:
Salaries and employee benefits ......................... 1,366,456 967,293
Professional and data processing fees .................. 139,941 121,675
Advertising and marketing .............................. 86,490 51,922
Occupancy and equipment expense ........................ 351,665 201,898
Stationery and supplies ................................ 73,205 36,692
Provision for merchant credit card losses .............. 1,963 25,125
Postage and telephone .................................. 70,381 45,400
Other .................................................. 211,728 156,828
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Total noninterest expenses ........................ 2,301,829 1,606,833
---------- ----------
Income before income taxes .................................. 729,272 559,142
Federal and state income taxes .............................. 290,451 218,200
---------- ----------
Net income ........................................ $ 438,821 $ 340,942
========== ==========
Earnings per common share:
Basic ............................................. $ 0.29 $ 0.23
Diluted ........................................... $ 0.27 $ 0.22
Weighted average common shares outstanding ........ 1,518,876 1,462,824
Weighted average common and common equivalent
shares outstanding .......................... 1,612,046 1,551,728
Comprehensive income ........................................ $ 691,563 $ 411,564
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
Three Months Ended September 30,
1998 1997
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 438,821 $ 340,942
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation .......................................................... 147,226 97,497
Provision for loan losses ............................................. 252,000 304,355
Provision for merchant credit card losses ............................. 1,963 25,125
(Accretion of discounts) on securities, net ............................ (533) (4,526)
Loans originated for sale ............................................. (20,603,450) (7,514,145)
Proceeds on sales of loans ............................................ 21,413,051 5,824,149
Net gains on sales of loans ........................................... (270,548) (100,004)
Gain on restructuring of merchant broker agreement .................... (183,000) 0
(Increase) in accrued interest receivable ............................. (165,843) (16,621)
(Increase) decrease in other assets ................................... 1,021,001 (452,097)
(Decrease) in other liabilities ....................................... (315,942) (2,407,154)
------------ ------------
Net cash provided by (used in) operating activities ................ $ 1,734,746 $ (3,902,479)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold ........................... (4,190,000) 6,950,000
Net (increase) in certificates of deposits at financial institutions .... (2,267,458) (208,109)
Purchase of securities available for sale ............................... (3,525,284) (1,284,294)
Proceeds from calls and maturities of securities ........................ 3,750,000 1,000,000
Proceeds from paydowns on securities .................................... 364,678 187,333
Net loans originated .................................................... (14,006,347) (19,450,100)
Purchase of premises and equipment ...................................... (101,330) (243,113)
------------ ------------
Net cash used in investing activities .............................. $(19,975,741) $(13,048,283)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts ........................................ 13,771,384 9,326,984
Net (decrease) in federal funds purchased ............................... (2,000,000) 0
Proceeds from Federal Home Loan Bank advances ........................... 4,032,120 8,500,000
Payments on Federal Home Loan Bank advances ............................. (2,617,074) (44,253)
Net increase in other borrowings ........................................ 1,000,000 0
Proceeds from issuance of preferred stock ............................... 0 1,000,000
Proceeds from issuance of common stock .................................. 111,613 0
------------ ------------
Net cash provided by financing activities .......................... $ 14,298,043 $ 18,782,731
------------ ------------
Net increase (decrease) in cash and due from banks ................. (3,942,952) 1,831,969
Cash and due from banks, beginning ................................. 11,640,813 6,953,463
------------ ------------
Cash and due from banks, ending .................................... $ 7,697,861 $ 8,785,432
============ ============
Supplemental disclosure of cash flow information, cash payments for:
Interest ................................................................ $ 2,529,291 $ 1,589,664
============ ============
Income/franchise taxes .................................................. $ 80,000 $ 265,000
============ ============
Supplemental schedule of noncash investing activities:
Change in unrealized gains (losses) on securities available for sale, net $ 252,742 $ 70,622
============ ============
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Part I
Item 1
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include information or footnotes necessary for a fair presentation of
financial position, results of operations and changes in financial condition in
conformity with generally accepted accounting principles. However, all
adjustments that are, in the opinion of management, necessary for a fair
presentation have been included. Results for the period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1999.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Quad
City Holdings, Inc. (the "Company"), a Delaware corporation, and its wholly
owned subsidiaries, Quad City Bank and Trust Company (the "Bank") and Quad City
Bancard, Inc. ("Bancard"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 3 - EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a
basic and diluted basis.
Three months ended
September 30,
---------------------------
1998 1997
---------- ----------
Net income, basic and diluted
earnings ............................... $ 438,821 $ 340,942
========== ==========
Weighted average common shares
outstanding ............................ 1,518,876 1,462,824
Weighted average common shares
Issuable upon exercise of stock
Options and warrants .................... 93,170 88,904
---------- ----------
Weighted average common and
Common equivalent shares
Outstanding ............................. 1,612,046 1,551,728
========== ==========
<PAGE>
Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Quad City Holdings, Inc. (the "Company") is the parent company of Quad
City Bank and Trust Company (the "Bank"), which commenced operations in January
1994. The Bank is an Iowa-chartered commercial bank that is a member of the
Federal Reserve System with depository accounts insured by the Federal Deposit
Insurance Corporation. The Bank provides full-service commercial and consumer
banking services in Bettendorf and Davenport, Iowa and Moline, Illinois and in
adjacent communities.
Quad City Bancard, Inc. ("Bancard") provides merchant credit card
processing services. Bancard has contracted with an independent sales
organization ("ISO") that markets credit card services to merchants throughout
the country. The current contract expires in June 1999. At September 30, 1998
approximately 12,500 merchants were processing transactions with Bancard.
The Company has a fiscal year end of June 30.
FINANCIAL CONDITION
Total assets of the Company increased by $14,624,033 or 5.85% to
$264,775,022 at September 30, 1998 from $250,150,989 at June 30, 1998. The
growth primarily resulted from an increase in deposits received from customers
and from Federal Home Loan Bank ("FHLB") advances.
Cash and due from banks decreased by $3,942,952 or 33.87% to $7,697,861 at
September 30, 1998 from $11,640,813 at June 30, 1998 and represented both cash
maintained at the Bank, as well as funds that the Bank and the Company had
deposited in other banks in the form of demand deposits.
Federal funds sold are inter-bank funds with daily liquidity. At September
30, 1998, the Bank had $27,150,000 invested in such funds. This amount increased
by $4,190,000 or 18.25% from $22,960,000 at June 30, 1998.
Certificates of deposit at financial institutions increased by $2,267,458
or 27.10% to $10,633,581 at September 30, 1998 from $8,366,123 at June 30, 1998.
The Bank continued to make new deposits in other banks in the form of
certificates of deposit.
Securities decreased by $204,713 or 0.59% to $34,413,841 at September 30,
1998 from $34,618,554 at June 30, 1998. The decrease was the result of a number
of transactions in the securities portfolio. Additional securities, classified
as available for sale, were purchased in the amount of $3,525,284. The accretion
of discounts, net of the amortization of premiums, was $533, and the increase in
unrealized gains on securities available for sale, before applicable income tax,
was $384,148. The increase was offset by paydowns received on mortgage-backed
securities of $364,678 and the maturities and calls of securities in the amount
of $3,750,000.
Loans receivable increased by $13,396,657 or 8.22% to $176,371,793 at
September 30, 1998 from $162,975,136 at June 30, 1998. The increase was the
result of the origination or purchase of $47,717,369 of commercial business,
consumer and real estate loans, less loan repayments and payments on sales of
loans of $34,229,808. 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 allowance for estimated losses on loans at September 30, 1998 was
$2,531,201, representing approximately 1.4% of gross loans outstanding.
Similarly, the allowance for estimated losses on loans at June 30, 1998 was
approximately 1.4% of gross loans outstanding, or $2,349,838. Although
management believes that the allowance for estimated losses on loans at
September 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 the Company will not be required to make additional provisions for loan
losses in the future.
<PAGE>
Premises and equipment decreased by $45,896 or 0.60% to $7,614,372 at
September 30, 1998 from $7,660,268 at June 30, 1998. The decrease resulted from
depreciation expense offset by the purchase of additional furniture, fixtures
and equipment for the Bank and Bancard.
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $165,843 or 9.35% to $1,939,066 at September 30, 1998 from
$1,773,223 at June 30, 1998. The increase was primarily due to greater average
outstanding balances in interest-bearing assets.
Other assets decreased by $1,021,001 or 40.73% to $1,485,709 at September
30, 1998 from $2,506,710 at June 30, 1998. Other assets consisted mainly of
miscellaneous receivables, prepaid expenses and accrued trust department income.
The substantial decrease reflected a $1,344,086 decrease in receivables due to
Bancard, which was a result of the timing of the receipt of funds from Visa and
Mastercard and the subsequent payout to merchants.
Deposits increased by $13,771,384 or 6.98% to $211,155,348 at September
30, 1998 from $197,383,964 at June 30, 1998. The increase resulted from a
$5,972,121 net increase in non-interest bearing, NOW, money market and other
savings accounts and a $7,799,263 net increase in certificates of deposit.
Federal funds purchased decreased from $2,000,000 at June 30, 1998 to $0
at September 30, 1998. The Bank, on occasion, makes a purchase of Federal funds
for the short term from some of its correspondent banks.
FHLB advances increased by $1,415,046 or 5.74% to $26,082,220 at September
30, 1998 from $24,667,174 at June 30, 1998. 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 increase was primarily
attributable to the fact that the use of the advances enabled the Bank to hedge
against the possibility of rising interest rates.
Other borrowings increased by $1,000,000 or 66.67% to $2,500,000 at
September 30, 1998 from $1,500,000 at June 30, 1998. Other borrowings of
$2,500,000 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, the Company amended the credit note for a total amount of
$4,500,000 extending the expiration date to July 1, 2000. The borrowed funds
were utilized to provide additional capital to the Bank to maintain an 8%
aggregate capital ratio.
Other liabilities decreased by $365,573 or 6.65% to $5,132,060 at
September 30, 1998 from $5,497,633 at June 30, 1998. Other liabilities was
comprised of unpaid amounts for various products and services, and accrued but
unpaid interest on deposits.
Preferred stock of $25 at both September 30, 1998 and June 30, 1998
represented 25 shares at $1.00 par value of the Company's perpetual, nonvoting
preferred stock.
Common stock increased by $10,100 or 0.67% to $1,520,474 at September 30,
1998 from $1,510,374 at June 30, 1998. The increase was the result of the
issuance of 10,100 shares at $1.00 par value of the Company's common stock
through the exercise of warrants and options.
Additional paid-in capital increased by $101,513 or 0.68% to $15,116,397
at September 30, 1998 from $15,014,884 at June 30, 1998. The increase resulted
from cash received in excess of the par value for the 10,100 shares of common
stock.
Retained earnings increased by $438,821 or 17.11% to $3,003,264 at
September 30, 1998 from $2,564,443 at June 30, 1998 to reflect net income for
the three months.
Unrealized gains and losses on securities available for sale, net of
related income taxes, was a $265,234 gain at September 30, 1998 as compared to a
$12,492 gain at June 30, 1998. The increase was attributable to the increase
during the quarter in fair value of the securities identified as available for
sale.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for the three-month period ended September 30, 1998 was
$438,821 as compared to net income of $340,942 for the same period in 1997 for
an increase of $97,879 or 28.71%.
Interest income increased by $1,479,907 from $3,305,107 for the three
month period ended September 30, 1997 to $4,785,014 for the three month period
ended September 30, 1998. The 44.78% rise in interest income was primarily
attributable to greater average outstanding balances in interest earning assets.
Interest expense increased by $935,707 from $1,757,272 for the three month
period ended September 30, 1997 to $2,692,979 for the three month period ended
September 30, 1998. The 53.25% increase in interest expense was primarily
attributable to greater average outstanding balances in interest bearing
liabilities.
The Company had an allowance for estimated losses on loans of
approximately 1.4% of total loans at September 30, 1998 and 1997. The provision
for loan losses decreased by $52,355 from $304,355 for the three month period
ended September 30, 1997 to $252,000 for the three month period ended September
30, 1998. The primary loan growth for the quarter was in the real estate and
commercial loan portfolios as opposed to the consumer loan portfolio, which
carries a greater degree of risk. Asset quality is a priority for the Company
and its subsidiaries. The ability to grow profitably is, in part, dependent upon
the ability to maintain that quality. The Company intends to continue to closely
monitor the loan portfolio and currently does not anticipate any material
losses.
Other income increased by $268,571 from $922,495 for the three month
period ended September 30, 1997 to $1,191,006 for the three month period ended
September 30, 1998. Other income at September 30, 1998 and 1997 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 increase was primarily due to increased loan sales
activity in the residential real estate department of the Bank and the
recognition of deferred income resulting from a gain on the restructuring of
Bancard's merchant broker agreement.
In June 1998, the Company recognized $2,168,000 of income as the result of
signing a new merchant broker agreement with its current ISO. The term of the
new agreement is for a 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,
which was recognized in income during the Company's last fiscal year. During
this first fiscal quarter, $183,000 was recognized in income related to this
transaction. The remaining $549,000 will be recognized in income during the
remainder of the fiscal year ending June 30,1999. Additionally, the Company is
receiving a monthly fee 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. It is the Company's intent, however, to actively pursue relationships
with one or more ISOs.
Merchant credit card fees, net of processing costs, decreased by $225,107
from $418,734 for the three month period ended September 30, 1997 to $193,627
for the three month period ended September 30, 1998. Bancard continued the
process of restructuring its merchant portfolio to focus on smaller merchants
with less risk and as a result experienced reduced earnings.
The main components of other expenses were primarily salaries and
benefits, occupancy and equipment expenses, and professional and data processing
fees, for both periods. Other expenses for the three months ended September 30,
1998 were $2,301,829 as compared to $1,606,833 for the same period in 1997, or
an increase of $694,996.
From September 30, 1997 to September 30, 1998, salaries and benefits
experienced the most significant dollar increase of any noninterest expense
component. For the three months ended September 30, 1998, total salaries and
benefits increased to $1,366,456 or $399,163 over the 1997 quarter total of
$967,293. The change was primarily attributable to the addition of eleven new
Bank employees during the quarter and increased commission expense in the real
estate department proportionate to the large volume of loan originations and
subsequent loan sales.
The provision for income taxes was $290,451 for the three-month period
ended September 30, 1998 compared to $218,200 for the three-month period ended
September 30, 1997 for an increase of $72,251 or 33.11%.
<PAGE>
OTHER DEVELOPMENTS
Construction of the Davenport full service banking facility was completed
in July 1996 to provide for the convenience of customers and to expand the
Bank's market territory. 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
developer owns the northern portion. The Bank occupies its first floor and
utilizes the basement for the operations and item processing department, as well
as storage. The second floor is leased to two law firms. In addition, the
residential real estate department of the Bank began leasing approximately 2,500
square feet in the attached building across the first floor atrium in January
1998.
Renovation of a third full service banking facility was completed in
February 1998 at the historic Velie Plantation Mansion located near the
intersection of 7th Street and John Deere Road in Moline, Illinois near the Rock
Island/Moline border. The developer owns the building and both the Bank and
Bancard are major tenants. Bancard relocated its operations to the lower level
of the 35,000 square foot building in December 1997. The Bank began its
operations on the first floor of the building on February 17, 1998. The Bank is
leasing the entire first floor of the building, and is subleasing approximately
3,500 square feet to a non-related entity for the first twenty-four months of
the lease contract.
YEAR 2000 COMPLIANCE
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, the Company started
the process of identifying the hardware and software issues required to be
addressed to assure Year 2000 compliance. The Company began by assessing the
issues related to the Year 2000 and the potential for those issues to adversely
affect the Company's operations and those of its subsidiaries.
Since that time, the Company 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 the Company's operations. The committee has identified all
mission-critical software and hardware that may be adversely affected by the
Year 2000 and has required vendors to represent that the systems and products
provided are or will be Year 2000 compliant.
The Company licenses all software used in conducting its business from
third party vendors. None of the Company's software has been internally
developed. The Company has developed a comprehensive list of all software, all
hardware and all service providers used by the Company. Every vendor has been
contacted regarding the Year 2000 issue, and the Company 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 the Company
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 March 31, 1999. The Company 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, the
Company continues to monitor all other major vendors of services to the Company
for Year 2000 issues in order to avoid shortages of supplies and services in the
coming months. The Company 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 the Company has an
important relationship, i.e. Ameritech, McLeod and US West (phone service), and
MidAmerican Energy Corporation (electricity and natural gas). The Company has
not identified any practical, long-term alternatives to relying on these
companies for basic utility services. In the event that the utilities
significantly curtailed or interrupted their services to the Company, it would
have a significant adverse effect on the Company's ability to conduct business.
<PAGE>
The Company also has tested such things as vault doors, alarm systems,
networks, etc. and is not aware of any significant problems with such systems.
The Company's cumulative costs of the Year 2000 project through the first
quarter of fiscal 1999 have been $57,600. The estimated total cost of the Year
2000 project is $200,000. 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.
The Company is committed to a plan for achieving compliance, focusing not
only on its own data processing systems, but also on its loan customers. The
Year 2000 committee has taken steps to educate and assist its customers with
identifying their Year 2000 compliance problems. In addition, the management
committee has proposed policy and procedure changes to help identify potential
risks to the Company and to gain an understanding of how customers are managing
the risks associated with the Year 2000. The Company is assessing the impact, if
any, the Year 2000 will have on its credit risk and the loan underwriting. In
connection with potential credit risk related to the Year 2000 issue, the
Company has contacted its large commercial loan customers regarding their level
of preparedness for the Year 2000.
The Company has developed contingency plans for various Year 2000 problems
and continues to revise those plans based on testing results and vendor
notifications.
RECENT REGULATORY DEVELOPMENTS/YEAR 2000
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 (the
"FFIEC"), but are not intended to replace or supplant the FFIEC 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, as amended (the "FDIA"), 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 FDIA, 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 FDIA, 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.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. Management believes that adoption of this
Statement will not have a material effect on the consolidated financial
statements.
The Financial Accounting Standards Board has issued SFAS No. 134
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" which is
effective for fiscal quarters beginning after December 15, 1998. This Statement
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests as held to maturity,
available for sale, or trading based on its ability and intent to sell or hold
those investments. Management believes that adoption of this Statement will not
have a material effect on the consolidated financial statements.
<PAGE>
Part II
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QUAD CITY HOLDINGS, INC.
(Registrant)
Date November 13, 1998 By: /s/ Douglas M. Hultquist
--------------------------------------------
Douglas M. Hultquist, President
Date November 13, 1998 /s/ Michael A. Bauer
---------------------------------------------
Michael A. Bauer, Chairman
Date November 13, 1998 /s/ Douglas M. Hultquist
---------------------------------------------
Douglas M. Hultquist, President
Principal Executive, Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
SEPTEMBER 30, 1998 FORM 10-Q FOR QUAD CITY HOLDINGS, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 7,698
<INT-BEARING-DEPOSITS> 10,634
<FED-FUNDS-SOLD> 27,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,238
<INVESTMENTS-CARRYING> 2,176
<INVESTMENTS-MARKET> 0
<LOANS> 176,372
<ALLOWANCE> 2,531
<TOTAL-ASSETS> 264,775
<DEPOSITS> 211,155
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,132
<LONG-TERM> 31,582
0
0
<COMMON> 1,520
<OTHER-SE> 18,385
<TOTAL-LIABILITIES-AND-EQUITY> 264,775
<INTEREST-LOAN> 3,714
<INTEREST-INVEST> 508
<INTEREST-OTHER> 563
<INTEREST-TOTAL> 4,785
<INTEREST-DEPOSIT> 2,238
<INTEREST-EXPENSE> 2,693
<INTEREST-INCOME-NET> 2,092
<LOAN-LOSSES> 252
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,302
<INCOME-PRETAX> 729
<INCOME-PRE-EXTRAORDINARY> 439
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439
<EPS-PRIMARY> .29
<EPS-DILUTED> .27
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,350
<CHARGE-OFFS> 71
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,531
<ALLOWANCE-DOMESTIC> 2,531
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
