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 December 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------------- --------------------
Commission file number 0-22208
Quad City Holdings, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 42-1397595
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3551 7th Street, Suite 100, Moline, Illinois 61265
--------------------------------------------------
(Address of principal executive offices)
(309) 736-3580
---------------------------
(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 the 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: 2,280,846 as of February 12, 1999
<PAGE>
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets,
December 31, 1998 & June 30, 1998
Consolidated Statements of Income,
For the Three Months Ended December 31, 1998 and 1997
Consolidated Statements of Income,
For the Six Months Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows,
For the Six Months Ended December 31, 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)
December 31, 1998 and June 30, 1998
<TABLE>
December 31, June 30,
1998 1998
------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................ $ 10,409,017 $ 11,640,813
Federal funds sold ............................................. 27,475,000 22,960,000
Certificates of deposit at financial institutions .............. 12,046,201 8,366,123
Securities held to maturity, at amortized cost ................. 1,803,163 2,380,309
Securities available for sale, at fair value ................... 37,285,049 32,238,245
------------------------------
Total securities .......................................... 39,088,212 34,618,554
------------------------------
Loans receivable ............................................... 187,156,061 162,975,136
Less: Allowance for estimated losses on loans .................. (2,628,952) (2,349,838)
------------------------------
Net loans receivable ...................................... 184,527,109 160,625,298
------------------------------
Premises and equipment, net .................................... 7,497,135 7,660,268
Accrued interest receivable .................................... 1,821,646 1,773,223
Other assets ................................................... 2,918,760 2,506,710
------------------------------
Total assets ........................................... $ 285,783,080 $ 250,150,989
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing deposits ................................ $ 41,696,121 $ 26,605,138
Interest-bearing deposits ................................... 189,713,227 170,778,826
------------------------------
Total deposits ............................................ 231,409,348 197,383,964
------------------------------
Federal funds purchased ........................................ 0 2,000,000
Federal Home Loan Bank advances ................................ 26,871,547 24,667,174
Other borrowings ............................................... 2,500,000 1,500,000
Other liabilities .............................................. 4,470,662 5,497,633
------------------------------
Total liabilities ...................................... 265,251,557 231,048,771
------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; shares authorized 250,000; shares 25 25
issued and
outstanding 25
Common stock, $1 par value; shares authorized 5,000,000; shares
issued and
outstanding December 1998, 2,280,846; June 1998, 1,510,374 ... 2,280,846 1,510,374
Additional paid-in capital ..................................... 14,356,807 15,014,884
Retained earnings .............................................. 3,621,830 2,564,443
------------------------------
20,259,508 19,089,726
Accumulated other comprehensive income, unrealized gain on
securities available for sale, net ........................... 272,015 12,492
------------------------------
Total stockholders' equity ............................. 20,531,523 19,102,218
------------------------------
Total liabilities and stockholders' equity ............. $ 285,783,080 $ 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 December 31
<TABLE>
Three Months Ended
December 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans ............................. $ 3,917,314 $ 2,955,441
Interest and dividends on securities ................... 504,153 485,988
Interest on federal funds sold ......................... 354,438 78,473
Other interest ......................................... 174,056 97,930
--------------------------
Total interest income ............................. 4,949,961 3,617,832
--------------------------
Interest expense:
Interest on deposits .................................. 2,254,491 1,646,371
Interest on borrowings ................................ 463,943 317,106
--------------------------
Total interest expense ............................ 2,718,434 1,963,477
--------------------------
Net interest income ............................... 2,231,527 1,654,355
Provision for loan losses .................................. 174,200 215,643
--------------------------
Net interest income after provision for loan losses 2,057,327 1,438,712
--------------------------
Noninterest income:
Merchant credit card fees, net of processing costs ..... 217,459 316,694
Trust department fees .................................. 372,987 278,458
Deposit service fees ................................... 100,886 66,946
Gains on sales of loans, net ........................... 337,375 128,300
Investment securities gains, net
Gain on restructuring of merchant broker agreement ..... 183,000 0
Other .................................................. 118,112 81,719
--------------------------
Total noninterest income .......................... 1,329,819 872,117
--------------------------
Noninterest expenses:
Salaries and employee benefits ......................... 1,450,346 968,988
Professional and data processing fees .................. 139,539 127,132
Advertising and marketing .............................. 95,866 80,681
Occupancy and equipment expense ........................ 362,159 205,781
Stationery and supplies ................................ 65,595 47,717
Provision for merchant credit card losses .............. (538) 35,075
Postage and telephone .................................. 71,192 41,989
Other .................................................. 192,217 198,736
--------------------------
Total noninterest expenses ........................ 2,376,376 1,706,099
--------------------------
Income before income taxes .................................. 1,010,770 604,730
Federal and state income taxes .............................. 391,314 237,075
==========================
Net income ........................................ $ 619,456 $ 367,655
==========================
Earnings per common share: *
Basic ............................................. $ 0.27 $ 0.17
Diluted ........................................... $ 0.26 $ 0.16
Weighted average common shares outstanding ........ 2,280,794 2,194,236
Weighted average common and common equivalent
shares outstanding .......................... 2,404,968 2,354,858
Comprehensive income ........................................ $ 626,237 $ 393,446
</TABLE>
* On November 30, 1998 the Company issued an additional 760,262 shares necessary
to effect a 3 for 2 common stock split. Per share data has been retroactively
adjusted for the split as if it occurred on July 1, 1997.
<PAGE>
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended December 31
<TABLE>
Six Months Ended
December 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Interest income:
Interest and fees on loans ............................. $7,631,184 $5,572,602
Interest and dividends on securities ................... 1,012,231 985,424
Interest on federal funds sold ......................... 757,694 167,589
Other interest ......................................... 333,866 197,324
-----------------------
Total interest income ............................. 9,734,975 6,922,939
-----------------------
Interest expense:
Interest on deposits .................................. 4,492,393 3,139,329
Interest on borrowings ................................ 919,020 581,420
-----------------------
Total interest expense ............................ 5,411,413 3,720,749
-----------------------
Net interest income ............................... 4,323,562 3,202,190
Provision for loan losses .................................. 426,200 519,998
-----------------------
Net interest income after provision for loan losses 3,897,362 2,682,192
-----------------------
Noninterest income:
Merchant credit card fees, net of processing costs ..... 411,086 735,428
Trust department fees .................................. 686,692 525,787
Deposit service fees ................................... 201,166 129,368
Gains on sales of loans, net ........................... 607,923 228,304
Investment securities gains, net ....................... 366,000 0
Other .................................................. 248,018 175,725
------------------------
Total noninterest income .......................... 2,520,885 1,794,612
------------------------
Noninterest expenses:
Salaries and employee benefits ......................... 2,816,802 1,936,281
Professional and data processing fees .................. 279,480 248,807
Advertising and marketing .............................. 182,356 132,603
Occupancy and equipment expense ........................ 713,824 407,679
Stationery and supplies ................................ 138,800 84,409
Provision for merchant credit card losses .............. 1,425 60,200
Postage and telephone .................................. 141,573 87,389
Other .................................................. 403,945 355,564
------------------------
Total noninterest expenses ........................ 4,678,205 3,312,932
------------------------
Income before income taxes .................................. 1,740,042 1,163,872
Federal and state income taxes .............................. 681,765 455,275
-----------------------
Net income ........................................ $1,058,277 $ 708,597
=======================
Earnings per common share: *
Basic ............................................. $ 0.46 $ 0.32
Diluted ........................................... $ 0.44 $ 0.30
Weighted average common shares outstanding ........ 2,279,554 2,194,236
Weighted average common and common equivalent
shares outstanding .......................... 2,402,597 2,341,208
Comprehensive income ........................................ $1,317,800 $ 734,388
<FN>
* On November 30, 1998 the Company issued an additional 760,262 shares necessary
to effect a 3 for 2 common stock split. Per share data has been retroactively
adjusted for the split as if it occurred on July 1, 1997.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended December 31
<TABLE>
Six Months Ended
December 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 1,058,277 $ 708,597
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation ........................................... 295,313 201,161
Provision for loan losses .............................. 426,200 519,998
Provision for merchant credit card losses .............. 1,425 60,200
Amortization of premiums (accretion of discounts) on
securities, net ...................................... 909 (9,425)
Loans originated for sale .............................. (50,843,410) (17,838,625)
Proceeds on sales of loans ............................. 50,720,117 15,987,429
Net gains on sales of loans ............................ (607,923) (228,304)
Gain on restructuring of merchant broker agreement ..... (366,000) 0
(Increase) in accrued interest receivable .............. (48,423) (213,279)
(Increase) in other assets ............................. (412,050) (440,800)
(Decrease) in other liabilities ........................ (798,414) (844,557)
----------------------------
Net cash provided by (used in) operating activities . $ (573,979) $ (2,097,605)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in federal funds sold ..................... (4,515,000) (2,135,000)
Net (increase) in certificates of deposits at financial .. (3,680,078) (801,247)
institutions
Purchase of securities held to maturity .................. 0 (251,413)
Purchase of securities available for sale ................ (11,853,678) (3,738,088)
Proceeds from calls and maturities of securities ......... 6,850,000 3,000,000
Proceeds from paydowns on securities ..................... 928,652 432,746
Proceeds from sales of securities available for sale ..... 0 0
Net loans originated ..................................... (23,596,795) (29,992,501)
Purchase of premises and equipment ....................... (132,180) (1,435,044)
----------------------------
Net cash used in investing activities ............... $(35,999,079) $(34,920,547)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts ......................... 34,025,384 27,413,088
Net (decrease) in federal funds purchased ................ (2,000,000) 0
Proceeds from Federal Home Loan Bank advances ............ 9,944,698 17,900,000
Payments on Federal Home Loan Bank advances .............. (7,740,325) (7,864,250)
Net increase in other borrowings ......................... 1,000,000 0
Proceeds from issuance of preferred stock ................ 0 1,500,000
Proceeds from issuance of common stock, net .............. 111,505 0
----------------------------
Net cash provided by financing activities ........... $ 35,341,262 $ 38,948,838
----------------------------
Net increase (decrease) in cash and due from banks .. (1,231,796) 1,930,686
Cash and due from banks, beginning .................. 11,640,813 6,953,463
----------------------------
Cash and due from banks, ending ..................... $ 10,409,017 $ 8,884,149
============================
Supplemental disclosure of cash flow information, cash payments for:
Interest ................................................. $ 5,250,847 $ 3,459,770
============================
Income/franchise taxes ................................... $ 880,000 $ 446,500
============================
Supplemental schedule of noncash investing activities:
Change in unrealized gains on securities available for
sale, net .............................................. $ 259,523 $ 85,976
============================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Part I
Item 1
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 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 December 31, 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.
<TABLE>
Three months ended Six months ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Net income, basic and diluted
Earnings ...................... $ 619,546 $ 367,655 $1,058,277 $ 708,597
=================================================
Weighted average common shares
Outstanding ................... 2,280,794 2,194,236 2,279,554 2,194,236
Weighted average common shares
issuable upon exercise of stock
options and warrants .......... 124,174 160,622 123,043 146,972
-------------------------------------------------
Weighted average common and
common equivalent shares
outstanding ................... 2,404,968 2,354,858 2,402,597 2,341,208
=================================================
</TABLE>
The earnings per share information was retroactively adjusted to reflect the
effect of the November 30, 1998 3 for 2 stock split as if it occurred on July 1,
1997.
<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 to
adjacent communities.
Quad City Bancard, Inc. ("Bancard") provides merchant credit card
processing services. Bancard has contracted with independent sales organizations
("ISOs") that market credit card services to merchants throughout the country.
The Company's primary ISO contract expires in June 1999. At December 31, 1998,
approximately 12,900 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 $35,632,091 or 14.24% to
$285,783,080 at December 31, 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 $1,231,796 or 10.58% to $10,409,017
at December 31, 1998 from $11,640,813 at June 30, 1998. Cash and due from banks
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 December
31, 1998, the Bank had $27,475,000 invested in such funds. This amount increased
by $4,515,000 or 19.66% from $22,960,000 at June 30, 1998.
Certificates of deposit at financial institutions increased by $3,680,078
or 43.99% to $12,046,201 at December 31, 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 increased by $4,469,658 or 12.91% to $39,088,212 at December
31, 1998 from $34,618,554 at June 30, 1998. The increase was the result of a
number of transactions in the securities portfolio. Paydowns of $928,652 were
received on mortgage-backed securities, and the amortization of premiums, net of
the accretion of discounts, was $909. Maturities and calls of securities
occurred in the amount of $6,850,000. These decreases were offset by the
purchase of additional securities, classified as available for sale, in the
amount of $11,853,678, and an increase in unrealized gains on securities
available for sale, before applicable income tax, of $395,541.
Loans receivable increased by $24,180,925 or 14.84% to $187,156,061 at
December 31, 1998 from $162,975,136 at June 30, 1998. The increase was the
result of the origination or purchase of $152,904,054 of commercial business,
consumer and real estate loans, less loan charge-offs, net of recoveries, of
$147,086, and loan repayments or sales of loans of $128,576,043. 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 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
judgement, 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.
<PAGE>
The allowance for estimated losses on loans was $2,628,952 at December 31,
1998 compared to $2,349,838 at June 30, 1998 for an increase of $279,114 or
11.88%. Net charge-offs for the three months ended December 31, were $76,449 in
1998 and $58,036 in 1997. Net charge-offs for the six months ended December 31,
were $147,086 and $47,258 in 1998 and 1997. 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 1.40% at December 31, 1998 and 1.44% at June 30,
1998. In management's judgement an adequate allowance has been established to
absorb possible losses on existing loans.
Nonaccrual loans were $989,000 at December 31, 1998 compared to $964,000
at June 30, 1998 for an increase of $25,000 or 2.59%. The increase in nonaccrual
loans was comprised of increases in real estate loans of $ 29,000 and consumer
loans of $9,000 offset by a decrease in commercial loans of $13,000. Nonaccrual
loans consisted primarily of loans that were well-collateralized and were not
expected to result in material losses.
Premises and equipment decreased by $163,133 or 2.13% to $7,497,135 at
December 31, 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 Moline, Illinois location and Bancard's new facilities.
Part I Item 2
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $48,423 or 2.73% to $1,821,646 at December 31, 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 increased by $412,050 or 16.44% to $2,918,760 at December 31,
1998 from $2,506,710 at June 30, 1998. The increase consisted primarily of an
increase in accrued trust department income of $323,540. Other assets also
included miscellaneous receivables and prepaid expenses.
Deposits increased by $34,025,384 or 17.24% to $231,409,348 at December
31, 1998 from $197,383,964 at June 30, 1998. The increase resulted from a
$29,451,582 net increase in non-interest bearing, NOW, money market and other
savings accounts and a $4,573,802 net increase in certificates of deposit. The
increases are in part a continuation of the reaction by customers to the large
number of acquisitions and mergers of local banks by transferring their
financial business to community banks that offer more personalized service.
Federal funds purchased decreased from $2,000,000 at June 30, 1998 to $0
at December 31, 1998. The Bank, on occasion, purchases Federal funds for the
short-term from some of its correspondent banks.
Federal Home Loan Bank advances increased by $2,204,373 or 8.94% to
$26,871,547 at December 31, 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
primarily resulted as the Bank used FHLB advances to hedge against the
possibility of rising interest rates.
Other borrowings increased by $1,000,000 or 66.67% to $2,500,000 at
December 31, 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 increased the amount available under the credit
note to $4,500,000 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 $1,026,971 or 18.68% to $4,470,662 at
December 31, 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 December 31, 1998 and June 30, 1998
represented 25 shares at $1.00 par value of the Company's perpetual, nonvoting
preferred stock.
<PAGE>
Common stock increased by $770,472 or 51.01% to $2,280,846 at December 31,
1998 from $1,510,374 at June 30, 1998. The increase was the result of several
capital transactions, including exercises of stock warrants and options
resulting in the issuance of 10,210 additional shares of common stock. The most
significant transaction was a 3 for 2 stock split, effective November 30, 1998,
which resulted in the issuance of an additional 760,262 shares of common stock.
Additional paid-in capital decreased by $658,077 or 4.38% to $14,356,807
at December 31, 1998 from $15,014,884 at June 30, 1998. The decrease resulted
from the transfer of $760,262 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 $102,185 received in excess of the $1.00 per
share par value for 10,210 shares of common stock issued as the result of the
exercise of stock warrants and options.
Retained earnings increased by $1,057,387 or 41.23% to $3,621,830 at
December 31, 1998 from $2,564,443 at June 30, 1998. The increase reflected net
income for the six months offset by a total payment to stockholders of $890
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 $272,015 gain at December 31, 1998 as compared to a
$12,492 gain at June 30, 1998. The increase was attributable to the increase
during the period in fair value of the securities identified as available for
sale.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net income for the three-month period ended December 31, 1998 was $619,456
as compared to net income of $367,655 for the same period in 1997 for an
increase of $251,801 or 68.49%. Basic earnings per share for the quarter
increased to $0.27 from $0.17 in 1997. The increase in net income was comprised
of an increase in net interest income after provision for loan losses of
$618,615 reduced by both a decrease in net noninterest income of $212,575 and an
increase in income taxes of $154,239.
Interest income increased by $1,332,129 from $3,617,832 for the three
month period ended December 31, 1997 to $4,949,961 for the three month period
ended December 31, 1998. The 36.82% rise in interest income was primarily
attributable to greater average outstanding balances in interest earning assets.
Interest expense increased by $754,957 from $1,963,477 for the three month
period ended December 31, 1997 to $2,718,434 for the three month period ended
December 31, 1998. The 38.45% increase in interest expense was primarily
attributable to greater average outstanding balances in interest bearing
liabilities.
At December 31, the Company had an allowance for estimated losses on loans
of approximately 1.40% of total loans in 1998 and 1.50% in 1997. The provision
for loan losses decreased by $41,443 from $215,643 for the three month period
ended December 31, 1997 to $174,200 for the three month period ended December
31, 1998. Commercial and real estate loans combined for total charge-offs of
$78,417 and for total recoveries of $50,150 for the three months ending December
31, 1998. Consumer loan charge-offs and recoveries totaled $64,196 and $16,014
for the same three month period. The primary loan growth for the period 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 $457,702 from $872,117 for the three month
period ended December 31, 1997 to $1,329,819 for the three month period ended
December 31, 1998. Other income at December 31, 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 52.48% increase was primarily due to increased
loan sales activity in the residential real estate department of the Bank and
the recognition of $183,000 of deferred income resulting from a gain on the
restructuring of Bancard's merchant broker agreement.
<PAGE>
In June 1998, the Company recognized $2,168,000 of income as the result of
signing a new merchant broker agreement with its current major 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, of which $732,000 was deferred to be taken into income during the
Company's next fiscal year. During each of the first and second fiscal quarters
of 1999, $183,000 of the deferred portion was recognized in income related to
this transaction. The remaining $366,000 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. The Company has been actively pursuing
relationships with other ISOs and recently began processing for some additional
ISOs.
Merchant credit card fees, net of processing costs, decreased by $99,235
from $316,694 for the three month period ended December 31, 1997 to $217,459 for
the three month period ended December 31, 1998. In the new merchant broker
agreement with its major ISO, Bancard exchanged a substantial reduction in
merchant servicing fees for a reduction in its responsibility for merchant
credit risk.
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 three months ended December
31, 1998 were $2,376,376 as compared to $1,706,099 for the same period in 1997,
or an increase of $670,277 or 39.29%.
Salaries and benefits experienced the most significant dollar increase of
any noninterest expense component. For the three months ended December 31, 1998,
total salaries and benefits increased to $1,450,346 or $481,358 over the 1997
quarter total of $968,988. The change was primarily attributable to the addition
of eight new Bank employees during the 1998 quarter and increased commission
expense in the real estate department proportionate to the large volume of loan
originations and subsequent loan sales. Occupancy and equipment expense
increased $156,378 or 75.99% for the quarter. The increase was primarily due to
rent expense of $110,946 for the new Moline location. For the three month period
ended December 31, 1998, postage and telephone expense increased $29,203 or
69.55% over the three month period ended December 31, 1997. The increase was the
result of the overall increase in business volume of the Bank. The provision for
merchant credit card losses for the quarter decreased $35,613, which reflected
Bancard's new merchant broker agreement, the resulting reduction in its
responsibility for merchant credit risk, and a net recovery situation for the
three months ending December 31, 1998.
The provision for income taxes was $391,314 for the three-month period
ended December 31, 1998 compared to $237,075 for the three-month period ended
December 31, 1997 for an increase of $154,239 or 65.06%. The increase was the
result of an increase in income before income taxes of $ 406,040 or 67.14% for
the three month period ending December 31, 1998 compared to the three month
period ending December 31, 1997.
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net income for the six-month period ended December 31, 1998 was $1,058,277
as compared to net income of $708,597 for the same period in 1997 for an
increase of $349,680 or 49.35%. Basic earnings per share for the first half of
fiscal 1999 increased to $0.46 from $0.32 for the first half of fiscal 1998. The
increase in net income was comprised of an increase in net interest income after
provision for loan losses of $1,215,169 reduced by both a decrease in net
noninterest income of $639,000 and an increase in income taxes of $226,490.
Interest income increased by $2,812,036 from $6,922,939 for the six month
period ended December 31, 1997 to $9,734,975 for the six month period ended
December 31, 1998. The 40.62% rise in interest income was primarily attributable
to greater average outstanding balances in interest earning assets.
Interest expense increased by $1,690,664 from $3,720,749 for the six month
period ended December 31, 1997 to $5,411,413 for the six month period ended
December 31, 1998. The 45.44% increase in interest expense was primarily
attributable to greater average outstanding balances in interest bearing
liabilities.
<PAGE>
At December 31, the Company had an allowance for estimated losses on loans
of approximately 1.40% of total loans in 1998 and 1.50% in 1997. The provision
for loan losses decreased by $93,798 from $519,998 for the six month period
ended December 31, 1997 to $426,200 for the six month period ended December 31,
1998. For the six months ending December 31, 1998, commercial and real estate
loans combined for total charge-offs of $90,448 and total recoveries of $50,150.
Consumer loan charge-offs and recoveries totaled $132,069 and $25,281 for the
six months ending December 31, 1998. The primary loan growth for the period 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 $726,273 from $1,794,612 for the six month
period ended December 31, 1997 to $2,520,885 for the six month period ended
December 31, 1998. Other income at December 31, 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 41.14% increase was primarily due to increased
loan sales activity in the residential real estate department of the Bank and
the recognition of $366,000 of deferred income resulting from a gain on the
restructuring of Bancard's merchant broker agreement.
During the six month period ended December 31, 1998, the Company
recognized $366,000 in income of deferred compensation resulting from the
signing of a new merchant broker agreement in June 1998. Also by agreement,
$150,000 was received for servicing current merchants during the six month
period ended December 31, 1998 which was a reduction in the servicing income
compared to the prior agreement.
Merchant credit card fees, net of processing costs, decreased by $324,342
from $735,428 for the six month period ended December 31, 1997 to $411,086 for
the six month period ended December 31, 1998. In the new merchant broker
agreement with its major ISO, Bancard exchanged a substantial reduction in
merchant servicing fees for a reduction in its responsibility for merchant
credit risk.
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 six months ended December
31, 1998 were $4,678,205 as compared to $3,312,932 for the same period in 1997,
or an increase of $1,365,273.
Salaries and benefits experienced the most significant dollar increase of
any noninterest expense component. For the six months ended December 31, 1998,
total salaries and benefits increased to $2,816,802 or $880,521 over the 1997
period total of $1,936,281. The change was primarily attributable to the
addition of 19 new Bank employees during the period and increased commission
expense in the real estate department proportionate to the large volume of loan
originations and subsequent loan sales. For the six month period ended December
31, 1998, occupancy and equipment expense increased $306,145 or 75.09% over the
first half of fiscal 1998. The increase was primarily due to rent expense of
$206,321 for the new Moline location. Postage and telephone expense increased
$54,184 or 62.00% and stationery and supplies expense increased $54,391 or
64.44%. 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 half
of fiscal 1999 decreased $58,775 or 97.63% from the first half of fiscal 1998,
which reflected Bancard's new merchant broker agreement and the resulting
reduction in its responsibility for merchant credit risk.
The provision for income taxes was $681,765 for the six-month period ended
December 31, 1998 compared to $455,275 for the six-month period ended December
31, 1997 for an increase of $226,490 or 49.75%. The increase was the result of
an increase in income before income taxes of $576,169 or 49.50% for the six
month period ending December 31, 1998 compared to the six month period ending
December 31, 1997.
<PAGE>
OTHER DEVELOPMENTS
In addition to the Bank's main office in Bettendorf, construction of the
Davenport full service banking facility was completed in July 1996. 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 lower level 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 second
quarter of fiscal 1999 have been $79,900. 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.
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>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words, "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and its subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be place on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
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. In accordance with the guidance set forth in this statement,
on January 1, 1999 management transferred securities with an amortized cost of
$1,029,096 and an unrealized gain of $1,647 from the held to maturity portfolio
to the available for sale portfolio. Management believes that adoption of other
provisions 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 - None
Item 2 Changes in Securities and Use of Proceeds - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders -
The annual meeting of stockholders was held at the Jumer's Castle
Lodge located at 900 Spruce Hills Drive, Bettendorf, Iowa on October 22,
1998 at 10:00 a.m. At the meeting, Article IV of the Company's Certificate
of Incorporation was amended to increase the number of authorized shares
of common stock, $1.00 par value per share, from 2,500,000 to 5,000,000
shares. Also, Douglas M. Hultquist and John W. Schricker were re-elected
to serve as Class II directors, with terms expiring in 2001. Continuing as
Class III directors, with terms expiring in 1999, are Richard R. Horst and
Ronald G. Peterson. Continuing as Class I directors, with terms expiring
in 2000, are Michael A. Bauer, James J. Brownson, and Robert A. VanVooren.
At the time of the annual meeting, there were 1,520,474 issued and
outstanding shares of common stock. Either in person or by proxy, there
were 1,381,451 common shares represented at the meeting, constituting
approximately 91% of the outstanding shares. The voting was as follows:
Votes Votes Votes Broker
For Against Withheld Abstain Nonvotes
------------------------------------------------
Article IV Amendment ....... 1,356,756 17,587 7,108 139,023
Douglas M. Hultquist ....... 1,379,877 1,574 139,023
John W. Schricker .......... 1,379,977 1,474 139,023
Item 5 Other Information - None
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)
By: /s/ Douglas M. Hultquist
-------------------------------
Douglas M. Hultquist, President
Date February 12, 1999 /s/ Michael A. Bauer
------------------------------
Michael A. Bauer, Chairman
Date February 12, 1999 /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 FROM THE DECEMBER
31, 1998 FORM 10-Q OF QUAD CITY HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 10,409
<INT-BEARING-DEPOSITS> 12,046
<FED-FUNDS-SOLD> 27,475
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,285
<INVESTMENTS-CARRYING> 1,803
<INVESTMENTS-MARKET> 1,803
<LOANS> 187,156
<ALLOWANCE> 2,629
<TOTAL-ASSETS> 285,783
<DEPOSITS> 231,409
<SHORT-TERM> 1,351
<LIABILITIES-OTHER> 4,471
<LONG-TERM> 28,020
0
0
<COMMON> 2,281
<OTHER-SE> 18,251
<TOTAL-LIABILITIES-AND-EQUITY> 285,783
<INTEREST-LOAN> 7,631
<INTEREST-INVEST> 1,012
<INTEREST-OTHER> 1,092
<INTEREST-TOTAL> 9,735
<INTEREST-DEPOSIT> 4,492
<INTEREST-EXPENSE> 5,411
<INTEREST-INCOME-NET> 4,324
<LOAN-LOSSES> 426
<SECURITIES-GAINS> 366
<EXPENSE-OTHER> 4,678
<INCOME-PRETAX> 1,740
<INCOME-PRE-EXTRAORDINARY> 1,058
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,058
<EPS-PRIMARY> .46
<EPS-DILUTED> .44
<YIELD-ACTUAL> 0
<LOANS-NON> 989
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,350
<CHARGE-OFFS> 147
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,629
<ALLOWANCE-DOMESTIC> 2,629
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</TABLE>
