-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TfCfaDofq5AFbHmRkPy8AB/okTrNivOgxj4aeHcc7a6E3YYTrEvyPRUuRaoEdK5r UNOhkIPP14fY95HkNMfVwA== 0000743530-99-000018.txt : 19990506 0000743530-99-000018.hdr.sgml : 19990506 ACCESSION NUMBER: 0000743530-99-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAD CITY HOLDINGS INC CENTRAL INDEX KEY: 0000906465 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421397595 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22208 FILM NUMBER: 99610973 BUSINESS ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097363580 10-Q 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 [ ] 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 Registrant as specified in its charter) Delaware 42-1397595 - ------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer ID Number) incorporation or organization) 3551 7th Street, Suite 100, Moline, Illinois 61265 -------------------------------------------------- (Address of principal executive offices) (309) 736-3580 ---------------------------------------------------- (Registrant's telephone number, including area code) Check whether the Registrant (1) has 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of April 30, 1999, the Registrant had outstanding 2,296,251 shares of common stock, $1.00 par value per share. QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES INDEX Page Number Part I FINANCIAL INFORMATION Item 1 Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets, March 31, 1999 and June 30, 1998 Consolidated Statements of Income, For the Three Months Ended March 31, 1999 and 1998 Consolidated Statements of Income, For the Nine Months Ended March 31, 1999 and 1998 Consolidated Statements of Cash Flows, For the Nine Months Ended March 31, 1999 and 1998 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 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, 1999 and June 30, 1998 March 31, June 30, 1999 1998 ------------------------------ ASSETS Cash and due from banks ................................................... $ 8,454,698 $ 11,640,813 Federal funds sold ........................................................ 29,380,000 22,960,000 Certificates of deposit at financial institutions ......................... 12,469,754 8,366,123 Securities held to maturity, at amortized cost ............................ 774,240 2,380,309 Securities available for sale, at fair value .............................. 47,148,505 32,238,245 ------------------------------ 47,922,745 34,618,554 ------------------------------ Loans receivable .......................................................... 191,679,110 162,975,136 Less: Allowance for estimated losses on loans ............................. (2,704,448) (2,349,838) ------------------------------ 188,974,662 160,625,298 ------------------------------ Premises and equipment, net ............................................... 7,412,053 7,660,268 Accrued interest receivable ............................................... 2,057,075 1,773,223 Other assets .............................................................. 3,144,037 2,506,710 ------------------------------ $ 299,815,024 $ 250,150,989 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing deposits ........................................... $ 35,142,927 $ 26,605,138 Interest-bearing deposits .............................................. 203,981,572 170,778,826 ------------------------------ Total deposits ....................................................... 239,124,499 197,383,964 ------------------------------ Short-term borrowings ..................................................... 7,467,668 2,000,000 Federal Home Loan Bank advances ........................................... 25,883,714 24,667,174 Other borrowings .......................................................... 2,500,000 1,500,000 Other liabilities ......................................................... 3,736,789 5,497,633 ------------------------------ 278,712,670 231,048,771 ------------------------------ STOCKHOLDERS' EQUITY Preferred stock, $1 par value; shares authorized 250,000; shares issued and 25 25 outstanding 25 Common stock, $1 par value; shares authorized 5,000,000; .................. 2,295,876 1,510,374 shares issued and outstanding March 1999, 2,295,876; June 1998, 2,265,561 Additional paid-in capital ................................................ 14,452,187 15,014,884 Retained earnings ......................................................... 4,235,777 2,564,443 Accumulated other comprehensive income, unrealized gain on securities available for sale, net ...................................... 118,489 12,492 ------------------------------ 21,102,354 19,102,218 ------------------------------ Total liabilities and stockholders' equity ........................ $ 299,815,024 $ 250,150,989 ==============================
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended March 31 Three Months Ended March 31, 1999 1998 ---------------------------- Interest income: Interest and fees on loans ................................. $3,877,779 $3,069,419 Interest and dividends on securities ....................... 605,262 468,600 Interest on federal funds sold ............................. 286,399 137,878 Other interest ............................................. 179,315 121,486 ----------------------- Total interest income ................................. 4,948,755 3,797,383 ----------------------- Interest expense: Interest on deposits ...................................... 2,182,040 1,770,112 Interest on borrowings .................................... 491,891 387,805 ----------------------- Total interest expense ................................ 2,673,931 2,157,917 ----------------------- Net interest income ................................... 2,274,824 1,639,466 Provision for loan losses ...................................... 218,200 233,260 ----------------------- Net interest income after provision for loan losses ... 2,056,624 1,406,206 ----------------------- Noninterest income: Merchant credit card fees, net of processing costs ......... 369,582 326,122 Trust department fees ...................................... 427,848 299,602 Deposit service fees ....................................... 104,385 73,775 Gains on sales of loans, net ............................... 222,190 284,083 Investment securities gains, net ........................... 1,614 8,734 Amortization of deferred income resulting from restructuring of merchant broker agreement .......................... 183,000 0 Other ...................................................... 128,570 141,787 ----------------------- Total noninterest income .............................. 1,437,189 1,134,103 ----------------------- Noninterest expenses: Salaries and employee benefits ............................. 1,508,891 1,173,299 Professional and data processing fees ...................... 147,581 126,530 Advertising and marketing .................................. 84,321 103,430 Occupancy and equipment expense ............................ 351,045 282,105 Stationery and supplies .................................... 60,084 71,754 Provision for merchant credit card losses .................. 4,200 23,226 Postage and telephone ...................................... 82,572 74,307 Other ...................................................... 234,283 193,866 ----------------------- Total noninterest expenses ............................ 2,472,977 2,048,517 ----------------------- Income before income taxes ...................................... 1,020,836 491,792 Federal and state income taxes .................................. 406,889 191,425 ----------------------- Net income ............................................ $ 613,947 $ 300,367 ======================= Earnings per common share: * Basic ................................................. $ 0.27 $ 0.14 Diluted ............................................... $ 0.25 $ 0.13 Weighted average common shares outstanding ............ 2,286,863 2,194,236 Weighted average common and common equivalent shares outstanding .............................. 2,406,896 2,378,271 Comprehensive income ............................................ $ 460,421 $ 303,047 * Per share data has been adjusted for a 3 for 2 common stock split on November 30, 1998.
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Nine Months Ended March 31 Nine Months Ended March 31, 1999 1998 --------------------------- Interest income: Interest and fees on loans ................................................................ $11,508,963 $ 8,642,021 Interest and dividends on securities ...................................................... 1,617,493 1,454,024 Interest on federal funds sold ............................................................ 1,044,093 305,467 Other interest ............................................................................ 513,181 318,810 ------------------------- Total interest income ................................................................ 14,683,730 10,720,322 ------------------------- Interest expense: Interest on deposits ..................................................................... 6,674,433 4,909,441 Interest on borrowings ................................................................... 1,410,911 969,225 ------------------------- Total interest expense ............................................................... 8,085,344 5,878,666 ------------------------- Net interest income .................................................................. 6,598,386 4,841,656 Provision for loan losses ..................................................................... 644,400 753,258 ------------------------- Net interest income after provision for loan losses .................................. 5,953,986 4,088,398 ------------------------- Noninterest income: Merchant credit card fees, net of processing costs ........................................ 780,668 1,061,550 Trust department fees ..................................................................... 1,114,540 825,389 Deposit service fees ...................................................................... 305,551 203,143 Gains on sales of loans, net .............................................................. 830,113 512,387 Investment securities gains, net .......................................................... 1,614 8,734 Amortization of deferred income resulting from restructuring of merchant broker agreement ......................................................... 549,000 0 Other ..................................................................................... 376,588 317,512 ------------------------- Total noninterest income ............................................................. 3,958,074 2,928,715 ------------------------- Noninterest expenses: Salaries and employee benefits ............................................................ 4,325,693 3,109,580 Professional and data processing fees ..................................................... 427,061 375,337 Advertising and marketing ................................................................. 266,677 236,033 Occupancy and equipment expense ........................................................... 1,064,869 689,784 Stationery and supplies ................................................................... 198,884 156,163 Provision for merchant credit card losses ................................................. 5,625 83,426 Postage and telephone ..................................................................... 224,145 161,696 Other ..................................................................................... 638,228 549,430 ------------------------- Total noninterest expenses ........................................................... 7,151,182 5,361,449 ------------------------- Income before income taxes ..................................................................... 2,760,878 1,655,664 Federal and state income taxes ................................................................. 1,088,654 646,700 ------------------------- Net income ........................................................................... $ 1,672,224 $ 1,008,964 ========================= Earnings per common share: * Basic ................................................................................ $ 0.73 $ 0.46 Diluted .............................................................................. $ 0.69 $ 0.42 Weighted average common shares outstanding ........................................... 2,286,863 2,194,236 Weighted average common and common equivalent shares outstanding ............................................................. 2,406,896 2,378,271 Comprehensive income ........................................................................... $ 1,778,221 $ 1,097,620 * Per share data has been adjusted for a 3 for 2 common stock split on November 30, 1998
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended March 31 Nine Months Ended March 31, 1999 1998 ------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................................... $ 1,672,224 $ 1,008,964 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ....................................................... 463,521 330,521 Provision for loan losses .......................................... 644,400 753,258 Provision for merchant credit card losses .......................... 5,625 83,426 Amortization of premiums (accretion of discounts) on securities, net 19,354 (14,329) Investment securities gains, net ................................... (1,614) (8,734) Loans originated for sale .......................................... (68,986,640) (38,142,945) Proceeds on sales of loans ......................................... 71,954,396 32,137,607 Net gains on sales of loans ........................................ (830,113) (512,387) Amortization of deferred income resulting from restructuring of merchant broker agreement ..................................... (549,000) 0 Increase in accrued interest receivable ............................ (283,852) (376,276) Increase in other assets ........................................... (637,327) (469,927) Decrease in other liabilities ...................................... (1,285,318) (2,846,105) ------------------------------------ Net cash provided by (used in) operating activities .......... 2,185,656 (8,056,927) ------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Net increase in federal funds sold ................................... (6,420,000) (3,595,000) Net increase in certificates of deposits at financial institutions ... (4,103,631) (2,423,779) Purchase of securities available for sale ............................ (27,114,462) (5,751,974) Purchase of securities held to maturity .............................. 0 (251,413) Proceeds from calls and maturities of securities ..................... 12,350,000 7,500,000 Proceeds from paydowns on securities ................................. 1,340,345 974,227 Proceeds from sales of securities available for sale ................. 276,032 14,013 Net loans originated ................................................. (31,131,407) (38,658,194) Purchase of premises and equipment, net .............................. (215,306) (2,618,325) ------------------------------------- Net cash used in investing activities ........................ (55,018,429) (44,810,445) ------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit accounts ..................................... 41,740,535 49,319,068 Net increase in short-term borrowings ................................ 5,467,668 0 Proceeds from Federal Home Loan Bank advances ........................ 1,480,000 20,400,000 Paydowns on Federal Home Loan Bank advances .......................... (263,460) (7,936,780) 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 .......................... 221,915 0 ------------------------------------- Net cash provided by financing activities .................... 49,646,658 63,282,288 ------------------------------------- Net increase (decrease) in cash and due from banks ........... (3,186,115) 10,414,916 Cash and due from banks, beginning ........................... 11,640,813 6,953,463 ------------------------------------- Cash and due from banks, ending .............................. $ 8,454,698 $ 17,368,379 ===================================== Supplemental disclosure of cash flow information, cash payments for: Interest ............................................................. $ 8,031,509 $ 5,495,988 ===================================== Income/franchise taxes ............................................... $ 1,234,378 $ 1,324,000 ===================================== Supplemental schedule of noncash investing activities: Change in accumulated other comprehensive income, unrealized gains on securities available for sale, net ........................ $ 105,997 $ 88,656 ===================================== Investment securities transferred from held to maturity portfolio to available for sale portfolio, at fair value ..................... $ 1,030,743 $ 0 =====================================
See Notes to Consolidated Financial Statements Part I Item 1 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1999 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. Any differences appearing between numbers presented in financial statements and management's discussion and analysis are due to rounding. Results for the period ended March 31, 1999 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 Nine months ended March 31, March 31, ----------------------- ----------------------- 1999 1998 1999 1998 ----------------------- ----------------------- Net income, basic and diluted earnings ...................... $ 613,947 $ 300,367 $1,672,224 $1,008,964 ========== ========== ========== ========== Weighted average common shares outstanding ................... 2,286,863 2,194,236 2,286,863 2,194,236 Weighted average common shares issuable upon exercise of stock options and warrants .......... 120,033 184,035 120,033 184,035 ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding ................... 2,406,896 2,378,271 2,406,896 2,378,271 ========== ========== ========== ==========
All share and per share data has been retroactively adjusted for a 3 for 2 common stock split on November 30, 1998. 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 2000. At March 31, 1999, approximately 14,000 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 $49.6 million or 20% to $299.8 million at March 31, 1999 from $250.2 million at June 30, 1998. The growth primarily resulted from an increase in the loan portfolio funded by deposits received from customers and from short-term borrowings. Cash and due from banks decreased by $3.2 million or 27% to $8.4 million at March 31, 1999 from $11.6 million at June 30, 1998. Cash and due from banks 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 March 31, 1999, the Bank had $29.4 million invested in such funds. This amount increased by $6.4 million or 28% from $23.0 million at June 30, 1998. Certificates of deposit at financial institutions increased by $4.1 million or 49% to $12.5 million at March 31, 1999 from $8.4 million at June 30, 1998. The Bank continued to make new deposits in other banks in the form of certificates of deposit. Securities increased by $13.3 million or 38% to $47.9 million at March 31, 1999 from $34.6 million at June 30, 1998. The increase was the result of a number of transactions in the securities portfolio. Paydowns of $1.3 million were received on mortgage-backed securities, and the amortization of premiums, net of the accretion of discounts, was $19 thousand. Maturities, calls, and sales of securities occurred in the amount of $12.6 million. These decreases were offset by the purchase of additional securities, classified as available for sale, in the amount of $27.1 million, and an increase in unrealized gains on securities available for sale, before applicable income tax, of $162 thousand. Loans receivable increased by $28.7 million or 18% to $191.7 million at March 31, 1999 from $163.0 million at June 30, 1998. The increase was the result of the origination or purchase of $207.1 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $290 thousand, and loan repayments or sales of loans of $178.1 million. The majority of residential real estate loans originated by the Bank were sold on the secondary market to avoid the interest rate risk associated with long term fixed rate loans. The allowance for estimated losses on loans was $2.7 million at March 31, 1999 compared to $2.3 million at June 30, 1998 for an increase of $355 thousand or 15%. The adequacy of the allowance for estimated losses on loans was determined by management based on factors that included the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, and other factors that, in management's 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. Although management believes that the allowance for estimated losses on loans at March 31, 1999 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. Net charge-offs for the three months ended March 31, were $143 thousand in 1999 and $29 thousand in 1998. Net charge-offs for the nine months ended March 31, were $290 thousand and $77 thousand in 1999 and 1998, respectively. One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the total loan portfolio. Provisions were made monthly to ensure that an adequate level was maintained. The allowance for estimated losses on loans as a percentage of total loans was 1.41% at March 31, 1999 and 1.44% at June 30, 1998. Nonaccrual loans were $1.5 million at March 31, 1999 compared to $1.0 million at June 30, 1998 for an increase of $484 thousand or 47 %. The increase in nonaccrual loans was comprised of increases in commercial loans of $422 thousand and consumer loans of $100 thousand offset by a decrease in real estate loans of $38 thousand. A single loan accounted for 57% of the increase in commercial loans having nonaccrual status. The maturity date on the loan had passed requiring the loan to be classified as nonaccrual, but monthly payments continued to be received. Nonaccrual loans consisted primarily of loans that were well collateralized and were not expected to result in material losses. Premises and equipment decreased by $248 thousand or 3% to $7.4 million at March 31, 1999 from $7.7 million at June 30, 1998. The decrease resulted from depreciation expense offset by the purchase of additional furniture, fixtures and equipment. Accrued interest receivable on loans, securities and interest-bearing cash accounts increased by $284 thousand or 16% to $2.1 million at March 31, 1999 from $1.8 million at June 30, 1998. The increase was primarily due to greater average outstanding balances in interest-bearing assets. Other assets increased by $637 thousand or 25% to $3.1 million at March 31, 1999 from $2.5 million at June 30, 1998. The increase consisted primarily of an increase in accrued trust department fees of $356 thousand. Other assets also included miscellaneous receivables and prepaid expenses. Deposits increased by $41.7 million or 21% to $239.1 million at March 31, 1999 from $197.4 million at June 30, 1998. The increase resulted from a $27.8 million net increase in non-interest bearing, NOW, money market and other savings accounts and a $13.9 million net increase in certificates of deposit. The increase in certificates of deposit was the product of an aggressive pricing program. Also, management believes the increases were 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 can offer more personalized service. Short-term borrowings increased $5.5 million or 275% from $2.0 million at June 30, 1998 to $7.5 million at March 31, 1999. In recent months the Bank began offering short-term repurchase agreements to some of its major customers. Also, on occasion, the Bank purchases Federal funds for the short-term from some of its correspondent banks. As of March 31, 1999 short-term borrowings were comprised entirely of the customer repurchase agreements. As of June 30, 1998 short-term borrowings represented federal funds purchased from correspondent banks. Federal Home Loan Bank advances increased by $1.2 million or 5% to $25.9 million at March 31, 1999 from $24.7 million 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 from the Bank utilizing FHLB advances for loan matching and for hedging against the possibility of rising interest rates. Part I Item 2 Other borrowings increased by $1.0 million or 67% to $2.5 million at March 31, 1999 from $1.5 million at June 30, 1998. Other borrowings consisted of the amount outstanding on a revolving credit note with a third party lender, which is secured by all the outstanding stock of the Bank. On July 1, 1998, the Company increased the amount available under the credit note to $4.5 million and extended the expiration date to July 1, 2000. The borrowed funds were utilized to provide additional capital to the Bank to maintain a 7.5% aggregate capital ratio. Other liabilities decreased by $1.8 million or 33% to $3.7 million at March 31, 1999 from $5.5 million 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 March 31, 1999 and June 30, 1998 represented 25 shares at $1.00 par value of the Company's perpetual, nonvoting preferred stock. With the related additional paid-in capital, the preferred stock represented $2.5 million. Common stock increased by $786 thousand or 52% to $2.3 million at March 31, 1999 from $1.5 million at June 30, 1998. The increase was caused by: (i) exercises of stock warrants and options resulting in the issuance of 30,345 additional shares of common stock, and (ii) a 3 for 2 stock split in the form of a stock dividend, effective November 30, 1998. Additional paid-in capital decreased by $563 thousand or 4% to $14.4 million at March 31, 1999 from $15.0 million at June 30, 1998. The decrease resulted from the transfer of $760 thousand from additional paid-in capital to common stock representing the issuance of additional common shares from the 3 for 2 stock split. The decrease was offset by $197 thousand received in excess of the $1.00 per share par value for 30,345 shares of common stock issued as the result of the exercise of stock warrants and options. Retained earnings increased by $1.7 million or 68% to $4.2 million at March 31, 1999 from $2.5 million at June 30, 1998. The increase reflected net income for the nine months offset by an immaterial payment to stockholders which represented the cash value of fractional shares created by the 3 for 2 stock split. Unrealized gains and losses on securities available for sale, net of related income taxes, was a $118 thousand gain at March 31, 1999 as compared to a $12 thousand 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. QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company realizes income principally from the spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volumes and yields, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Additionally, because of the terms and conditions of many of the Bank's loan and deposit accounts, a change in interest rates could also affect the projected maturities in the loan portfolio and/or the deposit base which could alter the Company's sensitivity to future changes in interest rates. Accordingly, management considers interest rate risk to be a significant market risk. Interest rate risk management focuses on maintaining consistent growth in net interest income within policy limits approved by the Board of Directors, while taking into consideration, among other factors, the Company's overall credit, operating income, operating cost, and capital profile. The Company's ALM/Investment Committee, which includes senior management representatives and members of the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. RESULTS OF OPERATIONS OVERVIEW The Company's net income is derived primarily from net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on borrowings and customer deposits. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. Net interest margin for the nine months ended March 31, 1999 was 3.47% compared to 3.66% for the nine months ended March 31, 1998. THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Net income for the three-month period ended March 31, 1999 was $614 thousand as compared to net income of $300 thousand for the same period in 1998 for an increase of $314 thousand or 104%. Basic earnings per share for the quarter increased to $0.27 from $0.14 in 1998. The increase in net income was comprised of an increase of $650 thousand in net interest income after provision for loan losses and an increase in noninterest income of $303 thousand offset by increases in noninterest expense of $424 thousand and income tax expense of $215 thousand. The increase in noninterest income included $183 thousand from the recognition of deferred income resulting from the restructuring of Bancard's merchant broker agreement. Interest income increased by $1.1 million from $3.8 million for the three-month period ended March 31, 1998 to $4.9 million for the three-month period ended March 31, 1999. The 30% rise in interest income was basically attributable to greater average, outstanding balances in interest earning assets, principally loans receivable. Interest expense increased by $516 thousand from $2.2 million for the three-month period ended March 31, 1998 to $2.7 million for the three-month period ended March 31, 1999. The 24% increase in interest expense was basically caused by greater, average, outstanding balances in interest-bearing liabilities, principally customer deposits. At both March 31, 1999 and June 30, 1998, the Company had an allowance for estimated losses on loans of approximately 1.4% of total loans. The provision for loan losses decreased by $15 thousand from $233 thousand for the three month period ended March 31, 1998 to $218 thousand for the three month period ended March 31, 1999. The primary loan growth for the period ended March 31, 1999 was in the commercial loan portfolio, as opposed to the consumer loan portfolio historically carrying a greater degree of risk, which allowed a decrease in the provision necessary for the period. Commercial and real estate loans combined for total charge-offs of $39 thousand and no recoveries for the three months ending March 31, 1999. Consumer loan charge-offs and recoveries totaled $130 thousand and $26 thousand, respectively, for the same three month period. Indirect auto loans accounted for a majority of the consumer loan charge-offs. Because asset quality is a priority for the Company and its subsidiaries, management has made the decision to downscale indirect auto loan activity based on charge-off history. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income increased by $303 thousand from $1.1 million for the three-month period ended March 31, 1998 to $1.4 million for the three-month period ended March 31, 1999. Noninterest income at March 31, 1999 and 1998 consisted of income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 27% increase was primarily due to an increased volume of fees earned in the trust department of the Bank and the recognition of deferred income resulting from the restructuring of Bancard's merchant broker agreement. In June 1998, the Company recognized $2.2 million of gross income resulting from the amendment of the merchant broker agreement with Bancard's current, major independent sales organization (ISO). The term of the amended agreement is for a minimum of one year and replaced a prior agreement that was to expire in the year 2002. In consideration for the reduction in term from one to four years, the Company received total compensation of $2.9 million of which $732 thousand was deferred to be recognized in income during fiscal 1999. In the prior agreement, Bancard and the ISO had shared both merchant servicing fees and related merchant credit risk. With the amended agreement, Bancard receives a fixed, monthly fee of $25 thousand for servicing the current merchants and is released of the responsibility for any merchant credit risk. The new agreement exchanges a substantial reduction in merchant servicing income for a like reduction in the related merchant credit risk. In an effort to offset the reduced merchant servicing income, Bancard has been actively pursuing other ISO relationships and has recently begun processing for some additional ISOs. Also, Bancard recently formed its own ISO, Allied Merchant Services, Inc., which will seek to generate additional credit card processing business. During the three months ended March 31, 1999, merchant credit card fees, net of processing costs, increased by $44 thousand to $370 thousand from $326 thousand for the three months ended March 31, 1998. The increase reflected the terms of the amended merchant broker agreement, which were reduced fees in exchange for reduced risk, partially offset by merchant servicing fees brought in through new ISO relationships that Bancard had established. Also as a result of the amended merchant broker agreement, the Company recognized $183 thousand of the deferred income and earned $75 thousand of merchant servicing fees for the three months ended March 31, 1999. For the three months ended March 31, 1999 trust department fees increased $128 thousand, or 43%, to $428 thousand from $300 thousand for the three months ended March 31, 1998. The increase was a reflection of the development of additional trust relationships during the period. Gain on sales of loans, net was $222 thousand for the three months ended March 31, 1999, which reflected a decrease of 22%, or $62 thousand, from $284 thousand for the three months ended March 31, 1998. The decrease resulted from smaller numbers of both home refinances and first-time home purchases, and the subsequent sale of the majority of these loans into the secondary market. 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 March 31, 1999 were $2.5 million as compared to $2.1 million for the same period in 1998, or an increase of $424 thousand or 21%. The following table sets forth the various categories of noninterest expenses for the three months ended March 31, 1999 and 1998. Noninterest Expenses Three months ended March 31, ---------------------------------- 1999 1998 % Change ---------------------------------- Salaries and employee benefits .............................. $1,508,891 $1,173,299 28.6% Professional and data processing fees ....................... 147,581 126,530 16.6% Advertising and marketing ................................... 84,321 103,430 -18.5% Occupancy and equipment expense ............................. 351,045 282,105 24.4% Stationery and supplies ..................................... 60,084 71,754 -16.3% Provision for merchant credit card losses ................... 4,200 23,226 -81.9% Postage and telephone ....................................... 82,572 74,307 11.1% Other ....................................................... 234,283 193,866 20.9% ----------------------- Total noninterest expenses ..... $2,472,977 $2,048,517 20.7% =======================
Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For the three months ended March 31, 1999, total salaries and benefits increased to $1.5 million or $336 thousand over the 1998 quarter total of $1.2 million. The change was primarily attributable to the addition of new Bank employees during the 1999 quarter and increased commission expense in the trust department proportionate to the large volume of trust fees earned. Occupancy and equipment expense increased $69 thousand or 24% for the quarter. The increase was primarily due to rent expense for the new Moline location. For the three-month period ended March 31, 1999, postage and telephone expense increased $8 thousand or 11% over the three-month period ended March 31, 1998. 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 $19 thousand, which reflected Bancard's amended merchant broker agreement and the corresponding reduction in its responsibility for merchant credit risk. The provision for income taxes was $407 thousand for the three-month period ended March 31, 1999 compared to $191 thousand for the three-month period ended March 31, 1998 for an increase of $216 thousand or 113%. The increase was the result of an increase in income before income taxes of $529 thousand or 108% for the three-month period ending March 31, 1999 compared to the three-month period ending March 31, 1998. NINE MONTHS ENDED MARCH 31, 1999 AND 1998 Net income for the nine-month period ended March 31, 1999 was $1.7 million as compared to net income of $1.0 million for the same period in 1998 for an increase of $663 thousand or 66%. Basic earnings per share for the first nine months of fiscal 1999 increased to $0.73 from $0.46 for the first nine months of fiscal 1998. The increase in net income was comprised of increases in both net interest income after provision for loan losses of $1.9 million and noninterest income of $1.0 million reduced by increases in both noninterest expenses of $1.8 million and income tax expense of $442 thousand. The increase in noninterest income included $549 thousand due to the amortization of deferred income resulting from the restructuring of Bancard's merchant broker agreement in 1998. Interest income increased by $4.0 million from $10.7 million for the nine-month period ended March 31, 1998 to $14.7 million for the nine-month period ended March 31, 1999. The 37% rise in interest income was basically attributable to greater average outstanding balances in interest earning assets, principally loans receivable. Interest expense increased by $2.2 million from $5.9 million for the nine-month period ended March 31, 1998 to $8.1 million for the nine-month period ended March 31, 1999. The 37% increase in interest expense was basically attributable to greater average outstanding balances in interest bearing liabilities, principally customer deposits. At both March 31, 1999 and June 30, 1998, the Company had an allowance for estimated losses on loans of approximately 1.4% of total loans. The provision for loan losses decreased by $109 thousand from $753 thousand for the nine month period ended March 31, 1998 to $644 thousand for the nine month period ended March 31, 1999. The primary loan growth for the period ended March 31, 1999 was in our commercial loan portfolio, as opposed to our consumer loan which has historically carried a greater degree of risk, allowing a decrease in the provision necessary for the period. For the nine months ending March 31, 1999, commercial and real estate loans combined for total charge-offs of $130 thousand and total recoveries of $50 thousand. Consumer loan charge-offs and recoveries totaled $262 thousand and $52 thousand, respectively, for the nine months ending March 31, 1999. Indirect auto loans accounted for a majority of the consumer loan charge-offs. Because asset quality is a priority for the Company and its subsidiaries, management has made the decision to downscale indirect auto loan activity based on charge-off history. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income increased by $1.0 million from $2.9 million for the nine month period ended March 31, 1998 to $3.9 million for the nine month period ended March 31, 1999. Noninterest income at March 31, 1999 and 1998 consisted of income from the merchant credit card operation, the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 35% increase was primarily due to increased loan sales activity in the residential real estate department of the Bank and the recognition of deferred income resulting from the restructuring of Bancard's merchant broker agreement. During the nine month period ended March 31, 1999, the Company recognized $549 thousand of deferred income resulting from the signing of Bancard's amended merchant broker agreement in June 1998. Also by agreement, $225 thousand was received for servicing current merchants during the nine month period ended March 31, 1999 which was a reduction in the servicing income compared to the prior agreement. Merchant credit card fees, net of processing costs, decreased by $281 thousand from $1.1 million for the nine month period ended March 31, 1998 to $781 thousand for the nine month period ended March 31, 1999. In the amended merchant broker agreement with its major ISO, Bancard exchanged a substantial reduction in merchant servicing fees for a like reduction in its responsibility for merchant credit risk. For the nine months ended March 31, 1999 trust department fees increased $289 thousand, or 35%, to $1.1 million from $825 thousand for the nine months ended March 31, 1998. The increase was a reflection of the development of additional trust relationships during the period. Gain on sales of loans, net was $830 thousand for the nine months ended March 31, 1999 which reflected an increase of 62%, or $318 thousand, from $512 thousand for the nine months ended March 31, 1998. The increase resulted from low interest rates, which created a large number of both home refinances and first-time home purchases, and the subsequent sale of the majority of these loans into the secondary market. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees, for both periods. Noninterest expenses for the nine months ended March 31, 1999 were $7.2 million as compared to $5.4 million for the same period in 1998, or an increase of $1.8 million. The following table sets forth the various categories of noninterest expenses for the nine months ended March 31, 1999 and 1998. Noninterest Expenses Nine months ended March 31, ---------------------------------- 1999 1998 % change ---------------------------------- Salaries and employee benefits ............................. $4,325,693 $3,109,580 39.1% Professional and data processing fees ...................... 427,061 375,337 13.8% Advertising and marketing .................................. 266,677 236,033 13.0% Occupancy and equipment expense ............................ 1,064,869 689,784 54.4% Stationery and supplies .................................... 198,884 156,163 27.4% Provision for merchant credit card losses .................. 5,625 83,426 -93.3% Postage and telephone ...................................... 224,145 161,696 38.6% Other ...................................................... 638,228 549,430 16.2% ----------------------- Total noninterest expenses ..... $7,151,182 $5,361,449 33.4% =======================
Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For the nine months ended March 31, 1999, total salaries and benefits increased to $4.3 million or $1.2 million over the 1998 period total of $3.1 million. The change was primarily attributable to the addition of new Bank employees during the period and increased commission expense in the residential real estate department proportionate to the large volume of loan originations and subsequent loan sales. For the nine-month period ended March 31, 1999, occupancy and equipment expense increased $375 thousand or 54% over the first nine months of fiscal 1998. The increase was primarily due to rent expense for the new Moline location. Postage and telephone expense increased $62 thousand or 39% and stationery and supplies expense increased $43 thousand or 27%. The increases were the result of the overall increase in business volume of the Bank. The provision for merchant credit card losses during the first nine months of fiscal 1999 decreased $78 thousand or 93% from the first nine months of fiscal 1998, which reflected Bancard's amended merchant broker agreement and the resulting reduction in its responsibility for merchant credit risk. The provision for income taxes was $1.1 million for the nine-month period ended March 31, 1999 compared to $647 thousand for the nine-month period ended March 31, 1998 for an increase of $442 thousand or 68%. The increase was the result of an increase in income before income taxes of $1.1 million or 67% for the nine months ending March 31, 1999 compared to the nine months ending March 31, 1998 LIQUIDITY Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The liquidity of the Company primarily depends upon cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities, consisting primarily of proceeds on loan sales, was $2.2 million for the nine months ended March 31, 1999 compared to $8.1 million of cash used, primarily for loans originated for sale, for the same period in 1998. Net cash used in investing activities, consisting principally of loan and investment funding, was $55.0 million for the nine months ended March 31, 1999 and $44.8 million for the nine months ended March 31, 1998. Net cash provided by financing activities, consisting primarily of deposits' growth and proceeds from short-term borrowings, for the nine months ended March 31, 1999 was $49.6 million and for same period in 1998 was $63.3 million, consisting principally of deposits growth and proceeds from Federal Home Loan Bank advances. 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. In March 1999, the Bank acquired a 3,000 square foot office building adjacent to the Davenport facility at a cost of $225 thousand. It is expected that improvements will be made at a cost of approximately $60 thousand. The office space will be utilized for various operational and administrative functions. 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 June 30, 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. Information received from these utilities indicates that they have significantly completed remediation and validation of their mission critical applications. 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 third quarter of fiscal 1999 were $91 thousand. The estimated total cost of the Year 2000 project is $250 thousand. 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 and depository customers. The Year 2000 committee has taken steps to educate and assist its customers with identifying their Year 2000 compliance problems, if any. In addition, the management committee has proposed policy and procedure changes to help identify potential risks to 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, of the Year 2000 risk in its credit analysis. Quad City also utilizes loan agreements and other legal documents to ensure large corporate borrowers acknowledge Year 2000 compliance requirements. In connection with potential credit risk related to the Year 2000 issue, the Company has contacted its large commercial loan and depository customers regarding their level of preparedness for the Year 2000. Through these questionnaires and resulting assessments, the Company believes that overall credit are liquidity risk to its large corporate borrowers and depositors is not excessive. 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. 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 placed 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 Current accounting development: The FASB has issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which is effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Management believes that adoption of this Statement will not have a material effect on the consolidated financial statements. The FASB has issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" which is effective for fiscal years beginning after December 15, 1997. This Statement standardizes employers' disclosures about pensions and other postretirement benefit plans, requires certain additional information, and eliminates other existing disclosures. It does not change the measurement or recognition of these benefit plans. Management believes that adoption of this Statement will not have a material affect on the consolidated financial statements. 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 - None Item 5 Other Information - None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits (4.1) Certificate of Designation of Series A Preferred Stock (27) Financial Data Schedule (b) Reports on Form 8-K None 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 May 5,1999 /s/ Michael A. Bauer ---------------------------------- Michael A. Bauer, Chairman Date May 5, 1999 /s/ Douglas M. Hultquist ---------------------------------- Douglas M. Hultquist, President Principal Executive, Financial and Accounting Officer EX-4 2 CERTIFICATE OF DESIGNATION of SERIES A PREFERRED STOCK of QUAD CITY HOLDINGS, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware QUAD CITY HOLDINGS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority vested in the Board of Directors in accordance with the provisions of the Certificate of Incorporation of the said Corporation, the said Board of Directors on August 21, 1996, adopted the following resolution creating a series of 100 shares of Preferred Stock designated as "Series A Preferred Stock": RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of the Certificate of Incorporation, a series of Preferred Stock, $1.00 par value per share, of the Corporation be and hereby is created, and that the designation and number of shares thereof and the voting and other powers, preferences and relative, participating, optional or other rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows: Series A Preferred Stock 1. Designation and Amount. The board of directors (the "Board") of Quad City Holdings, Inc., a Delaware corporation (the "Company"), has designated 100 shares of the Company's authorized and unissued preferred stock as "Series A Preferred Stock," has authorized such shares for issuance at a price of $100,000 per share (the "Series A Preferred Stock") and has determined that no further shares of Series A Preferred Stock shall be issued. 2. Dividends. The Series A Preferred Stock shall accrue no dividends nor carry any stated dividend rate. 3. Redemption. (a) At any time after the first anniversary of the issuance of any shares of Series A Preferred Stock (the "Redemption Date"), such shares: (i) may be redeemed at any time at the option of the Company; or (ii) shall be redeemed if the Company sells for cash additional shares of its common stock, $1.00 par value per share ("Common Stock"), subject to receipt in either case of all required regulatory approvals. The proceeds of any such sales of additional shares of Common Stock shall be used to redeem all outstanding shares of Series A Preferred Stock on a first issued, first redeemed basis, and with respect to all Preferred Stock issued on the same date, on a pro rata basis. Notwithstanding anything contained herein to the contrary, the Company shall not be required to use the cash proceeds from the sale or issuance of any of its shares of Common Stock made solely to its employees or directors, whether or not such sales have been registered with the Securities and Exchange Commission on Form S-8, or in connection with the exercise of any options or warrants or through a dividend reinvestment plan or other form of ongoing stock purchase plan which may be offered to the Company's stockholders from time to time. Each issued and outstanding share of Series A Preferred Stock shall be redeemed at an aggregate per share price equal to the sum of: (x) $100,000; plus (y) $9,750 multiplied by a fraction the numerator of which is the total number of calendar days the share of Series A Preferred Stock has been issued and outstanding through the Redemption Date, and the denominator of which is 365 (the "Redemption Price"). (b) Not less than 30 days nor more than 60 days prior to the Redemption Date, written notice (the "Redemption Notice") shall be mailed, first class postage prepaid, to the holders of the shares of the Series A Preferred Stock at their address last shown on the records of the Company. The Redemption Notice shall state: (i) the number of shares being redeemed; (ii) what the Redemption Date and Redemption Price are; and (iii) that each holder is to surrender to the Company, in the manner and at the place designated, the certificates representing the shares of Series A Preferred Stock to be redeemed. (c) Before any holder of shares of Series A Preferred Stock shall be entitled to redeem any such shares for cash, it shall surrender the certificate or certificates therefor, duly endorsed, in the manner and at the specified in the Redemption Notice. Following delivery of the shares of Series A Preferred Stock to be redeemed, the Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be cancelled and retired. (d) Notwithstanding anything contained in this Section 3 to the contrary, the Company shall not be obligated to redeem for cash any shares of Series A Preferred Stock if such redemption would cause the Company to be in violation of any statute, rule, order, regulation or agreement to which the Company is a party, including, but not limited to, any statute, rule, order, regulation or agreement relating to minimum capital requirements. The Company shall use its best efforts promptly to remedy any such violation if the same has the effect of preventing the redemption of any shares of Series A Preferred Stock, and shall promptly complete the redemption of shares after such violation has been cured. 4. Voting Rights. (a) The holders of each share of Series A Preferred Stock shall not be entitled to vote, except: (i) as required by law; and (ii) to approve the authorization or issuance of any shares of any class or series of stock which ranks senior or on a parity with, the Series A Preferred Stock in respect of dividends and distributions upon the dissolution, liquidation or winding up of the Company. (b) Notwithstanding anything contained herein to the contrary, the holders of Series A Preferred Stock shall vote as a separate class when required by law and to approve the matters set forth in Section 4(a)(ii). In such circumstances, the affirmative vote of the holders of a majority (or such greater percentage as may be required by law or the Company's certificate of incorporation or bylaws) of the voting rights provided in this Section for the Series A Preferred Stock, voting separately as a class, shall be necessary to approve such proposed action by the holders of Series A Preferred Stock. 5. Liquidation. Upon the dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, each holder of shares of Series A Preferred Stock shall be entitled to receive out of the assets of the Company available for distribution to stockholders, the amount equal to the Redemption Price multiplied by the number of shares of Series A Preferred Stock owned by such holder. In the event the assets of the Company available for distribution to the holders of shares of Series A Preferred Stock upon any dissolution, liquidation or winding up of the Company shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to this paragraph, then all of the assets of the Company to be distributed shall be distributed ratably to the holders of Series A Preferred Stock. After the payment to the holders of the shares of Series A Preferred Stock of the full amounts provided for in this paragraph, the holders of shares of Series A Preferred Stock as such shall have no right or claim to any of the remaining assets of the Company. IN WITNESS WHEREOF, the undersigned have executed this Certificate this __ day of ____________, 1996. ATTEST QUAD CITY HOLDINGS, INC. By: /s/ Douglas M. Hultquist By: /s/ Michael A. Bauer --------------------------- ---------------------------- Douglas M. Hultquist Michael A. Bauer President Chairman of the Board STATE OF IOWA ) ) SS: COUNTY OF SCOTT ) BE IT REMEMBERED that, on _______________, 1996, before me, a Notary Public duly authorized by law to take acknowledgement of deeds, personally came each of Michael A. Bauer and Douglas M. Hultquist, the Chairman and President of Quad City Holdings, Inc., respectively, who duly signed the foregoing instrument before me and acknowledged that such signing is his respective act and deed, that such instrument as executed is the act and deed of said corporation and that the facts stated therein are true. GIVEN under my hand on _______________, 1996. Notary Public EX-27 3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1999 FORM 10-Q OF QUAD CITY HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS JUN-30-1999 MAR-31-1999 8,455 12,470 29,380 0 47,149 774 787 191,679 2,704 299,815 239,124 9,468 3,737 26,384 0 0 2,296 18,806 299,815 11,509 1,617 1,557 14,684 6,674 8,085 6,598 644 2 7,151 2,761 1,672 0 0 1,672 .73 .69 3.47 1,509 59 0 0 2,350 392 102 2,704 2,704 0 16
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