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, 2000
[ ] 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.
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(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
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(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 May 1, 2000,
the Registrant had outstanding 2,318,291 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,
September 30, 2000 and June 30, 2000
Consolidated Statements of Income,
For the Three Months Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows,
For the Three Months Ended September 30, 2000 and 1999
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)
September 30, 2000 and June 30, 2000
September 30, June 30,
2000 2000
------------------------------
ASSETS
Cash and due from banks ........................................ $ 16,076,382 $ 15,130,357
Federal funds sold ............................................. 29,195,000 26,105,000
Certificates of deposit at financial institutions .............. 11,098,188 12,776,463
Securities held to maturity, at amortized cost ................. 575,132 574,988
Securities available for sale, at fair value ................... 54,972,590 55,554,062
------------------------------
55,547,722 56,129,050
------------------------------
Loans receivable ............................................... 251,782,053 241,852,851
Less: Allowance for estimated losses on loans .................. (3,777,651) (3,617,401)
------------------------------
248,004,402 238,235,450
------------------------------
Premises and equipment, net .................................... 7,748,748 7,715,621
Accrued interest receivable .................................... 2,808,069 2,633,120
Other assets ................................................... 10,497,629 8,896,554
------------------------------
Total assets ........................................... $ 380,976,140 $ 367,621,615
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ......................................... $ 46,195,578 $ 44,043,932
Interest-bearing ............................................ 251,923,851 244,022,824
------------------------------
Total deposits ............................................ 298,119,429 288,066,756
------------------------------
Short-term borrowings .......................................... 20,089,696 20,771,724
Federal Home Loan Bank advances ................................ 25,335,219 22,425,398
Company obligated manditorily redeemable preferred securities of 12,000,000 12,000,000
subsidiary trust holding solely subordinated debentures
Other borrowings ............................................... 0 0
Other liabilities .............................................. 4,439,748 4,286,318
------------------------------
Total liabilities ...................................... 359,984,092 347,550,196
------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; shares authorized 5,000,000; ....... 2,325,566 2,325,416
shares issued and outstanding September 2000 - 2,325,566 and
2,272,420; June 2000 - 2,325,416 and 2,283,920 respectively
Additional paid-in capital ..................................... 12,148,759 12,147,984
Retained earnings .............................................. 7,956,266 7,296,017
Accumulated other comprehensive (loss), unrealized (losses) on
securities available for sale, net ........................... (660,725) (1,098,518)
------------------------------
21,769,866 20,670,899
Less: Cost of common shares acquired for the treasury;
September 2000 - 53,146; June 2000 - 41,496 ................. (777,818) (599,480)
------------------------------
Total stockholders' equity ............................. 20,992,048 20,071,419
------------------------------
Total liabilities and stockholders' equity ............. $ 380,976,140 $ 367,621,615
==============================
See Notes to Consolidated Financial Statements
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30
2000 1999
-----------------------
Interest income:
Interest and fees on loans ................................. $5,493,570 $4,456,722
Interest and dividends on securities:
Taxable .............................................. 786,334 695,558
Nontaxable ........................................... 65,943 48,505
Interest on federal funds sold ............................. 409,741 386,338
Other interest ............................................. 222,451 213,514
-----------------------
Total interest income ................................. 6,978,039 5,800,637
-----------------------
Interest expense:
Interest on deposits ...................................... 3,285,542 2,317,188
Interest on company obligated manditorily
redeemable preferred securities ...................... 284,411 276,979
Interest on short-term and other borrowings ............... 549,222 508,659
-----------------------
Total interest expense ................................ 4,119,175 3,102,826
-----------------------
Net interest income ................................... 2,858,864 2,697,811
Provision for loan losses ...................................... 176,075 274,700
-----------------------
Net interest income after provision for loan losses ... 2,682,789 2,423,111
-----------------------
Noninterest income:
Merchant credit card fees, net of processing costs ......... 372,442 537,796
Trust department fees ...................................... 504,917 399,644
Deposit service fees ....................................... 177,797 156,037
Gains on sales of loans, net ............................... 127,140 101,173
Securities gains, net ...................................... 125 0
Other ...................................................... 189,664 177,463
-----------------------
Total noninterest income .............................. 1,372,085 1,372,113
-----------------------
Noninterest expenses:
Salaries and employee benefits ............................. 1,781,812 1,628,442
Professional and data processing fees ...................... 264,003 220,837
Advertising and marketing .................................. 127,431 83,457
Occupancy and equipment expense ............................ 419,652 393,857
Stationery and supplies .................................... 72,252 82,068
Provision for merchant credit card losses .................. 0 0
Postage and telephone ...................................... 93,986 81,699
Other ...................................................... 318,502 283,181
-----------------------
Total noninterest expenses ............................ 3,077,638 2,773,541
-----------------------
Income before income taxes ............................ 977,236 1,021,683
Federal and state income taxes .................................. 316,987 389,035
-----------------------
Net income ............................................ $ 660,249 $ 632,648
=======================
Earnings per common share:
Basic ................................................. $ 0.29 $ 0.28
Diluted ............................................... $ 0.28 $ 0.26
Weighted average common shares outstanding ............ 2,275,261 2,299,430
Weighted average common and common equivalent ......... 2,332,368 2,399,788
shares outstanding
Comprehensive income ............................................ $1,098,042 $ 379,342
=======================
See Notes to Consolidated Financial Statements
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30
2000 1999
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 660,249 $ 632,648
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation ..................................................... 174,560 161,948
Provision for loan losses ........................................ 176,075 274,700
Amortization of offering costs on subordinated debentures ......... 8,411 7,611
Amortization of premiums on securities, net ....................... 14,186 17,382
Securities gains, net ............................................ (125) 0
Loans originated for sale ........................................ (11,941,125) (10,361,657)
Proceeds on sales of loans ....................................... 10,830,720 10,997,650
Net gains on sales of loans ...................................... (127,140) (101,173)
Tax benefit of nonqualified stock options exercised .............. 245 0
Increase in accrued interest receivable .......................... (174,949) (301,051)
Increase in other assets ......................................... (1,817,169) (896,989)
Increase (decrease) in other liabilities ......................... 153,185 (520,122)
---------------------------
Net cash used in operating activities ......................... $ (2,042,877) $ (89,053)
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold ...................... (3,090,000) 12,400,000
Net decrease in certificates of deposits at financial institutions . 1,678,275 491,222
Purchase of securities available for sale .......................... (54,838) (9,085,693)
Proceeds from calls and maturities of securities ................... 1,000,000 200,000
Proceeds from paydowns on securities ............................... 279,416 385,356
Proceeds from sales of securities available for sale ............... 10,125 0
Increase in cash value of life insurance contracts ................. (21,960) 0
Net loans originated ............................................... (8,707,482) (13,585,974)
Purchase of premises and equipment, net ............................ (207,687) (238,177)
---------------------------
Net cash used in investing activities ......................... $ (9,114,151) $ (9,433,266)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts ................................... 10,052,673 10,550,608
Net increase (decrease) in short-term borrowings ................... (682,028) 3,280,634
Proceeds from Federal Home Loan Bank advances ...................... 5,000,000 0
Payments on Federal Home Loan Bank advances ........................ (2,090,179) (88,956)
Purchase of treasury stock ......................................... (178,338) 0
Proceeds from issuance of common stock, net ........................ 925 27,500
---------------------------
Net cash provided by financing activities ..................... $ 12,103,053 $ 13,769,786
---------------------------
Net increase in cash and due from banks ....................... 946,025 4,247,467
Cash and due from banks, beginning ........................................... 15,130,357 8,528,195
---------------------------
Cash and due from banks, ending .............................................. $ 16,076,382 $ 12,775,662
===========================
Supplemental disclosure of cash flow information, cash payments for:
Interest ........................................................... $ 3,697,775 $ 3,247,442
Income/franchise taxes ............................................. $ 385,366 $ 379,635
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income (loss), ........... $ 437,793 $ (253,306)
unrealized gain (loss) on securities available for sale, net
Due to broker for purchase of securities available for sale ........ $ 0 $ 3,800,000
See Notes to Consolidated Financial Statements
Part I
Item 1
QUAD CITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
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 September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2001.
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"), Quad City
Bancard, Inc. ("Bancard"), Allied Merchant Services, Inc. ("Allied"), and Quad
City Holdings Capital Trust I ("Capital Trust"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
NOTE 3 - EARNINGS PER SHARE
The following information was used in the computation of earnings per share on a
basic and diluted basis.
Three months ended
September 30,
--------------------------
2000 1999
--------------------------
Net income, basic and diluted
Earnings ................................. $ 660,249 $ 632,648
Weighted average common shares
Outstanding .............................. 2,275,261 2,299,430
Weighted average common shares
issuable upon exercise of stock
options and warrants ..................... 57,107 100,358
Weighted average common and
common equivalent shares
outstanding .............................. 2,332,368 2,399,788
NOTE 4 - BUSINESS SEGMENT INFORMATION
Selected financial information on the Company's business segments is presented
as follows for the three months ended September 30, 2000 and 1999, respectively.
2000 1999
--------------------------
Revenue:
Quad City Holdings, Inc. .................... $ 62,762 $ 44,888
Quad City Bank and Trust Company ............ 7,360,150 6,171,266
Quad City Bancard, Inc. ..................... 422,295 556,952
Trust Department, Quad City Bank
and Trust Company ........................ 504,917 399,644
--------------------------
Total revenue .......................... $ 8,350,124 $ 7,172,750
==========================
Net income (loss):
Quad City Holdings, Inc. .................... $ (207,537) $ (228,753)
Quad City Bank and Trust Company ............ 691,656 636,602
Quad City Bancard, Inc. ..................... 64,114 126,568
Trust Department, Quad City Bank
and Trust Company ......................... 112,016 98,231
--------------------------
Total net income ....................... $ 660,249 $ 632,648
==========================
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, and trust and asset management services to the Quad City area and
adjacent communities through its three offices that are located in Bettendorf
and Davenport, Iowa and Moline, Illinois. A fourth full-service location is
scheduled to open in Davenport on October 30, 2000.
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 expired in May 2000. In March 1999, Bancard
formed its own subsidiary ISO, Allied Merchant Services, Inc., for the purpose
of generating additional credit card processing business. At September 30, 2000,
approximately 10,600 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 $13.4 million or 4% to $381.0
million at September 30, 2000 from $367.6 million at June 30, 2000. The growth
primarily resulted from an increase in the loan portfolio funded by deposits
received from customers and by advances from the Federal Home Loan Bank.
Cash and due from banks increased by $946 thousand or 6% to $16.1 million
at September 30, 2000 from $15.1 million at June 30, 2000. 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 September
30, 2000, the Bank had $29.2 million invested in such funds. This amount
increased by $3.1 million or 12% from $26.1 million at June 30, 2000.
Certificates of deposit at financial institutions decreased by $1.7
million or 13% to $11.1 million at September 30, 2000 from $12.8 million at June
30, 2000. During the first three months of fiscal 2001, the Bank's certificate
of deposit portfolio had six maturities totaling $2.5 million and eight
purchases which totaled $792 thousand.
Securities decreased by $581 thousand or 1% to $55.5 million at September
30, 2000 from $56.1 million at June 30, 2000. The decrease was the result of a
number of transactions in the securities portfolio. Paydowns of $279 thousand
were received on mortgage-backed securities, and the amortization of premiums,
net of the accretion of discounts, was $14 thousand. Maturities and calls of
securities occurred in the amount of $1.0 million, and sales of securities
totaled $10 thousand. These portfolio decreases were partially offset by the
purchase of additional securities, classified as available for sale, in the
amount of $55 thousand. Unrealized losses on securities available for sale,
before applicable income tax, decreased by the amount of $667 thousand.
Loans receivable increased by $9.9 million or 4% to $251.8 million at
September 30, 2000 from $241.9 million at June 30, 2000. The increase was the
result of the origination or purchase of $62.1 million of commercial business,
consumer and real estate loans, less loan charge-offs, net of recoveries, of $16
thousand, and loan repayments or sales of loans of $52.1 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 $3.8 million at September
30, 2000 compared to $3.6 million at June 30, 2000, an increase of $160 thousand
or 4%. 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.
Provisions were made monthly to ensure that an adequate level was maintained.
Although management believes that the allowance for estimated losses on loans at
September 30, 2000 was at a level adequate to absorb losses on existing loans,
there can be no assurance that such losses will not exceed the estimated
amounts.
Net charge-offs for the three months ended September 30, were $16 thousand
in 2000 and $84 thousand in 1999. One measure of the adequacy of the allowance
for estimated losses on loans is the ratio of the allowance to the total loan
portfolio. The allowance for estimated losses on loans as a percentage of total
loans was 1.50% at both September 30, 2000 and June 30, 2000.
Nonaccrual loans were $334 thousand at September 30, 2000 compared to $383
thousand at June 30, 2000, a decrease of $49 thousand or 13%. The decrease in
nonaccrual loans was comprised of decreases in real estate loans of $4 thousand,
commercial loans of $24 thousand and consumer loans of $21 thousand. Nonaccrual
loans consisted primarily of loans that were well collateralized and were not
expected to result in material losses.
Premises and equipment showed a slight increase of $33 thousand or less
than 1% to remain at $7.7 million at September 30, 2000. The increase resulted
from the purchase of additional furniture, fixtures and equipment of $208
thousand during the period offset by depreciation expense of $175 thousand.
Accrued interest receivable on loans, securities and interest-bearing cash
accounts increased by $175 thousand or 7% to $2.8 million at September 30, 2000
from $2.6 million at June 30, 2000. The increase was primarily due to greater
average outstanding balances in interest-bearing assets.
Other assets increased by $1.6 million or 18% to $10.5 million at
September 30, 2000 from $8.9 million at June 30, 2000. The largest component of
the increase was the $1.2 million growth in receivables due Bancard from its
terminated, primary ISO. As discussed further in Part II, Item 1, Bancard is
vigorously pursuing the collection of this receivable. Other assets also
included accrued trust department fees, other miscellaneous receivables, and
various prepaid expenses.
Deposits increased by $10.0 million or 3% to $298.1 million at September
30, 2000 from $288.1 million at June 30, 2000. The increase resulted from a $6.7
million net increase in non-interest bearing, NOW, money market and other
savings accounts and a $3.3 million net increase in interest-bearing
certificates of deposit. Management believes the increases were a result of
periodic aggressive pricing programs for deposits and increased marketing
efforts.
Short-term borrowings decreased $682 thousand or 3% from $20.8 million at
June 30, 2000 to $20.1 million at September 30, 2000. The Bank offers short-term
repurchase agreements to some of its major customers. Also, on occasion, the
Bank purchases Federal funds for the short-term from the Federal Reserve Bank or
from some of its correspondent banks. As of September 30, 2000, short-term
borrowings were comprised of $19.4 million of customer repurchase agreements and
$720 thousand of Federal funds purchased from correspondent banks. As of June
30, 2000, short-term borrowings represented customer repurchase agreements of
$15.8 million and Federal funds purchased from the Federal Reserve Bank of $5.0
million.
Federal Home Loan Bank advances increased by $2.9 million or 13% to $25.3
million at September 30, 2000 from $22.4 million at June 30, 2000. 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 Bank
primarily utilizes FHLB advances for loan matching and for hedging against the
possibility of rising interest rates.
In June 1999, the Company issued 1,200,000 shares of trust preferred
securities through a newly formed subsidiary, Quad City Holdings Capital Trust
I. On the Company's balance sheet these securities are included with liabilities
and are presented as "company obligated manditorily redeemable preferred
securities of subsidiary trust holding solely subordinated debentures", and were
$12.0 million at both September 30, 2000 and June 30, 2000.
Other liabilities increased by $153 thousand or 4% to $4.4 million at
September 30, 2000 from $4.3 million at June 30, 2000. Other liabilities was
comprised of unpaid amounts for various products and services, and accrued but
unpaid interest on deposits.
Common stock at September 30, 2000 increased by less than 1% to remain
unchanged at $2.3 million from June 30, 2000. The increase was the result of a
single exercise of stock options resulting in the issuance of 150 additional
shares of common stock.
Additional paid-in capital totaled $12.1 million at both September 30,
2000 and June 30, 2000. An increase of less than 1% resulted from proceeds
received in excess of the $1.00 per share par value for 150 shares of common
stock issued as the result of an exercise of stock options.
Retained earnings increased by $660 thousand or 9% to $8.0 million at
September 30, 2000 from $7.3 million at June 30, 2000. The increase reflected
net income for the three-month period.
Unrealized losses on securities available for sale, net of related income
taxes, totaled $661 thousand at September 30, 2000 as compared to $1.1 million
at June 30, 2000. The decrease in losses of $438 thousand was attributable to
the increase during the period in fair value of the securities identified as
available for sale.
On April 5, 2000, the Company announced that the board of directors
approved a stock repurchase program enabling the Company to repurchase up to
60,000 shares of its common stock. As of September 30, 2000, 53,146 treasury
shares had been acquired at a total cost of $778 thousand compared to 41,496
treasury shares at a total cost of $599 thousand at June 30, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
One method used to quantify interest rate risk is the net portfolio value
("NPV") analysis. This analysis calculates the difference between the present
value of liabilities and the present value of expected cash flows from assets
and off-balance sheet contracts. The most recent NPV analysis, as of June 30,
2000, projects that net portfolio value would decrease by approximately 9.54% if
interest rates would rise 200 basis points over the next year. It projects an
increase in net portfolio value of approximately 1.05% if interest rates would
drop 200 basis points. Both simulations are within board-established policy
limits.
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three-month period ended September 30, 2000 was $660
thousand as compared to net income of $633 thousand for the same period in 1999,
an increase of $27 thousand or 4%. Basic earnings per share for the first three
months increased to $0.29 from $0.28 in 1999. The increase in net income was
comprised of an increase of $259 thousand in net interest income after provision
for loan losses and a decrease in income tax expense of $72 thousand offset by
an increase in noninterest expense of $304 thousand.
The Company's net income is derived largely 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.
The Company's average yield on interest-earning assets increased 0.42% for
the quarter ended September 30, 2000 when compared to the quarter ended
September 30, 1999. With the same comparison, the average cost of
interest-bearing liabilities increased 0.82% which resulted in a 0.40% decrease
in the net interest spread of 3.06% at September 30, 1999 to 2.66% at September
30, 2000. The narrowing of the net interest spread created a decline in the net
interest margin. For the three months ended September 30, 2000 net interest
margin was 3.36% compared to 3.56% for the same period in 1999. Management is
taking steps to address this decline in margin.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Interest income increased by $1.2 million from $5.8 million for the
three-month period ended September 30, 1999 to $7.0 million for the quarter
ended September 30, 2000. The 20% rise in interest income was attributable to
greater average, outstanding balances in interest earning assets, principally
with respect to loans receivable, and higher interest rates.
Interest expense increased by $1.0 million from $3.1 million for the
three-month period ended September 30, 1999 to $4.1 million for the three-month
period ended September 30, 2000. The 33% increase in interest expense was caused
by greater average, outstanding balances in interest-bearing liabilities,
principally with respect to customers' time deposits in and repurchase
agreements with the subsidiary bank, and higher interest rates.
At both September 30, 2000 and June 30, 2000, the Company had an allowance
for estimated losses on loans of approximately 1.5% of total loans. The
provision for loan losses decreased by $99 thousand from $275 thousand for the
three month period ended September 30, 1999 to $176 thousand for the three month
period ended September 30, 2000. During the fourth quarter of fiscal 2000,
management had made an increased provision for loan losses based on the economic
outlook of a few significant commercial borrowers. Based on a number of factors,
including the improvement of the economic conditions of some of these same
commercial borrowers during the first quarter of fiscal 2001, and a subsequent
loan payoff by one of these customers, management determined that a lower
provision for the quarter was appropriate. Real estate loans had no charge-offs
or recoveries for the three months ending September 30, 2000. For the same
three-month period, commercial loans had no charge-offs, and recoveries totaled
$2 thousand. Consumer loan charge-offs and recoveries totaled $27 thousand and
$9 thousand during the quarter. Indirect auto and credit card loans equally
accounted for 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 was $1.4 million for the three-month periods ended both
September 30, 2000 and September 30, 1999. Noninterest income during each of the
quarters in comparison consisted primarily 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
absence of an increase was primarily due to a 31% decrease in fees earned by the
merchant credit card operation of Bancard, offset by a 26% increase in fees
earned by the trust department of the Bank, a 26% increase in gains on sales of
loans and modest increases in all other categories of noninterest income.
In November 1999, Bancard's largest ISO notified Bancard that it intended
to terminate its processing relationship in May 2000 and start processing its
own transactions, as per a previous agreement. Processing for this ISO ceased in
May 2000 as anticipated. Bancard has begun processing for nine additional ISOs.
In spite of this, Bancard's net merchant credit card fee income will remain
below previous levels until additional ISO relationships can be developed,
processing volumes with existing ISOs increase, or Allied can generate
processing volumes comparable to those experienced by Bancard prior to the
termination of processing with the original ISO. Bancard's average dollar volume
of transactions processed per month during fiscal 2000 was $90 million, and of
that, $58 million was attributable to the ISO that terminated its relationship.
This reduction in processing fees and the cessation of a related monthly service
fee to Bancard is expected to adversely affect consolidated income for the
Company in fiscal 2001.
During the three months ended September 30, 2000, merchant credit card
fees, net of processing costs, decreased by $166 thousand to $372 thousand from
$538 thousand for the three months ended September 30, 1999. The 31% decrease
was the result of decreased merchant processing fees in conjunction with the
termination of Bancard's major ISO, partially offset by increased processing
volumes with other ISOs.
For the quarter ended September 30, 2000, trust department fees increased
$105 thousand, or 26%, to $505 thousand from $400 thousand for the same quarter
in 1999. The increase was primarily a reflection of the development of
additional trust relationships and a revision of the trust department fee
structure effective January 1, 2000.
Deposit service fees increased $22 thousand, or 14%, to $178 thousand from
$156 thousand for the three-month periods ended September 30, 2000 and September
30, 1999. Service charges and NSF (non-sufficient funds) charges related to
demand deposit accounts were the main components of deposit service fees.
Gains on sales of loans, net was $127 thousand for the three months ended
September 30, 2000, which reflected an increase of 26%, or $26 thousand, from
$101 thousand for the three months ended September 30, 1999. The increase
resulted from larger numbers of both home refinances and home purchases, and the
subsequent sale of the majority of these loans into the secondary market. The
stability of interest rates over recent months has accounted for the increased
activity in this area.
The main components of noninterest expenses were primarily salaries and
benefits, occupancy and equipment expenses, and professional and data processing
fees, for both quarters. Noninterest expenses for the three months ended
September 30, 2000 were $3.1 million as compared to $2.8 million for the same
period in 1999, for an increase of $304 thousand or 11%.
The following table sets forth the various categories of noninterest
expenses for the three months ended September 30, 2000 and 1999.
Noninterest Expenses
Three months ended
September 30,
2000 1999 % change
----------------------------------
Salaries and employee benefits ........................ $1,781,812 $1,628,442 9.4%
Professional and data processing fees ................. 264,003 220,837 19.6%
Advertising and marketing ............................. 127,431 83,457 52.7%
Occupancy and equipment expense ....................... 419,652 393,857 6.6%
Stationery and supplies ............................... 72,252 82,068 -12.0%
Postage and telephone ................................. 93,986 81,699 15.0%
Other ................................................. 318,502 283,181 12.5%
----------------------------------
Total noninterest expenses $3,077,638 2,773,541 11.0%
==================================
Salaries and benefits experienced the most significant dollar increase of
any noninterest expense component. For the quarter ended September 30, 2000,
total salaries and benefits increased to $1.8 million or $153 thousand over the
1999 quarter total of $1.6 million. The change was primarily attributable to the
increase from September 1999 to September 2000 in the number of Bank employees
and increased incentive compensation to trust employees proportionate to the
increased volume of fees earned. Professional and data processing fees increased
from $221 thousand for the three months ended September 30, 1999 to $264
thousand for the same three month period in 2000. The $43 thousand increase was
predominately the result of increased fees to outside consultants addressing
compliance, efficiency, profitability and other growth-related issues.
Advertising and marketing increased 53% or $44 thousand for the quarter. The
increase was primarily the result of the development and start-up of the Bank's
new website (qcbt.com ) and the establishment of an online partnership with
America Online, Inc. creating local access to that website. The increase was
also the result of business development expenses incurred in support of various
area events. Occupancy and equipment expense increased $26 thousand or 7% for
the quarter. The increase was due to increased levels of depreciation,
maintenance, utilities and other expenses related to the upkeep of the four
physical locations.
The provision for income taxes was $317 thousand for the three-month
period ended September 30, 2000 compared to $389 thousand for the three-month
period ended September 30, 1999 for a decrease of $72 thousand or 19%. The
decrease was the result of a decrease in income before income taxes of $44
thousand or 4% for the fiscal 2001 quarter when compared to the fiscal 2000
quarter, as well as a reduction in the Company's effective tax rate.
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, investing, and
financing activities. Net cash used in operating activities, consisting
primarily of the funding of loans for sale, was $2.0 million for the three
months ended September 30, 2000 compared to $89 thousand net cash used in
operating activities for the same period in 1999. Net cash used in investing
activities, consisting principally of loan originations, was $9.1 million for
the three months ended September 30, 2000 and $9.4 million for the three months
ended September 30, 1999. Net cash provided by financing activities, consisting
primarily of deposit growth and net proceeds from Federal Home Loan Bank
advances, for the three months ended September 30, 2000 was $12.1 million and
for same period in 1999 was $13.8 million.
OTHER DEVELOPMENTS
In addition to the main office in Bettendorf, IA, the Bank has full
service banking locations in Davenport, IA, and Moline, IL. The Company also
maintains two locations that are utilized for various operational and
administrative functions. In March 1999, the Bank acquired and improved a 3,000
square foot office building adjacent to the Davenport facility for utilization
by its technology and lending departments. Beginning May 1, 2000, the Company
leased approximately 2,000 square feet on the second floor of the Velie's
facility. The space was renovated and serves as the corporate headquarters of
the Company.
Construction of a fourth full service banking facility began in early
summer of 2000 at 5515 Utica Ridge Road in Davenport. The Bank will lease
approximately 6,000 square feet on the first floor and 2,200 square feet in the
lower level of the 24,000 square foot facility. The office is scheduled to open
on October 30, 2000.
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, our implementation of new technologies, our ability
to develop and maintain secure and reliable electronic systems, and accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. 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.
RECENT REGULATORY DEVELOPMENTS
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November,
1999, allows eligible bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities and
insurance activities. Under the Act, an eligible bank holding company that
elects to become a financial holding company may engage in any activity that the
Board of Governors of the Federal Reserve System (the "Federal Reserve"), in
consultation with the Secretary of the Treasury, determines by regulation or
order is financial in nature, incidental to any such financial activity, or
complementary to any such financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally. National banks are also authorized by the Act to engage,
through "financial subsidiaries," in certain activity that is permissible for
financial holding companies (as described above) and certain activity that the
Secretary of the Treasury, in consultation with the Federal Reserve, determines
is financial in nature or incidental to any such financial activity.
Although various bank regulatory agencies have issued regulations as
mandated by the Act, except for the jointly issued privacy regulations, the Act
and its implementing regulations have had little impact on the daily operations
of the Company and the Bank and, at this time, it is not possible to predict the
impact the Act and its implementing regulations may have on the Company or the
Bank. As of the date of this filing, the Company has not applied for or received
approval to operate as a financial holding company. In addition, the Bank has
not applied for or received approval to establish any financial subsidiaries.
Less than 10% of all bank holding companies have elected to become financial
holding companies.
Part II
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Bancard is the holder of an account receivable in the approximate amount of
$1,500,000 owing from PMT Services, Inc. ("PMT"). PMT is a subsidiary of Nova
Corporation (trading symbol NIS on the New York Stock Exchange.) This receivable
arises pursuant to Bancard's provision of electronic credit card sales
authorization and settlement services to PMT pursuant to a written contract that
includes PMT's obligation to indemnify Bancard for credit card chargeback losses
arising from those services. PMT has failed to timely pay Bancard for monthly
invoices, including service charges and substantial chargeback losses, for the
period of May, 2000 through September, 2000. Bancard intends to vigorously
pursue collection of this receivable. On September 25, 2000, PMT filed a lawsuit
in federal court in Los Angeles, California, against Bancard and the Company.
This lawsuit alleges tortious acts and breaches of contract by Bancard, the
Company, and others and seeks recovery from Bancard and the Company of not less
than $3,600,000 of alleged actual damages, plus punitive damages. Based on a
preliminary evaluation of the complaint, Bancard and the Company believe the
allegations to be without merit, intend to vigorously defend the suit, and have
filed motions to dismiss such litigation in California. In addition, on October
13, 2000, Bancard and the Company filed a lawsuit in federal court in Davenport,
Iowa, against PMT. The lawsuit seeks a court order compelling PMT to participate
in arbitration in Bettendorf, Iowa, as provided for in the pertinent contract
documents, to resolve the disputes between PMT, Bancard and the Company,
including the unpaid account receivable.
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
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K with the
Securities and Exchange Commission on September 29, 2000
under Item 5 to report on an unpaid account receivable and the
filing of litigation.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QUAD CITY HOLDINGS, INC.
(Registrant)
Date November 6, 2000 /s/ Michael A. Bauer
Michael A. Bauer, Chairman
Date November 6, 2000 /s/ Douglas M. Hultquist
Douglas M. Hultquist, President
Principal Executive Officer
Date November 6, 2000 /s/ Todd A. Gipple
Todd A. Gipple, Executive Vice
President
Chief Financial Officer