-----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, UAbceS4SGDkWwGsC4EGWnx2K/OpHY1ThEjXwetR98Ej/DiRCt0O6HN3wwuCnnp1R 1RiSynxLriHuBjYC0L+0bw== 0000743530-98-000071.txt : 19980929 0000743530-98-000071.hdr.sgml : 19980929 ACCESSION NUMBER: 0000743530-98-000071 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-22208 FILM NUMBER: 98716459 BUSINESS ADDRESS: STREET 1: 2118 MIDDLE RD STREET 2: PO BOX 395 CITY: BETTENDORF STATE: IA ZIP: 52722 BUSINESS PHONE: 3193440600 10KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [ x ] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1998 [ ] Transition report under 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. ---------------------------------------------- (Name of Small Business Issuer in Its Charter) Delaware 42-1397595 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 3551 Seventh Street, Suite 100, Moline, Illinois 61265 - ------------------------------------------------ ---------- (Address of Principal Executive Offices) (Zip Code) (309) 736-3580 ------------------------------------------------ (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, $1 Par Value Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [ x ] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ x ] State issuer's revenues for its most recent fiscal year: $21,224,984. The aggregate market value of the voting and non-voting common equity held by non-affiliates as of August 25, 1998 was approximately $41,500,000. As of August 25, 1998, the Issuer had 1,520,474 shares of Common Stock issued and outstanding. Documents incorporated by reference: Part III of Form 10-KSB - Proxy statement for annual meeting of stockholders to be held in 1998. Transitional Small Business Disclosure Format (check one): Yes [ ] No [ x ] Part I Item 1. Description of the Business Quad City Holdings, Inc. (the "Company") was formed in February of 1993 under the laws of the state of Delaware for the purpose of becoming the bank holding company of Quad City Bank and Trust Company (the "Bank"). The Bank was capitalized on October 13, 1993 and commenced operations on January 7, 1994. The Bank is organized as 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 in the Quad City area through its offices located in Bettendorf and Davenport, Iowa and in Moline, Illinois. Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a Delaware corporation that provides merchant credit card processing services. This operation had previously been a division of the Bank since July 1994. Bancard has contracted with an independent sales organization ("ISO") that markets credit card services to merchants throughout the country. The contract with the current ISO expires in June of 1999. Currently, nearly 12,500 merchants process transactions with Bancard. The Company owns 100% of the Bank and Bancard, and in addition to such ownership invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with the Bank. The Bank competes with other commercial banks, investment and brokerage firms, savings banks, savings and loan institutions, credit unions and other financial service organizations in the Quad Cities market. The Bank, the Company and Bancard are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). In addition, the Bank is regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC"). The Company's principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The deposits of the Bank are insured to the maximum amount allowable by the FDIC. The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans and securities and the interest paid on deposits and borrowings. The Company's operating results are affected by merchant credit card fees, trust fees, deposit service charge fees, fees from the sales of residential real estate loans and other income. Operating expenses of the Company include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses and other administrative expenses. The Company's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The commercial banking business is a highly regulated business. See Appendix A for a brief summary regarding federal and state statutes and regulations, which are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks. The Company, the Bank and Bancard have a June 30th fiscal year end and employ 119 individuals. No one customer accounts for more than 10% of revenues, loans or deposits. See Appendix B for the tables and schedules that show selected comparative statistical information required pursuant to the industry guides promulgated under the Securities Act of 1933 and 1934, relating to the business of the Company. Item 2. Description of Property The main office of the Bank is in a 6,700 square foot facility, which was completed in January of 1994. In March of 1994, the Bank acquired that facility, which is located at 2118 Middle Road in Bettendorf. Construction of a second full service banking facility was completed in July of 1996 to provide for the convenience of customers and to expand its market territory. The Bank also owns its portion of that facility which is located at 4500 Brady Street in Davenport. The two-story building is in two segments that are separated by an atrium. The Bank owns the south half of the building, while the northern portion is owned by the developer. Each floor is 6,000 square feet. The Bank occupies its first floor and utilizes the basement for operational functions, item processing and storage. The entire second floor has been leased to two professional services firms. In addition, the residential real estate department of the Bank leases approximately 2,500 square feet on the first floor in the north half of the building. Renovation of a third full service banking facility was completed in February of 1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near the intersection of 7th Street and John Deere Road in Moline near the Rock Island/Moline border. The building is owned by a third party limited liability company and the Bank and Bancard are its major tenants. Pending regulatory approval, the Company intends to purchase a 20% interest in the company that owns the building. Bancard relocated its operations to the lower level of the 30,000 square foot building in late 1997. The Bank began its operations and the Company relocated its corporate headquarters to the first floor of the building on February 17, 1998. The business office of a medical clinic is sub-leasing approximately 3,500 square feet on the first floor. Management is of the opinion that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company. The Bank intends to limit its investment in premises to no more than 50% of Bank capital. The Bank frequently invests in commercial real estate mortgages. The Bank also invests in residential mortgages. The Bank has established lending policies which include a number of underwriting factors to be considered in making a loan including, location, loan to value ratio, cash flow, interest rate and credit worthiness of the borrower. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. Item 3. Legal Proceedings The Company is not aware of any legal proceedings against it, the Bank or Bancard. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the stockholders of the Company for a vote during the fourth quarter of the fiscal year ended June 30, 1998. Part II Item 5. Market for Common Equity and Related Stockholder Matters The Company's common stock has been traded on The Nasdaq SmallCap Market since October 6, 1993. High and low sales prices, as reported on Nasdaq, for each quarterly period during the two fiscal years ended June 30, 1998 and 1997 were as follows: Fiscal 1998 Fiscal 1997 sales price sales price ----------------- ----------------- High Low High Low ----------------- ----------------- First quarter .......... $22.125 $20.250 $13.750 $12.750 Second quarter ......... 29.000 21.250 15.250 13.000 Third quarter .......... 38.750 25.875 17.000 14.000 Fourth quarter ......... 33.000 29.000 21.000 16.000 No cash dividends were declared during the past fiscal year. The board of directors of the Company has approved a 3 for 2 stock split in the form of a dividend, which is scheduled to occur in the second fiscal quarter of 1998. At June 30, 1998, there were estimated to be approximately 2,500 holders of record of the Company's common stock. The Company expects that all earnings will be retained to finance the growth of the Company, the Bank and Bancard, and that no cash dividends will be paid in the near future. If and when dividends are declared, the Company will probably be largely dependent upon dividends from the Bank and Bancard for funds to pay dividends on the common stock. Under Iowa law, the Bank will be restricted as to the maximum amount of dividends it may pay on its common stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. The Bank is a member of the Federal Reserve System. The total of all dividends declared by the Bank in a calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. In addition, the Federal Reserve Board, the Iowa Superintendent and the FDIC are authorized under certain circumstances to prohibit the payment of dividends by the Bank. In the case of the Company, further restrictions on dividends may be imposed by the Federal Reserve Board. Item 6. Management's Discussion and Analysis Results of Operations Net income for the year ended June 30, 1998 was $2,393,272, compared to $1,219,336 for the year ended June 30, 1997, for an increase of 96%. Results improved primarily because of a $1,965,185 increase in net interest income after provision for loan losses, and a $3,340,663 increase in other income, of which $2,168,000 related to a one-time gain on the restructuring of a merchant broker agreement. It is not expected that the gain will reoccur in future years. These increases were offset by a $2,619,012 increase in other expenses due primarily to the increased number of employees and higher operating costs related to the increased volume of business, as well as an increase in income taxes of $1,512,900. Interest income increased to $15,076,567 in fiscal 1998 from $9,705,644 in fiscal 1997, a rise of $5,370,923. The 55% rise was primarily due to greater average outstanding balances in interest bearing assets. Interest income is comprised primarily of interest income on loans (including loan fees), securities, federal funds sold and the Company's own deposits maintained at other financial institutions. Interest income should continue to grow as the loan portfolio and other assets increase, and would also increase as a result of a rise in interest rates. Interest expense increased to $8,342,021 in fiscal 1998 from $4,993,868 in fiscal 1997, an increase of $3,348,153, or 67%, and represented interest paid primarily to depositors, as well as interest paid on Federal Home Loan Bank advances and federal funds purchased. The increase in interest expense was again primarily due to greater average outstanding balances in interest bearing liabilities. Interest expense will continue to increase as deposits and Federal Home Loan Bank advances and other borrowings grow and would also increase as a result of a rise in interest rates. Net interest income for the years ended June 30, 1998 and June 30, 1997 amounted to $6,734,546 and $4,711,776, respectively, and represented the difference between interest income earned on earning assets and interest expense paid on interest bearing liabilities. The provision for loan losses is established based on factors such as the local and national economy and the risk associated with the loans in the portfolio. The Company's provision for loan losses was $901,976 for the year ended June 30, 1998, compared to $844,391 for the year ended June 30, 1997. The $57,585, or 7%, increase in the provision for loan losses was primarily in response to greater growth in the loan portfolio during fiscal 1998. Noninterest income increased by $3,340,663, or 119%, to $6,148,417 in fiscal 1998 from $2,807,754 in fiscal 1997. In June 1998, the Company recognized $2,168,000 of income as a result of signing a new merchant broker agreement with its current ISO. The term of the new agreement is for a one-year period, and replaced a prior agreement that had an expiration date in the year 2002. In consideration for reducing the term from four years to one year, the Company received total compensation of $2,900,000. The remaining $732,000 will be recognized in income during the fiscal year ending June 30, 1999. Additionally, the Company will receive a monthly fee of $25,000 for servicing the current merchants during the remaining twelve months of the agreement. In future years, if an agreement with another ISO is not established, there could be a significant reduction in income. It is the Company's intent, however, to actively pursue relationships with one or more ISOs. Income generated from merchant credit card fees, net of processing costs, decreased $136,154, or 9%, in fiscal 1998 to $1,395,574 from $1,531,728 in fiscal 1997. During the year, Bancard began a process of restructuring its merchant portfolio to focus on smaller merchants. This was done to allow Bancard to operate with less risk, although as a result, it experienced reduced fees. Another component of noninterest income is gains on sales of loans, which totaled $713,121 and $44,441 in fiscal 1998 and 1997, respectively. The $668,680 increase experienced in fiscal 1998 reflected the increased volume of loans originated for sale by the Bank to be sold on the secondary market. Trust income increased by 55% to $1,138,502 in fiscal 1998 from $736,461 in fiscal 1997. The $402,041 increase reflected the development of new trust relationships and increased trust account balances, as well as a strong stock and bond market. Other income increased $161,742 in fiscal 1998 to $433,765 from $272,023 in fiscal 1997. The 59% increase was primarily due to the fees generated by the receipt of lease income on the second floor of the Davenport building, the growth in the commission income generated by the investment center and fees generated by the item processing department. Management has placed increased importance on enhancing noninterest income and established a profitability steering committee in December of 1997. Noninterest expenses consisted primarily of salaries and employee benefits; occupancy and equipment expenses; other expense, including trust related expenses and bank service charges; and professional fees, including data processing fees. Concurrent with the Company's growth, noninterest expenses increased to $7,909,815 in fiscal 1998 from $5,290,803 in fiscal 1997. The $2,619,012, or 50%, increase was primarily due to higher overhead expenses on the increased volume of business attained during fiscal 1998. Management will continue to attempt to contain overhead costs while maintaining optimal service levels and productivity. In fiscal 1998, salaries and employee benefits experienced the most significant dollar increase of any noninterest expense component. For the twelve months ended June 30, 1998, total salaries and benefits increased to $4,571,126 or $1,636,368 over the June 30, 1997 total of $2,934,758. The change was primarily attributable to the increase in the staff for the new Moline location, as well as merit and cost of living raises. In fiscal 1998, advertising and marketing expense experienced the largest single percentage increase within the noninterest expense category. For the twelve months ended June 30, 1998, total advertising and marketing expense increased to $238,160 or $112,099 over the June 30, 1997 total of $126,061. The change was primarily attributable to the promotional and marketing efforts of the Company's expansion to the new Moline Velie Plantation location. In fiscal 1998, provision for merchant credit card losses decreased to $105,910 or $70,566 from the June 30, 1997 amount of $176,476. As mentioned above, the decrease was primarily due to Bancard restructuring its merchant portfolio to focus on smaller merchants with less corresponding risk, and as a result experienced reduced losses. The Company's federal and state income tax expense totaled $1,677,900 and $165,000 in fiscal 1998 and 1997, respectively. The $1,512,900 increase was the result of higher income before income taxes. Additionally, during the year ended June 30, 1997, the Company was able to reduce its income tax expense in the first three fiscal quarters due to pre-opening and initial loss carryforwards, therefore it was only during the fiscal fourth quarter of 1997 that income tax expense was recorded. Financial Condition and Liquidity Total assets of the Company grew by $81,772,238, or 49%, to $250,150,989 at June 30, 1998 from $168,378,751 at June 30, 1997. The largest increase in the Company's financial condition was in deposits received from customers. This was a result of an aggressive program to increase the Company's liquidity through higher deposit pricing, increased marketing efforts and the hiring of new personnel to staff a business development department. The deposits were invested primarily into the loan portfolio. Cash and due from banks increased by $4,687,350, or 67%, to $11,640,813 at June 30, 1998 from $6,953,463 at June 30, 1997 and represented cash maintained at the Bank and 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 June 30, 1998, the Company had invested $22,960,000 in such funds, an increase of $13,770,000, or 150%, from $9,190,000 at June 30, 1997. The increase was attributable to the Company's increased liquidity at the end of the fiscal year. The Company made the decision to increase its liquidity position in order to meet anticipated loan demand and large deposit maturities. Portions of the investment securities of the Bank are purchased with the intent to hold the securities until they mature. These held to maturity securities were recorded at amortized cost at both June 30, 1998 and June 30, 1997. At June 30, 1998, mortgage-backed securities, municipal securities and other bonds made up the $2,380,309 balance. This was a decrease of $533,820, or 18%, from June 30, 1997, when mortgage-backed securities and municipal securities made up the $2,914,129 balance. Market values at June 30, 1998 and June 30, 1997 were $2,363,698 and $2,888,062, respectively. All of the Company's and a portion of the Bank's securities are placed in the available for sale category as the securities may be liquidated to provide cash for operating or financing purposes. These securities were reported at fair value and increased by $3,340,616, or 12%, to $32,238,245 at June 30, 1998 from $28,897,629 at June 30, 1997. The amortized cost of such securities at June 30, 1998 and June 30, 1997 was $32,221,115 and $28,986,270, respectively. The amortized cost and the weighted average yields for the categories of securities are summarized below. 1998 1997 -------------------- ---------------------- Amortized Average Amortized Average Cost Yield Cost Yield -------------------- ---------------------- Securities held to maturity: Mortgage-backed securities . $ 1,506,569 6.18% $ 2,317,513 6.21% Municipal securities ....... 848,740 5.94 596,616 6.82 Other bonds ................ 25,000 5.56 0 N/A ----------- ----------- Totals ................ $ 2,380,309 $ 2,914,129 =========== =========== Securities available for sale: U.S. treasury securities ... $17,007,239 5.46% $14,496,366 5.74% U.S. agency securities ..... 11,247,822 6.17 9,742,495 6.50 Mortgage-backed securities . 1,847,496 6.31 2,357,376 6.31 Municipal securities ....... 397,752 6.31 0 N/A Taxable municipal securities 220,000 6.56 0 N/A Other securities ........... 1,500,806 Variable 2,390,033 Variable ----------- ----------- Totals ................ $32,221,115 $28,986,270 =========== =========== Loans receivable increased by $54,609,707, or 50%, to $162,975,136 at June 30, 1998 from $108,365,429 at June 30, 1997. The totals represented loans made by the Bank and loan participations the Company had purchased from the Bank on loans that exceeded the Bank's legal lending limit. As of June 30, 1998, the Bank's legal lending limit was $3,056,035. The majority of residential real estate loans originated by the Bank were sold on the secondary market to avoid the interest rate risk associated with long term fixed rate loans. During the fiscal year ended June 30, 1998, the Bank originated $93,625,898 of loans and received repayments of $42,742,611. The Company's allowance for estimated losses on loans was $2,349,838 at June 30, 1998 or 1.44% of total loans, compared to $1,632,500 or 1.51% at June 30, 1997. Although management believes that the allowance for estimated losses on loans at June 30, 1998 was at a level adequate to absorb losses on existing loans, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan losses in the future. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. At June 30, 1998, past due loans of 30 days or more amounted to $2,259,936. At June 30, 1997, past due loans of 30 days or more amounted to $928,937. The Company anticipated an increase in the dollar amount of this category in fiscal 1998 from the prior years. At June 30, 1997 and in prior years, much of the loan portfolio had been on the books for a relatively short time, thus an increase in past due loans was likely as the portfolio matured. Past due loans as a percentage of gross loans receivable at June 30, 1998 increased to 1.4% from 0.9% at June 30, 1997. The Company intends to continue to closely monitor these loans and does not anticipate any material losses. The Company experienced loan charge-offs of $205,234 during fiscal 1998 compared to $64,913 during fiscal 1997. Approximately 70% of the charge-offs during fiscal 1998 were consumer loans, with the remainder consisting of commercial loans. Approximately 60% of the charge-offs during fiscal 1997 were consumer loans, and the remainder were commercial loans. At June 30, 1997 and in prior years, much of the loan portfolio had been on the books for a relatively short time, thus an increase in loan charge-offs was likely as the portfolio matured. Loans charged off as a percentage of gross loans receivable at June 30, 1998 increased to 0.13% from 0.06% at June 30, 1997. Premises and equipment increased by $2,411,579, or 46%, to $7,660,268 at June 30, 1998 from $5,248,689 at June 30, 1997. The increase resulted primarily from the purchase of additional furniture, fixtures and equipment for the Bank and Bancard, and leasehold improvement costs for the new Moline banking location, offset by depreciation expense. Additional information regarding the composition of this account and related accumulated depreciation is described in footnote 4 to the consolidated financial statements. Accrued interest receivable on loans, securities and interest-bearing cash accounts increased to $1,773,223, or 29%, at June 30, 1998 from $1,374,307 at June 30, 1997. The increase was primarily due to greater average outstanding balances in interest bearing assets. Other assets at June 30, 1998 and June 30, 1997 consisted primarily of miscellaneous receivables, prepaid expenses and accrued trust department income, and totaled $2,506,710 and $1,708,481, respectively. The $798,229, or 47%, increase was attributable to the increased volume of business and the related prepaid expenses associated with the growth at the Bank. Deposits grew to $197,383,964 at June 30, 1998 from $135,960,195 at June 30,1997, for an increase of $61,423,769, or 45%. The increase consisted of a $4,502,102 increase in noninterest bearing accounts and a $56,921,667 increase in interest bearing accounts. This was a result of an aggressive program through pricing of deposits, increased marketing efforts and the hiring of new personnel to staff a business development department. Federal Home Loan Bank ("FHLB") advances increased to $24,667,174 at June 30, 1998 from $10,777,712 at June 30, 1997, for an increase of $13,889,462, or 129%. The Bank is a member of the FHLB of Des Moines. As of June 30, 1998, the Bank held $1,234,600 of FHLB stock. As a result of its membership in the FHLB, the Bank has the ability to borrow funds for short- or long-term purposes under a variety of programs. The increase was primarily attributable to the fact that the use of the advances enabled the bank to hedge against potential rising interest rates. Other borrowings were $1,500,000 at both June 30, 1998 and 1997. Other borrowings consist of the amount outstanding on a $4,500,000 revolving credit note with a third party lender, which is secured by all the outstanding stock of the Bank. The borrowed funds were utilized to provide additional capital to the Bank to maintain the required 8% leverage ratio. Other liabilities decreased slightly to $5,497,633 at June 30, 1998 from $5,527,618 at June 30, 1997 for a decrease of $29,985. Other liabilities consisted primarily of accrued interest payable on deposit accounts, accrued expenses and accounts payable. Stockholders' equity increased by $4,488,992, or 31%, to $19,102,218 at June 30, 1998 from $14,613,226 at June 30, 1997. The increase resulted from the combination of the net income for the 1998 fiscal year, the issuance of 15 shares of perpetual, nonvoting preferred stock, the exercise of warrants held by the private placement stockholders, the exercise of stock options, and the change in the unrealized gains on securities available for sale. In anticipation of continued asset growth, the Company has privately placed shares of its preferred stock with a limited number of institutional investors. Additional commitments evidenced by signed subscriptions totaled $4.0 million at June 30, 1998. Liquidity For banks, liquidity represents the ability to meet both withdrawals from deposits and the funding of loans. The assets that provide for liquidity are cash, federal funds sold, and short term loans and securities. Liquidity needs are influenced by economic conditions, interest rates and competition. Securities that are available for sale in the Company's portfolio can be readily converted to cash if necessary. Management believes that current liquidity levels are sufficient to meet foreseeable future demands. Net outflows used in operating activities were $4,379,153 for the year ended June 30, 1998 compared to providing cash of $4,662,006 for the year ended June 30, 1997. The decrease of cash flow during the year resulted primarily from an increase in loans originated for sale, but not yet sold at the end of the fiscal year. Net cash outflows from investing activities totaled $70,269,771 for the year ended June 30, 1998, compared to cash outflows of $55,342,269 for the year ended June 30, 1997. The net outflows of cash were largely associated with the growth in the loan portfolio. Net cash inflows from financing activities totaled $79,336,274 for the year ended June 30, 1998, compared to cash inflows of $51,018,319 for the year ended June 30, 1997. The components of the net cash inflows were primarily from the growth of deposit accounts as well as the increase in FHLB advances and other borrowings. Impact of Inflation and Changing Prices Unlike most industries, essentially all of the assets and liabilities of a bank are monetary in nature. As such, the level of prices has less of an effect than do interest rates. Prices and interest rates do not always move in the same direction. The Company's financial statements and notes are generally prepared in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Impact of New Accounting Standards The Financial Accounting Standards Board has issued the following statements: SFAS No. 130 "Reporting Comprehensive Income"; SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information"; SFAS No. 132 "Employer' Disclosures about Pensions and Other Postretirement Benefits" and SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". All of these statements are discussed in footnote 1 to the consolidated financial statements. Year 2000 Compliance The Year 2000 issue is the result of computer programs using two-digits instead of four-digits to represent the year. These computer systems, if not renovated, will be unable to interpret dates past 1999, which could cause a system failure or other computer errors, leading to a disruption in operations. In 1997, the Company developed a five-phase program for Year 2000 compliance, as outlined by the Federal Financial Institutions Examination Council ("FFIEC") in a supervisory letter dated May 5, 1997. These phases are Awareness, Assessment, Renovation, Validation and Implementation. The Awareness phase is intended to define the problem and obtain executive level support for the resources necessary to perform compliance work. This phase was completed in the fall of 1997 with the formation of a Year 2000 Committee and the appointment of a Year 2000 Project Manager. The goal of the Assessment phase is to assess the size and complexity of the problem, including identifying all systems that will be affected by the Year 2000. Through the fall of 1997 and winter of 1998, the Committee identified any system that might be affected. This assessment included hardware, software, vendor services and computer-controlled devices such as alarms, elevators, and heating and cooling systems. Through correspondence with vendors, the Company has determined the Year 2000 status of these systems and has made determinations regarding replacement, upgrades, etc. In the Renovation phase, the goal is to undertake code enhancements, hardware and software upgrades, system replacements and vendor correspondence. The Company does not perform any of its own programming and is reliant on vendors to provide updates. The responses received have indicated that systems needing upgrades or replacements will be available for installation by December 31, 1998. The Company is working on developing contingency plans for any system that does not meet this deadline. The Validation phase will encompass the testing and verification of changes to systems and coordination with outside parties. The Company will be working with other users to test the core processing system starting in September 1998, in keeping with the timelines that the FFIEC has published. The Company expects to be finished testing all of its mission critical applications by March 31, 1999. By the Implementation phase, all systems should be certified as Year 2000 compliant and should be put into production. The Company expects this phase to be completed by June 30, 1999. Because there remain so many unknowns about the potential issues with the Year 2000, the Company is evaluating its disaster recovery plan and will be adding provisions for potential Year 2000 related disaster recovery situations. The Company believes it will incur approximately $200,000 in Year 2000 related costs, although this number could vary significantly based upon the results of testing and other factors. This estimate includes hardware and software upgrades in addition to human resources costs and consulting fees. At this time, the Company has not identified any situations that it anticipates will require material cost expenditures. The Company is also aware of the potential impact of the Year 2000 on the Bank's borrowing customers and their ability to repay. Loan officers have been in communication with key bank customers to raise awareness and evaluate their progress and will continue to do so to ensure they will not suffer serious adverse consequences. The federal banking regulators have issued several statements providing guidance to financial institutions on the steps the regulators expect financial institutions to take to become Year 2000 compliant. Each of the federal banking regulators is also examining the financial institutions under its jurisdiction to assess each institution's compliance with the outstanding guidance. If an institution's progress in addressing the Year 2000 problem is deemed by its primary federal regulator to be less than satisfactory, the institution will be required to enter into a memorandum of understanding with the regulator which will, among other things, require the institution to promptly develop and submit an acceptable plan for becoming Year 2000 compliant and to provide periodic reports describing the institution's progress in implementing the plan. Failure to satisfactorily address the Year 2000 problem may also expose a financial institution to other forms of enforcement action that its primary federal regulator deems appropriate to address the deficiencies in the institution's Year 2000 remediation program. Item 7. Financial statements QUAD CITY HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor's Report........................................... Consolidated Balance Sheets at June 30, 1998 and 1997.................. Consolidated Statements of Income for the years ended June 30, 1998, 1997 and 1996 ........................................ Consolidated Statements of Stockholders' Equity for the years ended June 30, 1998, 1997 and 1996 ........................................ Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 ................................................. Notes to Consolidated Financial Statements............................. MCGLADREY & PULLEN, LLP Certified Public Accountants and Consultants Independent Auditor's Report To the Board of Directors and Stockholders Quad City Holdings, Inc. Moline, Illinois We have audited the accompanying consolidated balance sheets of Quad City Holdings, Inc. and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended June 30, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quad City Holdings, Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for the years ended June 30, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ MCGLADREY & PULLEN, LLP Davenport, Iowa August 7, 1998 QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1998 and 1997 1998 1997 ------------------------------ ASSETS Cash and due from banks ................................................... $ 11,640,813 $ 6,953,463 Federal funds sold ........................................................ 22,960,000 9,190,000 Certificates of deposit at financial institutions ......................... 8,366,123 5,359,124 Securities held to maturity, at amortized cost (Note 2) ................... 2,380,309 2,914,129 Securities available for sale, at fair value (Note 2) ..................... 32,238,245 28,897,629 ------------------------------ Total securities ..................................................... 34,618,554 31,811,758 ------------------------------ Loans receivable (Note 3) ................................................. 162,975,136 108,365,429 Less: Allowance for estimated losses on loans (Note 3) .................... (2,349,838) (1,632,500) ------------------------------ Net loans receivable ................................................. 160,625,298 106,732,929 ------------------------------ Premises and equipment, net (Note 4) ...................................... 7,660,268 5,248,689 Accrued interest receivable ............................................... 1,773,223 1,374,307 Other assets .............................................................. 2,506,710 1,708,481 ------------------------------ Total assets ...................................................... $ 250,150,989 $ 168,378,751 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing deposits ........................................... $ 26,605,138 $ 22,103,036 Interest-bearing deposits .............................................. 170,778,826 113,857,159 ------------------------------ Total deposits (Note 5) .............................................. 197,383,964 135,960,195 ------------------------------ Federal funds purchased ................................................... 2,000,000 0 Federal Home Loan Bank advances (Note 6) .................................. 24,667,174 10,777,712 Other borrowings (Note 7) ................................................. 1,500,000 1,500,000 Other liabilities ......................................................... 5,497,633 5,527,618 ------------------------------ Total liabilities ................................................. 231,048,771 153,765,525 ------------------------------ COMMITMENTS AND CONTINGENCIES (Note 15) STOCKHOLDERS' EQUITY (Note 13) Preferred stock, $1 par value; shares authorized 250,000; shares issued and 25 10 outstanding 1998, 25; 1997, 10 (Note 12) Common stock, $1 par value; shares authorized 2,500,000; shares issued and outstanding 1998, 1,510,374; 1997, 1,462,824 ............................ 1,510,374 1,462,824 Additional paid-in capital ................................................ 15,014,884 13,039,406 Retained earnings ......................................................... 2,564,443 171,171 ------------------------------ 19,089,726 14,673,411 Unrealized gains (losses) on securities available for sale, net ........... 12,492 (60,185) ------------------------------ Total stockholders' equity ........................................ 19,102,218 14,613,226 ------------------------------ Total liabilities and stockholders' equity ........................ $ 250,150,989 $ 168,378,751 ==============================
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended June 30, 1998, 1997 and 1996 1998 1997 1996 --------------------------------------- Interest income: Interest and fees on loans ................................ $12,083,990 $ 6,905,590 $ 3,918,817 Interest and dividends on securities ...................... 1,905,668 2,139,263 1,868,976 Interest on federal funds sold ............................ 645,929 286,264 382,226 Other interest ............................................ 440,980 374,527 359,409 --------------------------------------- Total interest income ................................ 15,076,567 9,705,644 6,529,428 --------------------------------------- Interest expense: Interest on deposits ..................................... 6,971,153 4,358,476 3,349,548 Interest on borrowings ................................... 1,370,868 635,392 136,832 --------------------------------------- Total interest expense ............................... 8,342,021 4,993,868 3,486,380 --------------------------------------- Net interest income .................................. 6,734,546 4,711,776 3,043,048 Provision for loan losses (Note 3) ............................ 901,976 844,391 500,397 --------------------------------------- Net interest income after provision for loan losses .. 5,832,570 3,867,385 2,542,651 --------------------------------------- Noninterest income: Merchant credit card fees, net of processing costs ........ 1,395,574 1,531,728 1,007,830 Trust department fees ..................................... 1,138,502 736,461 355,360 Deposit service fees ...................................... 290,721 201,163 147,678 Gains on sales of loans, net .............................. 713,121 44,441 54,039 Investment securities gains, net .......................... 8,734 21,938 22,272 Gain on restructuring of merchant broker agreement (Note 8) 2,168,000 0 0 Other ..................................................... 433,765 272,023 129,147 --------------------------------------- Total noninterest income ............................. 6,148,417 2,807,754 1,716,326 --------------------------------------- Noninterest expenses: Salaries and employee benefits ............................ 4,571,126 2,934,758 1,973,682 Professional and data processing fees ..................... 504,344 437,259 282,640 Advertising and marketing ................................. 238,160 126,061 189,761 Occupancy and equipment expense ........................... 1,045,349 654,010 289,230 Stationery and supplies ................................... 219,523 191,682 100,672 Provision for merchant credit card losses ................. 105,910 176,476 126,805 Postage and telephone ..................................... 231,049 168,890 117,741 Other ..................................................... 994,354 601,667 495,858 --------------------------------------- Total noninterest expenses ........................... 7,909,815 5,290,803 3,576,389 --------------------------------------- Income before income taxes ..................................... 4,071,172 1,384,336 682,588 Federal and state income taxes (Note 9) ........................ 1,677,900 165,000 0 --------------------------------------- Net income ........................................... $ 2,393,272 $ 1,219,336 $ 682,588 ======================================= Earnings per common share (Note 14): Basic ................................................ $ 1.63 $ 0.85 $ 0.47 Diluted .............................................. $ 1.53 $ 0.81 $ 0.47 Weighted average common shares outstanding ........... 1,464,198 1,441,660 1,437,824 Weighted average common and common equivalent shares outstanding ............................. 1,569,288 1,500,245 1,455,593
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 1998, 1997 and 1996 Unrealized Gains (Losses) on Securities Additional Retained Available Preferred Common Paid-In Earnings For Sale, Stock Stock Capital (Deficit) Net Total ------------------------------------------------------------------------------ Balance, June 30, 1995 ............... $ 0 $1,437,824 $11,764,416 $(1,730,753) $ 118,253 $11,589,740 Change in unrealized (losses) on securities available for sale, net 0 0 0 0 (603,722) (603,722) Net income ........................... 0 0 0 682,588 0 682,588 ------------------------------------------------------------------------------ Balance, June 30, 1996 ............... $ 0 1,437,824 11,764,416 $(1,048,165) $(485,469) $11,668,606 Proceeds from sale of 10 shares of preferred stock ......... 10 0 999,990 0 0 1,000,000 Proceeds from issuance of 25,000 shares of common stock as a result of warrants exercised .... 0 25,000 275,000 0 0 300,000 Change in unrealized gains on securities available for sale, net 0 0 0 0 425,284 425,284 Net income ........................... 0 0 0 1,219,336 0 1,219,336 ------------------------------------------------------------------------------ Balance, June 30, 1997 ............... $ 10 1,462,824 13,039,406 $ 171,171 $ (60,185) $14,613,226 Proceeds from sale of 15 shares of preferred stock ......... 15 0 1,499,985 0 0 1,500,000 Proceeds from issuance of 47,550 shares of common stock as a result of warrants and stock .... 0 47,550 475,493 0 0 523,043 options exercised Change in unrealized gains (losses) on securities available for sale, net 0 0 0 0 72,677 72,677 Net income ........................... 0 0 0 2,393,272 0 2,393,272 ------------------------------------------------------------------------------ Balance, June 30, 1998 ............... $ 25 $1,510,374 15,014,884 $ 2,564,443 $ 12,492 $19,102,218 ==============================================================================
See Notes to Consolidated Financial Statements QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 1998, 1997 and 1996 1998 1997 1996 ------------------------------------------- Cash Flows From Operating Activities Net income $ 2,393,272 $ 1,219,336 $ 682,588 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 422,357 334,409 143,173 Provision for loan losses 901,976 844,391 500,397 Provision for merchant credit card losses 105,910 176,476 126,805 Amortization of premiums (accretion of discounts) on securities, net (16,742) 899 (16,920) Federal Home Loan Bank stock dividends 0 0 (3,000) Investment securities gains, net (8,734) (21,938) (22,272) Loans orginated for sale (57,206,140) (6,851,715) (6,371,085) Proceeds on sales of loans 54,008,203 6,040,971 6,425,124 Net gains on sales of loans (713,121) (44,441) (54,039) Gain on restructuring of merchant broker agreement (2,168,000) 0 0 Increase in accrued interest receivable (398,916) (253,039) (435,388) Increase in other assets (826,685) (847,702) (397,684) Increase (decrease) in other liabilities (872,533) 4,064,359 258,394 ------------------------------------------- Net cash provided by (used in) operating activities (4,379,153) 4,662,006 836,093 ------------------------------------------- Cash Flows from Investing Activities: Net (increase) decrease in federal funds sold (13,770,000) (6,462,000) 10,222,000 Net (increase) decrease in certificates of deposit at financial institutions (3,006,999) 112,888 (1,489,154) Purchase of securities available for sale (16,444,294) (5,926,816) (18,947,247) Purchase of securities held to maturity (276,398) 0 (2,873,782) Proceeds from calls and maturities of securities 9,500,000 2,250,000 4,000,000 Proceeds from paydowns on securities 4,531,123 1,250,667 4,483,584 Proceeds from sales of securities available for sale 14,020 5,249,967 4,637,700 Proceeds from restructuring of merchant broker agreement 2,900,000 0 0 Net loans originated (50,883,287) (50,764,915) (25,422,515) Purchase of premises and equipment (2,833,936) (1,052,060) (2,872,372) ------------------------------------------- Net cash used in investing activities (70,269,771) (55,342,269) (28,261,786) ------------------------------------------- Cash Flows from Financing Activities Net increase in deposits accounts 61,423,769 43,042,077 31,820,432 Net increase (decrease) in federal funds purchased 2,000,000 (1,190,000) (6,021,072) Proceeds from Federal Home Loan Bank advances 25,955,000 11,961,000 7,270,000 Payments on Federal Home Loan Bank advances (12,065,538) (4,594,758) (3,858,530) Net increase in other borrowings 0 500,000 1,000,000 Proceeds from issuance of preferred stock 1,500,000 1,000,000 0 Proceeds from issuance of common stock 523,043 300,000 0 -------------------------------------------- Net cash provided by financing activities 79,336,274 51,018,319 30,210,830 -------------------------------------------- Net increase in cash and due from banks 4,687,350 338,056 2,785,137 Cash and due from banks, beginning 6,953,463 6,615,407 3,830,270 -------------------------------------------- Cash and due from banks, ending $11,640,813 $ 6,953,463 $ 6,615,407 ============================================ Supplemental Disclosure of Cash Flow Information, cash payments for: Interest $ 7,769,512 $ 4,861,558 $ 3,384,353 ============================================ Income/franchise taxes $ 1,974,000 $ 249,000 $ 18,500 ============================================ Supplemental Schedule of Noncash Investing Activities: Change in unrealized gains (losses) on securities available for sale, net $ 72,677 $ 425,284 $ (603,722) ============================================ Investment securities transferred from held to maturity portfolio to available for sale portfolio, at fair value $ 0 $ 0 $ 8,004,543 ============================================
QUAD CITY HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies Nature of business: Quad City Holdings, Inc. (the "Company") is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (the "Bank") and Quad City Bancard, Inc. ("Bancard"). The Bank is a commercial bank that serves the Quad Cities area, is chartered and regulated by the state of Iowa, is insured and subject to regulation by the Federal Deposit Insurance Corporation and is a member of and regulated by the Federal Reserve System. Bancard is an entity formed in April 1995 to conduct the Company's merchant credit card operation and is regulated by the Federal Reserve System. This activity was previously conducted by the Bank. Significant accounting policies: Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for estimated losses on loans is inherently subjective as it requires material estimates that are susceptible to significant change. Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks. Cash flows from certificates of deposits at financial institutions, loans, deposits, other borrowings and federal funds purchased and sold are treated as net increases or decreases. Investment securities: Investment securities held to maturity are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered available for sale as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in stockholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Pursuant to a Financial Accounting Standards Board ("FASB") Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," the Company transferred at fair value $8,004,543 of investment securities from held to maturity to available for sale in December 1995. Loans held for sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Loans and allowance for estimated losses on loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for estimated losses on loans. The allowance for estimated losses on loans is maintained at the level considered adequate by management of the Company and the Bank to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance, the Company and the Bank make continuous evaluations of the loan portfolio and related off-balance sheet commitments, and consider current economic conditions and other factors that may effect a borrower's ability to repay. In accordance with FASB Statement No. 114 "Accounting by Creditors for Impairment of a Loan," loans are considered impaired when, based on current information and events, it is probable the Company and the Bank will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to an impaired loan is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Company and the Bank recognize interest income on impaired loans on a cash basis. Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives. Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company. Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Trust assets: Trust assets held by the Bank in a fiduciary, agency or custody capacity for its customers, other than cash on deposit at the Bank, are not included in the accompanying consolidated financial statements since such items are not assets of the Bank. Earnings per common share: Basic earnings per share are computed by dividing net income by the weighted average number of common stock shares outstanding for the respective period. Diluted earnings per share are computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding for the respective period. Prior year per share data has been restated to comply with FASB Statement No. 128 "Earnings Per Share". (See footnote 14 ) Current accounting developments: The FASB has issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" which is effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The purpose of reporting comprehensive income is to disclose a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. The Company will be required to disclose comprehensive income. Currently, the Company's comprehensive income would include net income and the change in unrealized gains (losses) on securities available for sale, net. 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 effect on the consolidated financial statements. The FASB has issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Management believes that adoption of this Statement will not have a material effect on the consolidated financial statements. Note 2. Investment Securities The amortized cost and fair value of investment securities at June 30, 1998 and 1997 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------------------------------------------------ June 30, 1998 ------------------------------------------------------ Securities held to maturity: Mortgage-backed securities ... $ 1,506,569 $ 0 $ (5,534) $ 1,501,035 Municipal securities ......... 848,740 1,704 (13,557) 836,887 Other bonds .................. 25,000 776 0 25,776 ------------------------------------------------------ Totals ................... $ 2,380,309 $ 2,480 $ (19,091) $ 2,363,698 ====================================================== Securities available for sale: U.S. treasury securities ..... $17,007,239 $ 54,811 $ (3,867) $17,058,183 U.S. agency securities ....... 11,247,822 4,020 (31,050) 11,220,792 Mortgage-backed securities ... 1,847,496 1,265 (346) 1,848,415 Municipal securities ......... 617,752 0 (11,193) 606,559 Other securities ............. 1,500,806 6,733 (3,243) 1,504,296 ------------------------------------------------------ Totals ................... $32,221,115 $ 66,829 $ (49,699) $32,238,245 ====================================================== Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------------------------------------------------ June 30, 1997 ------------------------------------------------------ Securities held to maturity: Mortgage-backed securities ... $ 2,317,513 $ 673 $ (15,871) $ 2,302,315 Municipal securities ......... 596,616 1,581 (12,450) 585,747 ------------------------------------------------------ Totals ................... $ 2,914,129 $ 2,254 $ (28,321) $ 2,888,062 ====================================================== Securities available for sale: U.S. treasury securities ..... $14,496,366 $ 45,514 ($ 20,226) $14,521,654 U.S. agency securities ....... 9,742,495 8,462 (120,306) 9,630,651 Mortgage-backed securities ... 2,357,376 9,388 (6,526) 2,360,238 Other securities ............. 2,390,033 8,971 (13,918) 2,385,086 ------------------------------------------------------ Totals ................... $28,986,270 $ 72,335 ($ 160,976) $28,897,629 ======================================================
All sales of securities during the years ended June 30, 1998, 1997 and 1996 were from securities identified as available for sale. Information on proceeds received, as well as the gains and losses from the sales of those securities is as follows: 1998 1997 1996 ------------------------------------ Proceeds from sales of securities ....... $ 14,020 $5,249,967 $4,637,700 Gross losses from sales of securities ... -- 8,486 18,848 Gross gains from sales of securities .... 8,734 30,424 41,120 The amortized cost and fair value of securities at June 30, 1998 by contractual maturity are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the mortgage-backed securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary. Other securities are excluded from the maturity categories as there is no fixed maturity date. Amortized Securities held to maturity Cost Fair Value ------------------------ Due in one year or less ............................. $ 150,000 $ 149,477 Due after one year through five years ............... 472,434 472,256 Due after five years ................................ 251,306 240,930 Mortgage-backed securities .......................... 1,506,569 1,501,035 ----------------------- Totals ......................................... $2,380,309 $2,363,698 ======================= Amortized Securities available for sale Cost Fair Value ------------------------- Due in one year or less ............................. $ 9,504,013 $ 9,512,590 Due after one year through five years ............... 16,749,829 16,768,880 Due after five years ................................ 2,618,971 2,604,064 Mortgage-backed securities .......................... 1,847,496 1,848,415 Other securities .................................... 1,500,806 1,504,296 ------------------------- Totals ......................................... $32,221,115 $32,238,245 ========================= At June 30, 1998 and 1997, investment securities with a carrying value of $19,024,656 and $21,928,921, respectively, were pledged on public deposits and for other purposes as required or permitted by law. The Company transferred securities with an amortized cost of $7,992,513 and an unrealized gain of $12,030 from the held to maturity portfolio to the available for sale portfolio in December 1995, based on management's reassessment of their previous designations of securities giving consideration to liquidity needs, management of interest rate risk and other factors. Note 3. Loans Receivable The composition of the loan portfolio at June 30, 1998 and 1997 is presented as follows: 1998 1997 ------------------------------ Commercial ................................... $ 99,097,297 $ 68,634,556 Real estate .................................. 31,145,517 20,293,440 Installment and other consumer ............... 32,732,322 19,437,433 ------------------------------ Total loans ............................. 162,975,136 108,365,429 Less allowance for estimated losses on loans . (2,349,838) (1,632,500) ------------------------------ Net loans ............................... $ 160,625,298 $ 106,732,929 ============================== Real estate loans include loans held for sale with a carrying value of $4,766,243 and $855,185 at June 30, 1998 and 1997, respectively. The market value of these loans exceeded its carrying value at those dates. Loans on nonaccrual status amounted to $1,025,761 and $230,591 at June 30, 1998 and 1997, respectively. Foregone interest income and cash interest collected on nonaccrual loans was not material during the years ended June 30, 1998, 1997 and 1996. Changes in the allowance for estimated losses on loans for the years ended June 30, 1998, 1997 and 1996 are presented as follows: 1998 1997 1996 --------------------------------- Balance, beginning .......................... $1,632,500 $ 852,500 $ 472,475 Provisions charged to expense ............ 901,976 844,391 500,397 Loans charged off ........................ (205,234) (64,913) (120,372) Recoveries on loans previously charged off 20,596 522 0 --------------------------------- Balance, ending ............................. $2,349,838 $1,632,500 $ 852,500 ================================= Impaired loans were not material at June 30, 1998 and 1997. Loans are made in the normal course of business to directors, officers and their related interests. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other persons. An analysis of the changes in the aggregate amount of these loans during the years ended June 30, 1998 and 1997 was as follows: 1998 1997 -------------------------------- Balance, beginning ................... $ 2,027,150 $ 1,013,874 Advances .......................... 4,016,294 1,858,974 Repayments ........................ (1,211,953) (845,698) ----------- ----------- Balance, ending ..................... $ 4,831,491 $ 2,027,150 =========== =========== Note 4. Premises and Equipment The following summarizes the components of premises and equipment at June 30, 1998 and 1997: 1998 1997 ---------------------------- Land ......................................... $ 554,379 $ 554,379 Buildings .................................... 5,046,679 3,503,851 Furniture and equipment ...................... 3,099,315 1,808,207 Total premises and equipment ............ 8,700,373 5,866,437 Less accumulated depreciation ................ (1,040,105) (617,748) ---------------------------- Total premises and equipment, net ....... $ 7,660,268 $ 5,248,689 ============================ Certain Company facilities are leased under various operating leases. Rental expense was $176,057, $9,971 and $20,000 in 1998, 1997 and 1996, respectively. Future minimum rental commitments under noncancelable leases on a fiscal year basis are: 1999 $ 413,904 2000 413,904 2001 413,904 2002 413,904 2003 413,904 thereafter 1,769,768 ---------- $3,839,288 ========== Note 5. Deposits The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was $31,937,377 and $22,978,123 at June 30, 1998 and 1997, respectively. At June 30, 1998, the scheduled maturities of certificates of deposit were as follows: 1999 $ 93,224,489 2000 6,139,765 2001 2,230,003 2002 1,541,006 2003 and thereafter 1,331,905 ------------ Total certificates of deposit $104,467,168 ============ Note 6. Federal Home Loan Bank Advances The Bank is a member of the Federal Home Loan Bank of Des Moines (the "FHLB"). At June 30, 1998, the Bank held $1,234,600 of FHLB stock. Maturity and interest rate information on advances from the FHLB at June 30, 1998 was as follows: Amount Due Interest Rate ----------- -------------- 1999 $ 0 2000 2,000,000 5.80% to 5.95% 2001 5,750,000 5.43% to 6.02% 2002 2,085,004 6.51% to 7.06% 2003 and thereafter 14,832,170 4.88% to 7.11% ----------- Total FHLB advances $24,667,174 =========== Advances from the FHLB are collateralized by 1-4 unit residential mortgages equal to 150% of total outstanding notes. Additionally, securities with a carrying value of approximately $12,507,513 at June 30, 1998 were pledged as collateral on these advances. At June 30, 1997, the Bank had advances from the FHLB totaling $10,777,712. These advances matured in varying amounts between 1998 and 2012 and carried interest at varying rates between 5.95% and 7.11%. Securities with a carrying value of approximately $13,434,707 at June 30, 1997 were pledged as collateral on these advances. At June 30, 1997, the Bank also had an open line of credit with the FHLB for $5,000,000, which was collateralized by residential real estate mortgages. No amounts were outstanding on the line of credit at June 30, 1997. The line of credit expired on June 26, 1998. Note 7. Other Borrowings The Company has a revolving credit note for $4,500,000, which is secured by all the outstanding stock of the Bank. The outstanding balance on this note at both June 30, 1998 and 1997 was $1,500,000. The revolving credit note expired on July 1, 1998. An amendment to the loan agreement has extended the expiration date to July 1, 2000. Interest is payable quarterly at the adjusted LIBOR rate. Adjusted LIBOR rate is defined as a rate of interest equal to two percent per annum in excess of the per annum rate of interest at which U.S. dollar deposits in an amount comparable to the amount of the relevant LIBOR Loan are offered generally to the Bank in the London Interbank Eurodollar market at 11:00 a.m. (London time) two banking days prior to the commencement of each interest period. The revolving credit note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various operating ratios. The Company complied with all of the covenants as of June 30, 1998 and 1997. Note 8. Restructuring of Merchant Broker Agreement In June 1998, the Company recognized $2,168,000 of income as a result of signing a new merchant broker agreement with its current ISO. The term of the new agreement is for a one-year period, and replaced a prior agreement that had an expiration date in the year 2002. In consideration for reducing the term from four years to one year, the Company received total compensation of $2,900,000. The remaining $732,000 will be recognized in income during the fiscal year ending June 30, 1999. In addition, the Company will receive monthly fees of $25,000 for servicing the current merchants during the remaining twelve months of the agreement. In future years, if an agreement with another ISO is not established, there could be a significant reduction in income. It is the Company's intent, however, to actively pursue relationships with one or more ISOs. Note 9. Federal and State Income Taxes Federal and state income tax expense was comprised of the following components for the years ended June 30, 1998, 1997 and 1996: 1998 1997 1996 -------------------------------- Current ...................................... $2,231,183 $472,385 $ 0 Deferred ..................................... (553,283) (307,385) 0 -------------------------------- Total federal and state income tax ..... $1,677,900 $165,000 $ 0 ================================ A reconciliation of the expected federal income tax expense to the income tax expense included in the statements of income was as follows for the years ended June 30, 1998, 1997 and 1996: 1998 1997 1996 --------------------------------------------------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ---------------------------------------------------------------- Computed "expected" tax expense ..................... $1,424,910 35.0% $ 484,517 35.0% $ 238,906 35.0% Effect of graduated tax rates . (40,712) (1.0) (13,843) (1.0) (6,826) (1.0) Tax exempt income, net ........ (19,759) (.5) (3,853) (.3) (2,115) (.3) State income taxes, net of federal benefit .......... 268,796 6.6 44,320 3.2 26,489 3.9 Change in valuation allowance . 0 0 (358,934) (25.9) (262,849) (38.5) Other ......................... 44,665 1.1 12,793 .9 6,395 .9 ---------------------------------------------------------------- $1,677,900 41.2% $ 165,000 11.9% $ 0 0% ================================================================
Note 9. Continued The net deferred tax assets included with other assets on the balance sheet consisted of the following at June 30, 1998 and 1997: 1998 1997 ----------------------- Deferred tax assets: Organization and start-up costs ................................ $ 27,183 $ 80,618 Net unrealized losses on securities available for sale ......... 0 28,456 Capital loss carryforwards ..................................... 13,830 12,686 Deferred income ................................................ 292,800 0 Loan and credit card losses .................................... 792,127 467,755 Other .......................................................... 7,460 11,087 ----------------------- $1,133,400 $ 600,602 ----------------------- Deferred tax liabilities: Accrual to cash conversion ..................................... $ 58,818 $ 173,747 Premises and equipment ......................................... 199,035 86,167 Net unrealized gains on securities available for sale .......... 4,638 0 Other .......................................................... 14,879 4,847 - ---------------------------------------------------------------- ----------------------- $ 277,370 $ 264,761 ----------------------- Net deferred tax asset ......................................... $ 856,030 $ 335,841 =======================
The change in deferred income taxes was reflected in the financial statements as follows for the years ended June 30, 1998, 1997 and 1996: 1998 1997 1996 ----------------------------------- Provision for income taxes ...................... $(553,283) $(307,385) $ 0 Statement of stockholders' equity-unrealized gains(losses) on securities available for sale, net ..................................... 33,094 (28,456) 0 ----------------------------------- $(520,189) $(335,841) $ 0 ===================================
Note 10. Employee Benefit Plan On February 1, 1994, the Company implemented a profit sharing plan, which includes a provision designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions. All employees are eligible to participate in the plan. The Company matches 100% of the first 2% of employee contributions, 50% of the next 2% of employee contributions, and 25% of the next 2% of employee contributions, up to a maximum amount of 3.5% of an employee's compensation. Additionally, at its discretion, the Company may make additional contributions to the plan which are allocated to the accounts of participants in the plan based on relative compensation. Company contributions for the years ended June 30, 1998, 1997 and 1996 were as follows: 1998 1997 1996 ------------------------------------ Matching contribution ................ $100,164 $ 64,535 $ 47,233 Discretionary contribution ........... 45,000 30,000 20,000 ------------------------------------ Total contributions ............. $145,164 $ 94,535 $ 67,233 ==================================== Note 11. Warrants and Stock Based Compensation Warrants As part of the underwriting agreement for its initial public offering, the Company issued warrants to the underwriters for the purchase of 25,000 shares of common stock at $12.00 per share. The underwriters exercised all of the warrants on May 6, 1997. The warrants became exercisable on October 13, 1994 (the date commencing one year from the date of the public offering) and would have remained exercisable for a period of four years after such date. Common stock of $75,000 at June 30, 1993 represented 75,000 shares of the Company's common stock issued in a private placement in 1993. Each stockholder who purchased stock in the private placement received a unit (at a price of $10.00 per unit) which consisted of one share of the Company's common stock and one warrant to purchase an additional share of Company common stock for $11.00, exercisable during a five year period commencing October 13, 1994 (one year after completion of the public offering). As of June 30, 1998, 47,500 of the private placement warrants had been exercised, leaving 27,500 remaining. Stock Option and Incentive Plans The Company's Board of Directors and its stockholders adopted in June, 1993 the Quad City Holdings, Inc. Stock Option Plan (the "Stock Option Plan"). Up to 100,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of incentive stock options or non-qualified stock options granted under the Stock Option Plan. The Company's Board of Directors adopted in November, 1996 the Quad City Holdings, Inc. 1997 Stock Incentive Plan (the "Stock Incentive Plan"). Up to 40,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of non-qualified stock options and restricted stock granted under the Stock Incentive Plan. The Stock Option Plan and the Stock Incentive Plan are administered by the compensation committee appointed by the Board of Directors (the "Committee"). The number and exercise price of options granted under the Stock Option Plan and the Stock Incentive Plan is determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for incentive stock options. The stock options will generally vest 20% per year. The term of an incentive stock option may not exceed 10 years from the date of the grant. In the case of non-qualified stock options, the Stock Option Plan and the Stock Incentive Plan provide for the granting of "Tax Benefit Rights" to certain participants at the same time as these participants are awarded non-qualified options. Each Tax Benefit Right entitles a participant to a cash payment equal to the excess of the fair market value of a share of common stock on the exercise date over the exercise price of the related option multiplied by the difference between the rate of tax on ordinary income over the rate of tax on capital gains (federal and state). As permitted under generally accepted accounting principles, grants under the plan are accounted for following the provisions of APB Opinion No. 25 and its related interpretations. Accordingly, no compensation cost has been recognized for grants made to date. Had compensation cost been determined based on the fair value method prescribed in FASB Statement No. 123, reported net income would not have changed by a material amount and earnings per share would not have changed by more than 2 cents for the years ended June 30, 1998, 1997 and 1996. In determining compensation cost using the fair value method prescribed in Statement No. 123, the value of each grant is estimated at the grant date with the following weighted-average assumptions for grants in 1998, 1997 and 1996: dividend rate of 0%; risk-free interest rates based upon current rates at the date of grant (5.6% to 7.9%); expected lives of 10 years, and expected price volatility of 14% to 19%. A summary of the stock option plans at June 30, 1998, 1997 and 1996 and changes during the years ended on those dates is presented as follows: 1998 1997 1996 -------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------- Outstanding at beginning of year ...... 116,770 $ 11.84 98,020 $ 10.19 93,300 $ 9.96 Granted ............................... 12,675 31.38 19,100 20.26 6,900 13.12 Exercised ............................. (50) 27.88 0 0 0 0 Forfeited ............................. (2,170) 18.22 (350) 10.28 (2,180) 9.32 -------- -------- -------- Outstanding at end of year ............ 127,225 $ 13.68 116,770 $ 11.84 98,020 $ 10.19 ======== ======== ======== Exercisable at end of year ............ 86,970 64,230 44,780 Weighted average fair value per option of options granted during the year .. $ 14.58 $ 10.03 $ 6.40
A further summary of options outstanding at June 30, 1998 is presented as follows: Options Outstanding Options Exercisable ------------------------------------- ---------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - --------------------------------------------------------------------------------------------------- $9.00 to $10.25 ..................... 90,760 5.47 years $ 9.97 80,880 $ 9.97 $11.75 to $13.25 .................... 6,240 7.95 years 13.14 2,580 13.14 $15.00 to $17.50 .................... 1,000 8.63 years 16.25 200 16.25 $20.00 to $20.50 .................... 16,550 9.00 years 20.48 3,310 20.48 $21.13 to $32.00 .................... 12,675 9.95 years 31.38 0 0 -------- -------- 127,225 86,970 ======== ========
Stock Appreciation Rights Additionally, the Stock Incentive Plan allows the granting of stock appreciation rights ("SARs"). SARs are rights entitling the grantee to receive cash having a fair market value equal to the appreciation in the market value of a stated number of shares from the date of grant. Like options, the number and exercise price of SARs granted is determined by the Committee. The SARs will vest 20% per year, and the term of the SAR may not exceed 10 years from the date of the grant. At June 30, 1998, there were 22,250 SARs granted, with 2,000 currently exercisable. Note 12. Preferred Stock At June 30, 1998 and 1997, the Company had 25 and 10 shares, respectively, of Perpetual, Nonvoting Preferred Stock, Series A (the "Preferred Stock"). The Preferred Stock will accrue no dividends, nor will it carry any stated dividend rate. After the first anniversary of the issuance of these shares of Preferred Stock, subject to all required regulatory approvals and upon a thirty-day notice, the Company can redeem all outstanding Preferred Stock. The Preferred Stock shall be redeemed for an amount per share in cash which is equal to the sum of: (i) $100,000; plus (ii) a premium in the amount of $9,750 multiplied by a fraction, the numerator of which is the total number of calendar days the Preferred Stock being redeemed has been outstanding and the denominator of which is 365. All shares of Preferred Stock that have been issued are senior to common stock as to dividends, liquidation and redemption rights, but they do not confer general voting rights. Note 13. Regulatory Capital Requirements and Restrictions on Dividends Federal regulatory agencies have adopted various capital standards for financial institutions, including risk-based capital standards. The primary objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of financial institutions and to take into account the different risks among financial institutions' assets and off-balance sheet items. Risk-based capital standards have been supplemented with requirements for a minimum Tier 1 capital to average total assets ratio (leverage ratio). In addition, regulatory agencies consider the published capital levels as minimum levels and may require a financial institution to maintain capital at higher levels. The actual amounts and capital ratios at June 30, 1998 and 1997 with the minimum requirements for the Bank are presented below: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions ------------------------- ------------------------ ------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------------------- At June 30, 1998: Total Risk Based Capital ........................ $20,167,000 11.8% $13,649,408 =>8.0% $17,061,760 =>10.0% Tier 1 Risk Based Capital ........................ 18,032,000 10.6% 6,823,841 =>4.0% 10,235,762 =>6.0% Leverage Ratio ................... 18,032,000 7.6% 9,453,211 =>4.0% 11,816,514 =>5.0% At June 30, 1997: Total Risk Based Capital ........................ $15,248,139 11.2% $10,881,812 =>8.0% $13,602,265 =>10.0% Tier 1 Risk Based Capital ........................ 13,623,139 10.0% 5,438,379 =>4.0% 8,157,568 =>6.0% Leverage Ratio ................... 13,623,139 8.8% 6,164,316 =>4.0% 7,705,395 =>5.0%
Federal Reserve Board policy provides that a bank holding company should not pay dividends unless (i) the dividends can be fully funded out of net income from the company's net earnings over the prior year and (ii) the prospective rate of earnings retention appears consistent with the company's (and its subsidiaries') capital needs, asset quality and overall financial condition. In addition, the Delaware General Corporation Law restricts the Company from paying dividends except out of its surplus, or in the case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. In addition, the Bank, as a member of the Federal Reserve System, will be prohibited from paying dividends to the extent such dividends declared in any calendar year exceed the total of its net profits of that year combined with its retained net profits of the preceding two years, or are otherwise determined to be an "unsafe and unsound practice" by the Federal Reserve Board. Note 14. Earnings Per Common Share The following information was used in the computation of basic and diluted earnings per common share for the years ended June 30, 1998, 1997 and 1996: 1998 1997 1996 ------------------------------------ Basic and diluted earnings, net income ...... $2,393,272 $1,219,336 $ 682,588 Weighted average common shares outstanding .. 1,464,198 1,441,660 1,437,824 Weighted average common shares issuable upon exercise of stock options and warrants 105,090 58,585 17,769 ------------------------------------ Weighted average common and common equivalent shares outstanding . 1,569,288 1,500,245 1,455,593 ====================================
Note 15. Commitments and Contingencies In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At June 30, 1998 and 1997, commitments to extend credit aggregated $38,024,001 and $26,318,470, respectively. At June 30, 1998 and 1997, standby letters of credit aggregated $1,278,000 and $993,000, respectively. Management does not expect that all of these commitments will be funded. Bancard is subject to the risk of chargebacks from cardholders and the merchant being incapable of refunding the amount charged back. Management attempts to mitigate such risk by regular monitoring of merchant activity and in appropriate cases, holding cash reserves deposited by the merchant. The Company also has a guaranty to MasterCard International Incorporated, which is backed up by a performance bond in the amount of $1,000,000. At June 30, 1998, there were no pending liabilities. Aside from cash on-hand and in-vault, the majority of the Company's cash is maintained at upstream correspondent banks. The total amount of cash on deposit and certificates of deposit exceeded federal insured limits by $3,767,204 and $1,091,609 at June 30, 1998 and 1997, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks. Note 16. Quarterly Results of Operations (Unaudited) Fiscal year ended June 30, 1998 ----------------------------------------------------------------------------- Sept. 1997 Dec. 1997 Mar. 1998 June 1998 ----------------------------------------------------------------------------- Total interest income ...................... $ 3,405,111 $ 3,746,132 $ 3,797,383 $ 4,127,941 Total interest expense ..................... 1,757,272 1,963,477 2,157,917 2,463,355 ----------------------------------------------------------------------------- Net interest income ........................ 1,647,839 1,782,655 1,639,466 1,664,586 Provision for loan losses .................. (304,355) (215,643) (233,260) (148,718) Other income ............................... 822,491 743,817 1,134,103 3,448,006 Other expense .............................. (1,606,833) (1,706,098) (2,048,517) (2,548,367) ----------------------------------------------------------------------------- Net income before income taxes ............. 559,142 604,731 491,792 2,415,507 Federal and state income taxes ............. 218,200 237,075 191,425 1,031,200 ----------------------------------------------------------------------------- Net income ................................. $ 340,942 $ 367,656 $ 300,367 $ 1,384,307 ============================================================================= Earnings per common share: Basic ................................... $ 0.23 $ 0.25 $ 0.21 $ 0.94 ============================================================================= Diluted ................................. $ 0.22 $ 0.23 $ 0.19 $ 0.89 ============================================================================= Fiscal year ended June 30, 1997 ----------------------------------------------------------------------------- Total interest income ...................... $ 2,014,237 $ 2,308,760 $ 2,499,725 $ 2,882,922 Total interest expense ..................... 1,008,269 1,202,258 1,325,463 1,457,878 ----------------------------------------------------------------------------- Net interest income ........................ 1,005,968 1,106,502 1,174,262 1,425,044 Provision for loan losses .................. (157,400) (146,325) (222,775) (317,891) Other income ............................... 519,208 599,095 790,345 899,106 Other expense .............................. (1,108,592) (1,257,025) (1,392,010) (1,533,176) ----------------------------------------------------------------------------- Net income before income taxes ............. 259,184 302,247 349,822 473,083 Federal and state income taxes ............. 0 0 0 165,000 ----------------------------------------------------------------------------- Net income ................................. $ 259,184 $ 302,247 $ 349,822 $ 308,083 ============================================================================= Earnings per common share: Basic ................................... $ 0.18 $ 0.21 $ 0.24 $ 0.22 ============================================================================= Diluted ................................. $ 0.18 $ 0.20 $ 0.23 $ 0.20 =============================================================================
Note 17. Parent Company Only Financial Statements The following is condensed financial information of Quad City Holdings, Inc. (parent company only): Condensed Balance Sheets June 30, --------------------------- 1998 1997 --------------------------- ASSETS Cash and due from banks ....................................... $ 433,928 $ 627,808 Securities available for sale, at fair value .................. 160,946 151,838 Investment in Quad City Bank and Trust Company ................ 18,040,231 13,567,901 Investment in Quad City Bancard, Inc. ......................... 367,916 941,923 Net loans receivable .......................................... 502,844 332,994 Other assets .................................................. 1,217,502 626,517 --------------------------- Total assets .......................................... $ 20,723,367 $ 16,248,981 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Other borrowings .............................................. $ 1,500,000 $ 1,500,000 Other liabilities ............................................. 121,149 135,755 --------------------------- Total liabilities ..................................... 1,621,149 1,635,755 --------------------------- STOCKHOLDERS' EQUITY Preferred stock ............................................... 25 10 Common stock .................................................. 1,510,374 1,462,824 Additional paid-in capital .................................... 15,014,884 13,039,406 Retained earnings ............................................. 2,564,443 171,171 Unrealized gains (losses) on securities available for sale, net 12,492 (60,185) --------------------------- Total stockholders' equity ............................ 19,102,218 14,613,226 --------------------------- Total liabilities and stockholders' equity ............ $ 20,723,367 $ 16,248,981 ===========================
Condensed Statements of Income Years ended June 30, ----------------------------------------------------- 1998 1997 1996 ----------------------------------------------------- Total interest income ............................................... $ 48,178 $ 84,431 $ 178,783 Investment securities gains, net .................................... 8,734 23,437 26,345 Dividends received from subsidiaries ................................ 1,900,000 200,000 0 Other ............................................................... 81,435 63,516 24,000 ----------------------------------------------------- Total income ................................................ 2,038,347 371,384 229,128 ----------------------------------------------------- Interest expense .................................................... 129,271 122,885 1,604 Other ............................................................... 304,186 342,396 241,702 ----------------------------------------------------- Total expenses .............................................. 433,457 465,281 243,306 Income (loss) before income tax benefit and equity in undistributed income of subsidiaries ............................ 1,604,890 (93,897) (14,178) Income tax benefit .................................................. 154,300 312,000 0 ----------------------------------------------------- Income (loss) before equity in undistributed income of subsidiaries ............................................. 1,759,190 218,103 (14,178) Distributions in excess of (less than) earnings of: Quad City Bank and Trust Company .................................. 1,208,090 844,915 300,672 Quad City Bancard, Inc. ........................................... (574,008) 156,318 396,094 ----------------------------------------------------- Net income .................................................. $ 2,393,272 $ 1,219,336 $ 682,588 =====================================================
Condensed Statements of Cash Flows Years ended June 30, ----------------------------------------- 1998 1997 1996 ----------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................................... $ 2,393,272 $ 1,219,336 $ 682,588 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Distributions in excess of (less than) earnings of: Quad City Bank and Trust Company ................................. (1,208,090) (844,915) (300,672) Quad City Bancard, Inc. .......................................... 574,008 (356,318) (396,094) Depreciation ....................................................... 3,520 2,647 2,524 Provision for loan losses .......................................... 0 (10,000) (8,300) Amortization of premiums (accretion of discounts) on securities, net 0 (5,495) 3,079 Investment securities gains, net ................................... (8,734) (23,437) (26,345) Decrease in accrued interest receivable ............................ 749 2,676 20,746 Increase in other assets ........................................... (605,877) (560,689) (30,731) Increase (decrease) in other liabilities ........................... (14,606) 35,115 32,429 ----------------------------------------- Net cash provided by (used in) operating activities ............. $ 1,134,242 $ (541,080) $ (20,776) ----------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in certificates of deposits at financial institutions ... 0 0 420,035 Purchase of securities available for sale ............................ (5,958) (49,515) (117,167) Proceeds from sale of securities available for sale .................. 14,020 95,691 145,512 Proceeds from paydowns on securities ................................. 0 5,496 28,419 Capital infusion, Quad City Bank and Trust Company ................... (3,200,000) (2,100,000) (2,099,000) Net loans (originated) repaid ........................................ (169,850) 809,702 572,837 (Purchase) disposal of premises and equipment ........................ 10,623 64,326 (69,221) ----------------------------------------- Net cash used in investing activities ........................... $(3,351,165) $(1,174,300) $(1,118,585) ----------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in other borrowings ..................................... 0 500,000 1,000,000 Proceeds from issuance of preferred stock ............................ 1,500,000 1,000,000 0 Proceeds from issuance of common stock ............................... 523,043 300,000 0 ----------------------------------------- Net cash provided by financing activities ....................... $ 2,023,043 $ 1,800,000 $ 1,000,000 ----------------------------------------- Net increase (decrease) in cash and due from banks .............. (193,880) 84,620 (139,361) Cash and due from banks, beginning .............................. 627,808 343,188 482,549 ----------------------------------------- Cash and due from banks, ending ................................. $ 433,928 $ 427,808 $ 343,188 =========================================
Note 18. Fair Value of Financial Instruments FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. When quoted market prices are not available, fair values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the discounted rates and estimates of future cash flows. In this regard, fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement. Some financial instruments and all nonfinancial instruments are excluded from the disclosures. The aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of their financial instruments: Cash and due from banks, federal funds sold, certificates of deposit at financial institutions and federal funds purchased: The carrying amounts reported in the balance sheets for cash and due from banks, federal funds sold, certificates of deposit at financial institutions and federal funds purchased approximate their fair values. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: The fair values for all types of loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Accrued interest receivable: The fair value of accrued interest receivable is considered to approximate its carrying value. Deposits: The fair values disclosed for demand deposits equal their carrying amounts which represents the amount payable on demand. Fair values for time deposits are estimated using a discount cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits. Federal Home Loan Bank advances: The fair value of the Company's Federal Home Loan Bank advances is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Other borrowings: For variable rate debt, the carrying amount is a reasonable estimate of fair value. Accrued interest payable: The fair value of accrued interest payable is considered to approximate its carrying value. Commitments to extend credit: The majority of the Company's commitment agreements contain variable interest rates, therefore, the carrying amount is a reasonable estimate of fair value. The carrying values and estimated fair values of the Company's financial instruments at June 30, 1998 and 1997 are presented as follows: 1998 1997 --------------------------- --------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------------------------------------------------- Cash and due from banks ... $ 11,640,813 $ 11,640,813 $ 6,953,463 $ 6,953,463 Federal funds sold ........ 22,960,000 22,960,000 9,190,000 9,190,000 Certificates of deposit at financial ................. 8,366,123 8,366,123 5,359,124 5,359,124 institutions Investment securities: Held to maturity ..... 2,380,309 2,363,698 2,914,129 2,888,062 Available for sale ... 32,238,245 32,238,245 28,897,629 28,897,629 Loans receivable, net ..... 160,625,298 162,770,000 106,732,929 108,833,000 Accrued interest receivable 1,773,223 1,773,223 1,374,307 1,374,307 Deposits .................. 197,383,964 197,378,000 135,960,195 135,904,000 Federal funds purchased ... 2,000,000 2,000,000 0 0 Federal Home Loan Bank advances ............... 24,667,174 25,334,000 10,777,712 10,848,000 Other borrowings .......... 1,500,000 1,500,000 1,500,000 1,500,000 Accrued interest payable .. 1,297,260 1,297,260 724,751 724,751
Note 19. Line of Business Information Selected financial information on the Company, the Bank and Bancard is presented as follows for the years ended June 30, 1998, 1997 and 1996: Quad City Holdings, Inc. 1998 1997 1996 ------------------------------------------- Revenue ......................... $ 114,347 $ 147,384 $ 205,128 Net income (loss) ............... (140,810) 18,103 (14,178) Identifiable assets ............. 6,675 20,818 87,791 Depreciation .................... 3,520 2,647 2,524 Capital expenditures ............ 0 0 69,221 Quad City Bank and Trust Company 1998 1997 1996 -------------------------------------------- Revenue ......................... $ 17,547,063 $ 10,817,617 $ 7,007,635 Net income ...................... 1,208,090 844,915 300,672 Identifiable assets ............. 7,535,319 5,108,723 4,396,962 Depreciation .................... 389,177 315,312 131,913 Capital expenditures ............ 2,870,009 1,027,073 2,780,158 Quad City Bancard, Inc. ......... 1998 1997 1996 ------------------------------------------- Revenue ......................... $ 3,563,574 $ 1,548,397 $ 1,032,991 Net income ...................... 1,325,992 356,318 396,094 Identifiable assets ............. 118,274 119,148 46,285 Depreciation .................... 29,660 16,450 8,736 Capital expenditures ............ 28,786 89,313 22,993 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The Company will file with the securities and exchange commission a definitive proxy statement no later than 120 days after the close of its fiscal year ended June 30, 1998 (the "Proxy Statement"). The information required by this item is incorporated by reference from the Proxy Statement. Item 10. Executive Compensation The information required by this item is incorporated by reference from the Proxy Statement. Item 11. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference from the Proxy Statement. Item 12. Certain Relationships and Related Transactions The information required by this item is incorporated by reference from the Proxy Statement. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits The Index to Exhibits appears at page 37 of this Report. (b) Reports on Form 8-K None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, as amended, the Issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QUAD CITY HOLDINGS, INC. Date: September 23, 1998 By: /s/ Douglas M. Hultquist ------------------------------------- Douglas M. Hultquist President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Issuer and in the capacities and on the dates indicated. Signature Title Date - ------------------------- ------------------------------------ ------------------ /s/ Michael A. Bauer Chairman of the Board of Directors September 23, 1998 - ------------------------- Michael A. Bauer /s/ Douglas M. Hultquist President, Chief Executive September 23, 1998 - ------------------------- and Financial Officer and Director Douglas M. Hultquist /s/ Richard R. Horst Director and Secretary September 23, 1998 - ------------------------- Richard R. Horst /s/ James J. Brownson Director September 23, 1998 - ------------------------- James J. Brownson /s/ Ronald G. Peterson Director September 23, 1998 - ------------------------- Ronald G. Peterson /s/ John W. Schricker Director September 23, 1998 - ------------------------- John W. Schricker /s/ Robert A. Van Vooren Director September 23, 1998 - ------------------------- Robert A. Van Vooren
APPENDIX A SUPERVISION AND REGULATION General Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the Iowa Superintendent of Banking (the "Superintendent"), the Board of Governors of the Federal Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the "SEC"). The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and its subsidiaries. Recent Regulatory Developments Year 2000 Compliance. The federal banking regulators have issued several statements providing guidance to financial institutions on the steps the regulators expect financial institutions to take to become Year 2000 compliant. Each of the federal banking regulators is also examining the financial institutions under its jurisdiction to assess each institution's compliance with the outstanding guidance. If an institution's progress in addressing the Year 2000 problem is deemed by its primary federal regulator to be less than satisfactory, the institution will be required to enter into a memorandum of understanding with the regulator which will, among other things, require the institution to promptly develop and submit an acceptable plan for becoming Year 2000 compliant and to provide periodic reports describing the institution's progress in implementing the plan. Failure to satisfactorily address the Year 2000 problem may also expose a financial institution to other forms of enforcement action that its primary federal regulator deems appropriate to address the deficiencies in the institution's Year 2000 remediation program. Pending Legislation. Legislation is pending in the Congress that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. The expanded powers generally would be available to a bank holding company only if the bank holding company and its bank subsidiaries remain well-capitalized and well-managed. At this time, the Company is unable to predict whether the proposed legislation will be enacted and, therefore, is unable to predict the impact such legislation may have on the operations of the Company and the Bank. The Company General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the FRB under the Bank Holding Company Act, as amended (the "BHCA"). In accordance with FRB policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not do so absent such policy. Under the BHCA, the Company is subject to periodic examination by the FRB and is required to file with the FRB periodic reports of its operations and such additional information as the FRB may require. Investments and Activities. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) or which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA also prohibits, with certain exceptions, the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. The principal exception to this prohibition allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the FRB to be "so closely related to banking ... as to be a proper incident thereto." Under current regulations of the FRB, the Company and its non-bank subsidiaries are permitted to engage in, among other activities, such banking-related businesses as the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau, including software development, and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies. Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with FRB capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The FRB's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships) and total capital means Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital and a portion of the company's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the FRB's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of June 30, 1998, the Company had regulatory capital in excess of the FRB's minimum requirements, with a risk-based capital ratio of 12.18% and a leverage ratio of 7.95%. Dividends. The FRB has issued a policy statement with regard to the payment of cash dividends by bank holding companies. In the policy statement, the FRB expressed its view that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition to the restrictions on dividends that may be imposed by the FRB, the Delaware General Corporation Law (the "DGCL") allows the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL), or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Federal Securities Regulation. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Bank General. The Bank is an Iowa-chartered bank, the deposit accounts of which are insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank is also a member of the Federal Reserve System ("member bank"). As an Iowa-chartered, FDIC-insured member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the Superintendent, as the chartering authority for Iowa banks, the FRB, as the primary federal regulator of member banks, and the FDIC, as administrator of the BIF. Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended June 30, 1998, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning July 1, 1998, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank. FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has been used to cover interest payments due on the outstanding obligations of the Financing Corporation ("FICO"), the entity created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations. Such FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20% of the amount of the FICO assessments made against SAIF members. Between January 1, 2000 and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. The FICO assessment rate for SAIF members is approximately 0.061% of deposits while the FICO assessment rate for BIF members is approximately 0.012% of deposits. During the year ended June 30, 1998, the Bank paid FICO assessments totaling $17,306. Capital Requirements. The FRB has established the following minimum capital standards for state-chartered Federal Reserve System member banks, such as the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital and total capital under the FRB's capital guidelines for bank holding companies (see "--The Company--Capital Requirements"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the FRB provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the year ended June 30, 1998, the Bank was not required by the FRB to increase its capital to an amount in excess of the minimum regulatory requirement. As of June 30, 1998, the Bank exceeded its minimum regulatory capital requirements with a leverage ratio of 7.6% and a risk-based capital ratio of 11.8%. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. Dividends. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by a state member bank, such as the Bank. Generally, a member bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior FRB approval, however, a state member bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank's calendar year-to-date net income plus the bank's adjusted retained net income for the two preceding calendar years. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of June 30, 1998. Notwithstanding the availability of funds for dividends, however, the FRB may prohibit the payment of any dividends by the Bank if the FRB determines such payment would constitute an unsafe or unsound practice. Insider Transactions. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship. Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines is of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action. Branching Authority. Iowa law strictly regulates the establishment of bank offices. Under Iowa law, a state bank may not establish a bank office outside the boundaries of the counties contiguous to or cornering upon the county in which the principal place of business of the state bank is located. The number of offices a state bank may establish in a particular municipality is also limited depending upon the municipality's population. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Iowa has enacted legislation permitting interstate mergers, subject to certain conditions, including a requirement that any Iowa bank to be acquired by an out-of-state institution have been in existence and continuous operation for more than five years. State Bank Activities. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank. Federal Reserve System. FRB regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $47.8 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $47.8 million, the reserve requirement is $1.434 million plus 10% of the aggregate amount of total transaction accounts in excess of $47.8 million. The first $4.7 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the FRB. The Bank is in compliance with the foregoing requirements. APPENDIX B GUIDE 3 INFORMATION The following tables and schedules show selected comparative financial information required by the Securities and Exchange Commission Securities Act Guide 3, regarding the business of the Company for the periods shown. All average amounts in these tables and schedules were determined by using month end data, which management believes provides a fair representation of the daily operations of the Company. I. Distribution of Assets, Liabilities and Stockholders' Equity A. Consolidated Average Balance Sheets June 30, 1998, 1997 and 1996 1998 1997 1996 ------------- ------------- ------------- ASSETS Cash and due from banks ....................................... $ 9,595,186 $ 7,682,287 $ 4,910,046 Federal funds sold ............................................ 11,005,417 5,692,500 6,867,750 Certificates of deposit at financial institutions ............. 7,173,147 5,649,217 5,453,878 Securities held to maturity, at amortized cost (Note 2) ....... 0 0 0 Securities available for sale, at fair value (Note 2) ......... 179,253 179,253 179,253 Investment securities ......................................... 31,456,496 34,574,285 31,201,706 Loans receivable .............................................. 141,974,417 81,251,090 44,749,454 Less: Allowance for estimated losses on loans ................. (2,114,392) (1,218,288) (685,151) ------------- ------------- ------------- Net loans receivable ..................................... 139,860,025 80,032,802 44,064,303 ------------- ------------- ------------- Premises and equipment, net ................................... 6,527,353 5,113,472 2,634,978 Other assets .................................................. 3,755,760 3,053,322 1,839,122 ------------- ------------- ------------- Total assets .......................................... $ 209,373,384 $ 141,797,885 $ 96,971,783 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing demand ................................. $ 23,544,939 $ 19,263,095 $ 12,338,863 Interest-bearing demand .................................... 56,612,018 41,184,379 27,172,011 Savings .................................................... 2,954,231 2,322,197 1,515,687 Time ....................................................... 83,789,647 52,510,409 40,511,816 ------------- ------------- ------------- Total deposits ........................................... 166,900,835 115,280,080 81,538,377 ------------- ------------- ------------- Federal funds purchased ....................................... 166,667 517,083 1,236,896 Federal Home Loan Bank advances ............................... 20,219,830 7,718,076 1,248,101 Other borrowings .............................................. 1,500,000 1,416,667 83,333 Other liabilities ............................................. 3,895,631 3,886,997 1,134,660 ------------- ------------- ------------- Total liabilities ..................................... 192,682,963 128,818,903 85,241,367 ------------- ------------- ------------- STOCKHOLDERS' EQUITY Preferred stock ............................................... 21 6 0 Common stock .................................................. 1,466,787 1,441,991 1,437,824 Additional paid-in capital .................................... 14,204,020 12,393,577 11,764,416 Retained earnings (deficit) ................................... 995,622 (704,979) (1,534,097) ------------- ------------- ------------- 16,666,450 13,130,595 11,668,143 Unrealized gains (losses) on securities available for sale, net 23,971 (151,613) 62,273 ------------- ------------- ------------- Total stockholders' equity ............................ 16,690,421 12,978,982 11,730,416 ------------- ------------- ------------- Total liabilities and stockholders' equity ............ $ 209,373,384 $ 141,797,885 $ 96,971,783 ============= ============= =============
I. Interest Rates and Interest Differential B. Analysis of Net Interest Earnings June 30, 1998, 1997 and 1996 1998 ------------------------------------------- Average Interest Average Amount Income/ Yield/ Outstanding Expense Cost of Funds ------------ ------------ ------------- INTEREST EARNING ASSETS Federal funds sold .............................. $ 11,005,417 $ 645,929 5.87% Certificates of deposit at financial institutions 7,173,147 440,980 6.15% Investment securities (1) ....................... 31,456,496 1,905,668 6.06% Net loans receivable (2) ........................ 139,860,025 12,083,990 8.64% ------------ ------------ -------- Total interest earning assets ........... $189,495,085 $ 15,076,567 7.96% ============ ============ ======== INTEREST BEARING LIABILITIES Interest-bearing demand deposits ................ $ 56,612,018 $ 2,053,545 3.63% Savings deposits ................................ 2,954,231 64,678 2.19% Time deposits ................................... 83,789,647 4,852,930 5.79% Federal funds purchased ......................... 166,667 9,231 5.54% Federal Home Loan Bank advances ................. 20,219,830 1,234,137 6.10% Other borrowings ................................ 1,500,000 127,500 8.50% ------------ ------------ -------- Total interest bearing liabilities ...... $165,242,393 $ 8,342,021 5.05% ============ ============ ======== Net interest margin ............................. $ 6,734,546 3.55% ============ ======== 1997 ------------------------------------------ Average Interest Average Amount Income/ Yield/ Outstanding Expense Cost of Funds ------------ ------------ ------------- INTEREST EARNING ASSETS Federal funds sold .............................. $ 5,692,500 $ 286,264 5.03% Certificates of deposit at financial institutions 5,649,217 374,527 6.63% Investment securities (1) ....................... 34,574,285 2,139,263 6.19% Net loans receivable (2) ........................ 80,032,802 6,905,590 8.63% ------------ ------------ -------- Total interest earning assets ........... $125,948,804 $ 9,705,644 7.71% ============ ============ ======== INTEREST BEARING LIABILITIES Interest-bearing demand deposits ................ $ 41,184,379 $ 1,381,170 3.35% Savings deposits ................................ 2,322,197 52,886 2.28% Time deposits ................................... 52,510,409 2,924,420 5.57% Federal funds purchased ......................... 517,083 28,281 5.47% Federal Home Loan Bank advances ................. 7,718,076 484,226 6.27% Other borrowings ................................ 1,416,667 122,885 8.67% ------------ ------------ -------- Total interest bearing liabilities ...... $105,668,811 $ 4,993,868 4.73% ============ ============ ======== Net interest margin ............................. $ 4,711,776 3.74% ============ ======== (1) Interest earned and yields on nontaxable investment securities are stated at face rate. (2) Loan fees are not material and are included in interest income from loans receivable.
I. Interest Rates and Interest Differential B. Analysis of Net Interest Earnings June 30, 1998, 1997 and 1996 1996 ---------------------------------------- Average Interest Average Amount Income/ Yield/ Outstanding Expense Cost of Funds ----------- ----------- ------------- INTEREST EARNING ASSETS Federal funds sold .............................. $ 6,867,750 $ 382,226 5.57% Certificates of deposit at financial institutions 5,453,878 359,409 6.59% Investment securities (1) ....................... 31,201,706 1,868,976 5.99% Net loans receivable (2) ........................ 44,064,303 3,918,817 8.89% ----------- ----------- -------- Total interest earning assets ........... $87,587,637 $ 6,529,428 7.45% =========== =========== ======== INTEREST BEARING LIABILITIES Interest-bearing demand deposits ................ $27,172,011 $ 946,870 3.48% Savings deposits ................................ 1,515,687 39,365 2.60% Time deposits ................................... 40,511,816 2,363,313 5.83% Federal funds purchased ......................... 1,236,896 64,909 5.25% Federal Home Loan Bank advances ................. 1,248,101 70,319 5.63% Other borrowings ................................ 83,333 1,604 1.92% ----------- ----------- -------- Total interest bearing liabilities ...... $71,767,844 $ 3,486,380 4.86% =========== =========== ======== Net interest margin ............................. $ 3,043,048 3.47% =========== ======== (1) Interest earned and yields on nontaxable investment securities are stated at face rate. (2) Loan fees are not material and are included in interest income from loans receivable.
I. Interest Rates and Interest Differential C. Analysis of Changes of Interest Income/Interest Expense June 30, 1998 and 1997 Increase (Decrease) Due To Total ------------------------------ Increase Volume Rate (Decrease) ------------------------------------------------- 1998 vs 1997 ------------------------------------------------- INTEREST EARNING ASSETS Federal funds sold ................................................ $ 359,665 $ 54,621 $ 305,044 Certificates of deposit at financial institutions ................. 66,453 (28,793) 95,246 Investment securities (2) ......................................... (233,595) (43,957) (189,638) Net loans receivable (3) .......................................... 5,178,400 9,304 5,169,096 ----------- ----------- ----------- Total interest earning assets ............................. $ 5,370,923 $ (8,825) $ 5,379,748 =========== =========== =========== INTEREST BEARING LIABILITIES Interest-bearing demand deposits .................................. $ 672,375 $ 120,311 $ 552,064 Savings deposits .................................................. 11,792 (2,114) 13,906 Time deposits ..................................................... 1,928,510 121,257 1,807,253 Federal funds purchased ........................................... (19,050) 354 (19,404) Federal Home Loan Bank advances ................................... 749,911 (13,497) 763,408 Other borrowings .................................................. 4,615 (2,505) 7,120 ----------- ----------- ----------- Total interest bearing liabilities ........................ $ 3,348,153 $ 223,806 $ 3,124,347 =========== =========== =========== 1997 vs. 1996 ------------------------------------------------- INTEREST EARNING ASSETS Federal funds sold ................................................ $ (95,962) $ (34,587) (61,375) Certificates of deposit at financial institutions ................. 15,118 2,179 12,939 Investment securities (2) ......................................... 270,287 63,167 207,120 Net loans receivable (3) .......................................... 2,986,773 (151,478) 3,138,251 ----------- ----------- ----------- Total interest earning assets ............................. $ 3,176,216 $ (120,719) $ 3,296,935 =========== =========== =========== INTEREST BEARING LIABILITIES Interest-bearing demand deposits .................................. $ 434,300 $ (36,871) $ 471,171 Savings deposits .................................................. 13,521 (5,331) 18,852 Time deposits ..................................................... 561,107 (111,332) 672,439 Federal funds purchased ........................................... (36,628) 2,633 (39,261) Federal Home Loan Bank advances ................................... 413,907 8,873 405,034 Other borrowings .................................................. 121,281 21,800 99,481 ----------- ----------- ----------- Total interest bearing liabilities ........................ $ 1,507,488 $ (120,228) $ 1,627,716 =========== =========== =========== (1) The column "increase/decrease from prior year" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. (2) Interest earned and yields on nontaxable investment securities are stated at face rate. (3) Loan fees are not material and are included in interest income from loans receivable.
II. Investment Portfolio. A. Investment Securities The following table presents the amortized cost and fair value of investment securities held on June 30, 1998, 1997 and 1996. Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------------------------------------------------ June 30, 1998 ------------------------------------------------------ Securities held to maturity: Mortgage-backed securities ... $ 1,506,569 $ 0 $ (5,534) $ 1,501,035 Municipal securities ......... 848,740 1,704 (13,557) 836,887 Other bonds .................. 25,000 776 0 25,776 ------------------------------------------------------ Totals ................... $ 2,380,309 $ 2,480 $ (19,091) $ 2,363,698 ====================================================== Securities available for sale: U.S. treasury securities ..... $17,007,239 $ 54,811 $ (3,867) $17,058,183 U.S. agency securities ....... 11,247,822 4,020 (31,050) 11,220,792 Mortgage-backed securities ... 1,847,496 1,265 (346) 1,848,415 Municipal securities ......... 617,752 0 (11,193) 606,559 Other securities ............. 1,500,806 6,733 (3,243) 1,504,296 ------------------------------------------------------ Totals ................... $32,221,115 $ 66,829 $ (49,699) $32,238,245 ====================================================== June 30, 1997 ------------------------------------------------------ Securities held to maturity: Mortgage-backed securities ... $ 2,317,513 $ 673 $ (15,871) $ 2,302,315 Municipal securities ......... 596,616 1,581 (12,450) 585,747 ------------------------------------------------------ Totals ................... $ 2,914,129 $ 2,254 $ (28,321) $ 2,888,062 ====================================================== Securities available for sale: U.S. treasury securities ..... $14,496,366 $ 45,514 $ (20,226) $14,521,654 U.S. agency securities ....... 9,742,495 8,462 (120,306) 9,630,651 Mortgage-backed securities ... 2,357,376 9,388 (6,526) 2,360,238 Other securities ............. 2,390,033 8,971 (13,918) 2,385,086 ------------------------------------------------------ Totals ................... $28,986,270 $ 72,335 $ (160,976) $28,897,629 ====================================================== June 30, 1996 ------------------------------------------------------ Securities held to maturity: Mortgage-backed securities ... $ 2,560,793 $ 2,513 $ (48,911) $ 2,514,395 Municipal securities ......... 595,808 1,355 (14,443) 582,720 ------------------------------------------------------ Totals ................... $ 3,156,601 $ 3,868 $ 63,354) $ 3,097,115 ====================================================== Securities available for sale: U.S. treasury securities ..... $14,504,449 $ 42,191 $ (156,912) $14,389,728 U.S. agency securities ....... 12,612,166 8,759 (355,026) 12,265,899 Mortgage-backed securities ... 2,851,340 12,930 (20,365) 2,843,905 Other securities ............. 1,550,166 9,079 (26,125) 1,533,120 ------------------------------------------------------ Totals ................... $31,518,121 $ 72,959 $ (558,428) $31,032,652 ======================================================
II. Investment Portfolio. B. Investment Securities Maturities and Yields The following table presents the maturity of securities held on June 30, 1998 and the weighted average rates by range of maturity: Average Amount Yield ----------------------- U.S. treasury securities: Within 1 year ....................................... $ 9,006,265 5.80% After 1 but within 5 years .......................... 8,000,974 5.77% Total .......................................... $17,007,239 5.79% U.S. agency securities: Within 1 year ........................................ $ 497,748 4.47% After 1 but within 5 years .......................... 8,748,855 6.04% After 5 but within 10 years ......................... 2,001,219 6.29% Total .......................................... $11,247,822 6.01% Mortgage-backed securities: After 1 but within 5 years .......................... $ 1,441,738 6.27% After 5 but within 10 years ......................... 1,613,360 6.41% After 10 years ...................................... 298,967 6.00% Total .......................................... $ 3,354,065 6.31% Municipal securities: Within 1 year ........................................ $ 150,000 4.23% After 1 but within 5 years .......................... 447,434 6.72% After 5 but within 10 years ......................... 869,058 4.76% Total .......................................... $ 1,466,492 6.01% Other bonds: After 1 but within 5 years .......................... $ 25,000 6.30% Other securities with no maturity or stated face rate .... $ 1,500,806
The Company does not use any financial instruments referred to as derivatives to manage interest rate risk. C. Investment Concentrations As of June 30, 1998, there existed no security in the investment portfolio above (other than U.S. Government and U.S. Government agencies) that exceeded 10% of stockholders' equity at that date. III. Loan Portfolio. A. Types of Loans The composition of the loan portfolio at June 30, 1998, 1997, 1996, 1995 and 1994 is presented as follows: 1998 1997 1996 1995 1994 --------------------------------------------------------------------------------- Commercial ........................ $ 99,097,297 $ 68,634,556 $ 40,338,645 $ 24,748,659 $ 10,509,745 Real estate ....................... 31,145,517 20,293,440 9,011,608 2,879,530 354,035 Installment and other Consumer ....................... 32,732,322 19,437,433 7,459,467 1,903,681 3,879,388 --------------------------------------------------------------------------------- Total loans .................. 162,975,136 108,365,429 56,809,720 31,507,577 12,767,461 Less allowance for Estimated losses on loans ...... (2,349,838) (1,632,500) (852,500) (472,475) (191,500) --------------------------------------------------------------------------------- Net loans .................... $ 160,625,298 $ 106,732,929 $ 55,957,220 $ 31,035,102 $ 12,575,961 =================================================================================
B. Maturities and Sensitivities of Loans to Changes in Interest Rates The following table presents consolidated loan maturities by yearly ranges. Also included for loans after one year are the amounts that have predetermined interest rates and floating or adjustable rates. Maturities After One Year -------------- -------------- At June 30, 1998 Due in one Due after one Due after Predetermined Adjustable year or less through 5 years 5 years interest rates interest rates ------------- --------------- ------------ -------------- -------------- Commercial $ 34,796,849 $ 42,324,290 $ 21,976,158 $ 51,814,664 $ 12,485,784 Real estate 2,947,680 1,300,852 26,896,985 12,245,661 15,952,176 Installment and other consumer 5,596,595 23,762,290 3,373,437 25,440,774 1,694,953 ------------ ------------ ------------ ------------- ------------- Totals $ 43,341,124 $ 67,387,432 $ 52,246,580 $ 89,501,099 $ 30,132,913 ============ ============ ============ ============= =============
C. Risk Elements 1. Nonaccrual, Past Due and Renegotiated Loans. 1998 1997 1996 1995 1994 -------------------------------------------------------------- Loans accounted for on Nonaccrual basis ... $1,025,761 $ 230,591 $ 0 $ 0 $ 0 Accruing loans past due 90 days or more .... 259,277 223,966 306,774 1,678 0 Troubled debt Restructurings ..... 0 0 0 0 0 -------------------------------------------------------------- Total ............ $1,285,038 $ 454,557 $ 306,774 $ 1,678 $ 0 ==============================================================
III. Loan Portfolio. The policy of the Company is to place a loan on nonaccrual status if: (a) payment in full of interest or principal is not expected, or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. Well secured is defined as collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status. 2. Potential Problem Loans. To management's best knowledge, there are no such significant loans that have not been disclosed in the above table. 3. Foreign Outstandings. None 4. Loan Concentrations. No individual real estate property or mortgage amounts to 10% or more of consolidated assets. D. Other Interest Bearing Assets There are no interest bearing assets required to be disclosed here. IV. Summary of Loan Loss Experience. A. Analysis of the Allowance for Estimated Losses on Loans The following table summarizes activity in the allowance for estimated losses on loans of the Company for the fiscal years ending June 30, 1998, 1997, 1996, 1995 and 1994: 1998 1997 1996 1995 1994 ------------------------------------------------------------------------------------- Average amount of loans outstanding, before allowance for estimated losses on loans $ 141,974,417 $ 81,251,090 $ 44,749,454 $ 23,451,527 $ 3,433,648 Allowance for estimated losses on loans: Balance, beginning of fiscal year ...... $ 1,632,500 $ 852,500 $ 472,475 $ 191,500 $ 0 Charge-offs: Commercial ........................ (62,763) (26,141) (117,555) 0 0 Real estate ...................... 0 0 0 0 0 Installment and other consumer ...................... (142,471) (38,772) (2,817) (1,725) 0 ------------------------------------------------------------------------------------- Subtotal charge-offs .............. (205,234) (64,913) (120,372) (1,725) 0 ------------------------------------------------------------------------------------- Recoveries: Commercial ........................ 13,146 266 0 0 0 Real estate ...................... 0 0 0 0 0 Installment and other consumer ...................... 7,450 256 0 100 0 ------------------------------------------------------------------------------------- Subtotal recoveries ............... 20,596 522 0 100 0 ------------------------------------------------------------------------------------- Net charge-offs ................... (184,638) (64,391) (120,372) (1,625) 0 ------------------------------------------------------------------------------------- Provision charged to expense ........... 901,976 844,391 500,397 282,600 191,500 ------------------------------------------------------------------------------------- Balance, end of fiscal year ............ $ 2,349,838 $ 1,632,500 $ 852,500 $ 472,475 $ 191,500 ===================================================================================== Ratio of net charge-offs to Average loans outstanding ........... 0.13% 0.08% 0.27% 0.01% 0.00%
IV. Summary of Loan Loss Experience. B. Allocation of the Allowance for Estimated Losses on Loans The following table presents the allowance for estimated losses on loans by type of loans and the percentage of loans in each category to total loans: 1998 1997 ------------------------ ------------------------ % of Loans to % of Loans to Amount Total Loans Amount Total Loans ------------------------ ------------------------ Commercial and industrial ........ $1,213,439 60.81%$ $ 799,566 63.34% Real estate ...................... 79,198 19.11% 66,742 18.73% Consumer ......................... 515,489 20.08% 387,096 17.93% Unallocated ...................... 541,712 N/A 379,096 N/A ---------------------------------------------- Total ....................... $2,349,838 100.00% $1,632,500 100.00% ============================================== 1996 1995 ----------------------- -------------------------- % of Loans to % of Loans to Amount Total Loans Amount Total Loans ----------------------- -------------------------- Commercial and industrial ..... $ 0 71.01% $ 0 78.55% Real estate ................... 0 15.86% 0 9.14% Consumer ...................... 0 13.13% 0 12.31% Unallocated ................... 852,500 N/A 472,475 N/A Total .................... $852,500 100.00% $472,475 100.00%
1994 ------------------------ % of Loans to Amount Total Loans ------------------------ Commercial and industrial ..... $ 0 82.32% Real estate ................... 0 2.77% Consumer ...................... 0 14.91% Unallocated ................... 191,500 N/A Total .................... $191,500 100.00% V. Deposits. The average amount of and average rate paid for the categories of deposits for the fiscal years 1998, 1997 and 1996 are disclosed in the consolidated average balance sheets and can be found on page 3 of Appendix B. Included in interest bearing deposits at June 30, 1998, 1997 and 1996 were certificates of deposit totaling $31,937,377, $22,978,123 and $13,720,210, respectively, that were $100,000 or greater. Maturities of these certificates were as follows: 1998 1997 1996 ------------------------------------------- One to three months ............ $ 8,633,273 $10,745,903 $ 5,984,277 Three to six months ............ 9,647,980 4,324,058 1,931,085 Six to twelve months ........... 10,997,407 4,131,882 3,494,877 Over twelve months ............. 2,658,717 3,776,280 2,309,971 ------------------------------------------- Total certificates of deposit greater than $100,000 ................ $31,937,377 $22,978,123 $13,720,210 =========================================== VI. Return on Equity and Assets. The following table presents the return on assets and equity and the equity to assets ratio of the Company for the years ended June 30, 1998 and 1997. 1998 1997 1996 ---------------------------------------------------- Average total assets ... $ 209,373,383 $ 141,797,885 $ 96,971,783 Average equity ......... $ 16,690,420 $ 12,978,982 $ 11,730,416 Net income ............. $ 2,393,272 $ 1,219,336 $ 682,588 Return on average assets 1.14% 0.86% 0.70% Return on average equity 14.34% 9.39% 5.82% Average equity to assets ratio ................ 7.97% 9.15% 12.10% ratio VII. Short Term Borrowings. The information requested is not required because the average balance of short term borrowings outstanding during fiscal 1998 was less than 30% of stockholders' equity at June 30, 1998. INDEX TO EXHIBITS Incorporated Herein by in Filed Sequential Exhibit No. Description Reference To Herewith Page No. - --------------------------------------------------------------------------------------------- 3.1 Certificate of Exhibit 3.1 to the Incorporation of Quad Registration City Holdings, Inc., as Statement of Quad amended City Holdings, Inc. on Form SB-2, File No. 33-67028 3.2 Bylaws of Quad City Exhibit 3.2 to the Holdings, Inc. Registration Statement of Quad City Holdings, Inc. on Form SB-2, File No. 33-67028 4.1 Specimen Stock Exhibit 4.1 to the Certificate of Quad Registration City Holdings, Inc.(See Statement of Quad also Articles VIII, XII City Holdings, Inc. and XIII of Exhibit 3.1 on Form SB-2, File and Articles II, VI, IX No. 33-67028 and XII of Exhibit 3.2) 4.2 Certificate of Designation X of Series A Preferred Stock 10.1 Quad City Holdings, Exhibit 10.1 to the Inc. Stock Option Plan Registration Statement of Quad City Holdings, Inc. on Form SB-2, File No. 33-67028 10.2 Form of Stock Option Exhibit 10.2 to the Agreement between Registration Quad City Holdings, Inc. Statement of Quad and each of Michael A. City Holdings, Inc. Bauer, Douglas M. on Form SB-2, File Hultquist and Victor J. No. 33-67028 Quinn 10.3 Employment Agreement Exhibit 10.3 to the between Quad City Registration Holdings, Inc. and Statement of Quad Michael A. Bauer dated City Holdings, Inc. May 4, 1993 on Form SB-2, File No. 33-67028 10.4 Employment Agreement Exhibit 10.4 to the between Quad City Registration Holdings, Inc. and Statement of Quad Michael A. Bauer dated City Holdings, Inc. July 1, 1993 on Form SB-2, File No. 33-67028 10.5 Employment Agreement Exhibit 10.5 to the between Quad City Registration Holdings, Inc. and Statement of Quad Douglas M. Hultquist City Holdings, Inc. dated April 30, 1993 on Form SB-2, File No. 33-67028 Incorporated Herein by in Filed Sequential Exhibit No. Description Reference To Herewith Page No. - --------------------------------------------------------------------------------------------- 10.6 Employment Agreement Exhibit 10.6 to the between Quad City Registration Holdings, Inc. and Statement of Quad Douglas M. Hultquist City Holdings, Inc. dated July 1, 1993 on Form SB-2, File No. 33-67028 10.7 Development Agreement Exhibit 10.7 to the between Quad City Registration Holdings, Inc. and Statement of Quad Kaizen, Inc. City Holdings, Inc. on Form SB-2, File No. 33-67028 10.8 Lease/Option Exhibit 10.8 to the Agreement between Registration Quad City Holdings, Inc. Statement of Quad and Kaizen, Inc. City Holdings, Inc. on Form SB-2, File No. 33-67028 10.9 Lease Agreement between X Quad City Bank and Trust Company and Kaizen, Inc. 10.10 Employment Agreement X between Quad City Holdings, Inc. and John W. Schricker 10.11 Loan Agreement between X Quad City Holdings, Inc. and LaSalle National Bank 10.12 First Amendment to Loan X Agreement between Quad City Holdings, Inc. and LaSalle National Bank 10.13 Second Amendment to Loan X Agreement between Quad City Holdings, Inc. and LaSalle National Bank 10.14 Replacement Revolving Credit X Note Agreement between Quad City Holdings, Inc. and LaSalle National Bank 22.1 Subsidiaries of Quad Exhibit 22.1 to the City Holdings, Inc. Registration Statement of Quad City Holdings, Inc. on Form SB-2, File No. 33-67028 23.1 Consent of McGladrey and Pullen X
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-10 3 LEASE Tenant: Quad City Bank & Trust Company Landlord: Kaizen Company of America, L.C., an Iowa limited liability company Building: Velie Plantation Suite No.: First Floor TABLE OF CONTENTS 1. PARTIES............................................................ 2. PREMISES........................................................... 3. TERM............................................................... 4. BASE RENT.......................................................... 5. OPERATING EXPENSES--ADDITIONAL RENT................................ 6. USE OF PREMISES.................................................... 7. CONSTRUCTION OF TENANT IMPROVEMENTS................................ 8. COMPLIANCE WITH LAWS............................................... 9. RIGHT TO ASSIGN OR SUBLET.......................................... 10. LANDLORD'S REPAIR AND MAINTENANCE RESPONSIBILITIES................. 11. INSURANCE.......................................................... 12. WAIVER OF SUBROGATION.............................................. 13. INDEMNIFICATION.................................................... 14. DEFAULTS/REMEDIES.................................................. 15. UTILITIES, SERVICES AND TAXES (OPERATING EXPENSES)................. 16. CASUALTY........................................................... 17. CONDEMNATION....................................................... 18. HOLDOVER........................................................... 19. NOTICES............................................................ 20. QUIET ENJOYMENT.................................................... 21. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT...................... 22. ESTOPPEL CERTIFICATE............................................... 23. ALTERATIONS AND TRADE FIXTURES..................................... 24. CONDITION OF PREMISES UPON TERMINATION............................. 25. INSPECTION BY LANDLORD............................................. 26. HAZARDOUS SUBSTANCES............................................... 27. EMF................................................................ 28. INSTALLATION OF SATELLITE BUSINESS TERMINAL SYSTEM................. 29. RENEWAL OPTION..................................................... 30. SIGNAGE............................................................ 31. PARKING............................................................ 32. SECURITY/AFTER-HOURS BUILDING ACCESS............................... 33. BROKERAGE.......................................................... 34. AMERICANS WITH DISABILITIES ACT.................................... 35. MISCELLANEOUS...................................................... 36. RIDERS AND EXHIBITS................................................ 37. OPTION TO PURCHASE................................................. 38. FURTHER OBLIGATIONS OF LANDLORD.................................... LEASE PARTIES THIS LEASE is made and entered into this ____ day of ____________, 1998, by and between Kaizen Company of America, L.C., having an address at c/o Ruhl & Ruhl Commercial Company, 5111 Utica Ridge Road, Davenport, Iowa, 52807 (hereinafter the "Landlord") and Quad City Bank & Trust Company, having its principal place of business at 3551 7th Street, Moline, Illinois 61265, Attn: Doug Hultquist (hereinafter the "Tenant"). PREMISES Landlord hereby leases to Tenant and Tenant leases from Landlord, approximately 15,300 rentable square feet as described and set forth in Exhibit "A" attached hereto and incorporated herein by reference (hereinafter the "Premises"), in that certain building consisting of approximately 35,349 rentable square feet of space located at 3551 - 7th Street, Moline, Illinois, which will be commonly known as First Floor of the Velie Plantation (hereinafter the "Building"), the land under and around the Building being legally described in Exhibit "B" ("Legal Description") attached hereto and incorporated herein by reference (hereinafter the "Property"). Tenant's "Proportionate Share" is estimated to be forty three and 28/100 percent (43.28%), which calculation is set forth in Article 15 of this Lease. TERM Tenant shall have and hold said Premises for a term of one hundred eight (108) months, (hereinafter the "Term") upon the terms and conditions set forth in this Lease. The Commencement Date of the Term of this Lease shall be on March 1, 1998, or upon receipt of a Certificate of Occupancy from the City of Moline, Illinois, whichever shall later occur (the "Commencement Date"). Unless sooner terminated as herein provided, the Expiration Date of this Lease shall be the last day of the calendar month which is one hundred eight (108) full calendar months following the Commencement Date. BASE RENT During the Term of this Lease, Tenant shall pay to Landlord in advance, on or before the first day of each and every month as Base Rent the amount stated below. Rental payments shall commence April 1, 1998, and be paid at the address of the Landlord set forth above, or at such other address as the Landlord may specify in writing from time to time during the Term of this Lease. The payments of Base Rent are as follows: Months Monthly Base Rent 1-54 $17,085 55-108 $18,488 OPERATING EXPENSES--ADDITIONAL RENT Beginning on the Commencement Date, in addition to the monthly Base Rent set forth above, Tenant shall be responsible for its proportionate share of the Operating Expenses, as hereinafter defined and as sometimes defined as Common Area Maintenance expenses, on an annualized basis. In the event that the Building is in operation for only a portion of 1998, the actual 1998 Operating Expenses for such partial year shall be annualized. The calculation of the Tenant's Operating Expenses, including all taxes, shall assume a Building occupancy rate of 100% and full tax assessment and such amount shall be annualized. The Tenant shall pay as additional rent ("Additional Rent") its Proportionate Share of the Operating Expenses in accordance with Article 15. Base Rent and Additional Rent are collectively referred to herein as Rent. In the event that any recurring, monthly charge under this Lease is not paid within ten (10) days of the date due or in the event that any non-recurring charge is not paid within thirty (30) days of receipt of an invoice by Tenant with appropriate supporting documentation attached, the amount due shall bear interest from the date due until the date paid at a rate of five percent (5%) above the current "prime rate" of the Chase Manhattan Bank, N.A. (the "Default Rate"). USE OF PREMISES The Premises may be used for general office purposes, and for all other things necessary or incidental to Tenant's business, or the business of an affiliate, subsidiary, parent organization or representative of Tenant, it being understood that Tenant's business is banking and the offering of related financial services. Landlord agrees that it will seek professional office and mutually agreed upon commercial retail tenants for the remaining rental space of the Building and Property on substantially similar terms and conditions as those imposed upon Tenant, excepting that Landlord shall have sole discretion in establishing lease rates for such remaining rental space. No bank, credit union, savings and loan association, savings institution, mortgage broker, securities firm or finance company will be permitted without prior approval of Tenant. No tenant shall be allowed to sell or distribute adult books, magazines or video tapes, or operate a pet store or educational institution. No other tenant may be allowed to sell or distribute alcoholic beverages or food without prior consent of Tenant, with the exception of Velie's Plantation Club. CONSTRUCTION OF TENANT IMPROVEMENTS Tenant shall have the responsibility for the construction of all Tenant improvements and must obtain Landlord's prior written consent for the plans of specifications of such improvements, which consent shall not be unreasonably withheld. All improvements shall be installed using industry standard materials and installed in a good and workmanlike manner by qualified craftsmen. COMPLIANCE WITH LAWS Tenant, at its expense, shall comply with any valid and applicable laws, rules, orders, ordinances, regulations and other requirements, present or future (collectively, "Applicable Law"), affecting the Premises and with any reasonable requirements of the insurance companies insuring Landlord against damage, loss or liability for accidents in or connected with the Building to the extent that the same shall affect or be applicable to (i) Tenant's particular manner of use of the Premises (as opposed to its mere use thereof), (ii) alterations and improvements made by Tenant, or (iii) a breach by Tenant of its obligations under this Lease. Nothing herein contained, however, shall be deemed to impose any obligation upon Tenant to make any structural changes or repairs unless necessitated by reason of a particular use by Tenant of the Premises. Landlord shall be responsible for complying with all Applicable Law affecting the design, construction and operation of the Building (including the Premises to the extent Tenant is not required to comply therewith as provided for above) or relating to the performance by Landlord of any duties or obligations to be performed by it hereunder. RIGHT TO ASSIGN OR SUBLET Tenant shall neither assign this Lease nor sublet all or any part of the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Landlord agrees to respond in writing to any request for assignment or subletting within ten (10) days following receipt of such a request. Notwithstanding the foregoing, Tenant without release of liability may assign this Lease and/or sublet any part or all of the Premises, without Landlord's prior consent, to any affiliates, subsidiaries, parent organizations, or representatives of Tenant. Furthermore, Landlord herein consents to the sublease between Tenant and Advanced Radiology, S.C. for a portion of the Premises. LANDLORD'S REPAIR AND MAINTENANCE RESPONSIBILITIES Except as hereinafter provided, Landlord hereby agrees to keep the entire exterior portion of the Building in good repair and maintenance, including all grounds, parking lots, windows, the roof, structure, exterior walls, and all common areas, including the provision of Class A office building janitorial service to all common areas. Repairs and maintenance shall be made in a prompt and reasonable fashion, including replacement of capital items where necessary. Landlord also agrees to keep all mechanical and electrical portions of the Building in good working order and condition, including, but not limited to, the heating, electrical, air conditioning, elevators, ventilation, and standard plumbing systems. Tenant shall give written notice to the Landlord of any necessary repairs or maintenance, and if the Landlord does not complete the same within ten (10) days after said notice (or such longer period as is required to make repair or maintenance which by its nature cannot be completed in such ten (10) day period so long as Landlord commence the repair within ten (10) days and diligently prosecutes the same to completion), Tenant shall have the right, but not the obligation, to complete such repairs or maintenance and recover its cost by offsetting such cost against the Rent payable to Landlord. Landlord shall, at its sole expense, provide and maintain in good order and repair all structural and utility systems including but not limited to roof, ceiling, walls, floors, elevators, stairs, escalators, windows, plumbing and hot and cold water. Tenant shall maintain its own personal property in good and orderly fashion. Landlord agrees that such work shall not (i) damage the appearance or reduce the floor area of the Premises, (ii) affect Tenant's layout (including access to the Premises), or (iii) materially interfere with Tenant's use and enjoyment of the Premises. All such work shall be performed by Landlord in such a way as to minimize disruption to Tenant's business. In the event of any interruption in the services required to be provided by Landlord hereunder that interferes with Tenant's use and enjoyment of the Premises, Tenant shall have the right to abate Base Rent and Additional Rent if said interruption continues for at least five (5) days, and Tenant shall have the right to terminate this Lease by giving notice thereof to Landlord if said interruption continues for at least thirty (30) days. Landlord shall have no obligation to maintain the drive through facility operated by Tenant nor shall it have any obligation to maintain that portion of the driveway which specifically services the drive through facility. All such maintenance shall be the obligation of Tenant. Landlord acknowledges that Tenant is a banking organization subject to federal and state regulations. As such, Landlord further acknowledges that it is responsible for maintaining and/or repairing the Premises and Building to assure that the Premises and the Building are compliant with the ability of all computerized systems installed and/or required to be maintained by Landlord to fully and properly function in the years 2000 and following. INSURANCE (a) Landlord shall maintain the following insurance coverage with carriers licensed to do business in the State of Illinois during the Term of this Lease: (i) All-Risk Broad Basis Fire Insurance with Extended Coverage for the full replacement value of the Building and all improvements and fixtures therein, including, but not limited to, the Premises; (ii) All-Risk Boiler and Machinery Insurance for the full replacement value of all eligible machinery; (iii) Commercial General Liability Insurance (including property damage and fire legal liability) with limits of not less than $1,000,000.00 per occurrence and $2,000,000.00 in the aggregate; and, (iv) Any other insurance required by law. (b) Tenant agrees at its own cost and expense to carry adequate public liability insurance which provides sufficient protection against any injuries or damages sustained by individuals while within the Premises. Tenant shall have the right to include the Premises within a blanket policy of insurance including the Premises and other locations. Any insurance maintained by Tenant may have deductibles or self-insurance retention in the amounts generally utilized by Tenant for its insurance with respect to a majority of its locations and Tenant may self-insure for plate glass and Tenant's personal property. (c) As evidence of the existence of any insurance required under the Lease, each party shall provide the other with a certificate of insurance or other reasonably satisfactory evidence of such insurance coverage. WAIVER OF SUBROGATION Landlord and Tenant each hereby release the other from liability for damage or destruction to the building containing the Premises and the improvements located on the Property, whether or not caused by acts or omissions of the other party; provided, however, such release shall only be in force and effect in respect of damage or destruction normally covered by standard policies of fire insurance with extended coverage (whether or not such coverage is in effect). Each party shall cause its fire insurance policies to contain a provision whereby the insurer either waives any right of subrogation against the other party or agrees that such a release shall not invalidate the insurance, whichever is obtainable. INDEMNIFICATION (a) Tenant shall indemnify, hold harmless and defend Landlord, its agents, servants and employees from and against all claims, actions, losses, costs and expenses (including reasonable attorney's fees and litigation costs actually incurred), judgments, settlement payments, and, whether or not reduced to final judgment, all liabilities, damages or fines paid, incurred or suffered by any third parties in connection with loss of life, personal injury and/or damage to property arising from, directly or indirectly, wholly or in part (a) any default by Tenant under the terms and conditions of this Lease, (b) the use or occupancy of the Premises by Tenant or any person claiming through or under Tenant and/or (c) any acts or omissions of Tenant or any contractor, agent, employee, invitee or licensee of Tenant in or about the Premises, Building or Common Areas. (b) Landlord shall indemnify, hold harmless and defend Tenant, its agents, servants and employees from and against all claims, actions, losses, costs and expenses (including reasonable attorney's fees and litigation costs actually incurred), judgments, settlement payments, and, whether or not reduced to final judgment, all liabilities, damages or fines paid, incurred or suffered by any third parties in connection with loss of life, personal injury and/or damage to property arising from, directly or indirectly, wholly or in part (a) any default by Landlord under the terms and conditions of this Lease, (b) the ownership, use or occupancy of the Building (other than the Premises) or Common Areas by Landlord or any person claiming through or under Landlord and/or (c) any acts or omissions of Landlord or any contractor, agent, employee, invitee or licensee of Landlord in or about the Premises, Building or Common Areas. DEFAULTS/REMEDIES Tenant Defaults/Landlord Remedies: (a) The following shall constitute a default by Tenant: (i) the failure to pay the Base Rent or any Additional Rents within fifteen (15) days after receipt of written notice from Landlord that the same is past due; (ii) the failure to perform any covenant, term, obligation, or condition otherwise required pursuant to this Lease within thirty (30) days after receipt of written notice from Landlord that the same has not been performed, provided, however, that in the event such failure to perform cannot reasonably be cured within such thirty (30) day period, then Tenant shall be allowed such additional time as is reasonable under the circumstances to perform such covenant, term, obligation, or condition before such failure shall constitute a default; (iii) the filing of a petition or proceeding under the Federal Bankruptcy Act or any insolvency act by or against Tenant which is not dismissed within sixty (60) days after the date of filing thereof; or (iv) the appointment of a receiver for Tenant, which receiver is not discharged within sixty (60) days after the appointment thereof. (b) In the event of a default by Tenant, Landlord shall have the following rights: (i) all rights available at law, except as otherwise modified herein; (ii) the right to terminate Tenant's possession of the Premises alone without terminating the Lease; and (iii) the right to terminate this Lease. (c) In the event Landlord terminates Tenant's possession of the Premises alone without terminating the Lease, all obligations of Tenant shall continue, including Tenant's obligation to pay Base Rent and Additional Rent as it accrues on a monthly basis, until the earlier to occur of the date a replacement tenant takes possession of the Premises, or the expiration date of the Lease. (d) Notwithstanding any termination of this Lease or Tenant's possession of the Premises by Landlord pursuant to a default by Tenant, Landlord shall not have the right to accelerate the Base Rent or Additional Rent thereafter to become due under the Lease, but instead Tenant shall continue to be obligated to pay the Base Rent and Additional Rent as it would have accrued monthly under the Lease but for such termination by Landlord. It is expressly understood and agreed that this provision shall survive the termination of this Lease. (e) Landlord covenants to use reasonable efforts to relet the Premises and otherwise mitigate its damages. Landlord Defaults/Tenant Remedies: (a) The following shall constitute a default by Landlord under this Lease: (i) Landlord's failure to pay any amounts due Tenant pursuant to the Lease within thirty (30) days after receipt of written notice from Tenant that the same is past due; or (ii) Landlord's failure to perform any terms, covenants, obligations, or conditions otherwise required pursuant to this Lease within thirty (30) days after receipt of written notice from Tenant that the same has not been performed, provided, however, that in the event such failure to perform cannot reasonably be cured within such thirty day period, then Landlord shall be allowed such additional time as is reasonable under the circumstances to perform such terms, covenants, obligations, or conditions before such failure shall constitute a default. (b) In the event of a default by Landlord, Tenant shall have the following rights: (i) all rights available at law or equity; (ii) in the event of a judgment entered against Landlord and in favor of Tenant, the right to offset money damages against payments of Base Rent and Additional Rent as such rent accrues; (iii) in the event of Landlord's default in the payment of any amounts due Tenant pursuant to the Lease, the right to offset its Base Rent and Additional Rent as such rent accrues by the amounts due Tenant; and (iv) the right to terminate this Lease. In addition to Tenant's Cancellation Option, Tenant shall also have the right to abandon or vacate the Premises without creating a default under this Lease, provided Tenant continues to pay the Base Rent and Additional Rent due hereunder and otherwise complies with the terms and conditions of this Lease. UTILITIES, SERVICES AND TAXES (OPERATING EXPENSES) (a) Landlord hereby agrees to pay any and all charges made by any public or private utility company for services furnished to Tenant on the Premises during the Term of this Lease, including all costs for electricity, sewers, gas, water, air conditioning, and heat. Landlord also agrees to pay all real estate taxes, special assessments, and occupancy taxes associated with the Premises and/or the Building. Notwithstanding the foregoing, Landlord and Tenant agree that Landlord may install a separate meter, at its sole expense, to measure the consumption of electricity and that in that event, Tenant shall pay the charges for such electrical consumption directly to the provider of this utility. Landlord specifically agrees to furnish sufficient heat and air conditioning to provide temperature conditions required for comfortable occupancy of the Tenant's Premises during Tenant's normal and usual business hours, to provide quantities of electricity and water for Tenant's reasonable needs, and, if applicable, Landlord shall provide Tenant passenger elevator service at all times during all normal and usual working days and by special arrangement. For the purposes of this Lease, Tenant's normal and usual business hours shall be deemed to be from 7:00 a.m. to 9:00 p.m. Monday through Friday, except holidays, and from 8:00 a.m. to 5:00 p.m. on Saturday, except holidays. Landlord shall operate the building in a first-class manner. The janitorial service to the Premises shall be provided by Tenant not less than five (5) days per week and shall include, but not be limited to, carpet vacuuming, dusting, and waste disposal. Janitorial service shall also include window washing of no less than two (2) times per year of exterior windows (more often as needed if Tenant is on the first floor) and once per month, and daily if needed, of interior glass within the Premises. In addition to Base Rent, Tenant shall pay as Additional Rent, Proportionate Share of the Operating Expenses as follows: The term "Operating Expenses" includes all expenses incurred by Landlord with respect to the maintenance and operation of the Building of which the Leased Premises are a part, including but not limited to the following: maintenance, repair and replacement costs; electricity, fuel, water, sewer, gas and other utility charges; security, window washing, janitorial services except as provided above, and trash and snow removal; landscaping and pest control; management fees, wages and benefits payable to employees of Landlord whose duties are directly connected with the operation and maintenance of the Building; all services, supplies, repairs, replacements or other expenses for maintaining and operating the Building or project, including parking and common areas; the cost, including interest, amortized over its useful life of any capital improvement made to the Building by Landlord after the date of this Lease which is required under any governmental law or regulation that was not applicable to the Building as of the date of this Lease; the cost, including interest, amortized over its useful life of installation of any device or other equipment which improves the operating efficiency of any system within the Building and thereby reduces Operating Expenses (but not in excess of the actual savings); all other expenses which would generally be regarded as operating and maintenance expenses (which would reasonably be amortized over a period not to exceed five (5) years); all real property taxes and installments of special assessments, including dues and assessments by means of deed restrictions and/or owner associations, including transportation management associations which Landlord is required to join which accrue against the Building of which the Leased Premises are a part during the Term of this Lease; all insurance premiums Landlord is required to pay or deems reasonably necessary to pay, including public liability insurance with respect to the Building; and all holiday decorations for the exterior of the Building and the Property as are agreed upon by Landlord and Tenant. Notwithstanding anything to the contrary contained herein, the term "Operating Expenses" shall not include the following: (a) the cost of off-site personnel; (b) the cost of any "tenant allowances" or other costs incurred in preparing space for occupancy and any alterations, decorations or improvements made to leasable space in the Building; (c) amounts paid for professional services in connection with the leasing of space or in connection with relationships or disputes with tenants, former tenants, prospective tenants or other occupants of the Building; (d) financing or refinancing costs; (e) expenses for which Landlord is or will be reimbursed; (f) expenses in the nature of interest, fines and penalties; (g) rent, additional rent and other charges payable under any ground lease or any lease superior to this Lease; (h) any management or similar fee in excess of 4% of the total gross revenues of the Property; (i) any costs or other sums paid to any person or entity related to or affiliated with Landlord to the extent that same exceeds the reasonable and customary cost thereof; (j) professional fees incurred in connection with the preparation of financial statements, tax returns and other documents and information for Landlord or its mortgagees, other than professional fees for a yearly reconciliation of Operating Expenses; (k) any repairs or alterations made by Landlord to comply with laws, regulations, codes or ordinances existing as of the execution hereof; and (l) any items or amounts which are not reasonable in amount and customarily included in operating expenses for similar properties located in the vicinity of the Building. Moreover, any Operating Expenses which are not customary for a Class A Office Building in the Quad Cities shall not be included within the meaning of Operating Expenses as set forth herein unless the same have first been approved by Tenant in writing. (b) If any real estate taxes or special assessments may be paid in installments, Landlord shall be deemed to pay the same in the longest period allowed without incurring penalty (whether or not paid in that manner) and only the installments coming due during the term of this Lease shall be included within the meaning of Operating Expenses. (c) At any time following the first year reconciliation of Operating Expenses, Tenant shall have the right, during normal business hours and upon reasonable advance notice to Landlord, to review or audit Landlord's books and records pertaining to Operating Expenses. In the event that Tenant's review or audit discloses that Landlord has overcharged Tenant, Landlord shall reimburse Tenant for the excess amounts paid by Tenant plus interest at the Default Rate. In addition, in the event that any such overcharge exceeds the amount actually owed by Tenant by more than three percent (3%), Landlord shall reimburse Tenant for the cost of its audit. (d) Tenant shall pay its Proportionate Share of the Operating Expenses, pro rated with respect to years in which this Lease is in effect for less than the entire calendar year. Operating expenses have been initially budgeted at $4.50 per square foot which shall be payable monthly, in advance, beginning on the Commencement Date (prorated for the remaining days of the month) and on the first of each month thereafter. Each year, Landlord shall estimate in a reasonable manner, the amount by which Operating Expenses are anticipated to increase for that year as set forth below. Landlord shall compute Tenant's Proportionate Share of such estimated increases, and 1/12 of Tenant's Proportionate Share of the Operating Expenses shall be paid by Tenant as Additional Rent in connection with each monthly rent payment. At the conclusion of each calendar year, Landlord shall compute the actual Operating Expenses. If the estimated payments collected from Tenant are insufficient to cover Tenant's Proportionate Share of the actual Operating Expenses, Tenant shall within thirty (30) days after receipt of a billing, accompanied by appropriate supporting documentation, pay the difference. If Landlord's estimate exceeded the amount of the actual Operating Expenses, Landlord shall refund the excess to Tenant along with its statement of the actual Operating Expenses. This provision shall survive the termination of this Lease. Landlord shall provide its statement of the estimated Operating Expenses no later than December 1 of each year and updated on January 31st. Landlord shall provide its statement of the actual Operating Expenses no later than March 31 of each year. Anything to the contrary notwithstanding and except for any increase for real estate taxes, Landlord shall not increase the Operating Expenses chargeable to Tenant by more than three percent (3%) per annum without first offering Tenant the opportunity to review all Operation Expenses and to obtain third party services at a lesser cost. (e) Tenant's "Proportionate Share" shall mean a fraction, the numerator of which is the number of rentable square feet of office space comprising the Premises and the denominator of which is the total number of rentable square feet of office space in the Building, whether or not such space is actually rented. CASUALTY In the event of any fire or other casualty affecting all or any part of the Premises, or any of the public areas of the Building adjacent to or leading to the Premises, then within sixty (60) days after such fire or other casualty Landlord shall notify Tenant of the length of time required to complete the restoration thereof and (i) if restoration of the Premises or of the public areas of the Building adjacent to or leading to the Premises shall be reasonably estimated to require more than 120 days to complete from the date of such casualty; or (ii) the Premises or the public areas of the Building adjacent to or leading to the Premises are not restored within 150 days after the date of such casualty, then, in either such instance Tenant shall have the right, exercisable by notice to Landlord given on or before the thirtieth (30th) day after the date of receipt by Tenant of the notice required under (i) above or after the expiration of the time period set forth in (ii) above, as the case may be, to terminate this Lease effective not less than thirty (30) days after the date of such Tenant's notice (except that if the circumstances set forth in (ii) above are applicable, and Landlord completes such restoration before the effective date of such termination, such termination shall be deemed a nullity). In the event the Premises or the Building are completely destroyed or so damaged by fire or other hazard that they cannot reasonably be used by Tenant for the purposes herein provided, and this Lease is not terminated as above provided, then there shall be a total abatement of Rent until said Premises are made usable for Tenant's business purpose. In the event the Premises are partially destroyed or damaged by fire or other hazard so that they can only be partially used by Tenant for the purposes herein provided, then there shall be a partial Rent abatement corresponding to the time and extent to which said Premises cannot be used by Tenant. CONDEMNATION If all or any part of the Premises shall be taken or appropriated by right of eminent domain, either party hereto shall have the right at its option exercisable within thirty (30) days after receipt of notice of such taking to terminate this Lease as of the date possession is taken by the condemning authority. Tenant shall be allowed to prosecute its own claim or action for the taking of personal property and fixtures belonging to Tenant and/or the interruption of or damage to Tenant's business and/or for Tenant's unamortized cost of leasehold improvements and/or for Tenant's relocation expenses. HOLDOVER If Tenant fails to vacate the Premises upon the expiration or termination of this Lease, Landlord's sole and exclusive remedies (which remedies may be exercised simultaneously) shall be to: (i) collect from Tenant until Tenant vacates the Premises use and occupancy for the Premises at a monthly rate of: (A) 125% of the Base Rent payable during the last month of the term of this Lease for each of the next six (6) succeeding months; and (B) thereafter 150% of the Base Rent payable during the last month of the term of this Lease; or (ii) evict Tenant from the Premises by appropriate legal proceedings. NOTICES Whenever in this Lease it shall be required or permitted that notice or demand be given or served by either party to this Lease, such notice or demand shall be given or served in writing and sent to Landlord at the address set forth and to Tenant as follows: If to Landlord: Kaizen Company of America, L.C. Attn: Charles A. Ruhl, Jr. Ruhl & Ruhl Commercial Company 5111 Utica Ridge Road Davenport, IA 52807 If to Tenant: Quad City Bank & Trust Company Attn: Douglas M. Hultquist 3551 7th Street Moline, IL 61265 All such notices shall be sent by certified or registered mail and in such case shall be effective three (3) days after the date of mailing or by reputable overnight courier, and in such case shall be effective one (1) day after the date of mailing. Any such address may be changed from time to time by either party serving notices as above provided. QUIET ENJOYMENT Landlord warrants that it has the full right and authority to execute and to perform pursuant to this Lease, to grant the estate demised herein, and that Tenant, upon payment of Rent and performance of the covenants herein contained, shall peaceably and quietly have, hold, and enjoy the Premises during the full Term of this Lease and any extensions or renewals hereof. Tenant, its permitted subtenants and their employees, licensees and guests, shall have access to the Premises at all times, 24 hours per day, every day of the year. In order to confirm the above, Landlord agrees, upon the written request of Tenant, to obtain from any mortgagee or ground lessor an agreement, in recordable form, that upon any assumption of or succession to Landlord's interest affecting the Premises by such mortgagee or ground lessor, that such mortgagee or ground lessor will recognize this Lease and permit the continued quiet enjoyment of the Premises by Tenant hereunder subject to Tenant's performance of its obligations hereunder. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT Upon written request of Landlord, or any first mortgagee or first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or hereinafter to be made thereunder. However, as a condition precedent to signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor of Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect and Tenant's right to possession and quiet enjoyment be undisturbed for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of a lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, so long as said purchaser, transferee or lessor agrees not to disturb Tenant in its quiet enjoyment of the Premises while Tenant is not in default under the Lease, and Tenant shall recognize that party as Landlord under this Lease, and such party shall accept the Premises subject to this Lease. ESTOPPEL CERTIFICATE Each party shall from time to time, within twenty (20) days after being requested to do so by the other, execute, acknowledge and deliver to the requesting party an instrument certifying: (a) that this Lease is unmodified and in full force and effect (or, if there has been any modification thereof, that it is in full force and effect so modified, stating therein the nature of such modification); (b) the date which the Base Rent and any Additional Rent and other charges arising hereunder have been paid in advance, if any; (c) the amount of any credit due hereunder; (d) that Tenant has accepted possession of the Premises, and the Commencement Date; and (e) as to whether the signer of such certificate has knowledge that either party is then in default in the performance of any of its obligations hereunder (and, if so, specifying the nature of each such default). ALTERATIONS AND TRADE FIXTURES Following acceptance and occupancy of the Premises, Tenant shall not make any alterations, improvements, or additions to the Premises without Landlord's prior written approval of the plans and specifications, which approval shall not be unreasonably withheld or delayed, except that Tenant shall have the right, without Landlord's consent, to make non-structural alterations to the Premises costing less than $10 per square foot. Tenant shall give Landlord not less than fifteen (15) days prior written notice of any such alterations and shall otherwise comply with the terms and provisions of this Lease. CONDITION OF PREMISES UPON TERMINATION Upon the expiration or termination of this Lease, Tenant shall leave the Premises peaceably and quietly and in as good order and condition as the same were on the date the Term of this Lease commenced, or were thereafter placed in, reasonable wear and tear excepted. Tenant shall not be required to remove any improvements made to the Premises unless Landlord's consent thereto was conditioned in writing upon removal thereof or, if consent was not required, unless Landlord notified Tenant prior to the making of the improvement that removal would be required. Tenant shall, however, have the right to remove such improvements and any trade fixtures or equipment provided it shall repair any material damage to the Premises resulting therefrom. Any property left on the Premises after the expiration or termination of this Lease shall be deemed to have been abandoned and shall become the property of Landlord to dispose of as Landlord deems expedient. INSPECTION BY LANDLORD Landlord may, upon giving one (1) day prior written notice to Tenant (except for an emergency, in which event such prior notice to Tenant shall not be required), by its duly authorized agents, go upon and inspect the Premises and perform any work therein that may be necessary to comply with any laws, ordinance, rules, regulations, or requirements of any public authority, or as required by Tenant or the insurance company insuring the Building. Tenant shall have the right to designate certain areas as secured areas to which Landlord shall have no access (except in the case of emergency). Landlord shall use its best efforts to minimize interference with Tenant's business in the exercise of its rights pursuant to this Article 25. HAZARDOUS SUBSTANCES Landlord hereby represents to the best of its knowledge and agrees as follows: (a) (i) No dangerous, toxic or hazardous pollutants, contaminants, chemicals, wastes, materials or substances, as defined in or governed by the provisions of any federal, state or local law, statute, code, ordinance, regulation, requirement or rule relating thereto (hereinafter collectively call "Environmental Regulations"), and also including urea-formaldehyde, polychlorinated biphenyls, asbestos, asbestos-containing materials, nuclear fuel or waste, and petroleum products, or any other waste, material, substance, pollutant or contaminant which would subject the owner or Tenant of all or any part of the Project, Building, Premises or the land upon which the Building is located (for purposes of this paragraph, the Project, Building, Premises and land hereinafter collectively referred to as the "Property") to any damages, penalties or liabilities under any applicable Environmental Regulation (hereinafter collectively called "Hazardous Substances") are now or have ever been located, produced, treated, transported, incorporated, discharged, emitted, released, deposited or disposed of in, upon, under, or from the Property; (ii) no threat exists of a discharge, release or emission of a Hazardous Substance upon or from the Property into the environment; (iii) the Property has not ever been used as or for a mine, a landfill, a dump or other disposal facility, industrial or manufacturing purposes, or a gasoline service station; (iv) no underground storage tank is now located on the Property or has previously been located therein but has been removed therefrom; (v) no violation of any Environmental Regulation now exists or has ever existed in, upon, under, or from the Property, and no notice of any such violation or any alleged violation thereof has been issued or given by any governmental investigation or report involving the Property by any governmental entity or agency which is in any way related to Hazardous Substances; (vi) no person, party, or private or governmental agency or entity has given any notice of or asserted any claim, cause of action, penalty, cost or demand for payment or compensation, whether or not involving any injury or threatened injury to human health, the environmental or natural resources, resulting or allegedly resulting from any activity or event described in (i) above; (vii) there are not now, nor have there ever been, any actions, suits, proceedings or damage settlements relating in any way to Hazardous Substances, in, upon, or from the Property; (viii) the Property is not listed in the United States Environmental Protection Agency's National Priorities List of Hazardous Waste Sites or any other list of Hazardous Substance sites maintained by any federal, state or local governmental agency; and (ix) the Property is subject to no lien or claim for lien in favor of any governmental entity or agency as a result of any release or threatened release of any Hazardous Substance. (b) Landlord shall indemnify Tenant against, shall hold Tenant harmless from, and shall reimburse Tenant for, any and all claims, demands, judgments, penalties, liabilities, costs, damages and expenses, including court costs and attorneys' fees incurred by Tenant (prior to trial, at trial and on appeal) in any action against or involving Tenant, resulting from the incorrectness or untruthfulness of any warranty or representation set forth in subparagraph (a) hereof, or from the discovery of any Hazardous Substance hereafter deposited in, upon, under or over the Property by Landlord or its agents, employees or contractors or persons claiming by, through or under Landlord, it being the intent of Landlord and Tenant that Tenant shall have no liability or responsibility for damage or injury to human health, the environment or natural resources caused by, for abatement and/or clean-up of, or otherwise with respect to, Hazardous Substances by virtue of the interests of Tenant in any part of the Property created hereby, or as the result of Tenant exercising any of its rights or remedies with respect thereto hereunder, unless such Hazardous Substances are hereafter deposited in, upon, under or over the Property by Tenant or its agents, employees or contractors or persons claiming by, through or under Tenant. The foregoing representations, warranties and covenants of subparagraph (a) and of this subparagraph (b) shall be deemed continuing covenants, representations and warranties for the benefit of Tenant, and any successors and assigns of Tenant, and shall survive the expiration or termination of this Lease. EMF The Premises must be fully functional in regard to the use of modern office equipment including computer equipment. In the event any portion of the Premises is affect by electromagnetic field (exclusive of fields caused by Tenant) of an intensity that it can materially and adversely affect the use of electronic equipment and such field is not removed or shielded within 30 days of notice to Landlord, Tenant shall have the right to terminate Lease. INSTALLATION OF SATELLITE BUSINESS TERMINAL SYSTEM Tenant shall have the right to install a Satellite Business Terminal System and its components (hereinafter the "System") consisting of an outdoor electronics unit, an indoor electronics unit, an antenna, and IFL signal cable. Landlord shall have the right to reasonably approve the location and size of the System. All costs of installation, operation, maintenance and removal of the System shall be paid by Tenant, including the costs of repair for any damage to the Building caused by such installation, operation, maintenance or removal, except costs incurred by Landlord for pre- and/or post-installation inspections, or for any engineering services (such as drawings and structural certifications) performed by or for Landlord or Tenant due to work requested by Landlord which is beyond the work described in this Article 28 and/or beyond local code requirements. If such additional work expense is incurred by Tenant, Landlord agrees to reimburse Tenant the amount of the additional expense within fifteen (15) days after receipt of evidence of such additional expense. Upon the expiration or earlier termination of the Lease, or any extension or renewal thereof, or in the event Tenant desires to remove the System, Tenant shall remove the System and repair any portion of the Building which was altered or damaged in connection with the installation, operation, maintenance, or removal of the System. All costs of removal of the System shall be paid by Tenant including, without limitation, the costs of repair for any damage to the Building caused by such removal. Tenant hereby agrees to indemnify and hold Landlord harmless from any damage, loss, liability, or cost (including increased insurance premiums) resulting from the installation, operation, maintenance, or removal of such System, including without limitation any damage to the roof or any other part of the Building caused by the antenna portion of the System, unless such damage, loss, liability or cost is caused by the negligence or misconduct of Landlord or anyone acting on behalf of Landlord. Tenant shall at all times own the System and shall insure the System against hazard and for liability. Tenant shall keep the System and the Building free of mechanic's liens arising out of the installation thereof. RENEWAL OPTION Tenant shall have two (2) separate options to renew this Lease (respectively the "First Renewal Term" which shall be for 132 months and the "Second Renewal Term" which shall be for 120 months). Tenant will notify the Landlord of its intention to renew at least 180 days prior to the end of the initial Term of this Lease or the First Renewal Term, as the case might be. The rental rate for the First Renewal Term and for the Second Renewal Term shall be negotiated in good faith by the parties but in any event shall be limited to the increase in the Consumer Price Index for the relevant geographic area based on the commencement date of each expiring lease term. In the event the parties have not agreed on a rental rate for any such renewal term at least 60 days prior to the end of the then expiring term, the parties shall submit the issue of the rental rate to arbitration pursuant to the then existing rules of the American Arbitration Association on an expedited basis. In the event no determination has been made by the time of commencement of the renewal term, Tenant shall continue to pay the rent required by the terms of the expired term until such determination has been made. Upon such determination, any arrearage in rent shall be paid by Tenant within 10 days. SIGNAGE It is agreed that Tenant may install and maintain the following signage: (i) Its corporate name on the building directory; (ii) Its corporate name and/or logo on the exterior of the building, subject to the reasonable approval of the Landlord; (iii) Its corporate name and/or logo on a multi tenant monument sign; and (iv) Its corporate name and/or logo in the building lobby. The location and size of all signage shall be reasonably approved by Landlord and Tenant and will be subject to local zoning codes. Tenant will be responsible for all costs of installing and maintaining such signage. PARKING Parking shall be free and in common for the Building's tenants. No tenant shall have the right to occupy for its use or its customers' use more than five (5) parking spaces per one thousand (1,000) square feet of rented space. SECURITY/AFTER-HOURS BUILDING ACCESS Tenant will have access to the Premises at all times. Doors for client access will remain open at least during the hours of 8 a.m. - 9 p.m. Monday through Friday, and 8 a.m. - 5 p.m. Saturdays, customary holidays excepted. Landlord will provide Tenant with means satisfactory to Tenant, for client access before 8:00 a.m. each day, after 9:00 p.m. on weekdays and after 5:00 p.m. on Saturdays and on all holidays. Landlord may install an intercom system near the building's front door which is connected to the Premises, thus allowing Tenant's visitors to request admittance to the office during non-building hours. BROKERAGE Each party warrants that it has had no dealings with any real estate broker or agent in connection with the negotiation or execution of this Lease except Charles A. Ruhl, Jr. and/or Ruhl & Ruhl Commercial Company (the "Brokers"). Landlord agrees to pay any brokerage commission due to the Brokers in accordance with a separate agreement between Landlord and the Brokers. Landlord hereby agrees to indemnify and hold Tenant harmless from and against any and all costs, expenses and liabilities for commissions and other compensation claimed by any broker or agent in connection herewith. Tenant hereby agrees to indemnify and hold Landlord harmless from and against any and all costs, expenses and liabilities for commissions and other compensation claimed by any broker or agent other than the Brokers. AMERICANS WITH DISABILITIES ACT Landlord warrants and represents that the Building, Premises, building systems and common areas of the Building meet the requirements of the Americans With Disabilities Act (ADA) and will be kept in compliance with ADA. Tenant shall comply with ADA as it applies to Tenant's design and particular manner of use of the Premises after the date hereof. MISCELLANEOUS (a) It is agreed that the Tenant may place signs on the Building and upon the entrance to the Premises only with the prior written consent of the Landlord, which consent shall not be unreasonably withheld or delayed. (b) It is agreed that the Landlord may promulgate reasonable rules and regulations, enforced in a non-discriminatory manner, with regard to the conduct of the Tenant, other tenants and their invitees within the Building and its grounds provided that such rules and regulations shall not increase Tenant's monetary obligations under this Lease. In the event of any conflict between said rules and regulations and the terms and conditions of this Lease, the terms and conditions of this Lease shall prevail. (c) Wherever herein the prior written consent of the Landlord is required, the same shall not be unreasonably withheld or delayed. (d) Landlord and Tenant agree that all provisions of this Lease shall be binding upon Landlord's and Tenant's successors, personal representatives, heirs, executors, receivers, devisees, administrators, legatees, and assigns of the parties hereto. (e) The captions throughout this Lease are inserted as a matter of convenience only and in no way confine, limit, or describe the scope or intent of any Article of this Lease. (f) The consent of either party to any variation of the terms of this Lease, or the receipt by Landlord of Rent with the knowledge of any breach, shall not be deemed to be a waiver as to a subsequent breach of such term, nor shall any waiver be claimed as to any provision of this Lease unless the same be in writing, signed by the party to be charged with the waiver, or the party's authorized agent. (g) This Lease contains the entire agreement between the parties. (h) If any terms or provisions of this Lease or any application thereof shall be invalid or unenforceable, then the remaining terms and provisions of this Lease and any other application of such term or provisions shall not be affected thereby. (i) In the event it is necessary for either party to this Lease to retain an attorney to enforce any covenant, condition, or provision hereof, it is agreed that the prevailing party shall be entitled to recover, in addition to any damages proven, its reasonable attorney fees. RIDERS AND EXHIBITS The Riders and Exhibits (A-__) to this Lease, shall be deemed incorporated by reference and made a part of this Lease. OPTION TO PURCHASE (a) Throughout the term hereof, including any renewals, Tenant shall have the first right to purchase the Building and Property at a mutually agreeable price (such price to include real estate and personal property owned by Landlord and utilized in the operation of the Building and Property, including but not limited to equipment and furnishings) prior to any offering of the Building and Property for sale by Landlord. Landlord shall have no obligation to sell to Tenant until Landlord has determined to offer the Building and Property for sale. If Landlord has made such determination, it shall notify Tenant by written notice and Landlord and Tenant shall have twenty one (21) days to agree on a price. Once such price has been determined, Tenant shall purchase the Building and Property within sixty (60) days therefrom and Landlord shall convey good and marketable title to Tenant free and clear of liens and encumbrances (excepting tenant leases) and shall deliver to Tenant a Bill of Sale for all personal property. All other customary and ordinary requirements of such conveyance including proration of real estate and personal property taxes shall be determined and followed in accordance with the custom and practice then existing in Rock Island County, Illinois. At any time prior to the expiration of twenty one (21) days from Landlord's notice of its determination, Tenant may elect to purchase the Building and Property by written notice to Landlord. In the event Landlord and Tenant cannot agree on a price during such twenty one (21) day period, the right of Tenant to purchase such Building and Property pursuant to this sub-paragraph (a) shall expire. (b) In the event that Tenant has not purchased the Building and Property pursuant to sub-paragraph (a) above and in the event Landlord has received a Bona Fide Offer to purchase the Building and Property during the term hereof, including any renewals, Landlord shall give written notice to Tenant along with a true and correct copy of the Bona Fide Offer. Within twenty one (21) days therefrom, Tenant may purchase the Building and Property at the price and upon the same terms and conditions contained in the Bona Fide Offer by providing Landlord with written notice of Tenant's intent to so purchase. Landlord will not accept a Bona Fide Offer unless same is specifically conditioned upon those rights of Tenant contained in this sub-paragraph (b). "Bona Fide Offer" shall be an offer made in writing by a person or entity that is not related to or affiliated with Landlord and which offer Landlord intends to accept. Tenant's election not to exercise the rights of Tenant contained in this sub-paragraph (b) shall not waive Tenant's rights hereunder as to any further Bona Fide Offer. (c) Landlord represents that it is an Iowa Limited Liability Company owned by Charles Ruhl, Jr. and Kent Pilcher (Ruhl & Pilcher) and that this Lease and the Building and Property will be transferred to Velie-Plantation Holding Company, L.C. within six (6) months of the execution of this Lease. Within thirty (30) days of transfer, Tenant or its parent corporation shall have the right to acquire an ownership interest of twenty percent (20%) of such Limited Liability Company for the amount of Two Hundred Twenty Thousand Dollars ($220,000.00), subject to obtaining any required regulatory approval, by delivery of written notice and payment of the purchase price within thirty (30) days from such notice. FURTHER OBLIGATIONS OF LANDLORD Landlord acknowledges that certain agreed upon improvements to the Premises, Building and Property have not been completed. Landlord agrees that it will undertake reasonable efforts to perform the following in an acceptable and suitable manner and at its sole cost: 1. Install a lobby chandelier by September 30, 1998. 2. Construct a garden area in the south parking lot as soon as is reasonable. 3. Commence construction of a monument sign near the Seventh Street entrance by September 30, 1998. 4. Restore fireplace in library (Board Room) to working order if feasible and allowable under the applicable building codes by December 31, 1998. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease or caused this Lease to be executed by their duly authorized representatives as of the date set forth above. AGREED AND ACCEPTED AGREED AND ACCEPTED LANDLORD TENANT KAIZEN COMPANY OF AMERICA, L.C. QUAD CITY BANK & TRUST COMPANY By: By: Title: Title: Name: Name: STATE OF ___________________ ) COUNTY OF _________________ ) I, ___________________________________ , a Notary Public for the County aforesaid in the State of _______ do certify that _____________________________________________ whose name, as ____________________________ of ______________________ is signed to the foregoing Lease. Given under my hand and official seal this ______ day of ________________ , 19___. My term of office expires the ____ day of ______________, 19____. Notary Public STATE OF ___________________ ) COUNTY OF _________________ ) I, _______________________________________ , a Notary Public for the County aforesaid in the State of , do certify that ________________________________ whose name, as ________________________________ of ______________________ is signed to the foregoing Lease. Given under my hand and official seal this ______ day of ____________ , 19___. My term of office expires the ____ day of ______________, 19___. Notary Public EXHIBIT "A" Premises EXHIBIT "B" Legal Description EX-10 4 EMPLOYMENT AGREEMENT BETWEEN QUAD CITY BANCARD,INC. AND JOHN W. SCHRICKER THIS EMPLOYMENT AGREEMENT (this "Agreement") dated effective as of the 1st day of July, 1997, is by and between QUAD CITY BANCARD, INC. (the "Employer") and JOHN W. SCHRICKER (the "Employee"), and joined in for purposes of Section 13 by QUAD CITY HOLDINGS, INC., a Delaware corporation (the "Corporation"). WITNESSETH: 1. Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. 2. Duties. The Employee agrees to provide all services necessary, incidental or convenient as the President and Chief Executive Officer ("CEO") of the Employer. The Employer shall designate the location or locations for the performance of the Employee's services. The Employer shall furnish or make available to the Employee such equipment, office space and other facilities and services as shall be adequate and necessary for the performance of his duties. 3. Term. The term of this Agreement shall commence on July 1, 1997 (the "Effective Date"), and shall continue for a period of three (3) years. This Agreement shall thereafter automatically extend for successive one (1) year terms, unless terminated by either party effective as of the last day of the then current term by written notice to that effect delivered to the other not less than ninety (90) days prior to the last day of the then current term. 4. Compensation. (a) The annual base compensation of the Employee shall be Fifty Thousand Dollars ($50,000). Said compensation shall be payable bi-weekly, in equal installments beginning July 1, 1997. (b) The Employee shall be paid a monthly incentive bonus based upon the Employer's monthly financial performance, all in accordance with the terms of this section (the "Bonus"). The Bonus shall be equal to a graduated percentage of the Employer's net income, plus an amount equal to the annual rate of three percent (3%) of the merchants' holds account for a given calendar month calculated in accordance with the Employer's past practices, except that income shall not be reduced by any accruals for taxes or the Bonus (the "Monthly Income"). The Bonus shall be paid at the earliest normal payroll date in the next month, provided, however, that if the Bonus cannot then be paid because the Employer's net income for the previous month has not yet been calculated, then a good faith estimate of the Bonus shall be made and paid to Employee at such earliest normal payroll date and appropriate adjustments shall be made as between the Employee and the Employer at the next regular payroll date when the Bonus has been properly determined. The percentage levels used to compute the Bonus shall decrease as set forth below as the aggregate Monthly Income for the Employer's current fiscal year increases. Notwithstanding anything contained herein to the contrary, if the Monthly Income for any calendar month is a negative number (a "Monthly Loss"), then no Bonus shall be paid for such month and the calculation of the Monthly Income for all subsequent calendar months (including a subsequent calendar month in the Employer's succeeding fiscal year) shall, until such Monthly Loss has been completely netted against any future income, be taken into account in calculating the Monthly Income. The percentages used to calculate the Bonus in any given calendar month are as follows: Percentage Applied to Monthly Aggregate Monthly Income Income to Calculate Bonus for Current Fiscal Year 12.0% $0 - $200,000 10.5% $200,001 - $499,000 9% $500,000 - $999,999 7.5% $1,000,000 and over Example 1: In September, 1997, the Employer has Monthly Income of $50,000, and through the end of September, 1997, for the current fiscal year, the Employer's aggregate Monthly Income is $240,000. The Bonus for September, 1997, would be equal to the sum of: (i) 12% of $10,000, plus (ii) 10.5% of $40,000, or a total of $5,400. Example 2: In October, 1997, the Employer has a Monthly Loss of $50,000 and therefore no Bonus is payable for October, 1997. Through the end of October, 1997, the Employer's aggregate Monthly Income (after taking into account the loss for October) for the current fiscal year is $190,000. In November, 1997, the Employer has Monthly Income, before reduction for the prior Monthly Loss, of $80,000. For purposes of calculating the Monthly Income for November, 1997, the cumulative Monthly Loss reduces the unadjusted Monthly Income to an adjusted Monthly Income of $30,000. The Bonus for November, 1997, would be equal to 10.5 % of $30,000, or a total of $3,150. 5. Benefits. The Employer shall provide the following benefits to the Employee: (a) 70% of the cost of family medical insurance; (b) Reimbursement of reasonable expenses advanced by the Employee in connection with the performance of his duties hereunder, including, but not limited to, one (1) paid week of continuing education; (c) The Employee will initially be entitled to twenty (20) personal days which may be increased in accordance with the Employer's established policies and practices; (d) Long-term and short-term disability coverage equal to 60 % of compensation; (e) A 401(k)/profit sharing plan; (f) Stock options as approved by the Employer; and (g) Term life insurance of two (2) times annual compensation. The Employee will be allowed to purchase additional life insurance of at least two (2) times annual compensation through such plan. The benefits listed above in this Section are of the same type and scope as the benefits generally made available to other employees of the subsidiaries of the Corporation at this time. The Employer and the Employee each acknowledge that the benefits described in this Section 5, and the terms upon which they are offered by the Employer to the Employee, shall automatically be revised to reflect any changes made by the Corporation in such benefits, or the terms upon which they are offered, to other employees of the subsidiaries of the Corporation. 6. Time Requirement. The Employee shall devote full time to his duties under this Agreement. The Employee shall be allowed to serve on outside boards of directors subject to the consent of the Employer and the Corporation. Notwithstanding the foregoing, the Corporation and the Employer expressly consent to the Employee serving as a member of Nobel Electronic Transfer, L.L.C., an Iowa limited liability company ("Nobel"), and devoting a portion of his business time to the affairs of Nobel, provided, that none of the foregoing relationships with or service to Nobel has a material adverse effect on the performance of his other duties under this Agreement to the Employer, and provided further, that any compensation paid by Nobel for services rendered by the Employee shall be paid to the Employer. Nothing herein shall require that membership distributions to Employee from Nobel, as distinguished from compensation paid to Employee from Nobel for services rendered, be paid to Employer. Further, upon termination of this Agreement, nothing herein shall require that any compensation paid to Employee from Nobel be paid to Employer. 7. Termination upon Disability or Death. In the event that illness, incapacity, injury or death of the Employee occurs during the employment term, payments based upon the Employee's then current annual base compensation shall continue thereafter through the last day of the six (6) month period beginning on the date of such illness, incapacity, injury or death. Payments made in the event of the Employee's illness, incapacity or injury will be reduced by any amounts received under the Employer's long-term disability program. In the event of the Employee's death during the term of this Agreement, such amounts shall be payable to the persons designated in writing by the Employee, or if none, to his estate. 8. Confidentiality and Loyalty. The Employee acknowledges that during the course of his employment he has produced and will produce and have access to material, records, data, trade secrets and information not generally available to the public (collectively, "Confidential Information") regarding the Employer and any subsidiaries and affiliates. Accordingly, during and subsequent to termination of this Agreement, the Employee shall hold in confidence and not directly or indirectly disclose, use, copy or make lists of any such Confidential Information, except to the extent that such information is or thereafter becomes lawfully available from public sources, or such disclosure is authorized in writing by the Employer, required by a law or any competent administrative agency or judicial authority, or otherwise as reasonably necessary or appropriate in connection with performance by the Employee of his duties hereunder. All records, files, documents and other materials or copies thereof relating to the Employer's business which the Employee shall prepare or use, shall be and remain the sole property of the Employer, shall not be removed from the Employer's premises without its written consent, and shall be promptly returned to the Employer upon termination of the Employee's employment hereunder. The Employee agrees to abide by the Employer's reasonable policies, as in effect from time to time, respecting avoidance of interests conflicting with those of the Employer. The parties acknowledge that the Employee has substantial experience and background in the credit card business, and nothing herein shall act to treat or consider that background and experience as "Confidential Information" within the meaning of this Agreement. 9. Non-Competition. (a) Restrictive Covenant. The Employer and the Employee have jointly reviewed the operations of the Employer and have agreed that the primary service area of the Employer's credit card processing extends to an area encompassing a two hundred (200) mile radius of the Employer's headquarters in Moline, Illinois (the "Non-Compete Area"). Therefore, as an essential ingredient of and in consideration of this Agreement and the payment of the amounts described in Sections 4 and 5, the Employee hereby agrees that, except with the express prior written consent of the Employer, and except as otherwise provided in Section 10, during the term of this Agreement and for a period of one (1) year after the termination of the Employee's employment with the Employer (the "Restrictive Period"), he will not directly or indirectly compete with the business of the Employer in the following particulars: (i)directly or indirectly own, manage, operate, control, finance, or directly or indirectly serve as an employee, officer or director of, or consultant to, any person, firm, partnership, corporation, trust or other entity which owns or operates, a business similar to that conducted by the Employer (a "Competing Institution") whose primary service area includes, or whose principal place of business is situated in the Non-Compete Area; (ii) solicit or induce, or attempt to solicit or induce, any employee or agent of the Employer to terminate employment with the Employer, or to establish a relationship with a Competing Institution; or (iii) solicit or induce, or attempt to solicit or induce, any client or account of the Employer, including, but not limited to, cardholders, merchants, Independent Sales Organizations or agent banks, to terminate its relationship with the Employer or to establish a relationship with a Competing Institution. If the Employee violates the Restrictive Covenant and the Employer brings legal action for injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed to have the duration specified in this Section computed from the date the relief is granted, but reduced by the time between the period when the Restrictive Period began to run and the date of the first violation of the Restrictive Covenant by the Employee. Notwithstanding anything contained herein to the contrary, the foregoing Restrictive Covenant shall not prohibit the Employee from owning directly or indirectly capital stock or similar securities which are listed on a securities exchange or quoted on the Nasdaq which do not represent more than one percent (1%) of the outstanding capital stock of any Competing Institution. (b) Remedies for Breach of Restrictive Covenant. The Employee acknowledges that the restrictions contained in this Section and Section 8 are reasonable and necessary for the protection of the legitimate business interests of the Employer, that any violation of these restrictions would cause substantial injury to the Employer and such interests, that the Employer would not have entered into this Agreement with the Employee without receiving the additional consideration offered by the Employee in binding himself to these restrictions and that such restrictions were a material inducement to the Employer to enter into this Agreement. In the event of any violation or threatened violation of these restrictions, the Employer, in addition to and not in limitation of, any other rights, remedies or damages available to the Employer under this Agreement or otherwise at law or in equity, shall be entitled to preliminary and permanent injunctive relief to prevent or restrain any such violation by the Employee and any and all persons directly or indirectly acting for or with him, as the case may be. 10. Severance. (a) If the Employee is terminated without "Cause" (as defined in Section 11), including any notice by Employer to prevent automatic extension of the term of the Agreement under Section 3 hereof, a severance payment will be made equal to six (6) months of compensation (as defined in Section 14(e) below) and the Restrictive Period described in Section 9 shall extend for a period of only six (6) months after the termination of the Employee's employment with the Employer. Such payment upon a termination without cause shall be made in a lump sum within fifteen (15) days of termination or in equal installments over the six (6) month period, at the Employee's option. If the Employee chooses to receive such payment in a lump sum, the amount due shall be discounted to its present value using the rate then applicable to securities with a term of two (2) years issued by the United States Treasury. If a Change of Control (as defined below) of the ownership of the Employer occurs and the Employee elects within six months thereafter to terminate his employment, a severance payment will be made within fifteen (15) days of termination equal to two (2) years of compensation. Such payment after a Change of Control shall be made in a lump sum within fifteen (15) days of termination or in equal installments over the two (2) year period, at the Employee's option. If the Employee chooses to receive any payment required by this Section in a lump sum, the amount due shall be discounted to its present value using the rate then applicable to securities with a term of two years issued by the United States Treasury. (b) For purposes of this Section, the term "Change in Control" shall mean the following: (1) The consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of thirty-three percent (33%) or more of the combined voting power of the then outstanding voting securities of the Employer or the Corporation; or (2) The individuals who, as of the date hereof, are members of the board of directors of the Corporation (the "Board") cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the stockholders, of any new director was approved by a vote of a majority of the Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Board; or (3) Approval by stockholders of either the Employer or Corporation: (A) a merger or consolidation if the stockholders, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the entity resulting from such merger or consolidation, in substantially the same proportion as their ownership of the combined voting power of the voting securities outstanding immediately before such merger or consolidation; or (B) a complete liquidation or dissolution or an agreement for the sale or other disposition of all or substantially all of the assets of the entity. (c) Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because thirty-three percent (33%) or more of the combined voting power of the then outstanding securities is acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders in the same proportion as their ownership of stock immediately prior to such acquisition. (d) If the Employer is not in compliance with any minimum capital requirements applicable to it or if the payments required under this Section would cause the Employer's capital to be reduced below any such minimum capital requirements, such payments shall be deferred until such time as the Employer is in capital compliance. Any amounts payable to the Employee that are deferred as a result of this paragraph (d) shall, when paid, be paid to the Employee with interest at the same rate then applicable to securities with a term of two years issued by the United States Treasury. (e) Any severance payments required to be made by the Employer to the Employee pursuant to the terms of this Agreement shall not be reduced in the event the Employee obtains other employment following the termination of employment by the Employer. 11. Termination for Cause. This Agreement may be terminated for cause as hereinafter defined. "Cause" for termination will exist if: (a) the Employee dies or suffers a disability which leaves him unable as a result of physical or mental incapacity, substantially to perform his duties hereunder for a period of six (6) consecutive months; (b) the Employee engages in one or more unsafe and unsound business practices or material violations of a law or regulation applicable to the Employer, any repeated violations of a policy of the Employer after being warned in writing by the Board not to violate such policy or any single violation of a policy of the Employer if such violation materially and adversely affects the business or affairs of the Employer or a direction or order of the Board; (c) the Employee engages in a breach of fiduciary duty or act of dishonesty involving the affairs of the Employer; (d) the Employee commits a material breach of his obligations under this Agreement; or (e) the willful or negligent failure of the Employee to perform his duties hereunder, or with the degree of skill, care or competence which the Board should reasonably expect given the Employee's age, experience and compensation level, in either case which materially and adversely affects the business or affairs of the Employer. The Employee shall be entitled to at least 30 days' prior written notice of the Employer's intention to terminate his employment for any cause (except the Employee's death) specifying the grounds for such termination, a reasonable opportunity to cure any conduct or act, if curable, alleged as grounds for such termination, and a reasonable opportunity to present to the Board his position regarding any dispute relating to the existence of such cause. In the event of the termination of the Employee by the Employer for cause, the Employer shall have no further obligations under the terms of this Agreement. 12. Indemnification. (a) The Employer shall provide the Employee (including his heirs, personal representatives, executors and administrators) for the term of this Agreement with coverage under a standard directors' and officers' liability insurance policy at its expense. (b) In addition to the insurance coverage provided in this Section, the Employer shall hold harmless and indemnify the Employee (and his heirs, executors and administrators) to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been an officer of the Employer (whether or not he continues to be an officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. (c) In the event the Employee becomes a party, or is threatened to be made a party, to any action, suit or proceeding for which the Employer has agreed to provide insurance coverage or indemnification under this Section, the Employer shall, to the full extent permitted under applicable law, advance all expenses (including reasonable attorneys' fees, judgments, fines and amounts paid in settlement (collectively "Expenses")) incurred by the Employee in connection with the investigation, defense, settlement or appeal of any threatened, pending or completed action, suit or proceeding, subject to receipt by the Employer of a written undertaking from the Employee: (1) to reimburse the Employer for all Expenses actually paid by the Employer to or on behalf of the Employee in the event it shall be ultimately determined that the Employee is not entitled to indemnification by the Employer for such Expenses; and (2) to assign to the Employer all rights of the Employee to indemnification, under any policy of directors' and officers' liability insurance or otherwise, to the extent of the amount of Expenses actually paid by the Employer to or on behalf of the Employee. 13. Guarantee. The Corporation hereby guarantees the performance by the Employer of the Employer's duties and obligations under this Agreement, and Employee acknowledges the Corporation's right to enforce the Employer's rights and remedies under this Agreement. 14. General Provisions. (a) This Agreement supersedes all prior agreements and understandings between the parties relating to the subject matter of this Agreement. It binds and benefits the parties and their successors in interest, heirs, beneficiaries, legal representatives and assigns. (b) This Agreement is governed by and construed in accordance with the laws of the State of Iowa. (c) No amendment or modification of this Agreement is effective unless made in writing and signed by each party. (d) This Agreement may be signed in several counterparts, each of which will be an original and all of which will constitute one agreement. (e) When used in this Agreement, the term "compensation" shall mean the average of the cash compensation, including any Bonus, paid during the preceding twelve (12) months to the Employee by the Employer pursuant to the terms of this Agreement; provided however, for purposes of computing any severance payment to Employee upon a Change of Control arising from the sale of the assets, rather than the stock, of Employer, any extraordinary compensation paid to Employee as a result of such sale shall not be included in the computation of the severance payment. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above set forth. QUAD CITY BANCARD, INC. QUAD CITY HOLDINGS, INC. By: /s/ Douglas M. Hultquist By: /s/ Michael A. Bauer -------------------------------- -------------------------------- Douglas M. Hultquist Michael A. Bauer Secretary-Treasurer Chairman of the Board By: /s/ Michael A. Bauer By: /s/ Douglas M. Hultquist --------------------------------- -------------------------------- Michael A. Bauer Douglas M. Hultquist Chairman of the Board President /s/ John W. Schricker - ------------------------------------- JOHN W. SCHRICKER EX-10 5 LOAN AGREEMENT The LOAN AGREEMENT (the "Agreement"), dated as of May 15, 1996, is entered into between QUAD CITY HOLDINGS, INC., a Delaware corporation ("Holdings") and QUAD CITY BANCARD, INC., a Delaware corporation ("Bancard") (Holdings and Bancard are collectively referred to herein individually as a "Borrower" and collectively as the "Borrowers"), and LASALLE NATIONAL BANK, a national banking association (the "Bank"). RECITALS: WHEREAS, Holdings desires to borrow from the Bank, on a revolving credit basis, an amount not to exceed TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000); and WHEREAS, Bancard desires the Bank to make available a letter of credit facility in an amount not to exceed ONE MILLION DOLLARS ($1,000,000); and WHEREAS, Bank is willing to establish (i) a revolving credit facility in favor of Holdings in an amount not to exceed up to TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000); and (ii) a letter of credit facility in favor of Bancard in an amount not to exceed ONE MILLION DOLLARS ($1,000,000), in accordance with the terms, subject to the conditions and in reliance on the representations, warranties and covenants set forth herein and in the other documents and instruments entered into or delivered in connection with or relating to the loan contemplated in this Agreement; and WHEREAS, in consideration of the establishment of the facilities set forth above, Holdings has agreed to pledge and grant to the Bank a security interest in 100% of the issued and outstanding stock of Quad City Bank and Trust (the "Subsidiary"); and NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT: 1. Commitments of the Bank. (a) The Bank agrees to extend a loan (the "Loan") to Holdings in a principal amount not to exceed TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000), evidenced by the Note (as such term is defined below); and (b) The Bank agrees to establish a letter of credit facility (the "L/C Facility") to Bancard in a principal amount not to exceed ONE MILLION DOLLARS ($1,000,000). The Loan and the L/C Facility shall be secured by the Pledge Agreement (as such term is defined below) in accordance with terms and subject to the conditions set forth in this Agreement, the Note and the Pledge Agreement. 2. Conditions of Borrowing. Notwithstanding any other provision of this Agreement, the Bank shall not be required to extend the Loan: (a) if, since the date of this Agreement and up to the agreed upon date of the Loan, there has occurred, in the Bank's sole and complete discretion, a material adverse change in the financial condition or affairs of the Borrowers or the Subsidiary; (b) if any Default (as such term is defined below) has occurred or any event which, with the giving of notice or lapse of time, or both, would constitute such a Default; (c) if any litigation or governmental proceeding has been instituted or threatened against the Borrowers or the Subsidiary or any of their respective officers or shareholders which, in the sole discretion of the Bank, will adversely affect the financial condition or operations of the Borrowers or the Subsidiary; (d) if all necessary or appropriate actions and proceedings shall not have been taken in connection with, or relating to the transactions contemplated hereby and all documents incident thereto shall not have been completed and tendered for delivery, in substance and form satisfactory to the Bank including, but not limited to (i); (e) that certain Pledge and Security Agreement to be delivered by Holdings (the "Pledge Agreement") dated of even date herewith for the benefit of Bank, together with all of the Pledged Security (as such term is defined in the Pledge Agreement); and (f) a legal opinion from the Borrowers' counsel. (g) if the Bank shall not have received in substance and form satisfactory to the Bank, all certificates, affidavits, schedules, resolutions, opinions, notes, and/or other documents which are provided for hereunder, or which it may reasonably request. 3. Note Evidencing Borrowing. (i) Revolving Note. The Loan shall be evidenced by a promissory note (the "Note") executed by Holdings in the principal amount of $2,500,000 and shall be in the form set forth in Exhibit A hereto. Without in any way limiting the term of the Note: (a) Holdings shall pay interest on amounts outstanding under the Note as provided herein. Interest shall be payable quarterly, in arrears, commencing July 1, 1996 and continuing on the first day of each October, January, April and July thereafter, with a final payment of all outstanding amounts due under the Note, including, but not limited to principal, interest and any amounts owing under Subsection 11(k) of the Agreement, if not sooner paid, on July 1, 1998. The amounts outstanding from time to time shall bear interest calculated on the actual number of days elapsed on the basis of a 360 day year, at a rate equal to the Prime Rate. For purposes of this Agreement, the term "Prime Rate" shall mean the floating prime rate in effect from time to time as set by the Bank, and referred to by the Bank as its Prime Rate. Holdings acknowledges that the Prime Rate is not necessarily the Bank's lowest or most favorable rate of interest at any one time. The effective date of any change in the Prime Rate shall for purposes hereof be the date the rate change is publicly announced by the Bank. (b) Any amount of principal or interest on the Note which is not paid when due, whether at stated maturity, by acceleration or otherwise shall bear interest payable on demand at an interest rate equal at all times to two percent (2%) above the Prime Rate. (c) Prepayments of principal amounts outstanding from time to time under the Note are permitted at any time without penalty or premium. (d) If any payment to be made by Holdings hereunder shall become due on a Saturday, Sunday or Bank holiday under the laws of the State of Illinois, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing any interest in respect of such payment. (ii) Letters of Credit. The Bank shall, at Bancard's request, issue letters of credit (the "Letters of Credit") pursuant to the L/C Facility. The Letter of Credit Obligations shall not exceed, in the aggregate, $1,000,000. (a) "Letter of Credit Obligations" shall mean an amount equal to the aggregate of the original face amounts of all Letters of Credit minus the sum of (i) the amount of any reductions in the original face amount of any Letter of Credit which did not result from a draw thereunder, (ii) the amount of any payments made by the Bank with respect to any draws made under a Letter of Credit for which Bancard has reimbursed the Bank, and (iii) the portion of any issued but expired Letter of Credit which has not been drawn by the beneficiary thereunder. For purposes of determining the outstanding Letter of Credit Obligations at any time, the Bank's acceptance of a draft drawn on the Bank pursuant to a Letter of Credit shall constitute a draw on the applicable Letter of Credit at the time of such acceptance. (b) Each Letter of Credit shall be issued by the Bank upon the execution by Bancard of the Bank's standard application therefor and the payment by Bancard of the Bank's fee of 1% of the face amount of each Letter of Credit. The principal amount of any payments made by the Bank with respect to any draws made under a Letter of Credit for which Bancard has not reimbursed the Bank upon the Bank's demand therefor, shall be immediately converted to a Prime Loan upon notice from the Bank to Bancard. 5. Representations and Warranties. To induce the Bank to make the Loan provided for herein, the Borrowers represent and warrant as follows: (a) Each of Holdings and Bancard: (i) is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware; (ii) is duly qualified as a foreign corporation and in good standing in all states in which it is doing business except where the failure to so qualify would not have a material adverse effect on such Borrower or its business; and (iii) has all requisite power and authority, corporate or otherwise, to own, operate and lease its properties and to carry on its business as now being conducted. The Subsidiary is an Iowa banking corporation, and has all requisite power and authority, corporate or otherwise, to own, operate and lease its property and to carry on its business as now being conducted. The Borrowers and the Subsidiary have made payment of all franchise and similar taxes in the states of their respective incorporation and in all of the respective jurisdictions in which they are qualified, and so far as such taxes are due and payable at the date of this Agreement, except for any such taxes the validity of which is being contested in good faith and for which proper reserves have been set aside on the books of the Borrowers or the Subsidiary, as the case may be. (b) Holdings is the owner of 100% of the issued and outstanding capital stock of the Subsidiary. (c) The Subsidiary Shares have been duly authorized, legally and validly issued, fully paid and nonassessable, and are owned by Holdings free and clear of all pledges, liens, security interest, charges or encumbrances, except, upon consummation of the transactions contemplated herein, for the security interest granted by Holdings to the Bank. There are, as of the date hereof, no outstanding options, rights or warrants obligating Holdings or the Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of the capital stock of the Subsidiary or obligating Holdings or the Subsidiary to grant, extend or enter into any such agreement or commitment. (d) The financial statements of: (i) the Borrowers, all of which have heretofore been furnished to the Bank, have been prepared in accordance with generally accepted accounting principles consistently applied ("GAAP") and maintained by the Borrowers throughout the periods involved, and fairly present the financial condition of the Borrowers individually and on a consolidated basis at such dates specified therein and the results of its operations for the periods then ended; and (ii) the Subsidiary, all of which have heretofore been furnished to the Bank, to the best knowledge of the Borrowers have been prepared in accordance with GAAP and maintained by the Subsidiary throughout the periods involved, and fairly present the financial condition of the Subsidiary at such dates specified therein and the results of its operation for the periods then entered. (e) To the best knowledge of the Borrowers, since the latest date of the financial statements referred to in Section 5(d) above, there have been no material changes in the assets, liabilities, or condition, financial or otherwise, of the Borrowers or the Subsidiary other than changes arising from transactions in the ordinary course of business, and none of such changes has been materially adverse, whether in the ordinary course of business or otherwise; to the best knowledge of the Borrowers, neither the business nor the properties of the Borrowers or the Subsidiary have been materially and adversely affected in any way, including, without limitation, as a result of any fire, explosion, accident, strike, lockout, labor disputes, food, drought, embargo, imposition of governmental restrictions, confiscation by a governmental agency, or acts of God. (f) There are no actions, suits, proceedings or written agreements pending, or to the best of the knowledge of the Borrowers threatened or proposed, against the Borrowers or, to the best knowledge of the Borrowers, the Subsidiary at law or in equity or before or by any federal, state, municipal, or other governmental department, commission, board, or other administrative agency, domestic or foreign, of a material nature. Neither the Borrowers nor, to the best knowledge of the Borrowers, the Subsidiary is in default with respect to any order, writ, injunction, or decree of, or any written agreement with, any court, commission, board or agency, domestic or foreign. (g) all tax returns and reports of the Borrowers and, to the best knowledge of the Borrowers, the Subsidiary, required by law to be filed have been duly filed, and all taxes, assessments, fees and other governmental charges upon the Borrowers and the Subsidiary or upon any of their properties or assets which are due and payable have been paid, except for such taxes, assessments, fees or charges the validity of which is being contested in good faith and for which proper reserves have set aside on the books of the Borrowers or the Subsidiary, as the case may be, and the Borrowers know of no additional assessment of a material nature against the Borrowers or the Subsidiary for taxes, or except as disclosed on the financial statements referred to in Section 5(d) above, of any basis for any such additional assessment. (h) Holdings's primary business is that of a bank holding company, and Bancard's primary business is that of a merchant card processor and all necessary regulatory approvals have been obtained for each of them to conduct their respective businesses. (i) The deposit accounts of the Subsidiary are insured by the Federal Deposit Insurance Corporation ("FDIC"). (j) None of the Pledged Security constitutes margin stock, as defined in Regulation U of the Board of Governors of the Federal Reserve System ("FRS"). The foregoing representations and warranties shall survive the making of this Agreement, and execution and delivery of the Note and the Pledge Agreement, and shall be deemed to be continuing representations and warranties until such time as the Borrowers have satisfied all of its obligations to the Bank, including, but not limited to the obligation to pay in full all principal, interest and other amounts in accordance with the terms of this Agreement or the Note. 6. Negative Covenants The Borrowers agree that until the Borrowers satisfy all of their obligations to the Bank, including, but not limited to their obligations to pay in full all principal, interest and other amounts owing in accordance with the terms of this Agreement or the Note, the Borrowers shall not themselves, nor shall Borrowers cause, permit or allow the Subsidiary to: (a) create, assume, incur, have outstanding, or in any manner become liable in respect of any indebtedness for borrowed money, except in the case of Borrowers, secured indebtedness under Section 6(b)(vi), and, in the case of the Subsidiary, indebtedness incurred in the ordinary course of the business of banking and in accordance with applicable laws and regulations and safe and sound banking practices. For purposes of this Agreement, the phrase "indebtedness" shall mean and include: (i) all items arising from the borrowing of money, which according to generally accepted accounting principles now in effect, would be included in determining total liabilities as shown on the balance sheet; (ii) all indebtedness secured by any lien in property owned by the Borrowers whether or not such indebtedness shall have been assumed; (iii) all guarantees and similar contingent liabilities in respect to indebtedness of others; and (iv) all other interest-bearing obligations evidencing indebtedness in others; (b) create, assume, incur, suffer or permit to exist any mortgage, pledge, deed of trust, encumbrance (including the lien or retained security title of a conditional vendor) security interest, assignment, lien or charge of any kind or character upon or with respect to any of their properties whether owned at the date hereof or hereafter acquired, or assigned or otherwise convey any right to receive income excepting only: (i) liens for taxes, assessments or other governmental charges for the then current year or which are not yet due or delinquent; (ii) liens for taxes, assessments or other governmental charges already due, but the validity of which is being contested at the time in good faith in such a manner as not to make the property forfeitable; (iii) liens and charges incidental to current operation which are not due or delinquent; (iv) liens for workmen's compensation awards not due or delinquent; (v) pledges or deposits to secure obligations under workmen's compensation laws or similar legislation; (vi) purchase money mortgages or other liens on real property including those incurred for the construction of a banking facility, and bank furniture and fixtures acquired or held in the ordinary course of business to secure the purchase price of such property or to secure the indebtedness incurred solely for the purpose of financing the acquisition, construction or improvement of any such property to be subject to such mortgages or other liens, or mortgages or other liens existing on any such property at the time of acquisition, or extensions, renewals, or replacements of any of the foregoing for the same or a lesser amount, provided that no such mortgage or other liens shall extend to or cover any property other than the property being acquired, constructed or improved, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the mortgage or lien being extended, renewed or replaced, and provided further that no such mortgage or lien shall exceed 75% of the price of acquisition, construction or improvement at the time of acquisition, construction or improvement, and provided, further that the aggregate principal amount of consolidated indebtedness at any one time outstanding and secured by mortgages, liens, conditional sale agreements and other security interests permitted by this clause (vi) shall not exceed 10% of the consolidated capital of the Borrowers or the Subsidiary, as the case may be; (vii) liens existing on the date hereof as shown on their financial statements; and (viii) in the case of the Subsidiary, liens incurred in the ordinary course of the business of banking and in accordance with applicable laws and regulations and safe and sound banking practices; (c) dispose by sale, assignment, lease or otherwise property or assets now owned or hereafter acquired, outside the ordinary course of business in excess of 10% of their consolidated assets in any fiscal year; (d) merge into or consolidate with or into any other person, firm or corporation; (e) make any loans or advances whether secured or unsecured to any person, firm or corporation, other than loans or advances made by the Subsidiary in the ordinary course of its banking business and in accordance with applicable laws and regulations and safe and sound banking practices, in an amount not to exceed 25% of the consolidated capital of Holdings at any time; (f) engage in any business or activity not permitted by all applicable laws and regulations, including without limitation, the Bank Holding Company Act of 1954, the Illinois Banking Act, the Federal Deposit Insurance Act and any regulations promulgated thereunder; (g) make any loan or advance secured by the capital stock of another bank or depository institution (except for loans made in the ordinary course of business), or acquire the capital stock, assets or obligations of or any interest in another bank or depository institution, without prior written approval of the Bank; (h) directly or indirectly create, assume, incur, suffer or permit to exist any pledge, encumbrance, security interest, assignment, lien or charge of any kind or character on the Subsidiary Shares or any other stock owned by the Borrowers; (j) sell, transfer, issue, reissue, exchange or grant any option with respect to the Subsidiary Shares; (k) redeem any of its capital stock, declare a stock dividend or split or otherwise change the capital structure of Borrowers or the Subsidiary, without the prior consent of the Bank; (l) breach or fail to perform or observe any of the terms and conditions of the Note, the Pledge Agreement or any other document or agreement entered into or delivered in connection with, or relating to, the Loan; or (m) engage in any unsafe or unsound banking practices. 7. Affirmative Covenants. The Borrowers agree that until the Borrowers satisfy all of their obligations to the Bank, including, but not limited to their obligations to pay in full all principal, interest and other amounts in accordance with the terms of thise Agreement, the Note and the Pledge Agreement, the Borrowers shall (except for compliance with subsections (c), (d), (e), (f), (g) and (h) hereof, which shall be the sole duty of Holdings): (a) furnish and deliver to the Bank: (i) as soon as practicable, and in no event later than forty-five (45) days after the end of each of the first three calendar quarterly periods of the Borrowers and the Subsidiary, a copy of: (1) the balance sheet, profit and loss statement, surplus statement and any supporting schedules prepared in accordance with generally accepted accounting principles consistently applied and signed by the respective presidents and chief financial officers of the Borrowers and the Subsidiary; and (2) all financial statements, including, but not limited to, all call reports, filed with any state or federal bank regulatory authority; (ii) as soon as practicable, and in no event later than one hundred twenty (120) days after the end of each calendar year, a copy of: (1) the consolidated balance sheets as of the end of such year and of the consolidated profit and loss and surplus statements for the Borrowers and the Subsidiary for such year audited by independent certified public accountants satisfactory to the Bank and accompanied by an unqualified opinion; and (2) all financial statements and reports, including, but not limited to call reports and annual reports, filed annually with state or federal regulatory authorities; (iii) as soon as practicable, and in no event later than forty-five (45) days after the end of each calendar quarter, copies of the then current loan/asset watch list, the substandard loan/asset list, the nonperforming loan/asset list and other real estate owned list of the Subsidiary; (iv) immediately after receiving knowledge thereof, notice in writing of all charges, assessment, actions, suits and proceeding that are proposed or initiated by, or brought before, any court or governmental department, commission, board or other administrative agency, in connection with the Borrowers or the Subsidiary, other than ordinary course of business litigation not involving the FRS, the FDIC or the Iowa Commissioner of Banks and Trust Companies, which, if adversely decided, would not have a material effect on the financial condition or operations of the Borrowers or the Subsidiary; and (v) promptly after the occurrence thereof, notice of any other matter which has resulted in a materially adverse change in the financial condition or operations of the Borrowers or the Subsidiary; (b) contemporaneously with the furnishing of a copy of each annual report and of each quarterly statement provided pursuant to Section 7(a)(i) and (ii) above, deliver to Bank, a certificate signed by the President and the Treasurer of each Borrower, containing a computation of the then current financial ratios specified in Subsections 7(c) through (h) of this Agreement, and stating that no Default or unmatured Default has occurred or is continuing, or, if there is any such event, describing such event, the steps, if any, that are being taken to cure it, and the time within which such cure will occur; (c) maintain such capital as is necessary to cause Holdings to be well capitalized in accordance with the regulations of the FRS and any requirements or conditions that the FRS has or may impose on Holdings; (d) at all times, maintain such capital as is necessary to cause the Subsidiary to be classified as a "well capitalized" institution in accordance with the regulations of the FDIC, currently measured on the basis of information filed by Borrowers in its quarterly Consolidated Report of Income and Condition (the "Call Report") as follows: (i) Total Capital to Risk-Weighted Assets of not less than 10% until January 7, 1997, and not less than 8% thereafter; (ii) Tier 1 Capital to Risk-Weighted Assets of not less than 6%; and (iii) Tier 1 Capital to average Total Assets of not less than 5% (For the purposes of this subsection (d)(iii) the average Total Assets shall be determined on the basis of information contain in the preceding four (4) Call Reports); (e) cause Holdings to maintain tangible equity capital of not less than $11,000,000 at December 31, 1996, and not less than $12,000,000 at December 31, 1997 and at all times thereafter. For the purposes of this Section 7(e), "tangible equity capital" shall mean the sum of the common stock, surplus and retained earning accounts reduced by the amount of any goodwill; (f) cause the ratio of nonperforming loans to the primary capital of the Subsidiary to be not more than twenty five percent (25%) at all times. For purposes of this Section 7(f), "primary capital" shall mean the sum of the common stock, surplus and retained earning accounts plus the reserve for loan and lease losses and "nonperforming loans" shall mean the sum of all non-accrual loans and loans on which any payment is ninety (90) or more days past due; (g) cause the Subsidiary to have a net profit of at least $1.00 for the 1996 and 1997 calendar years; (h) cause the ratios of the loan and lease loss reserve to the total loans of the Subsidiary to be not less than one percent (1%) at all times; (i) promptly pay and discharge all taxes, assessments and other governmental charges imposed upon the Borrowers or the Subsidiary or upon the income, profits, or property of the Borrowers or the Subsidiary and all claims for labor, material or supplies which, if unpaid, might by law become a lien or charge upon the property of the Borrowers or the Subsidiary. Neither the Borrowers nor any Subsidiary shall be required to pay any such tax, assessment, charge or claim, so long as the validity thereof shall be contested in good faith by appropriate proceedings, and reserves therefor shall be maintained on the books of the Borrowers or the Subsidiary as are deemed reasonably adequate by the Bank; (j) maintain bonds and insurance and cause the Subsidiary to maintain bonds and insurance with responsible and reputable insurance companies or associations in such amounts and covering such risk as is usually carried by owners of similar businesses and properties in the same general area in which the Borrowers or the Subsidiary respectively, operate, and such additional bonds and insurance as may be reasonably required by the Bank; (k) permit and cause the Subsidiary to permit the Bank through its employees, attorneys, accountants or other agents, to inspect any of the properties, corporate books and financial books and records of the Borrowers and the Subsidiary at such times and as often as the Bank reasonably may request; and (l) provide and cause the Subsidiary promptly to provide the Bank with such other information concerning the business, operations, financial condition and regulatory status of the Borrowers and the Subsidiary as the Bank may from time to time reasonably request. 8. Collateral. Pursuant to the Pledge Agreement, Holdings has concurrently herewith assigned, transferred, pledged and delivered to the Bank as collateral for all of the obligations of the Borrowers from time to time to the Bank the Subsidiary Shares and any other Pledged Security (as defined in the Pledge Agreement) whether now or hereafter pledged. 9. Events of Default; Default; Rights Upon Default. The happening or occurrence of any of the following events or acts shall each constitute a Default hereunder, and any such Default shall also constitute a Default under the Note, the Letters of Credit, the Pledge Agreement and any other loan document, without right to notice or time to cure in favor of the Borrowers except as indicated below: (a) if the Borrowers fail to make any payments as provided for herein; (b) if there continues to exist any breach under any obligation of any other documents executed pursuant to this Agreement including, without limitation, the Note and the Pledge Agreement and such breach remains uncured beyond the applicable time period, if any, specifically provided therefor; (c) if any representation or warranty made in this Agreement shall continue to be false when made or at any time during the term of this Agreement or any extension thereof, or if the Borrowers fail to perform or observe any covenant or agreement contained in this Agreement fifteen (15) days after notice thereof by Bank; (d) if the Borrowers fail to perform or observe any covenant or agreement contained in any other agreement between the Borrowers or the Subsidiary and the Bank, or if any condition contained in any agreement between the Borrowers or the Subsidiary and the Bank is not fulfilled and such failure remains uncured beyond the applicable time period, if any, specifically provided therefor; (e) if the Borrowers shall continue to fail to perform and observe, or cause or permit the Subsidiary to fail to perform and observe any covenants under this Agreement, including, without limitation, all affirmative and negative covenants set forth in Sections 6 and 7 of this Agreement fifteen (15) days after notice by the Bank; (f) if the FRS, the FDIC, the Iowa Commissioner of Banks and Trust Companies or other governmental agency charged with the regulation of bank holding companies or depository institutions: (i) issues to any Borrower or the Subsidiary, or initiates any action, suit or proceeding to obtain against, impose on or require from any Borrower or the Subsidiary, a cease and desist order or similar regulatory order, the assessment of civil monetary penalties, articles or agreement, a memorandum of understanding, a capital directive, a capital restoration plan, restrictions that prevent or as a practical matter impair the payment of dividends by the Subsidiary or the payments of any debt by a Borrower, restrictions that make the payment for the dividends by the Subsidiary or the payment of debt by a Borrower subject to prior regulatory approval, a notice or finding under Section 8(a) of the Federal Deposit Insurance Act, or any similar enforcement action, measure or proceeding; or (ii) issues to any officer or director of a Borrower or the Subsidiary, or initiates any action, suit or proceeding to obtain against, impose on or require from any such officer or director, a cease and desist order or similar regulatory order, a removal order or suspension order, or the assessment of civil monetary penalties. (g) if the Subsidiary is notified that it is considered an institution in "troubled condition" within the meaning of 12 U.S.C. Section 1831i and the regulations promulgated thereunder, or if a conservator or receiver is appointed for the Subsidiary; (h) if any Borrower or the Subsidiary is notified by any governmental or regulatory agency that it has engaged in any unsafe or unsound banking practices; (i) if any Borrower or the Subsidiary becomes insolvent or is unable to pay their respective debts as they mature; or makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts as they mature; or suspends transaction of its usual business, or if a trustee of any substantial part of the assets of a Borrower or the Subsidiary is applied for or appointed, and if appointed in a proceeding brought against a Borrower, such Borrower by any action or failure to act indicates its approval of, consent to, or acquiescence in such appointment, or within thirty (30) days such appointment is not vacated or stayed on appeal or otherwise, or shall not otherwise have ceased to continue in effect; (j) if any proceedings involving any Borrower or the Subsidiary are commenced by or against a Borrower or the Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law or statute of the federal government or any state government and if such proceedings are instituted against a Borrower, such Borrower by any action or failure to act indicates its approval of, consent to or acquiescence therein, or an order shall be entered approving the petition in such proceedings and within thirty (30) days after the entry thereof such order is not vacated or stayed on appeal or shall not otherwise have ceased to continue in effect; or (k) if the Borrowers or the Subsidiary continue to be in default in any payment of principal or interest for any other obligation or in the performance of any other term, condition or covenant contained in any agreement (including but not limited to an agreement in connection with the acquisition of capital equipment on a title retention or net lease basis), under which any such obligation is created the effect of which default is to cause or permit the holder of such obligation to cause such obligation to become due prior to its stated maturity. Upon the occurrence of a Default, the Bank shall have all rights and remedies provided by applicable law and, without limiting the generality of the foregoing, may, at its option, declare its commitments to be terminated and the Note shall thereupon be and become forthwith, due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein or in the Note or the Pledge Agreement to the contrary notwithstanding, and may, also without limitation, appropriate and apply toward the payment of the Note any indebtedness of the Bank to the Borrowers however created or arising, and may, also without limitation exercise any and all rights in and to the collateral security referred to in Section 8 above and under the Pledge Agreement. There shall be no obligation to liquidate any collateral pledged hereunder in any order or with any priority or to exercise any remedy available to the Bank in any order. 10. Miscellaneous. (a) No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Time is of the essence in the performance of the covenants, agreements and obligations of the Borrowers and the Subsidiary. (b) This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements between the Bank and the Borrowers with respect to the subject matter hereof. No amendment, modification, termination or waiver of any provision of this Agreement, the Pledge Agreement or the Note, or consent to any departure by the Borrowers therefrom, shall be effective except for the specific purpose for which given. No notice to or demand on the Borrowers in any case shall entitle the Borrowers to any other or further notice or demand in similar or other circumstances. (c) All notices, requests, demands and other communications provided for hereunder shall be: (i) in writing, (ii) made in one of the following manners, and (iii) shall be deemed given (a) if and when personally delivered, (b) on the next business day if sent by nationally recognized overnight courier addressed to the appropriate party as set forth below, or (c) on the second business day after being deposited in United States certified or registered mail, and addressed as follows: If to Borrowers: Quad City Holdings, Inc. 2118 Middle Road Bettendorf, Iowa 52722 Attention: Mr. Douglas M. Hultquist, Chief Executive officer If to the Bank: LaSalle National Bank 135 South LaSalle Street Chicago, Illinois 60674 Attention: Delmar Rogers, Vice President or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this subsection. (d) This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. (e) This Agreement shall become effective when it shall have been executed by the Borrowers and the Bank and thereafter shall be binding upon and inure to the benefit of the Borrowers and the Bank and their respective successors and assigns, except that the Borrowers may not assign their rights hereunder or any interest herein without the prior consent of the Bank, which may be given or denied in the Bank's sole and absolute discretion. (f) This Agreement and the Note shall be governed by the internal laws of the State of Illinois, and for all purposes shall be construed in accordance with the laws of said State. (g) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or lack of enforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction; wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. (h) All covenants, agreements, representations and warranties made by the Borrowers herein shall, notwithstanding any investigation by or knowledge on the part of the Bank, be deemed material and relied on by the Bank and shall survive the execution and delivery to the Bank of this Agreement and the Note. (i) This Agreement shall govern the terms of any extensions or renewals of the Note, subject to any additional terms and conditions imposed by the Bank in connection with any such extension or renewal. (j) The Borrowers hereby represent that the indebtedness evidenced hereby constitutes a loan made by Bank to enable the Borrowers to carry on a commercial enterprise for the purpose of investment or profit; and that such loan is a loan for business purposes under the intent and purview of Ill. Rev. Stat. Ch. 17, Section 6404(c). (k) The Borrowers shall pay all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees) in connection with the preparation, negotiations, documentation, execution, delivery, administration, amendment, modification, collection and enforcement of this Agreement, the Note, the Pledge Agreement and the other instruments and documents to be delivered hereunder. Such fees in connection with the preparation, negotiation and executing of this Agreement, the Note and the Pledge Agreement shall not exceed $3,000.00. In addition, the Borrowers shall pay, and save Bank harmless from any liability for, any and all stamp and other taxes determined to be payable in connection with the execution and delivery of this Agreement, the borrowings hereunder, or the Note and the other instruments and documents to be delivered hereunder, and agree to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omitting to pay such taxes. The foregoing obligations shall survive any termination of this Agreement, the Note or the Pledge Agreement. Any of the foregoing amounts incurred by Bank and not paid by the Borrowers upon demand shall bear interest from the date incurred at the Prime Rate plus two percent (2%) per annum and shall be deemed part of the indebtedness hereunder. (l) Any accounting term not specifically defined herein shall be construed in accordance with generally accepted accounting principles which are applied in the preparation of the financial statements referred to herein, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. (m) The Bank reserves the right to sell participations in this loan or otherwise assign, transfer or hypothecate all or any part of this loan. (n) All covenants, agreements, warranties, and representations of the Borrowers herein shall be deemed to have been made jointly and severally by the Borrowers. (o) The Borrowers agree to do such further acts and things and to execute and deliver to Bank such additional assignments, agreements, powers and instruments, as Bank may reasonably require or deem advisable to carry into effect the purpose of this Agreement, the Note, the Pledge Agreement or any agreement or instrument in connection herewith, or to better assure and confirm unto Bank its rights, powers and remedies hereunder or under such other loan documents. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. QUAD CITY HOLDINGS, INC. QUAD CITY BANCARD, INC. By: By: Its: Its: LASALLE NATIONAL BANK By: Its: September 21, 1998 EX-10 6 FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT dated as of June 1, 1997 (this "Amendment"), is between QUAD CITY HOLDINGS, INC., a Delaware corporation (the "Borrower"), and LASALLE NATIONAL BANK, a national banking association (the "Bank"). W I T N E S S E T H: WHEREAS, the Borrower Quad City Bancard, Inc. ("Bancard") and the Bank entered into a Loan Agreement dated as of May 15, 1997 (the "Agreement"); and WHEREAS, the Borrower and the Bank desire to amend the Agreement by, among other things, deleting Bancard therefrom, as more fully described herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. All capitalized terms used herein without definition shall have the respective meanings set forth in the Agreement. 2. AMENDMENTS TO THE AGREEMENT. 2.1 Amendment to Preamble to the Agreement. The Preamble to the Agreement is hereby amended as of the date hereof by restating it in its entirety, as follows: "This LOAN AGREEMENT (the "Agreement"), dated as of May 15, 1996, is entered into between QUAD CITY HOLDINGS, INC., a Delaware corporation (the "Borrower") and LASALLE NATIONAL BANK, a national banking association (the "Bank")." All other references in the Agreement to the "Borrowers" and all references to "Holdings" shall, as of the date hereof, be deemed references to the "Borrower". All references in the Agreement to "Bancard" shall be deleted. 2.2 Amendment to the Recitals of the Agreement. The Recitals of the Agreement are hereby amended as of the date hereof by replacing the first three paragraphs thereof, as follows: "WHEREAS, the Borrower desires to borrow from the Bank, on a revolving credit basis, an amount not to exceed FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS ($4,500,000); and WHEREAS, Bank is willing to establish a revolving credit facility in favor of the Borrower in an amount not to exceed up to FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS ($4,500,000), in accordance with the terms, subject to the conditions and in reliance on the representations, warranties and covenants set forth herein and in the other documents and instruments entered into or delivered in connection with or relating to the loan contemplated in this Agreement; and" 2.3 Amendment to Section 1 of the Agreement. Section 1 of the Agreement is hereby amended as of the date hereof by restating it in its entirety, as follows: "1. Commitment of the Bank. The Bank agrees to extend a loan (the "Loan") to the Borrower in a principal amount not to exceed FOUR MILLION FIVE HUNDRED THOUSAND and 00/100 DOLLARS ($4,500,000), evidenced by the Note (as such term is defined below). The Loan shall be secured by the Pledge Agreement (as such term is defined below) in accordance with the terms and subject to the conditions set forth in this Agreement, the Note and the Pledge Agreement." 2.4 Amendment to Section 3(i) of the Agreement. Section 3(i) of the Agreement is hereby amended as of the date hereof by restating it in its entirety, as follows: "3. Note Evidencing Borrowing. The Loan shall be evidenced by a promissory note (the "Note") executed by the Borrower in the principal amount of $4,500,000 and shall be in the form of Exhibit A-1 attached hereto. Without in any way limiting the terms of the Note:" 2.5 Amendment to Section 3(i)(a) of the Agreement. Section 3(i)(a) of the Agreement is hereby amended as of the date hereof by deleting the date "July 1, 1996" and substituting therefor the date "July 1, 1997". 2.6 Amendment to Section 3(ii) of the Agreement. Section 3(ii) of the Agreement is hereby amended as of the date hereof by deleting it in its entirety and substituting the following in lieu thereof: "[Intentionally Deleted]." 2.7 Amendment to Section 6(l) of the Agreement. Section 6(l) of the Agreement is hereby amended as of the date hereof by deleting the phrase "or the L/C Facility" therefrom. 2.8 Amendment to Section 7(e) of the Agreement. Section 7(e) of the Agreement is hereby amended as of the date hereof by restating it in its entirety, as follows: "(e) cause the Borrower to maintain tangible equity capital of not less than $11,000,000 at December 31, 1997 and at all times thereafter. For the purposes of this Section 7(e), "tangible equity capital" shall mean the sum of the common stock, surplus and retained earning accounts reduced by the amount of any goodwill;" 2.9 Amendment to Section 7(f) of the Agreement. Section 7(f) of the Agreement is hereby amended as of the date hereof by deleting it in its entirety, as follows: "(f) cause the ratio of nonperforming loans to the primary capital of the Subsidiary to be not more than thirty percent (30%) at all times. For purposes of this Section 7(f), "primary capital" shall mean the sum of the common stock, surplus and retained earning accounts plus the reserve for loan and lease losses and "nonperforming loans" shall mean the sum of all non-accrual loans and loans on which any payment is ninety (90) or more days past due;" 3. WARRANTIES. To induce the Bank to enter into this Amendment, the Borrower warrants that: 3.1 Authorization. The Borrower is duly authorized to execute and deliver this Amendment and is and will continue to be duly authorized to borrow monies under the Agreement, as amended hereby, and to perform its obligations under the Agreement, as amended hereby. 3.2 No Conflicts. The execution and delivery of this Amendment and the performance by the Borrower of its obligations under the Agreement, as amended hereby, do not and will not conflict with any provision of law or of the charter or by-laws of the Borrower or of any agreement binding upon the Borrower. 3.3 Validity and Binding Effect. The Agreement, as amended hereby, is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 3.4 No Default. As of the date hereof, no Event of Default under Section 9 of the Agreement, as amended by this Amendment, or event or condition which, with the giving of notice or the passage of time, shall constitute an Event of Default, has occurred or is continuing. 3.5 Warranties. As of the date hereof, the representations and warranties in Section 5 of the Agreement are true and correct as though made on such date, except for such changes as are specifically permitted under the Agreement. 4. CONDITIONS PRECEDENT. This Amendment shall become effective as of the date above first written after receipt by the Bank of the following documents: (a) This Amendment, duly executed by the Borrower; (b) A Replacement Revolving Credit Note in the form of Exhibit A-1 attached hereto, duly executed by the Borrower; (c) A First Amendment to Pledge and Security Agreement, duly executed by the Borrower; and (d) Such other documents and instruments as the Bank reasonably requests. 5. GENERAL. 5.1 Law. This Amendment shall be construed in accordance with and governed by the laws of the State of Illinois. 5.2 Successors. This Amendment shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and their respective successors and assigns. 5.3 Confirmation of the Agreement. Except as amended hereby, the Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. LASALLE NATIONAL BANK QUAD CITY HOLDINGS, INC. By: By: Its: Its: 9/22/98 EX-10 7 SECOND AMENDMENT TO LOAN AGREEMENT THIS SECOND AMENDMENT TO LOAN AGREEMENT dated as of July 1, 1998 (this "Amendment"), is between QUAD CITY HOLDINGS, INC., a Delaware corporation (the "Borrower"), and LASALLE NATIONAL BANK, a national banking association (the "Bank"). W I T N E S S E T H: WHEREAS, the Borrower, Quad City Bancard, Inc. ("Bancard") and the Bank entered into a Loan Agreement dated as of May 15, 1996, as amended by a First Amendment thereto dated June 1, 1997, which, among other things, deleted Bancard therefrom (collectively, the "Agreement"); and NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. All capitalized terms used herein without definition shall have the respective meanings set forth in the Agreement. 2. AMENDMENTS TO THE AGREEMENT. 2.1 Amendment to Section 3(i) of the Agreement. Section 3(i) of the Agreement is hereby amended as of the date hereof by restating it in its entirety, as follows: "3. Note Evidencing Borrowing. The Loan shall be evidenced by a promissory note (the "Note") executed by the Borrower in the principal amount of $4,500,000 and shall be in the form of Exhibit A-2 attached hereto. Without in any way limiting the terms of the Note:" 2.2 Amendment to Section 3(i)(a) of the Agreement. Section 3(i)(a) of the Agreement is hereby amended as of the date hereof by restating it in its entirety, as follows: "(a) The Borrower shall pay interest on amounts outstanding under the Note as provided herein. Interest shall be payable quarterly, in arrears, commencing October 1, 1998 and continuing on the first day of each October, January, April and July thereafter, with a final payment of all outstanding amounts due under the Note, including, but not limited to principal, interest and any amounts owing under Subsection 11(k) of this Agreement, if not sooner paid, on July 1, 2000. The amounts outstanding from time to time shall bear interest calculated on the actual number of days elapsed on the basis of a 360 day year, at a rate equal to the Prime Rate or Adjusted LIBOR (as such terms are hereinafter defined). At any time and from time to time the Borrower may identify portions of the outstanding principal balance of the Note (each, a "LIBOR Loan") which will bear interest at "Adjusted LIBOR" (hereinafter defined). Each LIBOR Loan must equal $250,000 or an integral multiple thereof. "Adjusted LIBOR" means a rate of interest equal to two percent (2%) per annum in excess of the per annum rate of interest at which U.S. dollar deposits in an amount comparable to the amount of the relevant LIBOR Loan and for a period equal to the relevant "Interest Period" (hereinafter defined) are offered generally to the Bank (rounded upward if necessary, to the nearest 1/16 of 1.00%) in the London Interbank Eurodollar market at 11:00 a.m. (London time) two banking days prior to the commencement of each Interest Period, such rate to remain fixed for such Interest Period. "Interest Period" shall mean successive one, two, three or six month periods as selected from time to time by the Borrower by notice given to the Bank not less than three banking days prior to the first day of each respective Interest Period; provided that: (i) each such one, two, three or six month period occurring after such initial period shall commence on the day on which the next preceding period expires; (ii) the final Interest Period shall be such that its expiration occurs on or before the stated maturity date of the Note; and (iii) if for any reason the Borrower shall fail to select timely a period, then it shall be deemed to have selected a one-month period; provided that, at any time any Interest Period expires less than one month before the maturity of the Note, then, for the period commencing on such expiration date and ending on the maturity date such LIBOR Loan shall convert to a loan bearing interest at the Prime Rate. Interest on each LIBOR Loan shall be payable on the last banking day of each Interest Period with respect thereto, commencing on the first such date to occur after the date hereof, at maturity, after maturity on demand, and on the date of any payment hereon on the amount paid. The Borrower hereby further promises to pay to the order of the Bank, on demand, interest on the unpaid principal amount hereof after maturity (whether by acceleration or otherwise) at the Default Rate set forth in subsection (b), below. The Bank's determination of Adjusted LIBOR as provided above shall be conclusive, absent manifest error. Furthermore, if the Bank determines, in good faith (which determination shall be conclusive, absent manifest error), prior to the commencement of any Interest Period that (a) U.S. dollar deposits of sufficient amount and maturity for funding any LIBOR Loan are not available to the Bank in the London Interbank Eurodollar market in the ordinary course of business, or (b) by reason of circumstances affecting the London Interbank Eurodollar market, adequate and fair means do not exist for ascertaining the rate of interest to be applicable to the relevant LIBOR Loan, the Bank shall promptly notify the Borrower and such LIBOR Loan shall automatically convert on the last day of its then-current Interest Period to a loan bearing interest at the Prime Rate. If, after the date hereof, the introduction of, or any change in any applicable law, treaty, rule, regulation or guideline or in the interpretation or administration thereof by any governmental authority or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or its lending office (a "Regulatory Change"), shall, in the opinion of counsel to the Bank, makes it unlawful for the Bank to make or maintain any LIBOR Loan evidenced hereby, then the Bank shall promptly notify the Borrower and such LIBOR Loan shall automatically convert on the last day of its then-current Interest Period to a loan bearing interest at the Prime Rate. If, for any reason, any LIBOR Loan is paid prior to the last banking day of its then-current Interest Period, the Borrower agrees to indemnify the Bank against any loss (including any loss on redeployment of the funds repaid), cost or expense incurred by the Bank as a result of such prepayment. If any Regulatory Change (whether or not having the force of law) shall (a) impose, modify or deem applicable any assessment, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of or loans by, or any other acquisition of funds or disbursements by, the Bank; (b) subject the Bank or any LIBOR Loan to any tax, duty, charge, stamp tax or fee or change the basis of taxation of payments to the Bank of principal or interest due from the Borrower to the Bank hereunder (other than a change in the taxation of the overall net income of the Bank); or (c) impose on the Bank any other condition regarding such LIBOR Loan or the Bank's funding thereof, and the Bank shall determine (which determination shall be conclusive, absent manifest error) that the result of the foregoing is to increase the cost to the Bank of making or maintaining such LIBOR Loan or to reduce the amount of principal or interest received by the Bank hereunder, then the Borrower shall pay to the Bank, on demand, such additional amounts as the Bank shall, from time to time, determine are sufficient to compensate and indemnify the Bank for such increased cost or reduced amount." 3. WARRANTIES. To induce the Bank to enter into this Amendment, the Borrower warrants that: 3.1 Authorization. The Borrower is duly authorized to execute and deliver this Amendment and is and will continue to be duly authorized to borrow monies under the Agreement, as amended hereby, and to perform its obligations under the Agreement, as amended hereby. 3.2 No Conflicts. The execution and delivery of this Amendment and the performance by the Borrower of its obligations under the Agreement, as amended hereby, do not and will not conflict with any provision of law or of the charter or by-laws of the Borrower or of any agreement binding upon the Borrower. 3.3 Validity and Binding Effect. The Agreement, as amended hereby, is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 3.4 No Default. As of the date hereof, no Event of Default under Section 9 of the Agreement, as amended by this Amendment, or event or condition which, with the giving of notice or the passage of time, shall constitute an Event of Default, has occurred or is continuing. 3.5 Warranties. As of the date hereof, the representations and warranties in Section 5 of the Agreement are true and correct as though made on such date, except for such changes as are specifically permitted under the Agreement. 4. CONDITIONS PRECEDENT. This Amendment shall become effective as of the date above first written after receipt by the Bank of the following documents: (a) This Amendment, duly executed by the Borrower; (b) A Replacement Revolving Credit Note in the form of Exhibit A-2 attached hereto, duly executed by the Borrower; and (c) Such other documents and instruments as the Bank reasonably requests. 5. GENERAL. 5.1 Law. This Amendment shall be construed in accordance with and governed by the laws of the State of Illinois. 5.2 Successors. This Amendment shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and their respective successors and assigns. 5.3 Confirmation of the Agreement. Except as amended hereby, the Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. LASALLE NATIONAL BANK QUAD CITY HOLDINGS, INC. By: By: Its: Its: September 21, 1998 EX-10 8 REPLACEMENT REVOLVING CREDIT NOTE $4,500,000 Dated as of July 1, 1998 FOR VALUE RECEIVED, QUAD CITY HOLDINGS, INC. (the "Maker") promises to pay to the order of LASALLE NATIONAL BANK (the "Bank") the lesser of: the principal sum of FOUR MILLION FIVE HUNDRED THOUSAND and 00/100 DOLLARS ($4,500,000), or the aggregate unpaid principal amount outstanding under the Loan Agreement dated May 15, 1996 (as amended from time to time, the "Loan Agreement") between the Bank and the Maker at the maturity or maturities and in the amount or amounts as stated on the records of the Bank together with interest (computed on actual days elapsed on the basis of a 360 day year) on any and all principal amounts outstanding hereunder from time to time from the date hereof until maturity. Interest shall be payable at the rates of interest and the times set forth in the Loan Agreement. In no event shall any principal amount have a maturity later than July 1, 2000. This Note shall be available for direct advances. Principal and interest shall be paid to the Bank at its office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the holder of this Note may designate in writing to the Maker. This Note may be prepaid in whole or in part as provided for in the Loan Agreement. This Note evidences indebtedness incurred under the Loan Agreement, to which reference is hereby made for a statement of the terms and conditions under which the due date of the Note or any payment thereon may be accelerated. The holder of this Note is entitled to all of the benefits and security provided for in said Loan Agreement. The Maker agrees that in action or proceeding instituted to collect or enforce collection of this Note, the amount on the Bank's records shall be prima-facie evidence of the unpaid principal balance of this Note. This Note is in replacement and substitution for a Revolving Credit Note of the Maker dated June 1, 1997 in the principal amount of $4,500,000 and is in no way intended to constitute a novation therefor. QUAD CITY HOLDINGS, INC. By: Its: EX-23 9 MCGLADREY & PULLEN, LLP Certified Public Accountants and Consultants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the Quad City Holdings, Inc. 401(k)/Profit Sharing Plan (File No. 33-77420) and Stock Option Plan (File No. 33-78024) of our report dated August 7, 1998 relating to the June 30, 1998 financial statements of Quad City Holdings, Inc. and to the reference to our Firm under the caption "Experts" contained therein. /s/ MCGLADREY & PULLEN, LLP Davenport, Iowa September 28, 1998 EX-27 10
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1998 10-KSB FOR QUAD CITY HOLDINGS, INC. IN IS QUALIFIED IN ITS ENTRIETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR JUN-30-1998 JUN-30-1998 11,641 8,366 22,960 0 32,238 2,380 2,364 162,975 2,350 250,151 197,384 2,000 5,498 26,167 0 0 1,510 17,592 250,151 12,084 1,906 1,087 15,077 6,971 8,342 6,735 902 9 7,910 4,071 2,393 0 0 2,393 1.63 1.53 3.55 1,026 259 0 0 1,633 205 21 2,350 1,808 0 542
-----END PRIVACY-ENHANCED MESSAGE-----