-----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, VJIjc/G8C1/xSRyD7Tw+vwYbEx+dEa2Jr22UPvSaVskiUCjoVEleSk8zRS9W0dpE +OXd7qpmavs0QnDYKXKBCw== 0000743530-04-000014.txt : 20040319 0000743530-04-000014.hdr.sgml : 20040319 20040318184049 ACCESSION NUMBER: 0000743530-04-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QCR HOLDINGS INC CENTRAL INDEX KEY: 0000906465 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421397595 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22208 FILM NUMBER: 04678610 BUSINESS ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097363580 MAIL ADDRESS: STREET 1: 3551 7TH STREET CITY: MOLINE STATE: IL ZIP: 61265 FORMER COMPANY: FORMER CONFORMED NAME: QUAD CITY HOLDINGS INC DATE OF NAME CHANGE: 19930805 10-K 1 qcr10kfinal.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003. Commission file number: 0-22208 QCR HOLDINGS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 42-1397595 - -------------------------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 3551 Seventh Street, Suite 204, Moline, Illinois 61265 ------------------------------------------------------ (Address of principal executive offices) (309) 736-3580 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Exchange Act: ------------------------------------------------------ Preferred Securities of QCR Holdings Capital Trust I Securities registered pursuant to Section 12(g) of the Exchange Act: ------------------------------------------------------ Common stock, $1 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [ ] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [ x ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [ x ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The Nasdaq SmallCap Market on June 30, 2003, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $51,600,000. Documents incorporated by reference: -------------------------------------------------------------- Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be held in May 2004. 1 Part I Item 1. Business General. QCR Holdings, Inc. (the "Company") is a multi-bank holding company headquartered in Moline, Illinois that was formed in February 1993 under the laws of the state of Delaware. The Company serves the Quad City and Cedar Rapids communities. Its wholly owned subsidiaries, Quad City Bank and Trust Company, ("Quad City Bank & Trust") which is based in Bettendorf, Iowa and commenced operations in 1994, and Cedar Rapids Bank and Trust Company, ("Cedar Rapids Bank & Trust") which is based in Cedar Rapids, Iowa and commenced operations in 2001, provide full-service commercial and consumer banking and trust and asset management services. The Company also engages in merchant credit card processing through its wholly owned subsidiary, Quad City Bancard, Inc., based in Moline, Illinois. Quad City Bank & Trust was capitalized on October 13, 1993 and commenced operations on January 7, 1994. Quad City Bank & Trust is organized as an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation. Quad City Bank & Trust provides full service commercial and consumer banking, and trust and asset management services in the Quad Cities and adjacent communities through its four offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. Cedar Rapids Bank & Trust is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation. The Company commenced operations in Cedar Rapids in June 2001 operating as a branch of Quad City Bank & Trust. The Cedar Rapids branch operation then began functioning under the Cedar Rapids Bank & Trust charter in September 2001. Cedar Rapids Bank & Trust provides full-service commercial and consumer banking, and trust and asset management services to Cedar Rapids and adjacent communities through its office located in downtown Cedar Rapids, Iowa. Quad City Bancard, Inc. ("Bancard") was capitalized on April 3, 1995, as a Delaware corporation that provides merchant and cardholder credit card processing services. This operation had previously been a division of Quad City Bank & Trust since July 1994. On October 22, 2002, the Company announced Bancard's sale of its independent sales organization (ISO) related merchant credit card operations to iPayment, Inc. Until September 24, 2003, Bancard continued to process transactions for iPayment, Inc., and approximately 32,500 merchants. Since iPayment, Inc. discontinued processing with Bancard, processing volumes decreased significantly. Bancard does, however, continue to provide credit card processing for its local merchants and agent banks and for cardholders of the Company's subsidiary banks. On March 29, 1999, Bancard formed its own independent sales organization ("ISO") subsidiary, Allied Merchant Services, Inc. ("Allied"), to generate merchant credit card processing business. Bancard owned 100% of Allied. As a result of Bancard's sale of its ISO related merchant credit card operations to iPayment, Inc. in October 2002, Allied ceased its operations as an ISO. Included in the sale to iPayment, Inc., were all of the merchant credit card processing relationships owned by Allied. Allied was liquidated on December 31, 2003. QCR Holdings Capital Trust I ("Trust I") was formed in April 1999 and capitalized in June 1999 in connection with the public offering of $12 million of 9.2% trust preferred capital securities due June 30, 2029, which are callable on June 30, 2004. As a wholly owned subsidiary of the Company, Trust I's assets had previously been included in the Company's balance sheet consolidation. A U.S. Securities and Exchange Commission (SEC) ruling, made on December 19, 2003 based on the Financial Accounting Standards Board Interpretation (FIN) No. 46, required bank holding companies to deconsolidate trust preferred securities from the balance sheet as of December 31, 2003 for calendar year end companies. Therefore, the Company's equity investment in Trust I at December 31, 2003, of $390 thousand, was included in other assets on the fiscal 2003 year-end balance sheet. A detailed explanation of FIN No. 46 and its impact on the Company is presented in the "Impact of New Accounting Standards" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Additional information related to the Company's adoption of FIN No. 46 is included in Note 1 to the consolidated financial statements. In February 2004, the Company issued $8.0 million of floating rate capital securities and $12.0 million of fixed rate capital securities (together, the "Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust III"). The securities represent undivided beneficial interests in Trust II and Trust III, which were established by the Company for the purpose of issuing the Trust Preferred Securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the "Act") and have not been registered under the Act. 2 The securities issued by Trust II and Trust III mature in 30 years. The floating rate capital securities are callable at par after five years and the fixed rate capital securities are callable at par after seven years. The floating rate capital securities have a variable rate based on the three-month LIBOR, reset quarterly, with the initial rate set at 3.97%, and the fixed rate capital securities have a fixed rate of 6.93%, payable quarterly, for seven years, at which time they have a variable rate based on the three-month LIBOR, reset quarterly. Both Trust II and Trust III used the proceeds from the sale of the Trust Preferred Securities to purchase junior subordinated debentures of QCR Holdings, Inc. The Company incurred issuance costs of $410 thousand, which will be amortized over the lives of the securities. The Company intends to use its net proceeds for general corporate purposes, including the possible redemption in June 2004 of the $12.0 million of 9.2% cumulative trust preferred securities issued by Trust I in 1999. If redeemed, the trust preferred securities issued in 1999 carry approximately $750 thousand of unamortized issuance costs, which will be expensed as of June 30, 2004. The Company owns 100% of Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Bancard, and 100% of the common securities of Trust I. In addition to such ownership, the Company invests its capital in stocks of financial institutions and mutual funds, as well as participates in loans with the subsidiary banks. In addition, to its wholly -owned subsidiaries, the Company has an aggregate investment of $307 thousand in three associated companies, Nobel Electronic Transfer, LLC, Nobel Real Estate Investors, LLC, and Velie Plantation Holding Company, LLC. The Company had previously held an investment in Clarity Merchant Services Inc., which was liquidated on December 31, 2003. The Company and its subsidiaries collectively employed 233 individuals at December 31, 2003. No one customer accounts for more than 10% of revenues, loans or deposits. In August 2002, the Company's board of directors elected to change the Company's fiscal year end from June 30 to December 31. Due to this change, the Company filed a Form 10-K for the transition period from July 1, 2002 to December 31, 2002 and now holds its annual meetings in May of each year instead of October. The 2003 annual meeting will be held on May 5, 2004. The Company's subsidiaries have also changed their fiscal years aligning their financial reporting with that of the Company. Throughout this document references to fiscal 2003 are for the year ended December 31, 2003. References to the transition period are for the six months ended December 31, 2002. References to fiscal 2002 and fiscal 2001 are for the years ended June 30, 2002 and 2001, respectively. In most instances, results are shown for the fiscal year ended December 31, 2003 along with the six-month transition period and the two previous fiscal years ended June 30. Competition. The Company currently operates in the highly competitive Quad City and Cedar Rapids markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also, insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. Additionally, the Company competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits. These competitive trends are likely to continue and may increase as a result of the continuing reduction on restrictions on the interstate operations of financial institutions. Under the Gramm-Leach-Bliley Act of 1999, effective in March of 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which the Company and its subsidiary banks conduct business. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") regulates the Company and its subsidiaries. In addition, Quad City Bank & Trust and Cedar Rapids Bank & Trust are regulated by the Iowa Superintendent of Banking (the "Iowa Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC"). 3 Business. The Company's principal business consists of attracting deposits from the public and investing those deposits in loans and securities. The deposits of Quad City Bank & Trust and Cedar Rapids Bank & Trust 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. Its operating results are affected by merchant credit card fees, trust fees, deposit service charge fees, fees from the sale of residential real estate loans and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, insurance, 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. Lending. The Company and its subsidiaries provide a broad range of commercial and retail lending and investment services to corporations, partnerships, individuals and government agencies. Quad City Bank & Trust and Cedar Rapids Bank & Trust actively market their services to qualified lending customers. Lending officers actively solicit the business of new borrowers entering their market areas as well as long-standing members of the local business community. The subsidiary banks have 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 the credit history of the borrower. Quad City Bank & Trust's current legal lending limit is approximately $7.2 million. Its loan portfolio is comprised primarily of commercial, residential real estate and consumer loans. As of December 31, 2003, commercial loans made up approximately 81% of the loan portfolio, while residential mortgages comprised approximately 8% and consumer loans comprised approximately 11%. Cedar Rapids Bank & Trust's current corporate lending limit is approximately $2.5 million. Its loan portfolio is comprised primarily of commercial, residential real estate and consumer loans. As of December 31, 2003, commercial loans made up approximately 92% of the loan portfolio, while residential mortgages comprised approximately 3% and consumer loans comprised approximately 5%. As part of the loan monitoring activity at both subsidiary banks, credit administration personnel interact with senior bank management weekly. The Company has also instituted a separate loan review function to analyze credits of Quad City Bank & Trust and Cedar Rapids Bank & Trust. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of these situations. As noted above, both subsidiary banks are active commercial lenders. The areas of emphasis include loans to wholesalers, manufacturers, building contractors, developers, business services companies and retailers. Quad City Bank & Trust and Cedar Rapids Bank & Trust provide a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of facilities, equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. In addition, the subsidiary banks often take personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. A significant portion of the subsidiary banks' commercial business loans has floating interest rates or reprice within one year. Commercial real estate loans are also made. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. Residential mortgage lending has been a focal point of Quad City Bank & Trust and Cedar Rapids Bank & Trust as they continue to build their real estate lending business. The subsidiary banks' real estate loan portfolios were approximately $35.6 million at December 31, 2003. The subsidiary banks currently have eight mortgage originators. The subsidiary banks sell the majority of their real estate loans in the secondary market. They typically sell the majority of the fixed rate loans that they originate. During the year ended December 31, 2003, the subsidiary banks originated $268.8 million of real estate loans and sold $241.6 million, or90%, of these loans. During the six months ended December 31, 2002, the subsidiary banks originated $145.1 million of real estate loans and sold $121.5 million, or 84%, of these loans. During fiscal 2002, the subsidiary banks originated $175.5 million of real estate loans and sold $144.3 million, or 82%, of these loans. Generally, the subsidiary banks' residential mortgage loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature in one to five years. The subsidiary banks generally retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. 4 The consumer lending departments of each bank provide all types of consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. Appendices. The commercial banking business is a highly regulated business. See Appendix A for a brief summary of the 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. See Appendix B for 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. Consistent with the information presented in Form 10-K, results are presented for the fiscal year ended December 31, 2003, along with the six-month transition period ended December 31, 2002, and the two previous fiscal years ended June 30. A second presentation shows comparative financial information restated in calendar year periods for 1999, 2000, 2001 and 2002 consistent with the Company's current fiscal year. The Company maintains Internet sites for its two banking subsidiaries and the Company makes available free of charge through these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. The sites are www.qcbt.com and www.crbt.com. Item 2. Property The original office of Quad City Bank & Trust is in a 6,700 square foot facility, which was completed in January 1994. In March 1994, Quad City Bank & Trust acquired that facility, which is located at 2118 Middle Road in Bettendorf, Iowa. Construction of a second full service banking facility was completed in July 1996 to provide for the convenience of customers and to expand the market territory. Quad City Bank & Trust also owns that facility which is located at 4500 Brady Street in Davenport, Iowa. The two-story building is in two segments that are separated by an atrium. Originally, Quad City Bank & Trust owned the south half of the building, while the north half was owned by the developer. Quad City Bank & Trust acquired the northern segment of this facility in August 2003. Each segment has two floors that are 6,000 square feet. In addition, the southern segment has a 6,000 square foot basement level. In the southern segment, Quad City Bank & Trust occupies the first floor and utilizes the basement for operational functions, item processing and storage. At December 31, 2003, approximately 1,500 square feet on the second floor of the southern segment were leased to a professional services firm, and approximately 4,500 square feet were occupied by various operational and administrative functions, which prior to January 2003 had been located in an adjacent office building. Renovations are nearly complete on both floors of the northern segment of the building, which will be utilized by additional operational and administrative functions of Quad City Bank & Trust and the Company. Renovation of a third full service banking facility was completed in February 1998 at the historic Velie Plantation Mansion, 3551 Seventh Street, located near the intersection of 7th Street and John Deere Road in Moline, Illinois near the Rock Island/Moline border. The building is owned by a third party limited liability company, in which the Company has a 20% interest. Quad City Bank & Trust and Bancard are the building's major tenants. Quad City Bank & Trust occupies the main floor of the structure. Bancard relocated its operations to the lower level of the 30,000 square foot building in late 1997. The Company relocated its corporate headquarters to the building in February 1998 and occupies approximately 2,000 square feet on the second floor. In March 1999, Quad City Bank & Trust acquired a 3,000 square foot office building adjacent to the Brady Street location. At December 31, 2002, the office space was utilized for various operational and administrative functions. In January 2003, this building was sold, and these operations were moved to occupy vacant space on the second floor of the Brady street facility. Construction of a fourth full service banking facility was completed in October 2000 at 5515 Utica Ridge Road in Davenport, Iowa. Quad City Bank & Trust leases approximately 6,000 square feet on the first floor and 2,200 square feet on the lower level of the 24,000 square foot facility. The office opened in October 2000. Plans were announced in October 2003 for Quad City Bank & Trust to add a fifth full service banking facility. The facility is to be located in the Five Points area of west Davenport, Iowa. Demolition of existing structures on the site has been completed, and construction of the new facility is scheduled for completion in late 2004 or early 2005. 5 The Company announced plans, in April 2001, to expand its banking operations to the Cedar Rapids, Iowa market. Initially, from June until mid-September 2001, the Cedar Rapids operation functioned as a branch of Quad City Bank & Trust while waiting for regulatory approvals for a new state bank charter. On September 14, 2001, the Cedar Rapids branch operation was converted into the new charter and began operations as Cedar Rapids Bank & Trust Company. Cedar Rapids Bank & Trust leases approximately 8,200 square feet in the GreatAmerica Building, 625 First Street, S.E. in Cedar Rapids, which currently serves as its only office. In February 2004, Cedar Rapids Bank & Trust announced plans to build a four floor building in downtown Cedar Rapids. The bank's main office will be relocated to this site when construction is completed, which is anticipated to be early in 2005. Cedar Rapids Bank & Trust will own the lower three floors of the facility, and an unrelated third party will own the fourth floor in a condominium arrangement with the bank. The bank is also considering the construction of a branch office in Cedar Rapids during 2004. Management believes 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. Quad City Bank & Trust and Cedar Rapids Bank & Trust intend to limit their investment in premises to no more than 50% of their capital. The subsidiary banks frequently invest in commercial real estate mortgages and also invest in residential mortgages. Quad City Bank & Trust and Cedar Rapids Bank & Trust have 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 There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. 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 December 31, 2003. Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The common stock, par value $1.00 per share, of the Company is traded on The Nasdaq SmallCap Market under the symbol "QCRH". The stock began trading on October 6, 1993. As of December 31, 2003, there were 2,803,844 shares of common stock outstanding held by approximately 2,400 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by The Nasdaq SmallCap Market, for the periods indicated. Six Months Ended Fiscal 2003 December 31, 2002 Fiscal 2002 Sales Price Sales Price Sales Price ----------------- ----------------- ----------------- High Low High Low High Low --------------------------------------------------------- First quarter ............... $18.150 $16.830 $15.500 $13.620 $12.500 $10.100 Second quarter .............. 20.000 17.450 17.000 14.560 10.800 10.800 Third quarter ............... 25.000 19.810 NA N/A 13.450 11.180 Fourth quarter .............. 29.080 22.500 NA N/A 15.150 13.000
On May 8, 2003, the board of directors declared a cash dividend of $0.05 payable on July 3, 2003, to stockholders of record on June 16, 2003. On October 23, 2003, the board of directors declared a cash dividend of $0.06 per share payable on January 5, 2004, to stockholders of record on December 15, 2003. In the future, it is the Company's intention to continue to consider the payment of dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital for continued growth, but believes that operating results have reached a level that can sustain dividends to stockholders as well. The Company has issued junior subordinated debentures in two private placements and one public offering. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances currently exist. 6 Under Iowa law, Quad City Bank & Trust and Cedar Rapids Bank & Trust are restricted as to the maximum amount of dividends they may pay on their common stock. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. Quad City Bank & Trust and Cedar Rapids Bank & Trust are members of the Federal Reserve System. The total of all dividends declared by the subsidiary banks in a calendar year may not exceed the total of their net profits of that year combined with their 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 Quad City Bank & Trust and Cedar Rapids Bank & Trust. In the case of the Company, further restrictions on dividends may be imposed by the Federal Reserve Board. There were no repurchases of the Company's own stock during the fourth quarter of 2003. 7 Item 6. Selected Financial Data The following "Selected Consolidated Financial Data" of the Company is derived in part from, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto. See Item 8 "Financial Statements and Supplementary Data." Results for past periods are not necessarily indicative of results to be expected for any future period. SELECTED CONSOLIDATED FINANCIAL DATA (dollars in thousands, except per share data) Years Ended June 30, -------------------------------------------------- Year Six Months Ended Ended December December 31, 2003 31, 2002 2002 2001 2000 1999 --------------------------------------------------------------------------------- Statement of Income Data Interest income ........... $33,378 $16,120 $28,520 $28,544 $24,079 $20,116 Interest expense .......... 11,950 6,484 12,870 16,612 13,289 11,027 Net interest income ....... 21,428 9,636 15,650 11,932 10,790 9,089 Provision for loan losses . 3,405 2,184 2,265 889 1,052 892 Noninterest income (1) .... 11,168 8,840 7,915 6,313 6,154 5,561 Noninterest expenses ...... 21,035 11,413 17,023 13,800 11,467 9,679 Pre-tax net income......... 8,156 4,879 4,277 3,556 4,425 4,079 Income tax expense ........ 2,695 1,683 1,315 1,160 1,680 1,614 Net income ................ 5,461 3,196 2,962 2,396 2,745 2,465 Per Common Share Data: Net income-basic .......... $1.96 $1.16 $1.10 $1.06 $1.19 $0.98 Net income-diluted ........ 1.91 1.13 1.08 1.04 1.15 0.93 Cash dividends declared ... 0.11 0.05 - - - - Dividend payout ratio ..... 5.61% 4.31% -% -% -% - % Balance Sheet Total assets .............. $710,040 $604,600 $518,828 $400,948 $367,622 $321,346 Securities ................ 128,843 81,654 76,231 56,710 56,129 50,258 Loans ..................... 522,471 449,736 390,594 287,865 241,853 197,977 Allowance for estimated losses on loans ........... 8,643 6,879 6,111 4,248 3,617 2,895 Deposits .................. 511,652 434,748 376,317 302,155 288,067 247,966 Stockholders' equity: Common .................. 41,823 36,587 32,578 23,817 20,071 18,473 Preferred ............... - - - - - - Key Ratios: Return on average assets .. 0.83% 1.13% 0.64% 0.62% 0.82% 0.86% Return on average common equity ............ 13.93 18.41 10.07 10.95 14.17 13.69 Net interest margin (TEY). 3.55 3.68 3.74 3.38 3.56 3.42 Efficiency ratio (2) ..... 64.53 61.71 72.20 75.64 67.68 66.07 Nonperforming assets to total assets ............. 0.70 0.83 0.44 0.44 0.20 0.51 Allowance for estimated losses on loan to total 1.50 loans .................... 1.65 1.53 1.56 1.48 1.46 Net charge-offs to average loans ............ 0.34 0.34 0.12 0.10 0.16 0.26 Average common stockholders' equity to average assets ........... 5.94 6.12 6.38 5.69 5.77 6.26 Average stockholders' equity to average assets . 5.94 6.12 6.38 5.69 5.77 7.05 Earnings to fixed charges Excluding interest on Deposits .............. 2.51 x 2.90 x 1.95 x 1.90 x 2.29 x 2.81 x Including interest on Deposits .............. 1.66 1.73 1.32 1.21 1.33 1.36 (1) Year ended June 30, 1999 noninterest income includes amortization of $732 from Bancard's restructuring of an ISO agreement. Six months ended December 31, 2002 noninterest income includes a pre-tax gain of $3,460 from Bancard's gain on sale of merchant credit card portfolio (2) Noninterest expenses divided by the sum of net interest income before provision for loan losses and noninterest income.
8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion provides additional information regarding our operations for the twelve months ended December 31, 2003 and 2002, the six months ended December 31, 2002 and 2001, and the fiscal years ended June 30, 2002 and 2001, and financial condition at December 31, 2003, December 31, 2002, and June 30, 2002. In August 2002, the Company's board of directors elected to change the Company's fiscal year end from June 30 to December 31. Due to this change, the Company filed last year for the transition period from July 1, 2002 to December 31, 2002. Throughout this document, reference to fiscal 2003, the transition period, fiscal 2002 and 2001 are for the year ended December 31, 2003, the six months ended December 31, 2002, and the years ended June 30, 2002 and 2001, respectively. This discussion should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document. Overview The Company was formed in February 1993 for the purpose of organizing Quad City Bank & Trust and has grown to $710.0 million in consolidated assets as of December 31, 2003. Management expects continued opportunities for growth, even though the rate of growth may be slower than that experienced to date. The Company reported earnings of $5.5 million or $1.96 basic earnings per share for fiscal 2003 as compared to $4.8 million or $1.75 basic earnings per share for the twelve months ended December 31, 2002, $3.2 million or $1.16 basic earnings per share for the six-month transition period ended December 31, 2002, $3.0 million or $1.10 basic earnings per share for fiscal 2002, and $2.4 million or $1.06 basic earnings per share for fiscal 2001. In October 2002, the Company sold its ISO-related merchant credit card portfolio to iPayment, Inc., however Bancard continued to process the portfolio's transactions through September 2003. The Company's earnings for fiscal 2003 were positively impacted by the continued processing of these ISO volumes. This continued ISO processing resulted in additional net income in fiscal 2003 of $900 thousand or $0.32 per share. The sale in October 2002 resulted in a gain of $1.3 million, after income tax and related expenses, or $0.47 in diluted earnings per share, and was a significant contributor to the 139% increase in earnings for the six-months ended December 31, 2002 when compared to the same period in 2001. The 24% increase in fiscal 2002 earnings from fiscal 2001 was attributable primarily to significant increases in both net interest income and noninterest income, partially offset by an increase in noninterest expense. Excluding both the one-time gain from the sale of the ISO portfolio in October 2002, as well as the non-recurring revenue from the continued processing through September 2003, net income for the twelve months ended December 31, 2002 would have been $3.5 million, or diluted earnings per share of $1.24, and net income for the twelve months ended December 31, 2003 would have been $4.6 million, or diluted earnings per share of $1.61. This represents a 30% improvement in adjusted diluted earnings per share year to year. Although excluding the impact of these events is a non-GAAP measure, management believes that it is important to provide such information due to the non-recurring nature of this income and to more accurately compare the results of the periods presented. When compared to the same period in 2002, the fiscal year ended December 31, 2003 reflected significant growth in both net interest income and gains on sales of loans, net, for the Company. For fiscal 2003, net interest income and gains on sales of loans, net, improved by 19% and 40%, respectively, for a combined increase of $4.4 million when compared to the twelve months ended December 31, 2002. Both Quad City Bank & Trust and Cedar Rapids Bank & Trust generated marked improvement in net interest margin, as well as increases in the gains on sales of residential real estate loans for fiscal 2003. Bancard's continued processing through the first nine months of 2003 of the ISO-related merchant credit card portfolio that was sold, contributed $1.3 million of noninterest income. Partially offsetting these revenue contributions for the Company was an increase in noninterest expense of $845 thousand. The primary contributor to the increase in noninterest expense was salaries and employee benefits, which increased $1.3 million from the same period in 2002. Stock appreciation rights (SAR) expense was $915 thousand for the year, as the Company's stock price grew from $16.90 to $28.00 during 2003. For the fiscal year ended December 31, 2003, net income for Cedar Rapids Bank & Trust was $192 thousand as compared to a net loss of $753 thousand for the same period in 2002. Management is pleased with the outstanding progress that Cedar Rapids Bank & Trust has made in only its second full year of operation. 9 The Company's results of operations are dependent primarily on net interest income, which is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to the net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The Company's average tax equivalent yield on interest earning assets decreased 0.80% for the twelve months ended December 31, 2003 as compared to the same period in 2002. With the same comparison, the average cost of interest-bearing liabilities decreased 0.74%, which resulted in a 0.06% decrease in the net interest spread of 3.21% at December 31, 2002 compared to 3.15% at December 31, 2003. Resulting from the prolonged low rate environment, the relative stability in the net interest spread from year to year did not carry over to the net interest margin. For the fiscal year ended December 31, 2003, net interest margin was 3.55% compared to 3.72% for the like period in 2002. Management continues to closely monitor and manage net interest margin. From a profitability standpoint, an important challenge for the subsidiary banks is to maintain their net interest margins. Management continues to address this issue with alternative funding sources and pricing strategies. The Company's operating results are also affected by sources of noninterest income, including merchant credit card fees, trust fees, deposit service charge fees, gains 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 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 majority of the subsidiary banks' loan portfolios are invested in commercial loans. Deposits from commercial customers represent a significant funding source as well. The Company has added facilities and employees to accommodate both its historical growth and anticipated future growth. As such, overhead expenses have had a significant impact on earnings. This trend is likely to continue as both banks continue to add the facilities and resources necessary to attract and serve additional customers During 1994, Quad City Bank & Trust began to develop internally a merchant credit card processing operation and in 1995 transferred this function to Bancard, a separate subsidiary of the Company. Bancard initially had an arrangement to provide processing services exclusively to merchants of a single independent sales organization or ISO. This ISO was sold in 1998, and the purchaser requested a reduction in the term of the contract. Bancard agreed to amend the contract to reduce the term and accept a fixed monthly processing fee of $25 thousand for merchants existing at the time the agreement was signed, and a lower transaction fee for new merchants, in exchange for a payment of $2.9 million, the ability to transact business with other ISOs and the assumption of the credit risk by the ISO. Approximately two thirds of the income from this settlement, or $2.2 million, was reported in fiscal 1998, with the remainder of $732 thousand being recognized during fiscal 1999. Bancard terminated its processing for this ISO in May 2000, eliminating approximately 64% of its average monthly processing volume. Prior to this ISO's termination, Bancard's average monthly processing volume for fiscal 2000 was $91 million. During both fiscal 2001 and 2002, Bancard worked to establish additional ISO relationships and further develop the relationships with existing ISOs successfully rebuilding and expanding processing volumes. Bancard's average monthly dollar volume of transactions processed during fiscal 2001 was $76 million. During fiscal 2002, the average monthly dollar volume of transactions processed by Bancard increased 36% to $104 million. Monthly processing volumes at Bancard during fiscal 2002 climbed to a level above that existing prior to the termination of all processing with the initial ISO. 10 On October 22, 2002, the Company announced Bancard's sale of its ISO related merchant credit card operations to iPayment, Inc. for $3.5 million. After contractual compensation and severance payments, transaction expenses, and income taxes, the transaction resulted in a net gain of $1.3 million, or $0.47 per share, which was realized during the quarter ended December 31, 2002. Also included in the sale were all of the merchant credit card processing relationships owned by Bancard's subsidiary, Allied. Bancard will continue to provide credit card processing for its local merchants and cardholders of the subsidiary banks and agent banks. The Company anticipated that the termination of the ISO-related merchant credit card processing would reduce Bancard's future earnings. Bancard continued to process transactions for iPayment, Inc. through September 2003. As anticipated, the reduced processing volumes that Bancard experienced during the fourth quarter of 2003 resulted in a decline in quarterly merchant credit card fees, net of processing costs for the Company. The fourth quarter of 2003 generated $416 thousand of merchant credit card fees, net of processing costs, as compared to $784 thousand for the third quarter of 2003. Regardless of this decline in processing volumes and fees and the resulting reduction in operating results from prior quarters, the Company believes that on a smaller scale Bancard will remain profitable with its narrowed business focus of providing credit card processing for its local merchants and agent banks and for cardholders of the Company's subsidiary banks. During fiscal 1998, Quad City Bank & Trust expanded its presence in the mortgage banking market by hiring several experienced loan originators and an experienced underwriter, and now has eight loan originators on staff. Quad City Bank & Trust and Cedar Rapids Bank & Trust originate mortgage loans on personal residences and sell the majority of these loans into the secondary market to avoid the interest rate risk associated with long-term fixed rate financing. The subsidiary banks realize revenue from this mortgage banking activity from a combination of loan origination fees and gains on the sale of the loans in the secondary market. During the twelve months ended December 31, 2003, the subsidiary banks originated $268.8 million of real estate loans and sold $241.6 million, or90%, of these loans resulting in gains of $3.7 million. During the six months ended December 31, 2002, the subsidiary banks originated $145.1 million of real estate loans and sold $121.5 million, or 84%, of these loans resulting in gains of $1.9 million. During fiscal 2002, the subsidiary banks originated $175.5 million of real estate loans and sold $144.3 million, or 82%, of these loans, which resulted in gains of $2.0 million. The depressed interest rates during these periods have caused a significant increase in the subsidiary banks' mortgage origination volume. In fiscal 2001, Quad City Bank & Trust originated $97.6 million of real estate loans and sold $92.9 million, or 95%, of these loans resulting in gains of $1.1 million. Trust department income continues to be a significant contributor to noninterest income. Trust department fees contributed $2.2 million in revenues during fiscal 2003. In the six months ended December 31, 2002, trust department fees contributed $1.0 million in revenues. Trust department fees grew from $2.1 million in fiscal 2001 to $2.2 million in fiscal 2002. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. Assets under administration at December 31, 2003 increased to $673.5 million, resulting primarily from the development of existing relationships and the addition of new trust relationships. At December 31, 2002, assets under administration were $642.7 million. The decrease of $23.0 million in trust assets from June 30 to December 31, 2002 was a reflection of the reduced market values of securities held in trust accounts. Primarily as a result of new trust relationships, assets under administration had grown from $617.5 at June 30, 2001 to $665.7 million at June 30, 2002. The Company's initial public offering during the fourth calendar quarter of 1993 raised approximately $14 million. In order to provide additional capital to support the growth of Quad City Bank & Trust, the Company formed a statutory business trust, which issued $12 million of capital securities to the public for cash in June 1999. In conjunction with the formation of Cedar Rapids Bank & Trust, the Company sold approximately $5.0 million of its common stock through a private placement offering in September 2001, primarily to investors in the Cedar Rapids area. In February 2004, the Company formed two additional trusts, which, in a private transaction, issued $8.0 million of floating rate capital securities and $12.0 million of fixed rate capital securities. The Company intends to use the net proceeds for general corporate purposes, including the possible redemption, in June 2004, of the $12.0 million of capital securities issued in 1999. 11 Critical Accounting Policy The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly. Management may report a materially different amount for the provision for loan losses in the statement of operations to change the allowance for loan losses if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Management's Discussion and Analysis section entitled "Financial Condition - Allowance for Loan Losses." Although management believes the levels of the allowance as of both December 31, 2002 and 2003 and both June 30, 2002 and 2001 were adequate to absorb losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. Results of Operations Fiscal 2003 compared with the twelve months ended December 31, 2002 Overview. Net income for the twelve months ended December 31, 2003 was $5.5 million as compared to net income of $4.8 million for the twelve-month period ended December 31, 2002 for an increase of $640 thousand or 13%. Basic earnings per share for fiscal 2003 were $1.96 as compared to $1.75 for the comparable period in 2002. The increase in net income was comprised of an increase in net interest income after provision for loan losses of $3.4 million, partially offset by a decrease in noninterest income of $1.5 million, and increases in noninterest expenses of $845 thousand and federal and state income taxes of $327 thousand. Several specific factors contributed to the improvement in net income from 2002 to 2003 for the twelve-month periods. Primary factors included a 19% improvement in net interest income prompted by increased volume, and a 40% increase in gains on sales of real estate loans. Interest income. Interest income grew from $30.8 million for the twelve months ended December 31, 2002 to $33.4 million for fiscal 2003. The increase in interest income was attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, partially offset by a decrease in interest rates. The average yield on interest earning assets for the twelve months ended December 31, 2003 was 5.50% as compared to 6.30% for the twelve-month period ended December 31, 2002. Interest expense. Interest expense decreased by $770 thousand, from $12.7 million for the twelve months ended December 31, 2002 to $11.9 million for fiscal 2003. The 6% decrease in interest expense was primarily attributable to a reduction in interest rates, which was almost entirely offset by greater average outstanding balances in interest-bearing liabilities. The average cost on interest bearing liabilities was 2.35% for the twelve months ended December 31, 2003 as compared to 3.09% for the like period in 2002. 12 Provision for loan losses. The provision for loan losses is established based on a number of factors, including the local and national economy and the risk associated with the loans in the portfolio. The Company had an allowance for estimated losses on loans of approximately 1.65% of total gross loans at December 31, 2003, as compared to approximately 1.53% at December 31, 2002, 1.56% at June 30, 2002 and 1.48% at June 30, 2001. The provision for loan losses remained stable at $3.4 million for fiscal 2003, as it had been for the twelve months ended December 31, 2002. During both periods, management made monthly provisions for loan losses based upon a number of factors, principally the increase in loans and a detailed analysis of the loan portfolio. During fiscal 2003, the $3.4 million provision to the allowance for loan losses was attributed 35%, or $1.2 million, to net growth in the loan portfolio, and 65%, or $2.2 million, to downgrades and write-offs within the portfolio. For the twelve months ended December 31, 2003, commercial loans had total charge-offs of $1.8 million, which resulted primarily from a single customer relationship at Quad City Bank & Trust, and there were $192 thousand of commercial recoveries, due primarily to this same relationship. The net write-off of this relationship accounted for 17% of the provision for loans losses during fiscal 2003 and was in addition to a $1.1 million charge-off, which occurred during the quarter ended December 31, 2002. The additional losses were a result of environmental issues associated with the collateral for the loan, which were identified during the first quarter of 2003. The Company believed that these environmental issues negatively impacted the value and salability of the business and determined that it was appropriate to take a conservative approach and write down the loan balance to reflect no value in the real estate and equipment collateral. During the second quarter of 2003, all of the collateral, including the real estate and equipment, was sold resulting in a $120 thousand recovery. In the third and fourth quarters, there were recoveries of $50 thousand, as Quad City Bank & Trust realized gain from the sale of other real estate, which had been deferred in accordance with current accounting rules. Consumer loan charge-offs and recoveries totaled $298 thousand and $242 thousand, respectively, for the twelve months ended December 31, 2003. Real estate loans had no charge-off or recovery activity during fiscal 2003. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. The Company is focusing efforts at its subsidiary banks in an attempt to improve the overall quality of the Company's loan portfolio. Noninterest income. Noninterest income decreased by $1.5 million from $12.7 million for the twelve months ended December 31, 2002 to $11.2 million for fiscal 2003. In the twelve months ended December 31, 2002, the largest component of noninterest income was the gain on sale of the ISO related portion of the merchant credit card portfolio of $3.5 million, which accounted for 27% of the total. Noninterest income for both periods consisted of income from the merchant credit card operation, fees from the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. Making significant improvements from year to year in the noninterest income category were increases in gains on sales of loans and other miscellaneous fees. During the twelve-month period ended December 31, 2003, merchant credit card fees net of processing costs, decreased by $172 thousand to $2.2 million, from $2.4 million for the comparable period in 2002, reflecting little effect of the sale of the independent sales organization (ISO) related merchant credit card activity to iPayment, Inc. In October 2002, the Company sold Bancard's ISO-related merchant credit card operations to iPayment, Inc. for $3.5 million. After contractual compensation and severance payments, transaction expenses, and income taxes, the transaction resulted in a gain of $1.3 million, or $0.47 per share, which was realized during the quarter, ended December 31, 2002. Also included in the sale were all of the merchant credit card processing relationships owned by Allied. Bancard continues to provide credit card processing for its local merchants and cardholders of the subsidiary banks and agent banks. Through September 24, 2003, Bancard also temporarily continued to process ISO related transactions for iPayment, Inc. for a fixed monthly fee rather than a percentage of transaction volumes. Built into the sales contract with iPayment was an agreement that the fixed monthly fee would increase as the temporary processing period was extended. Extensions to the processing period and the resulting growth in the fixed monthly fee mitigated the drop in Bancard's earnings that was expected to occur. The transfer of this ISO processing to another provider occurred in September 2003, just prior to the close of the third quarter. As the Company anticipated, Bancard's monthly earnings were reduced significantly in the final quarter of 2003. For the three quarters through September 30, 2003, Bancard's net income was $741 thousand, and for the fourth quarter of fiscal 2003, Bancard's net income was $125 thousand. While future operating results are anticipated to be reduced, the Company believes that Bancard will, on a smaller scale, remain profitable with its narrowed business focus of continuing to provide credit card processing for its local merchants and agent banks and for cardholders of the Company's subsidiary banks. 13 For the twelve-month periods ended both December 31, 2003 and 2002, trust department fees were $2.2 million. The $33 thousand, or 2%, increase from year to year was primarily a reflection of the further development of existing trust relationships throughout 2003 and the addition of a significant volume of new trust relationships occurring late in the fourth quarter, which were almost entirely offset by the reduction of approximately $50.0 million during the first quarter of a single trust account and its resulting impact on the calculation of trust fees for the remainder of the year. Deposit service fees increased $377 thousand, or 33%, to $1.5 million from $1.1 million for the twelve-month periods ended December 31, 2003 and December 31, 2002, respectively. This increase was primarily a result of the growth in noninterest bearing demand deposit accounts of $41.3 million, or 46%, since December 31, 2002. Service charges and NSF (non-sufficient funds) charges related to demand deposit accounts were the main components of deposit service fees. Gains on sales of loans were $3.7 million for fiscal 2003, which reflected an increase of 40%, or $1.1 million, from $2.6 million for the same period in 2002. The increase resulted from the lower mortgage rates that originated in calendar 2002 and continued throughout 2003. This situation created significantly more home refinances during the period and the subsequent sale of the majority of these loans into the secondary market. Because the gains on sales of loans typically have an inverse relationship with mortgage interest rates, it is unlikely that the subsidiary banks will continue to maintain this level of activity in the long term. During the fourth quarter of fiscal 2003, refinancing volumes slowed dramatically from the pace that had existed in the three previous quarters. For the twelve months ended December 31, 2003, other noninterest income increased $700 thousand, or 82%, to $1.6 million from $857 thousand for the same period in 2002. The increase was primarily due to a combination of improved earnings on the cash surrender value of life insurance, gain realized on the sale of foreclosed property, increased earnings realized by Nobel Electronic Transfer, LLC, one of the three associated companies in which the Company holds an interest, dividends earned on Federal Reserve Bank and Federal Home Loan Bank stock, and increased fees generated from investment services offered at the subsidiary banks. Noninterest expenses. For the fiscal year ended December 31, 2003, the main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees. For the twelve months ended December 31, 2002, the main components of noninterest expenses were primarily salaries and benefits, compensation and other expenses related to sale of merchant credit card portfolio, occupancy and equipment expenses, and professional and data processing fees. Noninterest expenses for the twelve-month period ended December 31, 2003 were $21.0 million as compared to $20.2 million for the same period in 2002 for an increase of $845 thousand or 4%. The following table sets forth the various categories of noninterest expenses for the twelve months ended December 31, 2003 and 2002. Twelve Months Ended December 31, ---------------------------------------- 2003 2002 % Change ---------------------------------------- Salaries and employee benefits ........................................... $12,710,505 $11,379,110 12% Compensation and other expenses related to sale of ....................... merchant credit card portfolio ......................................... -- 1,413,734 -100% Professional and data processing fees .................................... 1,962,243 1,498,819 31% Advertising and marketing ................................................ 786,054 658,452 19% Occupancy and equipment expense .......................................... 2,640,602 2,517,047 5% Stationery and supplies .................................................. 460,421 469,458 -2% Postage and telephone .................................................... 632,354 548,328 15% Bank service charges ..................................................... 454,367 391,886 16% Insurance ................................................................ 444,947 356,529 25% Other .................................................................... 943,759 957,202 -1% --------------------------------------- Total noninterest expenses ................................. $21,035,252 $20,190,565 4% ========================================
14 For the fiscal year ended December 31, 2003, total salaries and benefits increased to $12.7 million or $1.3 million over the $11.4 million for the comparable period in 2002. Stock appreciation rights (SAR) expense was $915 thousand for the year, as the Company's stock price grew from $16.90 to $28.00 during 2003. Also contributing to the increase in salaries and benefits were increased incentive compensation to real estate officers and processors proportionate to the increased volumes of gains on sales of loans, and the addition of employees at both subsidiary banks. Compensation and other expenses related to the sale of the ISO-related merchant credit card portfolio of $1.4 million accounted for 7% of the $20.2 million total in noninterest expenses for the twelve months ended December 31, 2002. Contractual bonus and severance payments were based on the gain realized from the sale of Bancard's ISO-related merchant credit card operations to iPayment, Inc. in October 2002. Occupancy and equipment expense increased $124 thousand, or 5%, for the period. The increase was due primarily to increased levels of rent, property taxes, utilities, depreciation, maintenance, and other occupancy expenses, in conjunction with $46 thousand in losses on disposals of assets. Professional and data processing fees increased $463 thousand, or 31%, when comparing fiscal 2003 to the comparable period in 2002. The increase was primarily attributable to a combination of additional data processing fees incurred by the subsidiary banks and other professional fees incurred by the parent company. When comparing fiscal 2003 to the comparable period in 2002, advertising and marketing expense grew $128 thousand, insurance expense increased $88 thousand, postage and phone expense grew $84 thousand, and bank service charges increased $62 thousand. These increases were all proportionate reflections of the Company's growth during the year. Income tax expense. The provision for income taxes was $2.7 million for the fiscal year ended December 31, 2003 compared to $2.4 million for the comparable period in 2002, an increase of $327 thousand or 14%. The increase was primarily attributable to increased income before income taxes of $967 thousand or 13% for the twelve-month period ended December 31, 2003, in combination with a slight increase in the Company's effective tax rate for the 2003 period to 33.0% from 32.9% for the same period in 2002. Six months ended December 31, 2002 compared with six months ended December 31, 2001 Overview. Net income for the six months ended December 31, 2002 was $3.2 million as compared to net income of $1.3 million for the six-month period ended December 31, 2001 for an increase of $1.9 million or 139%. Basic earnings per share for the six-month period ended December 31, 2002 were $1.16 as compared to $0.51 for the comparable period in 2001. The increase in net income was comprised of an increase in net interest income after provision for loan losses of $1.3 million and an increase in noninterest income of $4.8 million, partially offset by increases in noninterest expenses of $3.2 million and an increase in federal and state income taxes of $1.1 million. Several specific factors contributed to the improvement in net income from 2001 to 2002 for the six-month periods. Primary factors included the $3.5 million gain on sale of the merchant credit card portfolio, a 34% improvement in net interest income prompted by increased volume, and a 51% increase in gains on sales of real estate loans. Interest income. Interest income grew from $13.8 million for the six months ended December 31, 2001 to $16.1 million for the comparable period in 2002. The increase in interest income was attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, partially offset by a decrease in interest rates. The average yield on interest earning assets for the six months ended December 31, 2002 was 6.13% as compared to 7.05% for the six-month period ended December 31, 2001. Interest expense. Interest expense decreased by $150 thousand, from $6.6 million for the six months ended December 31, 2001 to $6.5 million for the same period in 2002. The 2% decrease in interest expense was primarily attributable to a reduction in interest rates almost entirely offset by greater average outstanding balances in interest-bearing liabilities. The average cost on interest bearing liabilities was 2.90% for the six months ended December 31, 2002 as compared to 3.89% for the like period in 2001. 15 Provision for loan losses. The provision for loan losses is established based on a number of factors, including the local and national economy and the risk associated with the loans in the portfolio. The Company had an allowance for estimated losses on loans of approximately 1.53% of total gross loans at December 31, 2002, as compared to approximately 1.56% at June 30, 2002 and 1.43% at December 31, 2001. The provision for loan losses increased by $1.2 million, from $1.0 million for the six months ended December 31, 2001 to $2.2 million for the six-month period ended December 31, 2002. During the period, management made monthly provisions for loan losses based upon a number of factors, principally the increase in loans and a detailed analysis of the loan portfolio. During the six months ended December 31, 2002, $786 thousand, or 36%, of the provision for loan losses resulted from the deterioration of a single, significant loan relationship at Quad City Bank and Trust. For the six-month period ended December 31, 2002, commercial loans had total, net charge-offs of $1.3 million. The charge-off of a single commercial loan relationship at Quad City Bank and Trust accounted for $1.1 million, or 82%, of the commercial loan charge-offs for the period. Consumer loan charge-offs and recoveries totaled $105 thousand and $37 thousand, respectively, for the six months ended December 31, 2002. Real estate loans had no charge-off or recovery activity during this period in 2002. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income. Noninterest income increased by $4.8 million from $4.0 million for the six months ended December 31, 2001 to $8.8 million for the same period in 2002. In the six months ended December 31, 2002, the primary component of the increase in noninterest income was the gain on sale of the ISO related portion of the merchant credit card portfolio of $3.5 million, which accounted for 72% of the increase. Noninterest income for both periods consisted of income from the merchant credit card operation, fees from the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. Also making significant contributions to the 119% increase in noninterest income from year to year were increases in gains on sales of loans and merchant credit card fees net of processing costs. During the six-month period ended December 31, 2002, merchant credit card fees net of processing costs, increased by $270 thousand to $1.3 million, from $1.0 million for the comparable period in 2001. The increase was due to a 66% improvement from year to year in the volume of credit card transactions processed during the six months ended December 31. During the six-month period ended December 31, 2001, Bancard processed $568.3 million of transactions, which grew to $941.6 million for the same period in 2002. As a result of the sale of the ISO-related merchant credit card operations, processing volumes are expected to decrease dramatically in future months. Bancard will operate with a narrowed focus of processing for its local merchants and agent banks and for cardholders of the Company's subsidiary banks. For the six-month periods ended both December 31, 2002 and 2001, trust department fees were $1.0 million. The $48 thousand, or 5%, increase from year to year was primarily a reflection of the further development of existing trust relationships and the addition of new trust relationships during the 2002 period, almost entirely offset by the reduced market value of securities held in trust accounts and the resulting impact on the calculation of trust fees. Gains on sales of loans were $1.9 million for the six months ended December 31, 2002, which reflected an increase of 51%, or $632 thousand, from $1.2 million for the like period in 2001. The increase resulted from the decline in mortgage rates during calendar year 2002. This situation created significantly more home refinances during the period and the subsequent sale of the majority of these loans into the secondary market. Because the gains on sales of loans have an indirect relationship with interest and mortgage rates, it is unlikely that the subsidiary banks will continue to maintain this level of activity in the long term. The $3.5 million gain on sale of merchant credit card portfolio made the most significant contribution to the increase in noninterest income for the six months ended December 31, 2002 over the comparable period in 2001. In October 2002, the Company sold Bancard's ISO related merchant credit card operations to iPayment, Inc. Also included in the sale were all of the merchant credit card processing relationships owned by Allied. 16 Noninterest expenses. For the six months ended December 31, 2002, the main components of noninterest expenses were primarily salaries and benefits, compensation and other expenses related to sale of merchant credit card portfolio, occupancy and equipment expenses, and professional and data processing fees. For the six months ended December 31, 2001 noninterest expenses were comprised predominately of salaries and benefits, occupancy and equipment expenses, and professional and data processing fees. Noninterest expenses for the six-month period ended December 31, 2002 were $11.4 million as compared to $8.2 million for the same period in 2001 for an increase of $3.2 million or 38%. The following table sets forth the various categories of noninterest expenses for the six months ended December 31, 2002 and 2001. Six Months Ended December 31, ---------------------------------------- 2002 2001 % Change ---------------------------------------- Salaries and employee benefits ........................................... $ 6,075,885 $ 4,774,358 27% Compensation and other expenses related to sale of ....................... merchant credit card portfolio ......................................... 1,413,734 -- NA Professional and data processing fees .................................... 872,750 784,701 11% Advertising and marketing ................................................ 341,093 286,643 19% Occupancy and equipment expense .......................................... 1,322,826 1,137,585 16% Stationery and supplies .................................................. 229,066 235,766 -3% Postage and telephone .................................................... 291,737 229,462 27% Bank service charges ..................................................... 211,873 177,535 19% Insurance ................................................................ 186,308 193,458 -4% Other .................................................................... 467,779 425,406 10% ---------------------------------------- Total noninterest expenses ................................. $11,413,051 $ 8,244,914 38% ========================================
Compensation and other expenses related to the sale of the merchant credit card portfolio of $1.4 million accounted for 45% of the $3.2 million increase experienced in noninterest expenses in aggregate. Contractual bonus and severance payments were based on the gain realized from the sale of Bancard's ISO related merchant credit card operations to iPayment, Inc. in October 2002. For the six months ended December 31, 2002, total salaries and benefits increased to $6.1 million or $1.3 million over the $4.8 million for the comparable period in 2001. The change was attributable to increased incentive compensation to real estate officers and processors proportionate to the increased volumes of gains on sales of loans, in combination with the addition of employees at Cedar Rapids Bank & Trust and a slight increase in the number of Quad City Bank & Trust employees. Occupancy and equipment expense increased $185 thousand, or 16%, for the period. The increase was predominately due to increased levels of rent, property taxes, utilities, depreciation, maintenance, and other occupancy expenses. Professional and data processing fees increased $88 thousand, or 11%, when comparing the six months ended December 31, 2001 to the comparable period in 2002. The increase was primarily attributable to the additional data processing fees incurred by the subsidiary banks. From 2001 to 2002, postage and telephone expense for the six months ended December 31, increased 27%, or $62 thousand. The growth at Cedar Rapids Bank & Trust accounted for $40 thousand, or 65% of this increase. For the six-month period ended December 31, 2002, bank service charges increased $34 thousand, or 19%. Growth at Cedar Rapids Bank & Trust contributed $20 thousand, or 59% of this increase. Income tax expense. The provision for income taxes was $1.7 million for the six months ended December 31, 2002 compared to $630 thousand for the comparable period in 2001, an increase of $1.1 million or 167%. The increase was primarily attributable to increased income before income taxes of $2.9 million or 148% for the six-month period ended December 31, 2002, in combination with an increase in the Company's effective tax rate for the 2002 period to 34.5% from 32.0% for the same period in 2001. The increase in the Company's effective tax rate was due to a much lower percentage of the Company's income coming from federal tax-exempt securities, (primarily tax-free municipal bonds) in 2002 versus 2001. 17 Fiscal 2002 compared with fiscal 2001 Overview. Net income for fiscal 2002 was $3.0 million as compared to net income of $2.4 million in fiscal 2001 for an increase of $567 thousand or 24%. Basic earnings per share for fiscal 2002 were $1.10 as compared to $1.06 for fiscal 2001. The increase in net income was comprised of an increase in net interest income after provision for loan losses of $2.3 million and an increase in noninterest income of $1.6 million partially offset by increases in noninterest expenses of $3.2 million and an increase in federal and state income taxes of $155 thousand. Several factors contributed to the improvement in net income during fiscal 2002. Primary factors included the significant improvement of 36 basis points in net interest margin and the 75% increase in gains on sales of real estate loans. Interest income. Interest income was $28.5 million for fiscal 2001 and fiscal 2002. The stability in interest income was attributable to greater average outstanding balances in interest-earning assets, principally loans receivable, that was offset by the reduction in interest rates. The average yield on interest earning assets for fiscal 2002 was 6.77% as compared to 8.04% for fiscal 2001. Interest expense. Interest expense decreased by $3.7 million, from $16.6 million for fiscal 2001 to $12.9 million for fiscal 2002. The 23% decrease in interest expense was primarily attributable to significant reductions in interest rates partially offset by greater average outstanding balances in interest-bearing liabilities. The average cost on interest bearing liabilities was 3.56% for fiscal 2002 as compared to 5.32% for fiscal 2001. Provision for loan losses. The provision for loan losses is established based on a number of factors, including the local and national economy and the risk associated with the loans in the portfolio. The Company had an allowance for estimated losses on loans of approximately 1.56% of total loans at June 30, 2002 as compared to approximately 1.48% at June 30, 2001. The provision for loan losses increased by $1.4 million, from $900 thousand for fiscal 2001 to $2.3 million for fiscal 2002. During fiscal 2002, management made monthly provisions for loan losses based upon a number of factors, principally the increase in loans and a detailed analysis of the loan portfolio. For fiscal 2002, commercial loans had total charge-offs of $437 thousand and total recoveries of $101 thousand. Consumer loan charge-offs and recoveries totaled $204 thousand and $138 thousand, respectively, for fiscal 2002. Real estate loans had no charge-off or recovery activity during fiscal 2002. The ability to grow profitably is, in part, dependent upon the ability to maintain asset quality. Noninterest income. Noninterest income increased by $1.6 million, from $6.3 million for fiscal 2001 to $7.9 million for fiscal 2002. Noninterest income for fiscal 2002 and 2001 consisted of income from the merchant credit card operation, fees from the trust department, depository service fees, gains on the sale of residential real estate mortgage loans, and other miscellaneous fees. The 25% increase was primarily due to the increases in gains on sales of loans, merchant credit card fees net of processing costs, and deposit service fees received during the period. During fiscal 2002, merchant credit card fees net of processing costs increased by $424 thousand to $2.1 million, from $1.7 million for fiscal 2001. The increase was due to a 36% increase in the volume of credit card transactions processed during fiscal 2002, partially offset by the one-time charge during the third quarter related to an arbitration settlement involving Bancard. For fiscal 2002, trust department fees increased $90 thousand, or 4%, to $2.2 million from $2.1 million for fiscal 2001. The increase was primarily a reflection of the development of existing trust relationships and the addition of new trust relationships during the period, almost entirely offset by the reduced market value of securities held in trust accounts and the resulting impact on the calculation of trust fees. Gains on sales of loans were $2.0 million for fiscal 2002, which reflected an increase of 75%, or $855 thousand, from $1.1 million for fiscal 2001. The increase resulted from a significant decline in mortgage rates, which was driven by corresponding cuts by the Federal Reserve during calendar 2001. This created significantly more home refinances and home purchases during the fiscal year and the subsequent sale of the majority of these loans into the secondary market. Noninterest expenses. The main components of noninterest expenses were primarily salaries and benefits, occupancy and equipment expenses, and professional and data processing fees for both periods. Noninterest expenses for fiscal 2002 were $17.0 million as compared to $13.8 million for the same period in 2001 for an increase of $3.2 million or 23%. 18 The following table sets forth the various categories of noninterest expenses for the years ended June 30, 2002 and 2001. Years Ended June 30, ---------------------------------------- 2002 2001 % Change ---------------------------------------- Salaries and employee benefits ......................... $10,077,583 $ 8,014,268 26% Professional and data processing fees .................. 1,410,770 1,159,929 22% Advertising and marketing .............................. 604,002 579,524 4% Occupancy and equipment expense ........................ 2,331,806 1,925,820 21% Stationery and supplies ................................ 476,158 352,441 35% Postage and telephone .................................. 486,053 409,626 19% Bank service charges ................................... 357,550 293,012 22% Insurance .............................................. 351,873 328,405 7% Other .................................................. 926,633 736,928 26% ---------------------------------------- Total noninterest expenses ............... $17,022,428 $13,799,953 23% ========================================
Salaries and benefits experienced the most significant dollar increase of any noninterest expense component. For fiscal 2002, total salaries and benefits increased to $10.1 million or $2.1 million over the fiscal 2001 total of $8.0 million. The change was primarily attributable to the addition of employees to staff the Cedar Rapids Bank & Trust operation, which accounted for $1.7 million, or 82%, of the increase. A slight increase in the number of Quad City Bank & Trust employees, and increased incentive compensation to real estate officers proportionate to the increased volumes of gains on sales of loans, comprised the balance of the change. Occupancy and equipment expense increased $406 thousand or 21% for the period. The increase was predominately due to the addition of Quad City Bank & Trust's fourth full service banking facility in late October 2000, and Cedar Rapids Bank & Trust's permanent full service banking facility in September 2001, and the resulting increased levels of rent, utilities, depreciation, maintenance, and other occupancy expenses. Professional and data processing fees increased $251 thousand, or 22%, during fiscal 2002. The increase was primarily attributable to legal fees resulting from an arbitration involving Bancard, combined with the additional professional and data processing fees related to Cedar Rapids Bank & Trust. During fiscal 2002, stationary and supplies increased 35%, or $124 thousand. The addition of Cedar Rapids Bank & Trust accounted for $85 thousand, or 68% of this increase. Other noninterest expense increased $190 thousand, or 26% for the fiscal year. Significantly contributing to this increase was a $170 thousand merchant credit card loss resulting from the settlement of an arbitration dispute between Bancard and Nova Information Services, Inc. A settlement amount was paid to Bancard, which was the receivable due from Nova less an amount that approximated the costs of continued arbitration. For fiscal 2002, postage and telephone expense grew $76 thousand and bank service charges increased $65 thousand. Both reflected the growth of the subsidiary banks during the period. Income tax expense. The provision for income taxes was $1.3 million for fiscal 2002 compared to $1.2 million for fiscal 2001, an increase of $155 thousand or 13%. The increase was primarily attributable to increased income before income taxes of $722 thousand or 20% for fiscal 2002, partially offset by a reduction in the Company's effective tax rate for fiscal 2002 of 30.7% versus 32.6% for fiscal 2001. Financial Condition Total assets of the Company increased by $105.4 million or 17% to $710.0 million at December 31, 2003 from $604.6 million at December 31, 2002. The growth primarily resulted from an increase in the loan portfolio funded by deposits received from customers and by proceeds from short-term and other borrowings. Total assets of the Company increased by $85.8 million or 17% to $604.6 million at December 31, 2002 from $518.8 million at June 30, 2002. During this period the growth primarily resulted from an increase in the loan portfolio funded by deposits received from customers and by proceeds from Federal Home Loan Bank advances. Cash and Cash Equivalent Assets. Cash and due from banks decreased by $461 thousand or 2% to $24.4 million at December 31, 2003 from $24.9 million at December 31, 2002. Cash and due from banks increased by $6.5 million or 35% to $24.9 million at December 31, 2002 from $18.4 million at June 30, 2002. Cash and due from banks represented both cash maintained at the subsidiary banks, as well as funds that the Company and its subsidiaries had deposited in other banks in the form of noninterest-bearing demand deposits. 19 Federal funds sold are inter-bank funds with daily liquidity. Federal funds sold decreased by $10.4 million to $4.0 million at December 31, 2003 from $14.4 million at December 31, 2002. Federal funds sold increased by $13.6 million to $14.4 million at December 31, 2002 from $760 thousand at June 30, 2002. These fluctuations were attributable to the Company's varying levels of liquidity at the subsidiary banks. Interest-bearing deposits at financial institutions decreased by $4.2 million or 29% to $10.4 million at December 31, 2003 from $14.6 million at December 31, 2002. Included in interest-bearing deposits at financial institutions are demand accounts, money market accounts, and certificates of deposit. During fiscal 2003, the certificate of deposit portfolio had 35 maturities totaling $3.4 million and 30 purchases totaling $2.8 million. Interest-bearing deposits at financial institutions decreased by $502 thousand or 3% to $14.6 million at December 31, 2002 from $15.1 million at June 30, 2002. During the six months ended December 31, 2002, the certificate of deposit portfolio had 19 maturities totaling $1.9 million and no purchases. As the result of lower short-term interest rates and a strong loan demand during 2002 and 2003, the subsidiary banks reduced their deposits in other banks in the form of certificates of deposit and increased their utilization of Federal funds sold. Investments. Securities increased by $47.1 million or 58% to $128.8 million at December 31, 2003 from $81.7 million at December 31, 2002. The net increase was the result of a number of transactions in the securities portfolio. The Company purchased additional securities, classified as available for sale, in the amount of $91.7 million. This increase was partially offset by paydowns of $4.0 million that were received on mortgage-backed securities, proceeds from calls and maturities of $39.2 million, the amortization of premiums, net of the accretion of discounts, of $788 thousand, and the recognition a decrease in unrealized gains on securities available for sale, before applicable income tax of $549 thousand. Securities increased by $5.5 million or 7% to $81.7 million at December 31, 2002 from $76.2 million at June 30, 2002. The net increase was the result of a number of transactions in the securities portfolio. The Company purchased additional securities, classified as available for sale, in the amount of $14.8 million, and recognized an increase in unrealized gains on securities available for sale, before applicable income tax of $1.4 million. These increases were partially offset by paydowns of $1.2 million that were received on mortgage-backed securities, proceeds from the sales of securities available for sale of $2.1 million, proceeds from calls and maturities of $7.3 million, and amortization of premiums, net of the accretion of discounts, of $149 thousand. Certain investment securities of the subsidiary banks are purchased with the intent to hold the securities until they mature. These held to maturity securities, comprised of municipal securities and other bonds, were recorded at amortized cost at December 31, 2003, December 31, 2002, and June 30, 2002. The balance at December 31, 2003 was $400 thousand, which was a decrease of $25 thousand from the balance of $425 thousand at both December 31, 2002 and June 30, 2002. Market values at December 31 2003, December 31, 2002, and June 30, 2002 were $417 thousand, $451 thousand, and $437 thousand, respectively. All of the Company's and Cedar Rapids Bank & Trust's securities, and a majority of Quad City Bank & Trust's securities are placed in the available for sale category as the securities may be liquidated to provide cash for operating, investing or financing purposes. These securities were reported at fair value and increased by $47.2 million, or 58%, to $128.4 million at December 31, 2003, from $81.2 million at December 31, 2002. These securities were reported at fair value and increased by $5.4 million, or 7%, to $81.2 million at December 31, 2002, from $75.8 million at June 30, 2002. The amortized cost of such securities at December 31, 2003, December 31, 2002, and June 30, 2002 was $125.6 million, $77.8 million, and $73.7 million, respectively. The Company does not use any financial instruments referred to as derivatives to manage interest rate risk and as of December 31, 2003 there existed no security in the investment portfolio (other than U.S. Government and U.S. Government agency securities) that exceeded 10% of stockholders' equity at that date. Loans. Total gross loans receivable increased by $72.8 million or 16% to $522.5 million at December 31, 2003 from $449.7 million at December 31, 2002. The increase was the result of the origination or purchase of $691.1 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $1.6 million and loan repayments or sales of loans of $616.7 million. During the fiscal year ended December 31, 2003, Quad City Bank & Trust contributed $536.3 million, or 78%, and Cedar Rapids Bank & Trust contributed $154.8 million, or 22% of the Company's loan originations or purchases. The majority of residential real estate loans originated by the subsidiary banks were sold on the secondary market to avoid the interest rate risk associated with long-term fixed rate loans. As of December 31, 2003, Quad City Bank & Trust's legal lending limit was approximately $7.2 million and Cedar Rapids Bank & Trust's legal lending limit was approximately $2.5 million. 20 Total gross loans receivable increased by $59.1 million or 15% to $449.7 million at December 31, 2002 from $390.6 million at June 30, 2002. The increase was the result of the origination or purchase of $305.1 million of commercial business, consumer and real estate loans, less loan charge-offs, net of recoveries, of $1.4 million and loan repayments or sales of loans of $244.6 million. During the six months ended December 31, 2002, Quad City Bank & Trust contributed $231.4 million, or 76%, and Cedar Rapids Bank & Trust contributed $73.7 million, or 24% of the company's loan originations or purchases. The majority of residential real estate loans originated by the subsidiary banks were sold on the secondary market to avoid the interest rate risk associated with long-term fixed rate loans. As of December 31, 2002, Quad City Bank & Trust's legal lending limit was approximately $6.4 million and Cedar Rapids Bank & Trust's legal lending limit was approximately $1.6 million. Allowance for Loan Losses. The allowance for estimated losses on loans was $8.6 million at December 31, 2003 compared to $6.9 million at December 31, 2002, for an increase of $1.7 million or 26%. The allowance for estimated losses on loans was $6.9 million at December 31, 2002 compared to $6.1 million at June 30, 2002, for an increase of $800 thousand or 13%. The adequacy of the allowance for estimated losses on loans was determined by management based on factors that included the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions and other factors that, in management's judgment, deserved evaluation in estimating loan losses. To ensure that an adequate allowance was maintained, provisions were made based on the increase in loans and a detailed analysis of the loan portfolio. The loan portfolio was reviewed and analyzed monthly with specific detailed reviews completed on all credits risk-rated less than "fair quality" and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance for estimated losses on loans was monitored by the credit administration staff, and reported to management and the board of directors. Net charge-offs for the years ended December 31, 2003 and 2002, were $1.6 million and $1.5 million, respectively. Net charge-offs for the six months ended December 31, 2002 and 2001, were $1.4 million and $349 thousand respectively. One measure of the adequacy of the allowance for estimated losses on loans is the ratio of the allowance to the total loan portfolio. Provisions were made monthly to ensure that an adequate level was maintained. The allowance for estimated losses on loans as a percentage of total gross loans was 1.65% at December 31, 2003, 1.53% at December 31, 2002, and 1.56% at June 30, 2002. Although management believes that the allowance for estimated losses on loans at December 31, 2003 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. The Company is focusing efforts at its subsidiary banks in an attempt to improve the overall quality of the Company's loan portfolio. A slowdown in economic activity beginning in 2001 severely impacted several major industries as well as the economy as a whole. Even though there are numerous indications of emerging strength, it is not certain that this strength is sustainable. In addition, consumer confidence may still be negatively impacted by the substantial decline in equity security prices experienced in the period from 2000 through 2002. These events could still adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Company could experience increases in problem assets, delinquencies and losses on loans, and require further increases in the provision. Nonperforming Assets. 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. 21 Nonaccrual loans were $4.2 million at December 31, 2003 compared to $4.6 million at December 31, 2002, for a decrease of $404 thousand or 9%. The decrease in nonaccrual loans was comprised of decreases in commercial loans of $302 thousand and real estate loans of $139 thousand, partially offset by an increase in consumer loans of $36 thousand. The decrease in nonaccrual commercial loans was due primarily to the write-off of a single customer relationship at Quad City Bank for $1.3 million, partially offset by the transfer to nonaccrual status of another commercial lending relationship at Quad City Bank & Trust with an outstanding balance at December 31, 2003 of $702 thousand. Nonaccrual loans at December 31, 2003 represented less than one percent of the Company's loan portfolio. All of the Company's nonperforming assets were located in the loan portfolio at Quad City Bank & Trust. The loans in the Cedar Rapids Bank & Trust loan portfolio have been made since its inception in 2001, and none of the loans have been categorized as nonperforming assets. As the loan portfolio at Cedar Rapids Bank & Trust matures, it is likely that there will be nonperforming loans or charge-offs associated with the portfolio. Nonaccrual loans were $4.6 million at December 31, 2002 compared to $1.6 million at June 30, 2002, for an increase of $3.0 million or 196%. The increase in nonaccrual loans was comprised of increases in commercial loans of $2.9 million and real estate loans of $143 thousand, partially offset by a decrease in consumer loans of $10 thousand. The increase in nonaccrual commercial loans was due primarily to the transfer to nonaccrual status of two commercial lending relationships at Quad City Bank & Trust with an outstanding balance of $2.7 million. Nonaccrual loans at December 31, 2002 represented approximately one percent of the Company's loan portfolio. All of the Company's nonperforming assets were located in the loan portfolio at Quad City Bank & Trust. As of December 31, 2003, December 31, 2002, and June 30, 2002, past due loans of 30 days or more amounted to $6.9 million, $9.6 million, and $4.3 million, respectively. Past due loans as a percentage of gross loans receivable were 1.3% at December 31, 2003, 2.1% at December 31, 2002 and 1.1% at June 30, 2002. Other Assets. Premises and equipment increased by $2.8 million or 30% to $12.0 million at December 31, 2003 from $9.2 million at December 31, 2002. This increase resulted primarily from Quad City Bank & Trust's purchases of the northern segment of its Brady Street facility and the land for its fifth location, in combination with Company purchases of additional furniture, fixtures and equipment offset by depreciation expense. Premises and equipment increased by $18 thousand, or less than 1%, to remain at $9.2 million at December 31, 2002 as at June 30, 2002. This increase resulted from the purchase of additional furniture, fixtures and equipment offset by depreciation expense. Additional information regarding the composition of this account and related accumulated depreciation is described in Note 5 to the consolidated financial statements. Accrued interest receivable on loans, securities, and interest-bearing deposits at financial institutions increased by $425 thousand or 13% to $3.6 million at December 31, 2003 from $3.2 million at December 31, 2002. Accrued interest receivable on loans, securities, and interest-bearing deposits at financial institutions increased by $95 thousand or 3% to $3.2 million at December 31, 2002 from $3.1 million at June 30, 2002. Increases were primarily due to greater average outstanding balances in interest-bearing assets. Other assets decreased by $965 thousand or 7% to $12.8 million at December 31, 2003 from $13.8 million at December 31, 2002. The three largest components of other assets at December 31, 2003 were $5.5 million in Federal Reserve Bank and Federal Home Loan Bank stocks, $3.1 million in cash surrender value of life insurance contracts and $752 thousand in prepaid trust preferred offering expense. Other assets increased by $2.3 million or 19% to $13.8 million at December 31, 2002 from $11.5 million at June 30, 2002. The three largest components of other assets at December 31, 2002 were $4.3 million in Federal Reserve Bank and Federal Home Loan Bank stocks, $2.8 million in cash surrender value of life insurance contracts, and $3.3 million in prepaid Visa/Mastercard processing fees. At both December 31, 2003 and 2002, other assets also included accrued trust department fees, other miscellaneous receivables, and various prepaid expenses. Deposits. Deposits increased by $77.0 million or 18% to $511.7 million at December 31, 2003 from $434.7 million at December 31, 2002. The increase resulted from a $75.0 million net increase in noninterest bearing, NOW, money market and other savings accounts and a $2.0 million net increase in certificates of deposit. Deposits increased by $58.4 million or 16% to $434.7 million at December 31, 2002 from $376.3 million at June 30, 2002. The increase resulted from a $43.8 million net increase in noninterest bearing, NOW, money market and other savings accounts and a $14.6 million net increase in certificates of deposit. 22 Short-term Borrowings. Short-term borrowings increased by $18.7 million or 57% from $32.9 million as of December 31, 2002 to $51.6 million as of December 31, 2003. Short-term borrowings decreased by $1.7 million or 5% from $34.6 million as of June 30, 2002 to $32.9 million as of December 31, 2002. The subsidiary banks offer short-term repurchase agreements to some of their significant deposit customers. Also, on occasion, the subsidiary banks must purchase Federal funds for short-term funding needs from the Federal Reserve Bank, or from a correspondent bank. Short-term borrowings were comprised of customer repurchase agreements of $34.7 million, $32.9 million, and $29.1 million at December 31, 2003, December 31, 2002, and June 30, 2002, respectively, as well as federal funds purchased from correspondent banks of $16.9 million at December 31, 2003, none at December 31, 2002, and $5.5 million at June 30, 2002. FHLB Advances and Other Borrowings. FHLB advances increased $1.2 million or 2% from $75.0 million as of December 31, 2002 to $76.2 million as of December 31, 2003. FHLB advances increased $22.6 million or 43% from $52.4 million as of June 30, 2002 to $75.0 million as of December 31, 2002. As of December 31, 2003, the subsidiary banks held $4.3 million of FHLB stock in aggregate. As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. Both Quad City Bank & Trust and Cedar Rapids Bank & Trust utilized FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provided a less costly source of funds than customer deposits. Other borrowings increased to $10.0 million at December 31, 2003 for an increase of $5.0 million, or 100%, from December 31, 2002. In February and July 2003, the Company drew additional advances of $2.0 million and $3.0 million, respectively, as funding to maintain the required level of regulatory capital at Cedar Rapids Bank & Trust in light of the bank's growth. Other borrowings were $5.0 million at December 31, 2002 and at June 30, 2002. In September 2001, the Company drew a $5.0 million advance on a line of credit at its primary correspondent bank as partial funding for the initial capitalization of Cedar Rapids Bank & Trust. In June 1999, the Company issued 1,200,000 shares of trust preferred securities through its newly formed Capital Trust I subsidiary. On the Company's financial statements, these securities are listed as junior subordinated debentures and were $12,000,000 at December 31, 2003 and 2002, and June 30, 2002. Previously, these securities had been listed on financial statements as company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures, however upon adoption of Financial Accounting Standards Board Interpretation (FIN) No. 46 on December 31, 2003, prior years' financial statements were restated. Under current regulatory guidelines, these securities are considered to be Tier 1 capital, with certain limitations that are applicable to the Company. A detailed explanation of FIN No. 46 and its impact on the Company is presented in the "Impact of New Accounting Standards" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Additional information regarding the Company's adoption of FIN No. 46 is included in Note 1 to the consolidated financial statements. In February 2004, the Company issued, in a private transaction, $8.0 million of floating rate capital securities and $12.0 million of fixed rate capital securities (together, the "Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust III"), respectively. The securities represent undivided beneficial interests in Trust II and Trust III, which were established by the Company for the purpose of issuing the Trust Preferred Securities. Both Trust II and Trust III used the proceeds from the sale of the Trust Preferred Securities to purchase junior subordinated debentures of the Company. Other liabilities decreased by $1.7 million or 20% to $6.7 million as of December 31, 2003 from $8.4 million as of December 31, 2002. The decrease was primarily the result of the payment during 2003 of income taxes and a large portion of the accrued severance compensation related to Bancard's sale of its ISO related merchant credit card operations in October 2002. Other liabilities were comprised of unpaid amounts for various products and services, and accrued but unpaid interest on deposits. At both December 31, 2003 and 2002, the largest single component of other liabilities was interest payable at $1.2 million and $1.8 million, respectively. Other liabilities increased by $2.5 million or 43% to $8.4 million as of December 31, 2002 from $5.9 million as of June 30, 2002. The increase was primarily the result of accrued severance compensation and income taxes related to Bancard's sale of its ISO related merchant credit card operations in October 2002. At both December 31, 2002 and June 31, 2002, the largest single component of other liabilities was interest payable at $1.8 million and $1.9 million, respectively. Stockholders' Equity. Common stock of $2.8 million as of December 31, 2002 increased by $41 thousand, or 1%, to $2.9 million at December 31, 2003. The slight increase was the result of stock issued from the net exercise of stock options and stock purchased under the employee stock purchase plan. Common stock at December 31, 2002 was $2.8 million, which was unchanged from June 30, 2002. A slight increase of $13 thousand was the result of proceeds received from the exercise of stock options. 23 Additional paid-in capital increased to $17.1 million as of December 31, 2003 from $16.7 million at December 31, 2002. The increase of $382 thousand, or 2%, resulted primarily from proceeds received in excess of the $1.00 per share par value for the 40,929 shares of common stock issued as the result of the exercise of stock options and purchases of stock under the employee stock purchase plan. Additional paid-in capital totaled $16.8 million at December 31, 2002 compared to $16.7 million at June 30, 2002. An increase of $76 thousand resulted primarily from proceeds received in excess of the $1.00 per share par value for the 13,468 shares of common stock issued as the result of the exercise of stock options. Retained earnings increased by $5.2 million, or 33%, to $20.9 million at December 31, 2003 from $15.7 million at December 31, 2002. The increase reflected net income for the fiscal year reduced by the $307 thousand in dividends declared during 2003. The Company paid a cash dividend of $0.05 per share on July 3, 2003. On October 23, 2003, the board of directors declared a cash dividend of $0.06 per share payable on January 5, 2004, to stockholders of record on December 15, 2003. Retained earnings increased by $3.0 million, or 24%, to $15.7 million at December 31, 2002 from $12.7 million at June 30, 2002. The increase reflected net income for the six-month period reduced by the $138 thousand dividend declared in December. The Company also paid a cash dividend of $0.05 per share on January 3, 2003. Accumulated other comprehensive income was $1.8 million as of December 31, 2003 as compared to $2.1 million as of December 31, 2002. The decrease in the gains was attributable to the decrease during the period in the fair value of the securities identified as available for sale, primarily as a result of a slight recovery in market interest rates. Accumulated other comprehensive income consisting of net unrealized gains on securities available for sale, net of related income taxes, was $2.1 million as of December 31, 2002 as compared to $1.3 million as of June 30, 2002. The increase in the gains was attributable to the increase during the period in the fair value of the securities identified as available for sale, primarily as a result of a decline in market interest rates. In April 2000, the Company announced that the board of directors approved a stock repurchase program enabling the Company to repurchase approximately 60,000 shares of its common stock. This stock repurchase program was completed in the fall of 2000 and at both December 31, 2003 and 2002 and at June 30, 2002 the Company held in treasury 60,146 shares at a total cost of $855 thousand. The weighted average cost was $14.21 per share. Liquidity and Capital Resources Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $38.9 million at December 31, 2003, $53.9 million at December 31, 2002, and $34.2 million at June 30, 2002. Quad City Bank & Trust and Cedar Rapids Bank & Trust have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, sales of securities available for sale, FHLB advances, lines of credit and loan participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its portfolio of loans and mortgage-backed securities. The liquidity of the Company is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities, comprised predominately of proceeds on the sale of loans, was $30.2 million for fiscal 2003 compared to net cash used in operating activities, primarily for the origination of loans to be sold, of $9.8 million for the twelve months ended December 31, 2002. Net cash used in operating activities, consisting primarily of loan originations for sale, was $12.9 million for the six months ended December 31, 2002 compared to net cash provided by operating activities of $470 thousand for the six months ended December 31, 2001. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities, was $132.5 million for fiscal 2003 and $117.0 million for the comparable period in 2002, comprised predominately of loan originations. Net cash used in investing activities, consisting principally of loan funding and the purchase of securities and federal funds was $59.9 million for the six-month period ended December 31, 2002 and $59.7 million for the comparable period in 2001. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from short-term borrowings, was $101.8 million for fiscal 2003 compared to $132.1 million, comprised predominately of growth in deposits and proceeds from short-term borrowings, for the twelve months ended December 31, 2002. Net cash provided by financing activities, consisting primarily of deposit growth and proceeds from Federal Home Loan Bank advances, was $79.2 million for the six months ended December 31, 2002 compared to $60.2 million for the same period in 2001. 24 At December 31, 2003, the subsidiary banks had seven unused lines of credit totaling $41.0 million of which $4.0 million was secured and $37.0 million was unsecured. At December 31, 2002, the subsidiary banks had seven unused lines of credit totaling $38.0 million of which $4.0 million was secured and $34.0 million was unsecured. At the close of fiscal 2003, the Company had a $15.0 million unsecured revolving credit note. The note, which matures July 21, 2004, had a balance outstanding of $10.0 million at December 31, 2003. Interest is payable monthly at the Federal Funds rate plus one percent per annum, as defined in the credit note agreement. As of December 31, 2003, the interest rate was 1.97%. At December 31, 2002, the Company had a $10.0 million revolving credit note, which was secured by all of the outstanding stock of Quad City Bank & Trust. The note, which matured July 1, 2003, had a balance outstanding if $5.0 million at December 31, 2002. Interest was payable quarterly at the adjusted LIBOR rates, as defined in the credit note agreement. As of December 31, 2002, the interest rate was 3.8%. At December 31, 2002, the subsidiary banks had seven unused lines of credit totaling $38.0 million of which $4.0 million was secured and $34.0 million was unsecured. At June 30, 2002, the subsidiary banks had seven unused lines of credit totaling $36.0 million of which $4.0 million was secured and $32.0 million was unsecured. At both December 31, 2002 and June 30, 2002, the Company also had a secured line of credit for $10.0 million, of which $5.0 million had been used as partial funding for the capitalization of Cedar Rapids Bank and Trust. On February 18, 2004, the Company issued $8.0 million of floating rate capital securities and $12.0 million of fixed rate capital securities (together, the "Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust III"). The securities represent undivided beneficial interests in Trust II and Trust III, which were established by the Company for the purpose of issuing the Trust Preferred Securities. The securities issued by Trust II and Trust III mature in 30 years. The floating rate capital securities are callable at par after five years and the fixed rate capital securities are callable at par after seven years. The floating rate capital securities have a variable rate based on the three-month LIBOR, reset quarterly, with the initial rate set at 3.97%, and the fixed rate capital securities have a fixed rate of 6.93%, payable quarterly, for seven years, at which time they have a variable rate based on the three-month LIBOR, reset quarterly. Both Trust II and Trust III used the proceeds from the sale of the Trust Preferred Securities to purchase junior subordinated debentures of QCR Holdings, Inc. The Company incurred issuance costs of $410 thousand, which will be amortized over the lives of the securities. The Company intends to use its net proceeds for general corporate purposes, including the possible redemption in June 2004 of the $12.0 million of 9.2% cumulative trust preferred securities issued by Trust I in 1999. If redeemed, the trust preferred securities issued in 1999 carry approximately $750 thousand of unamortized issuance costs, which will be expensed as of June 30, 2004. Commitments, Contingencies, Contractual Obligations, and Off-balance Sheet Arrangements In the normal course of business, the subsidiary banks make various commitments and incur 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 subsidiary banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties. 25 Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year, or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the banks would be required to fund the commitments. The maximum potential amount of future payments the banks could be required to make is represented by the contractual amount. If the commitment is funded, the banks would be entitled to seek recovery from the customer. At December 31, 2003 and 2002 no amounts had been recorded as liabilities for the banks' potential obligations under these guarantees. As of December 31, 2003 and 2002, commitments to extend credit aggregated $194.9 million and $165.2 million, respectively. As of December 31, 2003 and 2002, standby letters of credit aggregated $6.0 million and $4.9 million, respectively. Management does not expect that all of these commitments will be funded. The Company had also executed contracts for the sale of mortgage loans in the secondary market in the amount of $3.8 million and $23.7 million as of December 31, 2003 and 2002, respectively. These amounts were included in loans held for sale at the respective balance sheet dates. Bancard is subject to the risk of cardholder chargebacks and its local merchants 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 local merchant. The Company also has a guarantee to MasterCard International Incorporated, which is backed by a performance bond in the amount of $1.0 million. As of December 31, 2003 there were no significant pending liabilities. A significant portion of residential mortgage loans sold to investors in the secondary market is sold with recourse. Specifically, certain loan sales agreements provide that if the borrower becomes delinquent a number of payments or a number of days, within six months to one year of the sale, the subsidiary banks must repurchase the loan from the subject investor. The banks did not repurchase any loans from secondary market investors under the terms of these loan sales agreements during the year ended December 31, 2003, six months ended December 31, 2002, or the years ended June 30, 2002 or 2001. In the opinion of management, the risk of recourse to the banks was not significant and, accordingly, no liability has been established related to such. The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following table presents, as of December 31, 2003, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. Payments Due by Period (in thousands) ---------------------------------------------------- Description and One year After 5 Note reference Total or less 1-3 years 4-5 years years ---------------------------------------------------- Deposits without a ......... $315,812 $315,812 $ -- $ -- $ -- stated maturity .......... Certificates of deposits (6) 195,840 157,188 34,665 3,987 -- Short-term borrowings (7) .. 51,610 51,610 -- -- -- Federal Home Loan Bank advances (8) ....... 76,232 19,500 13,410 19,300 24,022 Other borrowings (9) ....... 10,000 10,000 -- -- -- Junior subordinated debentures (10) .......... 12,000 -- -- -- 12,000 Rental commitments (5) ..... 1,926 514 977 253 182 Purchase obligations (17) .. 1,083 1,083 -- -- -- Operating leases (17) ...... 3,054 1,029 2,002 7 16 ---------------------------------------------------- Total contractual cash obligations ......... $667,557 $556,736 $ 51,054 $23,547 $36,220 ====================================================
26 Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The purchase obligation amounts presented primarily relate to certain contractual payments for capital expenditures of data processing technology and facilities expansion. The Company's operating lease obligations represent short and long-term lease payments for data processing equipment and services, software, and other equipment and professional services. Impact of Inflation and Changing Prices The consolidated financial statements and the accompanying notes have been prepared in accordance with Generally Accepted Accounting Principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Impact of New Accounting Standards The Financial Accounting Standards Board has issued Statement 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB No. 123". This Statement amends Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The alternative methods were effective for transitions during 2003 and the Company did not make any such voluntary changes in accounting. The disclosure requirements of the Statement were effective for and adopted in the consolidated financial statements for the fiscal year ending December 31, 2002. The Financial Accounting Standards Board has issued Statement 149, "Amendment of Statement 133 on Derivative Instruments and Hedging". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The Statement was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Implementation of the Statement on July 1, 2003 did not have a significant impact on the consolidated financial statements, as the Company had no such instruments or contracts. The Financial Accounting Standards Board has issued Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that certain freestanding financial instruments be reported as liabilities in the balance sheet. For the Company, the Statement was effective July 1, 2003 and implementation had no significant impact on the consolidated financial statements The Financial Accounting Standard Board has issued Interpretation (FIN) No. 46 "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51.", which, for the Company, is effective for the year ending December 31, 2003. FIN 46 establishes accounting guidance for consolidation of variable interest entities (VIE), that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIE's expected losses, receives a majority of the VIE's expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. Under the provisions of FIN 46, QCR Holdings Capital Trust I no longer meets the criteria for consolidation and, as such, has not been consolidated in these financial statements. FIN 46 was adopted on December 31, 2003 via a retroactive restatement of the prior year's financial statements. There was no cumulative effect on stockholders' equity from this adoption. 27 In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of this accounting change and, if necessary or warranted, provide further appropriate guidance. No further guidance has been issued to date and, as such, the $12 million in trust preferred securities issued by QCR Capital Trust I were included in Tier I capital for regulatory capital purposes at December 31, 2003. There can be no assurance that the Federal Reserve will continue to permit institutions to include trust preferred securities in Tier I capital in the future. Assuming the Company was not permitted to include these securities in Tier I capital at December 31, 2003, the Company would still exceed the regulatory required minimums for capital adequacy purposes. In February 2004, the Company issued, in a private transaction, $8.0 million of floating rate capital securities and $12.0 million of fixed rate capital securities (together, the "Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust III"), respectively. The securities represent undivided beneficial interests in Trust II and Trust III, which were established by the Company for the purpose of issuing the Trust Preferred Securities. Trust II and Trust III used the proceeds from the sale of the Trust Preferred Securities to purchase junior subordinated debentures of the Company. In February 2004, the Federal Reserve provided confirmation to the Company for their treatment of these new issuances as Tier 1 capital for regulatory capital purposes, subject to established limitations. The Accounting Standards Executive Committee has issued Statement of Position (SOP) 03-3 "Accounting for Certain Loans or Debt Securities Acquired in a Transfer". This Statement applies to all loans acquired in a transfer, including those acquired in the acquisition of a bank or a branch, and provides that such loans be accounted for at fair value with no allowance for loan losses, or other valuation allowance, permitted at the time of acquisition. The difference between cash flows expected at the acquisition date and the investment in the loan should be recognized as interest income over the life of the loan. If contractually required payments for principal and interest are less than expected cash flows, this amount should not be recognized as a yield adjustment, a loss accrual, or a valuation allowance. For the Company, this Statement is effective for calendar year 2005 and, early adoption, although permitted, is not planned. No significant impact is expected on the consolidated financial statements at the time of adoption. FORWARD LOOKING STATEMENTS Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "bode," "predict," "suggest," "appear," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following: o The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. o The economic impact of past and any future terrorist attacks, acts of war or threats thereof, and the response of the United States to any such threats and attacks. o The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. o The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of the Board of Governors of the Federal Reserve System. 28 o The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. o The inability of the Company to obtain new customers and to retain existing customers. o The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. o Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. o The ability of the Company to develop and maintain secure and reliable electronic systems. o The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. o Consumer spending and saving habits which may change in a manner that affects the Company's business adversely. o Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. o The costs, effects and outcomes of existing or future litigation. o Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board. o The ability of the Company to manage the risks associated with the foregoing as well as anticipated. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income. In an attempt to manage its exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank . Management also reviews Quad City Bank & Trust and Cedar Rapids Bank & Trust's securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting the Company's asset/liability position, the board and management attempt to manage the Company's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board and management may decide to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates. 29 One approach used to quantify interest rate risk is the net portfolio value analysis. In essence, this analysis calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance-sheet contracts. The following table sets forth, at December 31, 2003 and 2002, an analysis of the Company's interest rate risk as measured by the estimated changes in the net portfolio value resulting from instantaneous and sustained parallel shifts in the yield curve (+ or - 200 basis points). Estimated Increase Change in (Decrease) in NPV Interest Estimated ------------------------------------------------------------------ Rates NPV Amount Amount Percent - ------------------ ---------------------------------- ----------------------------------- ------------------------------ (Basis points) Dec.31, 2003 Dec. 31, 2002 Dec.31, 2003 Dec. 31, 2002 Dec.31, 2003 Dec. 31, 2002 - ------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) +200 $ 53,893 $ 45,225 $ (3,532) $ (2,584) (6.15%) (5.40%) --- $ 57,425 $ 47,809 -200 $ 59,932 $ 50,013 $ 2,507 $ 2,204 4.36% 4.61
The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the board of directors, the Company does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. 30 Item 8. Financial Statements QCR Holdings, Inc. Index to Consolidated Financial Statements Independent Auditor's Report 32 Financial Statements Consolidated balance sheets as of December 31, 2003 and 2002 33 Consolidated statements of income for the year ended December 31, 2003, six months ended December 31, 2002 and the year ended June 30, 2002 and 2001 34 Consolidated statements of changes in stockholders' equity for the year ended December 31, 2003, six months ended December 31, 2002 and the years ended June 30, 2002 and 2001 35 Consolidated statements of cash flows for the year ended December 31, 2003, six months ended December 31, 2002 and the years ended June 30, 2002 and 2001 36 - 37 Notes to consolidated financial statements 38 - 61 31 Independent Auditor's Report To the Board of Directors and Stockholders QCR Holdings, Inc. Moline, Illinois We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001. 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 auditing standards generally accepted in the United States of America. 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 QCR Holdings, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP Davenport, Iowa January 23, 2004 McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation of separate and independent legal entities. 32 QCR Holdings, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2003 and 2002 Assets 2003 2002 - -------------------------------------------------------------------------------------------- Cash and due from banks ..................................... $ 24,427,573 $ 24,888,350 Federal funds sold .......................................... 4,030,000 14,395,000 Interest-bearing deposits at financial institutions ......... 10,426,092 14,585,795 Securities held to maturity, at amortized cost (fair value 2003 $416,751; 2002 $451,121) (Note 3) .................... 400,116 425,332 Securities available for sale, at fair value (Note 3) ....... 128,442,926 81,228,749 --------------------------- 128,843,042 81,654,081 --------------------------- Loans receivable, held for sale (Note 4) .................... 3,790,031 23,691,004 Loans receivable, held for investment (Note 4) .............. 518,681,380 426,044,732 Less allowance for estimated losses on loans (Note 4) ..... 8,643,012 6,878,953 --------------------------- 513,828,399 442,856,783 --------------------------- Premises and equipment, net (Note 5) ........................ 12,028,532 9,224,542 Accrued interest receivable ................................. 3,646,108 3,221,246 Other assets ................................................ 12,809,809 13,774,559 --------------------------- Total assets ........................................ $710,039,555 $604,600,356 =========================== Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------- Liabilities: Deposits: Noninterest-bearing ..................................... $130,962,916 $ 89,675,609 Interest-bearing ........................................ 380,688,947 345,072,014 --------------------------- Total deposits (Note 6) ............................. 511,651,863 434,747,623 Short-term borrowings (Note 7) ............................ 51,609,801 32,862,446 Federal Home Loan Bank advances (Note 8) .................. 76,232,348 74,988,320 Other borrowings (Note 9) ................................. 10,000,000 5,000,000 Junior subordinated debentures (Notes 1 and 10) ........... 12,000,000 12,000,000 Other liabilities ......................................... 6,722,808 8,415,365 --------------------------- Total liabilities ................................... 668,216,820 568,013,754 --------------------------- Commitments and Contingencies (Note 17) Stockholders' Equity (Note 15): Preferred stock, stated value of $1 per share; shares authorized 250,000; shares issued none .................. -- -- Common stock, $1 par value; shares authorized 5,000,000; 2003 - shares issued 2,863,990 and outstanding 2,803,844; 2002 - shares issued 2,823,061 and outstanding 2,762,915 2,863,990 2,823,061 Additional paid-in capital ................................ 17,143,868 16,761,423 Retained earnings ......................................... 20,866,749 15,712,600 Accumulated other comprehensive income .................... 1,802,664 2,144,054 --------------------------- 42,677,271 37,441,138 Less cost of 60,146 common shares acquired for the treasury . 854,536 854,536 --------------------------- Total stockholders' equity .......................... 41,822,735 36,586,602 --------------------------- Total liabilities and stockholders' equity .......... $710,039,555 $604,600,356 ===========================
See Notes to Consolidated Financial Statements. 33 QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Income Six Year Ended Months Ended Year Ended June 30, December 31, December 31, --------------------------- 2003 2002 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Interest and dividend income: Loans, including fees ................................... $ 28,984,000 $ 13,747,643 $ 23,718,322 $ 22,970,407 Securities: Taxable ............................................... 3,248,115 1,702,046 3,166,323 3,067,722 Nontaxable ............................................ 493,162 235,155 429,138 290,990 Interest-bearing deposits at financial institutions ..... 432,119 361,218 948,098 947,755 Federal funds sold ...................................... 220,865 73,611 258,256 1,267,062 --------------------------------------------------------- Total interest and dividend income ................ 33,378,261 16,119,673 28,520,137 28,543,936 --------------------------------------------------------- Interest expense: Deposits ................................................ 7,005,306 4,151,446 8,894,578 13,022,210 Short-term borrowings ................................... 326,916 225,093 592,382 992,219 Federal Home Loan Bank advances ......................... 3,255,416 1,440,326 2,048,273 1,462,779 Other borrowings ........................................ 228,433 99,645 201,415 -- Junior subordinated debentures .......................... 1,133,506 566,753 1,133,506 1,134,541 --------------------------------------------------------- Total interest expense ............................ 11,949,577 6,483,263 12,870,154 16,611,749 --------------------------------------------------------- Net interest income ............................... 21,428,684 9,636,410 15,649,983 11,932,187 Provision for loan losses (Note 4) ........................ 3,405,427 2,183,745 2,264,965 889,670 --------------------------------------------------------- Net interest income after provision for loan losses 18,023,257 7,452,665 13,385,018 11,042,517 --------------------------------------------------------- Noninterest income: Merchant credit card fees, net of processing costs ...... 2,194,974 1,292,213 2,097,209 1,673,444 Trust department fees ................................... 2,242,747 1,045,046 2,161,677 2,071,971 Deposit service fees .................................... 1,505,200 596,999 994,630 816,489 Gains on sales of loans, net ............................ 3,667,513 1,864,813 1,991,437 1,136,572 Securities gains (losses), net .......................... 5 61,514 6,433 (14,047) Gain on sale of merchant credit card portfolio (Note 11) -- 3,460,137 -- -- Other ................................................... 1,557,170 518,999 663,273 628,639 --------------------------------------------------------- Total noninterest income .......................... 11,167,609 8,839,721 7,914,659 6,313,068 --------------------------------------------------------- Noninterest expenses: Salaries and employee benefits .......................... 12,710,505 6,075,885 10,077,583 8,014,268 Compensation and other expenses related to sale of merchant credit card portfolio (Note 11) .............. -- 1,413,734 -- -- Professional and data processing fees ................... 1,962,243 872,750 1,410,770 1,159,929 Advertising and marketing ............................... 786,054 341,093 604,002 579,524 Occupancy and equipment expense ......................... 2,640,602 1,322,826 2,331,806 1,925,820 Stationery and supplies ................................. 460,421 229,066 476,158 352,441 Postage and telephone ................................... 632,354 291,737 486,053 409,626 Bank service charges .................................... 454,367 211,873 357,550 293,012 Insurance ............................................... 444,947 186,308 351,873 328,405 Other ................................................... 943,759 467,779 926,633 736,928 --------------------------------------------------------- Total noninterest expenses ........................ 21,035,252 11,413,051 17,022,428 13,799,953 --------------------------------------------------------- Income before income taxes ........................ 8,155,614 4,879,335 4,277,249 3,555,632 Federal and state income taxes (Note 12) .................. 2,694,687 1,682,791 1,314,796 1,159,900 --------------------------------------------------------- Net income ........................................ $ 5,460,927 $ 3,196,544 $ 2,962,453 $ 2,395,732 ========================================================= Earnings per common share (Note 16): Basic ................................................... $ 1.96 $ 1.16 $ 1.10 $ 1.06 Diluted ................................................. $ 1.91 $ 1.13 $ 1.08 $ 1.04 Weighted average common shares outstanding .............. 2,782,042 2,752,739 2,685,996 2,268,465 Weighted average common and common equivalent shares outstanding .................................... 2,855,055 2,819,416 2,743,805 2,314,334
See Notes to Consolidated Financial Statements. 34 QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Year Ended December 31, 2003, Six Months Ended December 31, 2002 and Years Ended June 30, 2002 and 2001 Accumulated Additional Other Common Paid-In Retained Comprehensive Treasury Stock Capital Earnings Income (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 2000 ........................ $2,325,416 $12,147,984 $ 7,296,017 $(1,098,518) $(599,480) $20,071,419 Comprehensive income: Net income ................................ -- -- 2,395,732 -- -- 2,395,732 Other comprehensive income, net of tax (Note 2) ................................ -- -- -- 1,604,440 -- 1,604,440 ----------- Comprehensive income .................. 4,000,172 ----------- Proceeds from issuance of 150 shares of common stock as a result of stock options exercised (Note 14) ............... 150 775 -- -- -- 925 Purchase of 18,650 shares of common stock for the treasury .......................... -- -- -- -- (255,056) (255,056) --------------------------------------------------------------------------------- Balance, June 30, 2001 ........................ 2,325,566 12,148,759 9,691,749 505,922 (854,536) 23,817,460 Comprehensive income: Net income ................................ -- -- 2,962,453 -- -- 2,962,453 Other comprehensive income, net of tax (Note 2) ................................ -- -- -- 777,817 -- 777,817 ----------- Comprehensive income .................. 3,740,270 ----------- Proceeds from issuance of 23,375 shares of common stock as a result of stock options exercised (Note 14) ....................... 23,375 133,607 -- -- -- 156,982 Exchange of 14,772 shares of common stock in connection with options exercised ...... (14,772) (171,291) -- -- -- (186,063) Proceeds from issuance of 475,424 shares of common stock ........................... 475,424 4,513,198 -- -- -- 4,988,622 Tax benefit of nonqualified stock options exercised ................................. -- 60,332 -- -- -- 60,332 --------------------------------------------------------------------------------- Balance, June 30, 2002 ........................ 2,809,593 16,684,605 12,654,202 1,283,739 (854,536) 32,577,603 Comprehensive income: Net income ................................ -- -- 3,196,544 -- -- 3,196,544 Other comprehensive income, net of tax (Note 2) ................................ -- -- -- 860,315 -- 860,315 ----------- Comprehensive income .................. 4,056,859 ----------- Cash dividends declared, $.05 per share ..... -- -- (138,146) -- -- (138,146) Proceeds from issuance of 24,270 shares of common stock as a result of stock options exercised (Note 14) ....................... 24,270 140,404 -- -- -- 164,674 Exchange of 10,802 shares of common stock in connection with options exercised ...... (10,802) (151,508) -- -- -- (162,310) Tax benefit of nonqualified stock options exercised ................................. -- 87,922 -- -- -- 87,922 --------------------------------------------------------------------------------- Balance, December 31, 2002 .................... 2,823,061 16,761,423 15,712,600 2,144,054 (854,536) 36,586,602 Comprehensive income: Net income .................................. -- -- 5,460,927 -- -- 5,460,927 Other comprehensive income, net of tax (Note 2) .................................. -- -- -- (341,390) -- (341,390) ----------- Comprehensive income .................. 5,119,537 ----------- Cash dividends declared, $.11 per share ..... -- -- (306,778) -- -- (306,778) Proceeds from issuance of 6,852 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan (Note 14) ................................. 6,852 104,635 -- -- -- 111,487 Proceeds from issuance of 50,658 shares of common stock as a result of stock options exercised (Note 14) ....................... 50,658 325,820 -- -- -- 376,478 Exchange of 16,581 shares of common stock in connection with options exercised (16,581) (322,881) -- -- -- (339,462) Tax benefit of nonqualified stock options exercised ................................. -- 274,871 -- -- -- 274,871 --------------------------------------------------------------------------------- Balance, December 31, 2003 .................... $2,863,990 $17,143,868 $20,866,749 $ 1,802,664 $(854,536) $41,822,735 =================================================================================
See Notes to Consolidated Financial Statements. 35 QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows Six Year Ended Months Ended Year Ended June 30, December 31, December 31, ------------------------------ 2003 2002 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net income .............................................. $ 5,460,927 $ 3,196,544 $ 2,962,453 $ 2,395,732 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation .......................................... 1,072,943 497,460 923,747 768,310 Provision for loan losses ............................. 3,405,427 2,183,745 2,264,965 889,670 Deferred income taxes ................................. (674,681) (403,312) (634,045) (362,995) Amortization of offering costs on junior subordinated debentures .......................................... 29,506 14,753 29,506 29,506 Amortization of premiums on securities, net ........... 788,263 148,782 162,642 60,062 Investment securities (gains) losses, net ............. (5) (61,514) (6,433) 14,047 Loans originated for sale ............................. (245,414,955) (136,646,900) (146,973,634) (97,605,425) Proceeds on sales of loans ............................ 268,983,441 123,319,054 146,290,546 94,039,651 Net gains on sales of loans ........................... (3,667,513) (1,864,813) (1,991,437) (1,136,572) Net losses on sales of premises and equipment ......... 50,446 -- -- -- Gain on sale of merchant credit card portfolio ........ -- (3,460,137) -- -- Tax benefit of nonqualified stock options exercised ... 274,871 87,922 60,332 -- Increase in accrued interest receivable ............... (424,862) (95,254) (262,814) (230,058) (Increase) decrease in other assets ................... 2,075,198 (2,193,369) (283,790) (1,166,767) Increase (decrease) in other liabilities .............. (1,722,249) 2,386,668 970,602 633,631 ---------------------------------------------------------------- Net cash provided by (used in) operating activities 30,236,757 (12,890,371) 3,512,640 (1,671,208) ---------------------------------------------------------------- Cash Flows from Investing Activities: Net (increase) decrease in federal funds sold ........... 10,365,000 (13,635,000) 7,015,000 18,330,000 Net (increase) decrease in interest-bearing deposits at financial institutions ................................ 4,159,703 501,664 (1,568,962) (547,278) Activity in securities portfolio: Purchases ............................................. (91,746,856) (14,778,519) (30,034,923) (17,003,552) Calls and maturities .................................. 39,195,000 7,335,000 9,702,500 15,045,000 Paydowns .............................................. 4,025,159 1,166,490 1,789,042 1,537,072 Sales of securities available for sale ................ -- 2,141,382 101,285 1,262,841 Activity in life insurance contracts: Purchases ............................................. (66,312) (195,000) (401,087) -- Increase in cash value ................................ (190,873) (9,388) (115,888) (87,840) Proceeds from sale of merchant credit card portfolio .... -- 3,500,000 -- -- Net loans originated and held for investment ............ (94,278,016) (45,365,509) (100,456,216) (41,568,458) Purchase of premises and equipment ...................... (4,152,033) (515,241) (1,471,625) (1,713,387) Proceeds from sales of premises and equipment ........... 224,654 -- -- -- ---------------------------------------------------------------- Net cash used in investing activities ............. (132,464,574) (59,854,121) (115,440,874) (24,745,602) ---------------------------------------------------------------- Cash Flows from Financing Activities: Net increase in deposit accounts ........................ 76,904,240 58,430,314 74,162,085 14,088,468 Net increase (decrease) in short-term borrowings ........ 18,747,355 (1,766,263) 6,286,167 7,570,818 Activity in Federal Home Loan Bank advances: Advances .............................................. 12,550,000 29,000,000 25,000,000 16,750,000 Payments .............................................. (11,305,972) (6,426,003) (2,298,436) (9,462,639) Proceeds from other borrowings .......................... 5,000,000 -- 5,000,000 -- Purchase of treasury stock .............................. -- -- -- (255,056) Payment of cash dividends ............................... (277,086) -- -- -- Proceeds from issuance of common stock, net ............. 148,503 2,364 4,959,541 925 ---------------------------------------------------------------- Net cash provided by financing activities ......... $ 101,767,040 $ 79,240,412 $ 113,109,357 $ 28,692,516 ----------------------------------------------------------------
(Continued) 36 QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued) Six Year Ended Months Ended Year Ended June 30, December 31, December 31, ---------------------------- 2003 2002 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and due from banks ... $ (460,777) $ 6,495,920 $ 1,181,123 $ 2,275,706 Cash and due from banks: Beginning .................................................. 24,888,350 18,392,430 17,211,307 14,935,601 ------------------------------------------------------------ Ending ..................................................... $ 24,427,573 $ 24,888,350 $ 18,392,430 $ 17,211,307 ============================================================ Supplemental Disclosures of Cash Flow Information, cash payments for: Interest ................................................... $ 12,516,692 $ 6,537,656 $ 13,405,861 $ 16,069,527 Income and franchise taxes ................................. 4,904,697 1,112,741 1,363,292 1,480,894 Supplemental Schedule of Noncash Investing Activities: Change in accumulated other comprehensive income, unrealized gains (losses) on securities available for sale, net ..... (341,390) 860,315 777,817 1,604,440 Due from broker for call of securities available for sale .. -- -- -- (1,000,000) Exchange of shares of common stock in connection with options exercised ................................... (339,462) (162,310) (186,063) --
See Notes to Consolidated Financial Statements. 37 QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Nature of Business and Significant Accounting Policies Nature of business: QCR Holdings, Inc. (Company) is a bank holding company providing bank and bank related services through its subsidiaries, Quad City Bank and Trust Company (Quad City Bank & Trust), Cedar Rapids Bank and Trust Company (Cedar Rapids Bank & Trust), Quad City Bancard, Inc. (Bancard), and QCR Holdings Capital Trust I (Trust I). Quad City Bank & Trust is a commercial bank that serves the Quad Cities and adjacent communities. Cedar Rapids Bank & Trust is a commercial bank that serves Cedar Rapids and adjacent communities. Both banks are chartered and regulated by the state of Iowa, are insured and subject to regulation by the Federal Deposit Insurance Corporation, and are members of and regulated by the Federal Reserve System. Bancard is an entity formed in April 1995 to conduct the Company's credit card operation and is regulated by the Federal Reserve System. Bancard's wholly-owned subsidiary, Allied Merchant Services, Inc. (Allied), was liquidated on December 31, 2003. All of the merchant credit card relationships owned by Allied were included in Bancard's sale of its ISO-related merchant credit card operations to iPayment, Inc. in October 2002. QCR Holdings Capital Trust I was capitalized in June 1999 for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred Securities. 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. The fair value disclosure of financial instruments is an estimate that can be computed within a range. Principles of consolidation: The accompanying consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries, except QCR Holdings Capital Trust I, which does not meet the criteria for consolidation. 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 include cash on hand and non-interest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans, deposits, and short-term borrowings are treated as net increases or decreases. Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $12,216,000 and $7,721,000 as of December 31, 2003 and 2002, respectively. 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 movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. 38 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. Interest is credited to earnings as earned based on the principal amount outstanding. The allowance for estimated losses on loans is maintained at the level considered adequate by management of the Company and the subsidiary banks to provide for losses that are probable. 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 subsidiary banks consider the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful credits, economic conditions, and other factors that in management's judgment deserve evaluation. Loans are considered impaired when, based on current information and events, it is probable the Company and the bank involved 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 Banks recognize interest income on impaired loans on a cash basis. Direct loan origination fees and costs are deferred and the net amounts amortized as an adjustment of the related loan's yield. Sales of loans: As part of its management of assets and liabilities, the Company routinely sells residential real estate loans. Loans which are expected to be sold in the foreseeable future are classified as held for sale and are carried at the lower of cost or estimated market value in the aggregate. Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded. Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. 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. Stock-based compensation plans: At December 31, 2003, the Company has three stock-based employee compensation plans, which are described more fully in Note 14. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Six Year Ended Months Ended Year Ended June 30, December 31, December 31, ------------------------ 2003 2002 2002 2001 ---------------------------------------------------- Net income, as reported ............... $5,460,927 $3,196,544 $2,962,453 $2,395,732 Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects .. (96,447) (39,503) (90,182) (70,328) ---------------------------------------------------- Net income .................... $5,364,480 $3,157,041 $2,872,271 $2,325,404 ==================================================== Earnings per share: Basic: As reported ....................... $ 1.96 $ 1.16 $ 1.10 $ 1.06 Pro forma ......................... 1.93 1.15 1.07 1.03 Diluted: As reported ....................... 1.91 1.13 1.08 1.04 Pro forma ......................... 1.88 1.12 1.05 1.00
39 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 during the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001: dividend rate of .44% to .61% for the year ended December 31, 2003, .59% for the six months ended December 31, 2002, and 0% for the years ended June 30, 2002 and 2001; risk-free interest rates based upon current rates at the date of grant (3.68% to 6.22% for stock options and .82% to 1.29% for the employee stock purchase plan); expected lives of 10 years for stock options and 3 months to 6 months for the employee stock purchase plan; and expected price volatility of 23.09% to 24.69%. 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 Quad City Bank & Trust in a fiduciary, agency, or custodial 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 is computed by dividing net income by the weighted average number of common stock shares outstanding for the respective period. Diluted earnings per share is computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding for the respective period. Change in year-end: In August 2002, the Company changed its fiscal year-end from June 30th to December 31st. The change in year-end resulted in a short fiscal year covering the six-month transition period from July 1, 2002 to December 31, 2002. References to the transition period, fiscal 2002 and, 2001 throughout these consolidated financial statements are for the six months ended December 31, 2002 and the years ended June 30, 2002 and 2001, respectively. In connection with the Company's change in fiscal year, presented below is the financial data for comparable six month and twelve month periods: Six Months Ended Twelve Months Ended December 31, December 31, ------------------------------------------------------------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) 2002 2001 2003 2002 2001 ------------------------------------------------------------------- Total interest income ........ $16,119,673 $13,845,800 $33,378,261 $30,794,010 $28,146,996 Total interest expense ....... 6,483,263 6,633,525 11,949,577 12,719,892 14,803,076 ------------------------------------------------------------------- Net interest income .. 9,636,410 7,212,275 21,428,684 18,074,118 13,343,920 Provision for loan losses .... 2,183,745 1,039,865 3,405,427 3,408,845 1,409,660 Noninterest income ........... 8,839,721 4,040,240 11,167,609 12,714,140 7,565,727 Noninterest expenses ......... 11,413,051 8,244,914 21,035,252 20,190,565 15,501,058 ------------------------------------------------------------------- Net income before income taxes ......... 4,879,335 1,967,736 8,155,614 7,188,848 3,998,929 Federal and state income taxes 1,682,791 630,126 2,694,687 2,367,461 1,269,781 ------------------------------------------------------------------- Net income ........... $ 3,196,544 $ 1,337,610 $ 5,460,927 $ 4,821,387 $ 2,729,148 =================================================================== Earnings per common share: Basic ........................ $ 1.16 $ 0.51 $ 1.96 $ 1.75 $ 1.13 Diluted ...................... 1.13 0.50 1.91 1.71 1.11
40 Restatement of financial statements: Under the provisions of FIN 46, Consolidation of Variable Interest Entities, and FASB Interpretation No. FIN 46R, QCR Holdings Capital Trust I, a 100%-owned subsidiary of the Company, no longer meets the criteria for consolidation. FIN 46 was adopted on December 31, 2003 via a retroactive restatement of the prior year's financial statements. As a result, the balance sheet includes $12,000,000 of junior subordinated debentures, which were previously included in the balance sheet as Company Obligated Mandatorily Redeemable Preferred Securities. There was no cumulative effect on stockholders' equity from this adoption. In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of this accounting change and, if necessary or warranted, provide further appropriate guidance. No further guidance has been issued to date and the $12,000,000 in trust preferred securities issued by QCR Capital Trust I, which are no longer included on the Company's consolidated balance sheet as such, but are now represented by junior subordinated debentures, were included in Tier I capital for regulatory capital purposes at December 31, 2003. See also Notes 10 and 15. There can be no assurance that the Federal Reserve will continue to permit institutions to include trust preferred securities in regulatory capital in the future. Assuming the Company was not permitted to include these securities in regulatory capital at December 31, 2003, the Company would still exceed the regulatory required minimums for capital adequacy purposes. Reclassification: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders' equity, to conform with the current period presentation. Note 2. Comprehensive Income Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale. Other comprehensive income (loss) for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001 is comprised as follows: Tax Before Expense Net Tax (Benefit) of Tax ----------------------------------------- Year ended December 31, 2003: Unrealized gains (losses) on securities available for sale: Unrealized holding (losses) arising during the period ... $ (549,473) $ (208,086) $ (341,387) Less reclassification adjustment for gains included in net income ................................ 5 2 3 ----------------------------------------- Other comprehensive income (loss) ................... $ (549,478) $ (208,088) $ (341,390) ========================================= Six months ended December 31, 2002: Unrealized gains on securities available for sale: Unrealized holding gains arising during the period ...... $ 1,436,098 $ 537,283 $ 898,815 Less reclassification adjustment for gains included in net income ................................ 61,514 23,014 38,500 ----------------------------------------- Other comprehensive income .......................... $ 1,374,584 $ 514,269 $ 860,315 ========================================= Tax Before Expense Net Tax (Benefit) of Tax ----------------------------------------- Year ended June 30, 2002: Unrealized gains on securities available for sale: Unrealized holding gains arising during the year ........ $ 1,241,584 $ 459,716 $ 781,868 Less reclassification adjustment for gains included in net income ................................ 6,433 2,382 4,051 ----------------------------------------- Other comprehensive income .......................... $ 1,235,151 $ 457,334 $ 777,817 ========================================= Year ended June 30, 2001: Unrealized gains (losses) on securities available for sale: Unrealized holding gains arising during the year ........ $ 2,482,453 $ 887,041 $ 1,595,412 Less reclassification adjustment for (losses) included in net income ................................. (14,047) (5,019) (9,028) ----------------------------------------- Other comprehensive income .......................... $ 2,496,500 $ 892,060 $ 1,604,440 =========================================
41 Note 3. Investment Securities The amortized cost and fair value of investment securities as of December 31, 2003 and 2002 are summarized as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------------------------------------------------------------- December 31, 2003: Securities held to maturity: Municipal securities ....... $ 250,116 $ 3,856 $ -- $ 253,972 Foreign bonds .............. 150,000 12,779 -- 162,779 --------------------------------------------------------------- $ 400,116 $ 16,635 $ -- $ 416,751 =============================================================== Securities available for sale: U.S. Treasury securities ... $ 1,001,823 $ 3,028 $ -- $ 1,004,851 U.S. agency securities ..... 86,732,152 1,104,501 (63,574) 87,773,079 Mortgage-backed securities . 5,656,092 67,078 (8,438) 5,714,732 Municipal securities ....... 15,663,699 1,017,795 (884) 16,680,610 Corporate securities ....... 9,466,395 491,943 (3,782) 9,954,556 Trust preferred securities . 1,349,800 105,009 -- 1,454,809 Other securities ........... 5,687,664 173,612 (987) 5,860,289 --------------------------------------------------------------- $ 125,557,625 $ 2,962,966 $ (77,665) $ 128,442,926 =============================================================== Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value --------------------------------------------------------------- December 31, 2002: Securities held to maturity: Municipal securities ....... $ 250,332 $ 9,350 $ -- $ 259,682 Foreign bonds .............. 175,000 16,439 -- 191,439 ---------------------------------------------------------------- $ 425,332 $ 25,789 $ -- $ 451,121 ================================================================ Securities available for sale: U.S. Treasury securities ..... $ 1,016,608 $ 19,879 $ -- $ 1,036,487 U.S. agency securities ....... 47,534,699 1,701,832 (1,243) 49,235,288 Mortgage-backed securities ... 5,600,989 169,475 (18) 5,770,446 Municipal securities ......... 13,941,352 978,262 -- 14,919,614 Corporate securities ......... 7,691,358 475,136 -- 8,166,494 Trust preferred securities ... 1,349,796 93,146 (10,985) 1,431,957 Other securities ............. 659,168 19,926 (10,631) 668,463 ---------------------------------------------------------------- $ 77,793,970 $ 3,457,656 $ (22,877) $ 81,228,749 ================================================================
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2003 are summarized as follows: Less than 12 Months 12 Months or More Total ----------------------------- --------------------------- ---------------------------- Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses -------------------------------------------------------------------------------------------- Securities available for sale: U.S. agency securities ..... $ 29,629,310 $ (63,574) $ -- $ -- $ 29,629,310 $ (63,574) Mortgage-backed securities . 2,919,512 (8,438) -- -- 2,919,512 (8,438) Municipal securities ....... 246,727 (884) -- -- 246,727 (884) Corporate securities ....... 1,058,945 (3,782) -- -- 1,058,945 (3,782) Other securities ........... -- -- 24,927 (987) 24,927 (987) -------------------------------------------------------------------------------------------- $ 33,854,494 $ (76,678) $ 24,927 $ (987) $ 33,879,421 $ (77,665) ============================================================================================
42 For all of the above investment securities, the unrealized losses are generally due to changes in interest rates and, as such, are considered to be temporary, by the Company. There were no sales of securities during the year ended December 31, 2003. All sales of securities during the six months ended December 31, 2002 and the years ended June 30, 2002 and 2001 were from securities identified as available for sale. Information on proceeds received, as well as the gains and losses from the sale of those securities is as follows: Six Year Ended Months Ended Year Ended June 30, December 31, December 31, ------------------------- 2003 2002 2002 2001 ------------------------------------------------------- Proceeds from sales of securities ... $ -- $2,141,382 $ 101,285 $1,262,841 Gross gains from sales of securities -- 64,026 10,093 11,831 Gross losses from sales of securities -- 2,512 3,660 25,878
The amortized cost and fair value of securities as of December 31, 2003 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 Cost Fair Value ----------------------------- Securities held to maturity: Due in one year or less ...................... $ 300,116 $ 306,145 Due after one year through five years ........ 50,000 53,612 Due after five years ......................... 50,000 56,994 ----------------------------- $ 400,116 $ 416,751 ============================= Securities available for sale: Due in one year or less ...................... $ 16,752,367 $ 17,009,472 Due after one year through five years ........ 72,512,056 74,027,539 Due after five years ......................... 24,949,446 25,830,894 ----------------------------- 114,213,869 116,867,905 Mortgage-backed securities ................... 5,656,092 5,714,732 Other securities ............................. 5,687,664 5,860,289 ----------------------------- $125,557,625 $128,442,926 ============================= As of December 31, 2003 and 2002, investment securities with a carrying value of $83,068,190 and $55,974,583, respectively, were pledged on securities sold under agreements to repurchase and for other purposes as required or permitted by law. Note 4. Loans Receivable The composition of the loan portfolio as of December 31, 2003 and 2002 is presented as follows: 2003 2002 ------------------------------ Commercial ........................................... $ 435,345,514 $ 350,205,750 Real estate loans held for sale - residential mortgage 3,790,031 23,691,004 Real estate - residential mortgage ................... 29,603,777 28,760,597 Real estate - construction ........................... 2,253,675 2,229,740 Installment and other consumer ....................... 50,984,349 44,567,327 ------------------------------ 521,977,346 449,454,418 Deferred loan origination costs, net ................. 494,065 281,318 Less allowance for estimated losses on loans ......... (8,643,012) (6,878,953) ------------------------------ $ 513,828,399 $ 442,856,783 ==============================
43 Loans on nonaccrual status amounted to $4,204,078 and $4,608,391 as of December 31, 2003 and 2002, respectively. Interest income in the amount of $468,758, $311,519, and $156,478 for the year ended December 31, 2003, six months ended December 31, 2002, and the year ended June 30, 2002, respectively, would have been earned on the nonaccrual loans had they been performing in accordance with their original terms. Cash interest collected on nonaccrual loans was $262,819, $69,503, and $122,303 for the year ended December 31, 2003, six months ended December 31, 2002, and the year ended June 30, 2002, respectively. Foregone interest income and cash interest collected on nonaccrual loans was not material for the year ended June 30, 2001. Changes in the allowance for estimated losses on loans for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001 are presented as follows: Six Year Ended Months Ended Year Ended June 30, December 31, December 31, -------------------------- 2003 2002 2002 2001 -------------------------------------------------------- Balance, beginning ....................... $ 6,878,953 $ 6,111,454 $ 4,248,182 $ 3,617,401 Provisions charged to expense ............ 3,405,427 2,183,745 2,264,965 889,670 Loans charged off ........................ (2,075,406) (1,454,192) (641,156) (300,463) Recoveries on loans previously charged off 434,038 37,946 239,463 41,574 -------------------------------------------------------- Balance, ending .......................... $ 8,643,012 $ 6,878,953 $ 6,111,454 $ 4,248,182 ========================================================
Loans considered to be impaired as of December 31, 2003 and 2002 are as follows: 2003 2002 ---------------------- Impaired loans for which an allowance has been provided $3,355,017 $2,478,393 ====================== Allowance provided for impaired loans, included in the allowance for loan losses ....................... $ 539,105 $ 786,301 ====================== Impaired loans for which no allowance has been provided $ 932,064 $2,434,463 ====================== Impaired loans for which no allowance has been provided have adequate collateral, based on management's current estimates. The average recorded investment in impaired loans during the year ended December 31, 2003, six months ended December 31, 2002, and the year ended June 30, 2002 was $5,213,072, $5,795,054, and $1,157,939, respectively. Interest income on impaired loans of $205,366, $123,882, and $42,414 was recognized for cash payments received for the year ended December 31, 2003, six months ended December 31, 2002, and the year ended June 30, 2002, respectively. Average impaired loans and cash interest income on impaired loans were not material for the year ended June 30, 2001. Loans past due 90 days or more and still accruing interest totaled $755,757 and $430,745 as of December 31, 2003 and 2002, respectively. 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 year ended December 31, 2003, six months ended December 31, 2002, and year ended June 30, 2002 was as follows: Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2003 2002 2002 -------------------------------------------- Balance, beginning .............................. $ 23,267,366 $ 22,806,789 $ 19,383,492 Net (decrease) due to change in related parties (359) -- -- Advances ...................................... 10,589,823 1,876,950 11,004,085 Repayments .................................... (9,931,825) (1,416,373) (7,580,788) -------------------------------------------- Balance, ending ................................. $ 23,925,005 $ 23,267,366 $ 22,806,789 ============================================
44 Note 5. Premises and Equipment The following summarizes the components of premises and equipment as of December 31, 2003 and 2002: 2003 2002 ----------------------------- Land ....................................... $ 1,639,080 $ 813,400 Buildings .................................. 7,711,335 6,143,269 Furniture and equipment .................... 8,023,725 6,618,773 ----------------------------- 17,374,140 13,575,442 Less accumulated depreciation .............. 5,345,608 4,350,900 ----------------------------- $12,028,532 $ 9,224,542 ============================= Certain facilities are leased under operating leases. Rental expense was $837,271, $430,576, $795,768, and $615,058 for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001, respectively. Future minimum rental commitments under noncancelable leases are as follows as of December 31, 2003: Year ending December 31: 2004 $ 513,889 2005 504,459 2006 472,282 2007 150,915 2008 102,501 Thereafter 181,795 ----------- $ 1,925,841 =========== Note 6. Deposits The aggregate amount of certificates of deposit each with a minimum denomination of $100,000, was $73,799,534 and $69,373,970 as of December 31, 2003 and 2002, respectively. As of December 31, 2003, the scheduled maturities of certificates of deposit were as follows: Year ending December 31: 2004 $ 157,187,962 2005 25,259,419 2006 9,406,064 2007 2,636,926 2008 1,349,605 ------------- $ 195,839,976 ============= Note 7. Short-Term Borrowings Short-term borrowings as of December 31, 2003 and 2002 are summarized as follows: 2003 2002 -------------------------- Overnight repurchase agreements with customers ... $34,699,801 $32,862,446 Federal funds purchased .......................... 16,910,000 -- -------------------------- $51,609,801 $32,862,446 ========================== Information concerning repurchase agreements is summarized as follows as of December 31, 2003 and 2002: 2003 2002 -------------------------- Average daily balance during the period ................. $36,270,809 $32,121,426 Average daily interest rate during the period ........... 0.82% 1.22% Maximum month-end balance during the period ............. $38,341,650 $33,384,561 Weighted average rate as of end of period ............... 0.82% 1.26% Securities underlying the agreements as of end of period: Carrying value ........................................ $72,393,780 $44,745,780 Fair value ............................................ 72,393,780 44,745,780
45 The securities underlying the agreements as of December 31, 2003 and 2002 were under the Company's control in safekeeping at third-party financial institutions. Note 8. Federal Home Loan Bank Advances The Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As of December 31, 2003 and 2002, the Banks held $4,251,000 and $3,926,800, respectively, of FHLB stock. Maturity and interest rate information on advances from the FHLB as of December 31, 2003 and 2002 is as follows: December 31, 2003 -------------------------- Weighted Average Interest Rate Amount Due at Year-End -------------------------- Maturity: Year ending December 31: 2004 $ 19,500,000 3.21% 2005 4,000,000 3.27 2006 9,410,000 3.43 2007 8,700,000 3.95 2008 10,600,000 3.74 Thereafter 24,022,348 4.61 ------------ Total FHLB advances $ 76,232,348 3.84 ============ Of the advances maturing after December 31, 2003, $19,000,000 have options which allow the Banks the right, but not the obligation, to "put" the advances back to the FHLB. December 31, 2002 -------------------------- Weighted Average Interest Rate Amount Due at Year-End -------------------------- Maturity: Year ending December 31: 2003 $ 7,865,000 3.93% 2004 20,701,166 3.34 2005 4,750,000 3.68 2006 7,610,000 4.18 2007 8,200,000 4.02 Thereafter 25,862,154 4.70 ------------ Total FHLB advances $ 74,988,320 4.05 ============ Advances are collateralized by securities, with a carrying value of $3,196,119 and $2,109,106 as of December 31, 2003 and 2002, respectively. Advances as of December 31, 2003 and 2002 are also collateralized by 1-to-4 unit residential, home equity 2nd mortgages, commercial real estate, home equity lines of credit, and business loans equal to 135%, 175%, 175%, 200%, and 250%, respectively, of total outstanding notes. At December 31, 2003, the aggregate total of loans pledged was $229,843,419. Note 9. Other Borrowings As of December 31, 2003, the Company had a $15,000,000 unsecured revolving credit note. The note, which matures July 21, 2004, had a balance outstanding of $10,000,000 as of December 31, 2003. Interest is payable monthly at the Federal Funds rate plus 1% per annum, as defined in the credit note agreement. As of December 31, 2003, the interest rate was 1.97%. The revolving credit note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various operating ratios. As of December 31, 2002, the Company had a $10,000,000 revolving credit note, which was secured by all of the outstanding stock of Quad City Bank & Trust. The note had a balance outstanding of $5,000,000 at December 31, 2002. Interest was payable quarterly at the adjusted LIBOR rates as defined in the credit note agreement. As of December 31, 2002, the interest rate was 3.8%. 46 Unused lines of credit of the subsidiary banks as of December 31, 2003 and 2002 are summarized as follows: 2003 2002 -------------------------- Secured ........................................... $ 4,000,000 $ 4,000,000 Unsecured ......................................... 37,000,000 34,000,000 -------------------------- $41,000,000 $38,000,000 ========================== Note 10. Junior Subordinated Debentures Junior subordinated debentures are due to QCR Holdings Capital Trust I, a 100% owned non-consolidated subsidiary of the Company. The debentures were issued in 1999 in conjunction with the Trust's issuance of 1,200,000 shares of Company Obligated Mandatorily Redeemable Preferred Securities. The debentures bear the same interest rate and terms as the preferred securities. Distributions on the trust preferred securities are paid quarterly. Cumulative cash distributions are calculated at a 9.2% annual rate. The capital securities have a maturity date of June 30, 2029; however, the Trust has the option to shorten the maturity date to a date not earlier than June 30, 2004. The debentures are included on the balance sheets as liabilities; however for regulatory purposes, approximately $12,000,000 and $11,480,000, are allowed in the calculation of Tier I capital as of December 31, 2003 and 2002, respectively, with the remainder allowed as Tier II capital. The required deconsolidation of trust preferred subsidiaries, such as QCR Capital Trust I, under FIN 46R, has called into question the permissibility of including these securities in regulatory capital in the future. See further information in Note 1. Note 11. Sale of Merchant Credit Card Portfolio On October 22, 2002, the Company announced Bancard's sale of its ISO-related merchant credit card operations to iPayment, Inc. for the price of $3,500,000. After contractual compensation and severance payments, transaction expenses, and income taxes, the transaction resulted in a gain of approximately $1,300,000 or $0.47 per share. Also included in the sale were all of the merchant credit card processing relationships owned by Allied. Bancard continues to provide credit card processing for its local merchants and cardholders of the subsidiary banks and agent banks. It is anticipated that the Company's termination of ISO-related merchant credit card processing will reduce Bancard's future earnings. However, the Company believes that Bancard can be profitable with its narrowed business focus of continuing to provide credit card processing for its local merchants and agent banks and for cardholders of the Company's subsidiary banks. Note 12. Federal and State Income Taxes Federal and state income tax expense was comprised of the following components for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001: Six Year Ended Months Ended Year Ended June 30, December 31, December 31, ---------------------------- 2003 2002 2002 2001 ------------------------------------------------------------ Current ........ $ 3,369,368 $ 2,086,103 $ 1,948,841 $ 1,522,895 Deferred ....... (674,681) (403,312) (634,045) (362,995) ------------------------------------------------------------ $ 2,694,687 $ 1,682,791 $ 1,314,796 $ 1,159,900 ============================================================ 47 A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001: Year Ended Six Months Ended December 31, December 31, Year Ended June 30, --------------------- --------------------- --------------------------------------------- 2003 2002 2002 2001 --------------------- --------------------- --------------------- --------------------- % of % of % of % of Pretax Pretax Pretax Pretax Amount Income Amount Income Amount Income Amount Income --------------------------------------------------------------------------------------------- Computed "expected" tax expense ......... $ 2,854,465 35.0% $ 1,707,767 35.0% $ 1,497,037 35.0% $ 1,244,471 35.0% Effect of graduated tax rates ........... (81,556) (1.0) (48,793) (1.0) (42,772) (1.0) (35,556) (1.0) Tax exempt income, net (274,495) (3.4) (105,270) (2.2) (196,870) (4.6) (147,396) (4.1) State income taxes, net of federal benefit .. 226,446 2.8 161,761 3.3 166,812 3.9 132,546 3.7 Other ................. (30,173) (0.4) (32,674) (0.6) (109,411) (2.6) (34,165) (1.0) --------------------------------------------------------------------------------------------- $ 2,694,687 33.0% $ 1,682,791 34.5% $ 1,314,796 30.7% $ 1,159,900 32.6% =============================================================================================
The net deferred tax assets included with other assets on the consolidated balance sheets consisted of the following as of December 31, 2003 and 2002: 2003 2002 ----------------------- Deferred tax assets: Compensation ........................................ $1,058,111 $ 628,825 Loan and credit card losses ......................... 3,038,140 2,481,400 Other ............................................... 70,609 66,978 ----------------------- 4,166,860 3,177,203 ----------------------- Deferred tax liabilities: Net unrealized gains on securities available for sale 1,082,637 1,290,725 Premises and equipment .............................. 736,021 609,785 Investment accretion ................................ 36,226 36,242 Deferred loan origination fees, net ................. 198,945 102,177 Other ............................................... 93,258 1,270 ----------------------- 2,147,087 2,040,199 ----------------------- Net deferred tax asset ........................ $2,019,773 $1,137,004 ======================= The change in deferred income taxes was reflected in the consolidated financial statements as follows for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001: Year Ended Months Ended Year Edned June 30, December 31, December 31, -------------------- 2003 2002 2002 2001 ------------------------------------------------- Provision for income taxes ............ $(674,681) $(403,312) $(634,045) $(362,995) Statement of stockholders' equity- accumulated other comprehensive income, unrealized gains (losses) on securities available for sale, net (208,088) 514,269 457,334 892,060 -------------------------------------------------- $(882,769) $ 110,957 $(176,711) $ 529,065 ==================================================
48 Note 13. Employee Benefit Plans The Company has 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 3% of employee contributions, and 50% of the next 3% of employee contributions, up to a maximum amount of 4.5% 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 year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001 were as follows: Six Year Ended Months Ended Year Ended June 30, December 31, December 31, -------------------- 2003 2002 2002 2001 ------------------------------------------------ Matching contribution ........ $377,854 $179,930 $318,457 $240,960 Discretionary contribution ... 90,000 60,500 49,000 41,500 ---------------------------------------------- $467,854 $240,430 $367,457 $282,460 ==============================================
The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company's matching contribution differs by officer and is a maximum of between $10,000 and $20,000 annually. Interest is earned at The Wall Street Journal prime rate and also differs by officer, with a minimum of 6% and a maximum of 12%. Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. During the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001 the Company expensed $86,275, $41,041, $67,273, and $27,791, respectively, related to the agreements. As of December 31, 2003 and 2002 the liability related to the agreements totals $459,240 and $320,965, respectively. Note 14. Stock Based Compensation Stock option and incentive plans: The Company's Board of Directors and its stockholders adopted in June 1993 the QCR Holdings, Inc. Stock Option Plan (Stock Option Plan). Up to 150,000 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 nonqualified stock options granted under the Stock Option Plan. All of the options have been granted under this plan, and on June 30, 2003, the plan expired. The Company's Board of Directors adopted in November 1996 the QCR Holdings, Inc. 1997 Stock Incentive Plan (Stock Incentive Plan). Up to 150,000 shares of common stock may be issued to employees and directors of the Company and its subsidiaries pursuant to the exercise of nonqualified stock options and restricted stock granted under the Stock Incentive Plan. As of December 31, 2003, there are 24,917 remaining options available for grant under this plan. The Stock Option Plan and the Stock Incentive Plan are administered by the Executive Committee appointed by the Board of Directors (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. All options have a 10-year life and will vest and become exercisable from 1-to-5 years after the date of the grant. Only nonqualified stock options have been issued to date. In the case of nonqualified 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 nonqualified 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). 49 A summary of the stock option plans as of December 31, 2003 and 2002 and June 30, 2002 and 2001 and changes during the six months ended and years ended on those dates is presented below: December 31, June 30, ----------------------------------------- -------------------------------------------- 2003 2002 2002 2001 ------------------- ------------------- -------------------------------------------- Weighted Weighted Weighted Weighted Average Average Average Average Exercise Exercise Exercise Exercise Shares Price Shares Price Shares Price Shares Price --------------------------------------------------------------------------------------- Outstanding, beginning 200,275 $11.34 228,038 $10.89 236,437 $10.22 189,005 $10.24 Granted ............ 4,900 20.20 700 14.95 18,325 14.50 50,200 10.52 Exercised .......... (50,658) 7.47 (24,270) 6.79 (23,375) 6.72 (150) 6.17 Forfeited .......... (4,742) 14.11 (4,193) 14.80 (3,349) 13.00 (2,618) 17.10 -------- -------- -------- -------- Outstanding, ending .. 149,775 12.86 200,275 11.34 228,038 10.89 236,437 10.22 ======== ======== ======== ======== Exercisable, ending .. 97,065 128,414 139,090 153,390 Weighted average fair value per option of options granted during the period .. $ 8.37 $ 6.10 $ 6.93 $ 5.17
A further summary of options outstanding as of December 31, 2003 is presented below: 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 - --------------------------------------------------------------------------------------------------------- $6.00 to $6.83 19,330 0.76 $ 6.52 19,330 $ 6.52 $7.83 to $8.83 6,060 2.45 8.77 6,060 8.77 $10.00 to $13.25 56,510 7.09 10.93 25,470 11.13 $13.33 to $13.67 17,390 3.50 13.66 17,390 13.66 $14.08 to $16.13 26,820 7.52 15.35 10,980 15.63 $17.11 to $22.90 23,665 5.74 20.26 17,835 20.41 --------- - --------- 149,775 97,065 ========= =========
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 vest 20% per year, and the term of the SARs may not exceed 10 years from the date of the grant. As of December 31, 2003 and 2002 and June 30, 2002 and 2001 there were 90,350, 90,450, 90,850, and 90,850 SARs, respectively, outstanding, with 61,540, 48,820, 48,820, and 28,200, respectively, exercisable. During the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 20, 2002 and 2001 the Company expensed $915,224, $120,474, $187,360 and $(36,825), respectively, related to the SARs. As of December 31, 2003 and 2002 the liability related to the SARs totals $1,223,058 and $307,834, respectively. 50 A further summary of SARs is presented below: Liability Recorded for SARs SAR Expense December 31, 2003 --------------------------- for the -------------------------- December 31, Year Ended SARs SARs ------------------------- December 31, Exercise Price Outstanding Exercisable 2003 2002 2003 - ----------------------------------------------------------------------------------------------------------- $10.35 23,100 9,420 $ 407,715 $ 153,270 $ 254,445 $10.50 15,000 6,000 262,500 96,000 166,500 $13.67 15,000 15,000 214,950 48,450 166,500 $16.13 12,850 7,830 152,594 10,114 142,480 $17.75 5,450 4,440 55,863 - 55,863 $18.25 500 400 4,875 - 4,875 $20.33 1,500 1,500 11,505 - 11,505 $21.33 16,950 16,950 113,056 - 113,056 -------------------------------------------------------------------------- 90,350 61,540 $ 1,223,058 $ 307,834 $ 915,224 ==========================================================================
Stock purchase plan: The Company's Board of Directors and its stockholders adopted in October 2002 the QCR Holdings, Inc. Employee Stock Purchase Plan (the "Purchase Plan"). As of January 1, 2003 there were 100,000 shares of common stock available for issuance under the Purchase Plan. For each six-month offering period, the Board of Directors will determine how many of the total number of available shares will be offered. The purchase price is the lesser of 90% of the fair market value at the date of the grant or the Investment Date. The investment date, as established by the Board of Directors of the Company, is the date common stock is purchased after the end of each calendar quarter during an offering period. The maximum dollar amount any one participant can elect to contribute in an offering period is $5,000. Additionally, the maximum percentage that any one participant can elect to contribute is 5% of his or her compensation. During the year ended December 31, 2003, 8,673 shares were granted and 6,852 purchased. Shares granted during the year ended December 31, 2003 had a weighted average fair value of $2.77 per share. Note 15. Regulatory Capital Requirements and Restrictions on Dividends The Company (on a consolidated basis) and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003 and 2002, that the Company and the Banks met all capital adequacy requirements to which they are subject. 51 As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Banks' categories. The Company and the Banks' actual capital amounts and ratios as of December 31, 2003 and 2002 are also presented in the table. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------- As of December 31, 2003: Company: Total risk-based capital ..... $59,326 10.3% $46,151 > 8.0% N/A N/A Tier 1 risk-based capital .... 52,020 9.0 23,076 > 4.0 N/A N/A Leverage ratio ............... 52,020 7.4 28,283 > 4.0 N/A N/A Quad City Bank & Trust: Total risk-based capital ..... $46,934 10.4% $36,724 > 8.0% $ 45,343 > 10.0% Tier 1 risk-based capital .... 41,252 9.1 18,137 > 4.0 27,206 > 6.0 Leverage ratio ............... 41,252 7.4 22,169 > 4.0 27,711 > 5.0 Cedar Rapids Bank & Trust (A): Total risk-based capital ..... $16,031 13.3% $ 9,618 > 8.0% $ 12,022 > 10.0% Tier 1 risk-based capital .... 14,524 12.1 4,809 > 4.0 7,213 > 6.0 Leverage ratio ............... 14,524 10.1 5,782 > 4.0 7,227 > 5.0 As of December 31, 2002: Company: Total risk-based capital ..... $52,482 10.9% $38,534 > 8.0% N/A N/A Tier 1 risk-based capital .... 45,922 9.5 19,267 > 4.0 N/A N/A Leverage ratio ............... 45,922 7.8 23,582 > 4.0 N/A N/A Quad City Bank & Trust: Total risk-based capital ..... $41,401 10.3% $32,155 > 8.0% $ 40,193 > 10.0% Tier 1 risk-based capital .... 36,368 9.1 16,077 > 4.0 24,116 > 6.0 Leverage ratio ............... 36,368 7.1 20,364 > 4.0 25,454 > 5.0 Cedar Rapids Bank & Trust (A): Total risk-based capital ..... $10,248 14.0% $ 5,846 > 8.0% $ 7,308 > 10.0% Tier 1 risk-based capital .... 9,332 12.8 2,923 > 4.0 4,385 > 6.0 Leverage ratio ............... 9,332 11.0 3,396 > 4.0 4,245 > 5.0 (A) As a denovo bank, Cedar Rapids Bank & Trust may not, without the prior consent of the Federal Reserve Bank, pay dividends until after the first three years of operations and two consecutive satisfactory CAMELS ratings. In addition, the Bank is required to maintain a tangible Tier I leverage ratio of at least 9% throughout its first three years of operations.
Federal Reserve Bank 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 Banks, as members 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. 52 Note 16. Earnings Per Common Share The following information was used in the computation of basic and diluted earnings per common share for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001: Six Year Ended Months Ended Year Ended June 30, December 31, December 31, ----------------------- 2003 2002 2002 2001 --------------------------------------------------- Net income ....................................... $5,460,927 $3,196,544 $2,962,453 $2,395,732 ================================================== Weighted average common shares outstanding ....... 2,782,042 2,752,739 2,685,996 2,268,465 Weighted average common shares issuable upon exercise of stock options and under the Employee Stock Purchase Plan ............................ 73,013 66,677 57,809 45,869 -------------------------------------------------- Weighted average common and common equivalent shares outstanding .................. 2,855,055 2,819,416 2,743,805 2,314,334 ==================================================
Note 17. Commitments and Contingencies In the normal course of business, the Banks make various commitments and incur 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 Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Banks would be required to fund the commitments. The maximum potential amount of future payments the Banks could be required to make is represented by the contractual amount. If the commitment is funded the Banks would be entitled to seek recovery from the customer. At December 31, 2003 and 2002 no amounts have been recorded as liabilities for the Banks' potential obligations under these guarantees. As of December 31, 2003 and 2002, commitments to extend credit aggregated $194,915,000 and $165,163,000, respectively. As of December 31, 2003 and 2002, standby letters of credit aggregated $5,994,000 and $4,914,000, respectively. Management does not expect that all of these commitments will be funded. The Company has also executed contracts for the sale of mortgage loans in the secondary market in the amount of $3,790,031 and $23,691,004 as of December 31, 2003 and 2002, respectively. These amounts are included in loans held for sale at the respective balance sheet dates. Bancard is subject to the risk of cardholder chargebacks and its local merchants 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 local merchant. The Company also has a guarantee to MasterCard International Incorporated, which is backed up by a performance bond in the amount of $1,000,000. As of December 31, 2003 there were no significant pending liabilities. 53 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, certificates of deposit, and federal funds sold exceeded federal insured limits by $20,809,486 and $25,256,262 as of December 31, 2003 and 2002, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks. A significant portion of residential mortgage loans sold to investors in the secondary market are sold with recourse. Specifically, certain loan sales agreements provide that if the borrower becomes delinquent a number of payments or a number of days, within six months to one year of the sale, the Banks must repurchase the loan from the subject investor. The Banks did not repurchase any loans from secondary market investors under the terms of these loan sales agreements during the year ended December 31, 2003, six months ended December 31, 2002, or the years ended June 30, 2002 or 2001. In the opinion of management, the risk of recourse to the Banks is not significant and, accordingly, no liability has been established related to such. The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The Company has purchase obligations which represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms. At December 31, 2003, the Company's purchase obligations were primarily related to certain contractual payments for capital expenditures of data processing technology and facilities expansion. The Company has operating lease obligations which represent short and long-term lease payments for data processing equipment and services, software, and other equipment and professional services. The following table presents, as of December 31, 2003, significant fixed and determinable contractual obligations to these third parties by payment date. Purchase Operating Obligation Lease ------------------------------ Year ending December 31: 2004 $ 1,082,897 $ 1,029,476 2005 -- 1,036,011 2006 -- 946,579 2007 -- 18,900 2008 -- 3,525 Thereafter -- 19,340 ----------------------------- $ 1,082,897 $ 3,053,831 ============================= Plans were announced in October 2003 for Quad City Bank & Trust to add a fifth full service banking facility. The facility is to be located in the Five Points area of west Davenport, Iowa. Demolition of existing structures on the site has been completed, and construction of the new facility is scheduled for completion in late 2004 or early 2005. Total costs for the project are anticipated to be approximately $1,700,000 with $519,000 incurred as of December 31, 2003. In February 2004, Cedar Rapids Bank & Trust announced plans to build a four floor building in downtown Cedar Rapids. The Bank's main office will be relocated to this site when construction is completed, which is anticipated to be early in 2005. Cedar Rapids Bank & Trust will own the lower three floors of the facility, and an unrelated third party will own the fourth floor in a condominium arrangement with the Bank. Costs for this facility are projected to be $5,000,000 with $141,000 incurred at December 31, 2003. The Bank is also considering the construction of a branch office in late 2004. 54 Note 18. Quarterly Results of Operations (Unaudited) Year Ended December 31, 2003 ------------------------------------------------- March June September December 2003 2003 2003 2003 ------------------------------------------------- Total interest income ........ $7,906,067 $8,346,224 $8,622,572 $8,503,398 Total interest expense ....... 3,057,956 3,227,136 2,889,456 2,775,029 ------------------------------------------------- Net interest income .. 4,848,111 5,119,088 5,733,116 5,728,369 Provision for loan losses .... 1,330,427 358,000 939,000 778,000 Noninterest income ........... 2,488,823 3,248,738 3,259,834 2,170,214 Noninterest expenses ......... 4,783,843 5,399,579 5,356,233 5,495,597 ------------------------------------------------- Net income before income taxes ......... 1,222,664 2,610,247 2,697,717 1,624,986 Federal and state income taxes 395,716 883,347 889,569 526,055 ------------------------------------------------- Net income ........... $ 826,948 $1,726,900 $1,808,148 $1,098,931 ================================================= Earnings per common share: Basic ...................... $ 0.30 $ 0.62 $ 0.65 $ 0.39 Diluted .................... 0.29 0.61 0.63 0.38
Six Months Ended December 31, 2002 ---------------------------- September December 2002 2002 ---------------------------- Total interest income ...................... $7,875,657 $8,244,016 Total interest expense ..................... 3,188,761 3,294,502 ---------------------------- Net interest income ................ 4,686,896 4,949,514 Provision for loan losses .................. 636,800 1,546,945 Noninterest income ......................... 2,469,074 6,370,647 Noninterest expenses ....................... 4,771,406 6,641,645 ---------------------------- Net income before income taxes ....................... 1,747,764 3,131,571 Federal and state income taxes ............. 588,459 1,094,332 ---------------------------- Net income ......................... $1,159,305 $2,037,239 ============================ Earnings per common share: Basic .................................... $ 0.42 $ 0.74 Diluted .................................. 0.41 0.72 55 Year Ended June 30, 2002 ------------------------------------------------- September December March June 2001 2001 2002 2002 ------------------------------------------------- Total interest income ..................... $6,950,044 $6,895,756 $7,081,985 $7,592,352 Total interest expense .................... 3,520,220 3,113,305 3,129,885 3,106,744 ------------------------------------------------- Net interest income ............... 3,429,824 3,782,451 3,952,100 4,485,608 Provision for loan losses ................. 408,490 631,375 497,500 727,600 Noninterest income ........................ 1,847,654 2,192,586 1,828,673 2,045,746 Noninterest expenses ...................... 3,925,786 4,319,128 4,395,187 4,382,327 ------------------------------------------------- Net income before income taxes ...................... 943,202 1,024,534 888,086 1,421,427 Federal and state income taxes ............ 294,965 335,161 274,003 410,667 ------------------------------------------------- Net income ........................ $ 648,237 $ 689,373 $ 614,083 $1,010,760 ================================================= Earnings per common share: Basic ................................... $ 0.26 $ 0.25 $ 0.22 $ 0.37 Diluted ................................. 0.26 0.24 0.22 0.36 Year Ended June 30, 2001 ------------------------------------------------- September December March June 2001 2001 2001 2001 ------------------------------------------------- Total interest income ..................... $6,978,039 $7,264,701 $7,279,539 $7,021,657 Total interest expense .................... 4,119,175 4,323,023 4,313,369 3,856,182 ------------------------------------------------ Net interest income ............... 2,858,864 2,941,678 2,966,170 3,165,475 Provision for loan losses ................. 176,075 343,800 148,374 221,421 Noninterest income ........................ 1,372,085 1,415,496 1,632,061 1,893,426 Noninterest expenses ...................... 3,077,638 3,466,171 3,471,466 3,784,678 ------------------------------------------------- Net income before income taxes ...................... 977,236 547,203 978,391 1,052,802 Federal and state income taxes ............ 316,987 203,258 355,520 284,135 ------------------------------------------------- Net income ........................ $ 660,249 $ 343,945 $ 622,871 $ 768,667 ================================================= Earnings per common share: Basic ................................... $ 0.29 $ 0.15 $ 0.28 $ 0.34 Diluted ................................. 0.28 0.15 0.27 0.34
56 Note 19. Parent Company Only Financial Statements The following is condensed financial information of QCR Holdings, Inc. (parent company only): Assets 2003 2002 - ------------------------------------------------------------------------------------- Cash and due from banks .............................. $ 254,507 $ 206,768 Interest-bearing deposits at financial institutions .. 133,791 286,909 Securities available for sale, at fair value ......... 1,494,098 1,479,421 Investment in Quad City Bank & Trust Company ......... 42,736,830 38,247,616 Investment in Cedar Rapids Bank & Trust Company ...... 14,677,711 9,551,420 Investment in Quad City Bancard, Inc. ................ 2,903,214 2,444,989 Investment in QCR Holdings Capital Trust I ........... 390,432 390,432 Net loans receivable ................................. 21,764 21,007 Other assets ......................................... 2,186,991 1,952,467 ---------------------------- Total assets ................................. $ 64,799,338 $ 54,581,029 ============================ Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------- Liabilities: Other borrowings ................................... $ 10,000,000 $ 5,000,000 Junior subordinated debentures ..................... 12,000,000 12,000,000 Other liabilities .................................. 976,603 994,427 ---------------------------- Total liabilities ............................ 22,976,603 17,994,427 ---------------------------- Stockholders' Equity: Common stock ....................................... 2,863,990 2,823,061 Additional paid-in capital ......................... 17,143,868 16,761,423 Retained earnings .................................. 20,866,749 15,712,600 Accumulated other comprehensive income ............. 1,802,664 2,144,054 Less cost of common shares acquired for the treasury (854,536) (854,536) ---------------------------- Total stockholders' equity ................... 41,822,735 36,586,602 ---------------------------- Total liabilities and stockholders' equity ... $ 64,799,338 $ 54,581,029 ============================
57 Six Year Ended Months Ended Year Ended June 30, December 31, December 31, -------------------------- 2003 2002 2002 2001 - ----------------------------------------------------------------------------------------------------- Total interest income ..................... $ 83,894 $ 42,939 $ 102,458 $ 170,319 Investment securities gains (losses), net . 5 -- 6,433 (25,753) Equity in net income (loss) of Cedar Rapids Bank & Trust Company .................... 191,525 (275,095) (892,383) -- Equity in net income of Quad City Bank & Trust Company .................... 5,884,041 2,510,614 5,133,113 3,471,422 Equity in net income of Quad City Bancard, Inc. ........................... 867,217 1,580,932 111,057 184,234 Other ..................................... 303,052 171,822 70,067 (7,745) ------------------------------------------------------- Total income ...................... 7,329,734 4,031,212 4,530,745 3,792,477 ------------------------------------------------------- Interest expense .......................... 1,361,939 666,398 1,334,921 1,134,541 Salaries and employee benefits ............ 720,989 239,321 387,203 377,136 Professional and data processing fees ..... 288,217 117,658 145,843 173,277 Other ..................................... 292,914 150,046 495,859 408,091 ------------------------------------------------------- Total expenses .................... 2,664,059 1,173,423 2,363,826 2,093,045 ------------------------------------------------------- Income before income tax benefit .. 4,665,675 2,857,789 2,166,919 1,699,432 Income tax benefit ........................ 795,252 338,755 795,534 696,300 ------------------------------------------------------- Net income ........................ $ 5,460,927 $ 3,196,544 $ 2,962,453 $ 2,395,732 =======================================================
58 Six Year Ended Months Ended Year Ended June 30, December 31, December 31, ---------------------------- 2003 2002 2002 2001 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net income ............................................ $ 5,460,927 $ 3,196,544 $ 2,962,453 $ 2,395,732 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 & Trust Company .................... (4,884,041) (2,510,614) (4,333,113) (3,471,422) Cedar Rapids Bank & Trust Company ................. (191,525) 275,095 892,383 -- Quad City Bancard, Inc. ........................... 41,775 (9,932) 861,703 132,266 Depreciation ........................................ 4,506 795 252 1,121 Provision for loan losses ........................... -- (55) (1,835) (3,790) Investment securities (gains) losses, net ........... (5) -- (6,433) 25,753 Tax benefit of nonqualified stock options exercised . 274,871 87,922 60,332 -- (Increase) decrease in accrued interest receivable .. (6,715) (10,048) 4,016 (2,802) (Increase) decrease in other assets ................. (299,820) 187,941 (608,624) 317,712 Increase (decrease) in other liabilities ............ (47,516) (82,401) 277,024 457,834 ----------------------------------------------------------- Net cash provided by (used in) operating activities ............................ 352,457 1,135,247 108,158 (147,596) ----------------------------------------------------------- Cash Flows from Investing Activities: Net (increase) decrease in interest-bearing deposits at financial institutions .............................. 153,118 273,743 (5,263) 1,146,571 Purchase of securities available for sale ............. (28,496) (251,411) (18,205) (269,279) Proceeds from sale of securities available for sale ... -- -- 101,285 99,247 Proceeds from calls and maturities of securities ...... 200,000 -- 107,500 -- Capital infusion, Cedar Rapids Bank & Trust Company ... (5,000,000) -- (10,500,000) -- Capital infusion, Quad City Bank & Trust Company ...... -- (1,000,000) -- -- Capital infusion, Quad City Bancard, Inc. ............. (500,000) -- -- (900,000) Net loans (originated) repaid ......................... (757) -- 125,989 391,127 ----------------------------------------------------------- Net cash provided by (used in) investing activities ...................................... (5,176,135) (977,668) (10,188,694) 467,666 ----------------------------------------------------------- Cash Flows from Financing Activities: Proceeds from other borrowings ........................ 5,000,000 -- 5,000,000 -- Purchase of treasury stock ............................ -- -- -- (255,056) Payment of cash dividends ............................. (277,086) -- -- -- Proceeds from issuance of common stock, net ........... 148,503 2,364 4,959,541 925 ----------------------------------------------------------- Net cash provided by (used in) financing activities ...................................... 4,871,417 2,364 9,959,541 (254,131) ----------------------------------------------------------- Net increase (decrease) in cash and due from banks ...................................... 47,739 159,943 (120,995) 65,939 Cash and due from banks: Beginning ............................................. 206,768 46,825 167,820 101,881 ------------------------------------------------------------ Ending ................................................ $ 254,507 $ 206,768 $ 46,825 $ 167,820 ============================================================
59 Note 20. Fair Value of Financial Instruments FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosures 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, and interest-bearing deposits at financial institutions: The carrying amounts reported in the balance sheets for cash and due from banks, federal funds sold, and interest-bearing deposits at financial institutions equal 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 variable rate loans equal their carrying values. The fair values for all other 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. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market. Accrued interest receivable and payable: The fair value of accrued interest receivable and payable is equal to 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 discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits. Short-term borrowings: The fair value for short-term borrowings is equal to its carrying value. Federal Home Loan Bank advances and junior subordinated debentures: The fair value of these instruments is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Other borrowings: The fair value for variable rate other borrowings is equal to its carrying value. Commitments to extend credit: The fair value of these commitments is not material. The carrying values and estimated fair values of the Company's financial instruments as of December 31, 2003 and 2002 are presented as follows: December 31, --------------------------------------------------------- 2003 2002 --------------------------- --------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------------------- --------------------------- Cash and due from banks ....... $ 24,427,573 $ 24,427,573 $ 24,888,350 $ 24,888,350 Federal funds sold ............ 4,030,000 4,030,000 14,395,000 14,395,000 Interest-bearing deposits at financial institutions ...... 10,426,092 10,426,092 14,585,795 14,585,795 Investment securities: Held to maturity ............ 400,116 416,751 425,332 451,121 Available for sale .......... 128,442,926 128,442,926 81,228,749 81,228,749 Loans receivable, net ......... 513,828,399 518,111,399 442,856,783 451,842,783 Accrued interest receivable ... 3,646,108 3,646,108 3,221,246 3,221,246 Deposits ...................... 511,651,863 513,337,863 434,747,623 437,275,623 Short-term borrowings ......... 51,609,801 51,609,801 32,862,446 32,862,446 Federal Home Loan Bank advances 76,232,348 75,824,348 74,988,320 75,210,320 Other borrowings .............. 10,000,000 10,000,000 5,000,000 5,000,000 Junior subordinated debentures 12,000,000 12,886,941 12,000,000 12,049,741 Accrued interest payable ...... 1,236,906 1,236,906 1,804,021 1,804,021
60 Note 21. Business Segment Information Selected financial information on the Company's business segments is presented as follows for the year ended December 31, 2003, six months ended December 31, 2002, and the years ended June 30, 2002 and 2001: Six Year Ended Months Ended Year Ended June 30, December 31, December 31, ------------------------------ 2003 2002 2002 2001 ---------------------------------------------------------------- Commercial banking: Revenue ............. $ 39,545,476 $ 18,860,169 $ 31,834,976 $ 30,786,066 Net income .......... 5,398,289 1,893,051 3,151,538 2,599,978 Assets .............. 705,077,595 597,370,496 512,831,887 394,223,857 Depreciation ........ 1,042,781 483,920 888,186 724,330 Capital expenditures 4,143,705 494,914 1,453,335 1,702,763 Credit card processing: Revenue ............. 2,372,619 4,841,477 2,263,866 1,883,540 Net income .......... 1,056,399 1,703,340 343,552 220,890 Assets .............. 736,710 3,759,355 3,061,251 3,672,002 Depreciation ........ 25,656 12,745 35,309 42,859 Capital expenditures 8,328 9,827 15,270 10,624 Trust management: Revenue ............. 2,242,747 1,045,046 2,161,677 2,071,971 Net income .......... 490,018 222,117 540,942 523,670 Assets .............. N/A N/A N/A N/A Depreciation ........ N/A N/A N/A N/A Capital expenditures N/A N/A N/A N/A All other: Revenue ............. 385,028 212,702 174,277 115,427 Net (loss) .......... (1,483,779) (621,964) (1,073,579) (948,806) Assets .............. 4,225,250 3,470,505 2,935,357 3,052,075 Depreciation ........ 4,506 795 252 1,121 Capital expenditures . -- 10,500 3,020 --
Note 22. Subsequent Event On February 19, 2004, QCR Holdings, Inc. announced the issuance of $8.0 million of Floating Rate Capital Securities and $12.0 million of Fixed Rate Capital Securities (together, the "Trust Preferred Securities") of QCR Holdings Statutory Trust II ("Trust II") and QCR Holdings Statutory Trust III ("Trust III"), respectively. The securities represent undivided beneficial interests in Trust II and Trust III, which were established by QCR Holdings, Inc. for the purpose of issuing the Trust Preferred Securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the "Act") and have not been registered under the Act. The securities issued by Trust II and Trust III mature in 30 years. The Floating Rate Capital Securities are callable at par after five years and the Fixed Rate Capital Securities are callable at par after seven years. The Floating Rate Capital Securities have a variable rate based on the three-month LIBOR, reset quarterly, with the initial rate set at 3.97%, and the Fixed Rate Capital Securities have a fixed rate of 6.93%, payable quarterly, for seven years, at which time they have a variable rate based on the three-month LIBOR, reset quarterly. Both Trust II and Trust III used the proceeds from the sale of the Trust Preferred Securities to purchase junior subordinated debentures of QCR Holdings, Inc. The Company incurred issuance costs of $410,000, which will be amortized over the lives of the securities. The Company intends to use its net proceeds for general corporate purposes, including the possible redemption in June 2004 of the $12,000,000 of 9.2% cumulative Trust Preferred Securities issued by QCR Holdings Capital Trust I in 1999. If redeemed, the Trust Preferred Securities issued in 1999 carry approximately $750,000 of unamortized issuance costs, which will be expensed as of June 30, 2004. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 61 Item 9A. Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2003. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls. Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item is set forth under the caption "Election of Directors" in the Proxy Statement, and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is set forth under the caption "Executive Compensation" in the Proxy Statement, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is set forth under the caption "Security Ownership of Certain Beneficial Owners" in the Proxy Statement, and is incorporated herein by reference, or is presented below. Equity Compensation Plan Information The table below sets forth the following information as of December 31, 2003 for (i) all compensation plans previously approved by the Company's stockholders and (ii) all compensation plans not previously approved by the Company's stockholders: (a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights; (b) the weighted-average exercise price of such outstanding options, warrants and rights; and (c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans. 62 ==================================================================================================================================== EQUITY COMPENSATION PLAN INFORMATION - ------------------------------------------------------------------------------------------------------------------------------------ Number of securities remaining Number of securities available for to be issued upon future issuance under exercise of Weighted-average exercise equity compensation plans outstanding options, price of outstanding options, (excluding securities warrants and rights warrants and rights reflected in column(a)) Plan category (a) (b) (c) ==================================================================================================================================== Equity compensation plans approved by security holders............... 151,596 $ 12.92 116,244 (1) Equity compensation plans not approved by security holders.. -- -- -- Total............................. 151,596 $ 12.92 116,244 (1) ==================================================================================================================================== (1) Includes 91,327 shares available under the QCR Holdings, Inc. Employee Stock Purchase Plan.
Item 13. Certain Relationships and Related Transactions The information required by this item is set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Transactions with Management" in the Proxy Statement, and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The information required by this item is set forth under the caption "Independent Public Accountants" in the Proxy statement and is incorporated herein by reference. Part IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements These documents are listed in the Index to Consolidated Financial Statements under Item 8. (a) 2. Financial Statement Schedules Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the consolidated financial statements and the accompanying notes thereto. (a) 3. Exhibits The following exhibits are either filed as a part of this Annual Report on Form 10-K or are incorporated herein by reference: 63 Exhibit Number Exhibit Description -------------- ------------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of QCR Holdings, Inc., as amended (incorporated herein by reference to Exhibit 3(iii) of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). 3.2 Bylaws of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 3(ii) of Registrant's Quarterly Report on Form 10Q for the quarter ended September 30, 2002). 4.1 Specimen Stock Certificate of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 4.1 of Registrant's Form SB-2, File No. 33-67028). 4.2 Registration of Preferred Share Purchase Rights of QCR Holdings, Inc. (incorporated by reference to Item 1. of Registrant's form 8-A12G, File No. 000-22208). 10.1 Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer dated January 1, 2004 (exhibit is being filed herewith). 10.2 Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated January 1, 2004 (exhibit is being filed herewith). 10.3 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Michael A. Bauer dated January 1, 2004 (exhibit is being filed herewith). 10.4 Executive Deferred Compensation Agreement between Quad City Bank and Trust Company and Douglas M. Hultquist dated January 1, 2004 (exhibit is being filed herewith). 10.5 Lease Agreement between Quad City Bank and Trust Company and 56 Utica L.L.C. (incorporated herein by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the year ended June 30, 2000). 10.6 Employment Agreement between Quad City Bank and Trust Company and Larry J. Helling dated January 1, 2004 (exhibit is being filed herewith). 10.7 First Amendment of Lease Agreement dated October 2001, between Cedar Rapids Bank and Trust Company f.k.a. Quad City Bank and Trust Company, and Ryan Companies (incorporated herein by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). 10.8 Executive Deferred Compensation Agreement for Todd A. Gipple, Executive Vice President and Chief Financial Officer of QCR Holdings, Inc. dated January 1, 2004 (exhibit is being filed herewith). 10.9 Executive Deferred Compensation Agreement for Larry J. Helling, President and Chief Executive Officer of Cedar Rapids Bank and Trust Company dated January 1, 2004 (exhibit is being filed herewith). 10.10 Indenture by and between QCR Holdings, Inc. and First Union Trust Company, National Association, as trustee, dated June 9, 1999 (incorporated herein by reference to Exhibit 4.1 of Registrant's Form S-2, file No. 33-77889). 10.11 Employment Agreement between QCR Holdings, Inc. and Todd A. Gipple dated January 1, 2004 (exhibit is being filed herewith). 10.12 QCR Holdings, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 5.1 of Registrant's Form S-8, file No. 333-101356). 10.13 Dividend Reinvestment Plan of QCR Holdings, Inc. (incorporated herein by reference to Exhibit 5.1 of Registrant's Form S-3, File No. 333-102699). 10.18 Indenture by and between QCR Holdings, Inc. /QCR Holdings Statutory Trust II and U.S. Bank National Association, as debenture and institutional trustee, dated February 18, 2004 (exhibit is being filed herewith). 10.19 Indenture by and between QCR Holdings, Inc. / QCR Holdings Statutory Trust III and U.S. Bank National Association, as debenture and institutional trustee, dated February 18, 2004 (exhibit is being filed herewith). 12.1 Statement re: Computation of Ratios (exhibit is being filed herewith). 21.1 Subsidiaries of QCR Holdings, Inc. (exhibit is being filed herewith). 23.1 Consent of Independent Accountant - McGladrey and Pullen LLP (exhibit is being filed herewith). 64 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K The Company filed a current report on Form 8-K with the Securities and Exchange Commission on October 24, 2003 under Item 5, which reported information related to the Company's declaration of a $0.06 cash dividend payable January 5, 2004, and under Item 12, which reported information related to the Company's earnings for the quarter ended September 30, 2003 in the format of a press release. The Company filed a current report on Form 8-K with the Securities and Exchange Commission on November 7, 2003 under Item 12, which reported the Company's financial information, including earnings for the quarter ended September 30, 2003, in the format of a shareholder letter dated November 2003. The Company filed a current report on Form 8-K with the Securities and Exchange Commission on January 29, 2004 under Item 12, which reported information related to the Company's earnings for the quarter ended December 31, 2003 in the format of a press release. The Company filed a current report on form 8-K with the Securities and Exchange Commission on February 19, 2004 under Item 5, which reported information related to the Company's announcement of the issuance of $8.0 million of Floating Rate Capital Securities and $12.0 million of Fixed Rate Capital Securities of QCR Holdings Statutory Trust II and QCR Holdings Statutory Trust III in the format of a press release. (c) Exhibits Exhibits to the Form 10-K required by Item 601 of Regulation S-K are attached or incorporated herein by reference as stated in the Index to Exhibits. (d) Financial Statements Excluded from Annual Report to Shareholders Pursuant to Rule 14a3(b) Not applicable 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QCR HOLDINGS, INC. Dated: March 19, 2004 By: /s/ Douglas M. Hultquist ------------------------------------- Douglas M. Hultquist President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date - ---------------------------------------------------------------------------------------------- /s/ Michael A. Bauer Chairman of the Board of Directors March 19, 2004 - ----------------------------- Michael A. Bauer /s/ Douglas M. Hultquist President, Chief Executive March 19, 2004 - ----------------------------- Officer and Director Douglas M. Hultquist /s Patrick S. Baird Director March 19, 2004 - ----------------------------- Patrick Baird /s/ James J. Brownson Director March 19, 2004 - ----------------------------- James J. Brownson /s/ Larry J. Helling Director March 19, 2004 - ----------------------------- Larry J. Helling /s/ John K. Lawson Director March 19, 2004 - ----------------------------- John K. Lawson /s/ Ronald G. Peterson Director March 19, 2004 - ----------------------------- Ronald G. Peterson /s/ Henry Royer Director March 19, 2004 - ----------------------------- Henry Royer /s/ John W. Schricker Director March 19, 2004 - ----------------------------- John W. Schricker
66 Appendix A SUPERVISION AND REGULATION General Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including the Iowa Superintendent of Banking (the "Superintendent"), the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Federal Deposit Insurance Corporation (the "FDIC"). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities and securities laws administered by the Securities and Exchange Commission (the "SEC") and state securities authorities have an impact on the business of the Company. The effect of these statutes, regulations and regulatory policies may be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for the respective operations of the Company and its subsidiaries and is intended primarily for the protection of the FDIC-insured deposits and depositors of the Banks, rather than shareholders. The following is a summary of the material elements of the regulatory framework that applies to the Company and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. As such, the following is qualified in its entirety by reference to applicable law. Any change in statutes, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiaries. Recent Regulatory Developments National Bank Preemption. On January 7, 2004, the Office of the Comptroller of the Currency (the "OCC") issued two final rules that clarify the federal character of the national banking system. The first rule provides that, except where made applicable by federal law, state laws that obstruct, impair or condition national banks' ability to fully exercise their deposit-taking, lending and operational powers are not applicable to national banks. That rule further provides that the following types of state laws apply to national banks to the extent that they only incidentally affect the exercise of national banks' deposit-taking, lending and operational powers: contract, criminal, taxation, tort, zoning and laws relating to certain homestead rights, rights to collect debts, acquisitions and transfers of property and other laws as determined to apply to national banks by the OCC. The second rule affirms that, under federal law, with some exceptions, the OCC has exclusive visitorial authority (the power to inspect, examine, supervise and regulate) with respect to the content and conduct of activities authorized for national banks. These controversial rules give national banks, especially those that operate in multiple states, a significant competitive advantage over state-chartered banks and are therefore likely to be challenged by individuals and organizations that represent the interests of individual states and state-chartered banks. Both the U.S. House Committee on Financial Services and the New York Attorney General have already initiated such challenges. FACT Act. On December 4, 2003, President Bush signed into law the Fair and Accurate Credit Transactions Act of 2003 (the "FACT Act"), which contains numerous amendments to the Fair Credit Reporting Act relating to matters including identity theft and privacy. Among its other provisions, the FACT Act requires financial institutions: (i) to establish an identity theft prevention program; (ii) to enhance the accuracy and integrity of information furnished to consumer reporting agencies; and (iii) to allow customers to prevent financial institution affiliates from using, for marketing solicitation purposes, transaction and experience information about the customers received from the financial institution. The FACT Act also requires the federal banking regulators, and certain other agencies, to promulgate regulations to implement its provisions. The various provisions of the FACT Act contain different effective dates including March 31, 2004, for those provisions of the FACT Act that do not require significant changes to business procedures and December 1, 2004, for certain other provisions that will require significant business procedure changes. 67 The Company General. The Company, as the sole shareholder of the Banks, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the "BHCA"). In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company's operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require. Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve 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) and state laws that 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 generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that 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. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be "so closely related to banking ... as to be a proper incident thereto." This authority would permit the Company to engage in a variety of banking-related businesses, including the operation of a thrift, 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. Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, the Company has neither applied for nor received approval to operate as a financial holding company. Federal law also prohibits any person or company from acquiring "control" of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. "Control" is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances at 10% ownership. Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital levels fall below the minimum required levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. 68 The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of total assets weighted according to risk; and (ii) 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% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. 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 loan servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments that 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. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve'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 December 31, 2003, the Company had regulatory capital in excess of the Federal Reserve's minimum requirements. Dividend Payments. The Company's ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the Company is subject to the limitations of the Delaware General Corporation Law (the "DGCL"), which allow 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. Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. The Federal Reserve also 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. 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 Banks The Banks are Iowa-chartered banks, the deposit accounts of which are insured by the FDIC's Bank Insurance Fund ("BIF"). The Banks are members of the Federal Reserve System ("member banks"). As Iowa-chartered, FDIC-insured member banks, the Banks are subject to the examination, supervision, reporting and enforcement requirements of the Superintendent, as the chartering authority for Iowa banks, and the Federal Reserve, the primary federal regulator of member banks. The FDIC, as administrator of the BIF, also has regulatory authority over the Banks. Deposit Insurance. As FDIC-insured institutions, the Banks are 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 December 31, 2003, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2004, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. 69 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"). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations until the final maturity of such obligations in 2019. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2003, the FICO assessment rate for BIF and SAIF members was approximately 0.02% of deposits. Supervisory Assessments. All Iowa banks are required to pay supervisory assessments to the Superintendent to fund the operations of the Superintendent. The amount of the assessment is calculated on the basis of the bank's total assets. During the year ended December 31, 2003, the Banks paid supervisory assessments to the Superintendent totaling $77 thousand. Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. The Federal Reserve has established the following minimum capital standards for state-chartered insured member banks, such as the Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. For purposes of these capital standards, the components of Tier 1 capital and total capital are the same as those for bank holding companies discussed above. 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, regulations of the Federal Reserve 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. Further, federal law and regulations provide various incentives for financial institutions to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a financial institution that is "well-capitalized" may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities and may qualify for expedited processing of other required notices or applications. Additionally, one of the criteria that determines a bank holding company's eligibility to operate as a financial holding company is a requirement that all of its financial institution subsidiaries be "well-capitalized." Under the regulations of the Federal Reserve, in order to be "well-capitalized" a financial institution must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater. Federal law also 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 "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution's asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution. 70 As of December 31, 2003: (i) neither of the Banks was subject to a directive from the Federal Reserve to increase its capital to an amount in excess of the minimum regulatory capital requirements; (ii) each of the Banks exceeded its minimum regulatory capital requirements under Federal Reserve capital adequacy guidelines; and (iii) each of the Banks was "well-capitalized," as defined by Federal Reserve regulations. Liability of Commonly Controlled Institutions. Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC-insured depository institutions in danger of default. Because the Company controls each of the Banks, the Banks are commonly controlled for purposes of these provisions of federal law. Dividend Payments. The primary source of funds for the Company is dividends from the Banks. Under the Iowa Banking Act, Iowa-chartered banks may not pay dividends in excess of their undivided profits. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state member banks, such as the Banks. 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 Federal Reserve approval, however, a state member bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank's calendar year-to-date net income plus the bank's 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, each of the Banks exceeded its minimum capital requirements under applicable guidelines as of December 31, 2003. As of December 31, 2003, approximately $1.6 million would have been available to be paid as dividends by the Banks. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the Banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice. Insider Transactions. The Banks are subject to certain restrictions imposed by federal law on extensions of credit to the Company, on investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Banks. Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to their respective directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to "related interests" of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or one of its subsidiaries or a principal shareholder of the Company may obtain credit from banks with which the Banks maintain correspondent relationships. 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 safety and soundness 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. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments. 71 Branching Authority. Until 2001, an Iowa-chartered bank could only establish a branch office within the boundaries of the counties contiguous to, or cornering upon, the county in which the principal place of business of the bank was located. Further, Iowa law prohibited an Iowa bank from establishing new branches in a municipality other than the municipality in which the bank's principal place of business was located, if another bank already operated one or more offices in the municipality in which the branch was to be located. In 2001, the Iowa Banking Act was amended to allow Iowa-chartered banks to establish up to three branches at any location in Iowa, subject to regulatory approval, in addition to any branches established under the branching rules described above. Beginning July 1, 2004, Iowa-chartered banks will be permitted to establish any number of branches at any location in Iowa, subject to regulatory approval. In 1997, the Company formed a de novo Illinois bank that was merged into the Quad City Bank and Trust Company, resulting in the Quad City Bank and Trust Company establishing a branch office in Illinois. Under Illinois law, the Quad City Bank and Trust Company may continue to establish offices in Illinois to the same extent permitted for an Illinois bank (subject to certain conditions, including certain regulatory notice requirements). Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new 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 permitted only in those few states that authorize such expansion. State Bank Investments and Activities. The Banks generally are permitted to make investments and engage in activities directly or through subsidiaries as authorized by Iowa law. However, 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 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. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Banks. Federal Reserve System. Federal Reserve 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 $45.4 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $45.4 million, the reserve requirement is $1.164 million plus 10% of the aggregate amount of total transaction accounts in excess of $45.4 million. The first $6.6 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Banks are in compliance with the foregoing requirements. 72 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 QCR Holdings, Inc. ("the Company") for the periods shown. Dual presentation of the tables and schedules is provided. The first presentation is comparative financial information for periods as presented in teh Company's December 31, 2003 10-K. The second presentation is comparative financial information restatedi n calendar year periods consistent with the Company's current fiscal year, which was adopted in August 2002. I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential. A and B. Consolidated Average Balance Sheets and Analysis of Net Interest Earnings. Years Ended December 31, --------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------------- ----------------------------- ----------------------------- Interest Average Interest Average Interest Average Average Earned Yield or Average Earned Yield or Average Earned Yield or Balance or Paid Cost Balance or Paid Cost Balance or Paid Cost -------------------------------------------------------------------------------------------- (Dollars in Thousands) ASSETS Interest earnings assets: Federal funds sold .................. $ 23,864 $ 221 0.93% $ 9,813 $ 195 1.99% $ 14,030 $ 698 4.98 Interest-bearing deposits at at financial institutions.......... 14,705 432 2.94 20,221 826 4.08 15,050 975 6.48 Investment securities (1) ........... 92,558 3,995 4.32 74,500 4,090 5.49 57,163 3,513 6.15 Gross loans receivable (2) .......... 480,314 28,984 6.03 387,936 25,928 6.68 294,708 23,116 7.84 ------------------- ------------------- ------------------- Total interest earning assets..... 611,441 33,632 5.50 492,470 31,039 6.30 380,951 28,302 7.43 Noninterest-earning assets: Cash and due from banks ............. $ 28,394 $ 22,124 $ 16,748 Premises and equipment, net ......... 9,852 9,216 8,805 Less allowance for estimated losses on loans ................... (7,997) (5,902) (4,375) Other ............................... 18,362 13,572 11,482 -------- -------- -------- Total assets ..................... $660,052 $531,480 $413,611 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits .... $158,287 1,450 0.92% $119,388 1,751 1.47% $ 96,200 2,445 2.54 Savings deposits .................... 12,817 58 0.45 10,072 100 0.99 7,565 124 1.64 Time deposits ....................... 199,328 5,498 2.76 180,345 6,458 3.58 158,353 8,451 5.34 Short-term borrowings ............... 40,122 327 0.82 31,217 468 1.50 26,166 866 3.31 Federal Home Loan Bank advances ..... 77,669 3,255 4.19 54,113 2,592 4.79 30,123 1,699 5.64 Junior subordinated debentures ...... 12,000 1,134 9.45 12,000 1,134 9.45 12,000 1,134 9.45 Other borrowings .................... 8,071 228 2.82 5,000 217 4.34 1,538 84 5.46 ------------------- ------------------- ------------------- Total interest-bearing liabilities 508,294 11,950 2.35 412,135 12,720 3.09 331,945 14,803 4.46 Noninterest-bearing demand .......... 102,825 70,265 47,990 Other noninterest-bearing liabilities ....................... 9,720 16,141 8,236 Total liabilities ................... 620,839 498,541 388,171 Stockholders' equity ................ 39,213 32,939 25,440 ------------------- -------- -------- Total liabilities and stockholders' equity ........... $660,052 $531,480 $413,611 ======== ======== ======== Net interest income ................. $ 21,682 $ 18,319 $ 13,499 ======== ======== ======== Net interest spread ................. 3.15% 3.21% 2.97% ===== ===== ===== Net interest margin ................. 3.55% 3.72% 3.54% ===== ===== ===== Ratio of average interest earning assets to average interest- bearing liabilities ............... 120.29% 119.49% 114.76% ======== ======== ======= (1) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented. (2) Loan fees are not material and are included in interest income from loans receivable. 73
Six months Ended December 31, --------------------------------------------------------------- 2002 2001 ------------------------------ ------------------------------ Interest Average Interest Average Average Earned Yield or Average Earned Yield or Balance or Paid Cost (3) Balance or Paid Cost (3) ---------------------------------------------------------------- (Dollars in Thousands) ASSETS Interest earnings assets: Federal funds sold .................................. $ 10,593 $ 74 1.40% $ 8,277 $ 137 3.31% Interest-bearing deposits at at financial institutions.......................... 6,441 203 6.30 9,811 315 6.42 Investment securities (1) ........................... 82,723 2,058 4.98 63,294 1,780 5.62 Net loans receivable (2) ............................ 412,560 13,748 6.66 307,683 11,538 7.50 Other interest earning assets ....................... 17,521 158 1.80 5,746 168 5.85 -------------------- ------------------- Total interest earning assets..................... 529,837 16,241 6.13 394,811 13,938 7.05 Noninterest-earning assets: Cash and due from banks ............................. $ 23,651 $ 16,896 Premises and equipment, net ......................... 9,174 9,033 Other ............................................... 4,355 5,855 -------- -------- Total assets ..................................... $567,017 $426,595 ======== ======== STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits .................... $129,247 874 1.35% $100,840 1,084 2.15% Savings deposits .................................... 10,880 45 0.83 8,145 57 1.40 Time deposits ....................................... 189,891 3,233 3.41 155,353 3,596 4.63 Short-term borrowings ............................... 35,810 225 1.26 28,651 350 2.44 Federal Home Loan Bank advances ..................... 66,415 1,440 4.34 33,155 896 5.40 Junior subordinated debentures ...................... 12,000 567 9.45 12,000 567 9.45 Other borrowings .................................... 5,000 100 4.00 3,125 84 5.38 -------------------- ------------------- Total interest-bearing liabilities .................................. 449,243 6,484 2.90 341,269 6,634 3.89 Noninterest-bearing demand .......................... 70,028 54,613 Other noninterest-bearing liabilities ....................................... 13,026 3,016 Total liabilities ................................... 532,297 398,898 Stockholders' equity ................................ 34,720 27,697 -------- -------- Total liabilities and stockholders' equity ........................... $567,017 $426,595 ======== ======== Net interest income ................................. $ 9,757 $ 7,304 ======== ======== Net interest spread ................................. 3.23% 3.16% ===== ===== Net interest margin ................................. 3.68% 3.70% ===== ===== Ratio of average interest earning assets to average interest- bearing liabilities ............................... 117.94% 115.69% ======== ======== (1) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented. (2) Loan fees are not material and are included in interest income from loans receivable. (3) Average yields/costs for the six months ended December 31, 2002 and 2001 are annualized.
74 Years Ended June 30, --------------------------------------------------------------- 2002 2001 ------------------------------ ------------------------------ Interest Average Interest Average Average Earned Yield or Average Earned Yield or Balance or Paid Cost Balance or Paid Cost --------------------------------------------------------------- (Dollars in Thousands) ASSETS Interest earnings assets: Federal funds sold ............................ $ 8,831 $ 258 2.92% $ 21,404 $ 1,267 5.92% Interest-bearing deposits at at financial institutions.................... 9,233 590 6.39 11,102 702 6.32 Investment securities (1) ..................... 68,019 3,789 5.57 57,454 3,477 6.05 Net loans receivable (2) ...................... 329,578 23,718 7.20 261,404 22,971 8.79 Other interest earning assets ................. 8,642 386 4.47 4,915 245 4.98 -------------------- ------------------- Total interest earning assets............... 424,303 28,741 6.77 356,279 28,662 8.04 Noninterest-earning assets: Cash and due from banks ....................... $ 18,665 $ 15,085 Premises and equipment, net ................... 9,308 8,295 Other ......................................... 8,777 5,231 -------- -------- Total assets ............................... $461,053 $384,890 ======== ======== STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits .............. $104,021 1,962 1.89% $ 86,639 2,918 3.37% Savings deposits .............................. 8,597 112 1.30 6,707 132 1.97 Time deposits ................................. 164,542 6,821 4.15 159,822 9,972 6.24 Short-term borrowings ......................... 27,466 592 2.16 22,477 992 4.41 Federal Home Loan Bank advances ............... 41,310 2,048 4.96 24,324 1,463 6.01 Junior subordinated debentures ................ 12,000 1,134 9.45 12,000 1,135 9.46 Other borrowings .............................. 3,846 201 5.23 -- -- -- -------------------- ------------------- Total interest-bearing liabilities .............................. 361,782 12,870 3.56 311,969 16,612 5.32 Noninterest-bearing demand .................... 59,715 45,902 Other noninterest-bearing liabilities ................................. 10,143 5,133 Total liabilities ............................. 431,640 363,004 Stockholders' equity .......................... 29,413 21,886 -------- -------- Total liabilities and stockholders' equity ..................... $461,053 $384,890 ======== ======== Net interest income ........................... $ 15,871 $ 12,050 ======== ======== Net interest spread ........................... 3.22% 2.72% ===== ===== Net interest margin ........................... 3.74% 3.38% ===== ===== Ratio of average interest earning assets to average interest- bearing liabilities ......................... 117.28% 114.20% ======== ======== (1) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate in each year presented. (2) Loan fees are not material and are included in interest income from loans receivable.
75 C. Analysis of Changes of Interest Income/Interest Expense For the years ended December 31, 2003, 2002 and 2001 Components Inc./(Dec.) of Change (1) from ------------------ Prior Year Rate Volume ------------------------------ 2003 vs. 2002 ------------------------------ (Dollars in Thousands) INTEREST INCOME Federal funds sold ............................................................. $ 26 $ (144) $ 170 Interest-bearing deposits at other financial institutions(394) ................. (200) (194) Investment securities (2) ...................................................... (95) (973) 878 Gross loans receivable (2) (3) ................................................. 3,056 (2,692) 5,748 ----------------------------- Total change in interest income ...................................... $ 2,593 $(4,009) $ 6,602 ----------------------------- INTEREST EXPENSE Interest-bearing demand deposits ............................................... $ (301) $ (772) $ 471 Savings deposits ............................................................... (42) (64) 22 Time deposits .................................................................. (960) (1,591) 631 Short-term borrowings .......................................................... (141) (251) 110 Federal Home Loan Bank advances ................................................ 663 (355) 1,018 Junior subordinated debentures ................................................. -- -- -- Other borrowings ............................................................... 11 (93) 104 ----------------------------- Total change in interest expense ..................................... $ (770) $(3,126) $ 2,356 ----------------------------- Total change in net interest income ............................................ $ 3,363 $ (883) $ 4,246 ============================= 2002 vs. 2001 ----------------------------- (Dollars in Thousands) INTEREST INCOME Federal funds sold ............................................................. $ (503) $ (335) $ (168) Interest-bearing deposits at other financial institutions(149) ................. (424) 275 Investment securities (2) ...................................................... 577 (404) 981 Gross loans receivable (2) (3) ................................................. 2,812 (3,764) 6,576 ----------------------------- Total change in interest income ...................................... $ 2,737 $(4,927) $ 7,664 ----------------------------- INTEREST EXPENSE Interest-bearing demand deposits ............................................... $ (694) $(1,193) $ 499 Savings deposits ............................................................... (24) (58) 34 Time deposits .................................................................. (1,993) (3,052) 1,059 Short-term borrowings .......................................................... (398) (541) 143 Federal Home Loan Bank advances ................................................ 893 (288) 1,181 Junior subordinated debentures ................................................. -- -- -- Other borrowings ............................................................... 133 (20) 153 ----------------------------- Total change in interest expense ..................................... $(2,083) $(5,152) $ 3,069 ----------------------------- Total change in net interest income ............................................ $ 4,820 $ 225 $ 4,595 ============================= (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 determined on a tax equivalent basis using a 34% tax rate in each year presented. (3) Loan fees are not material and are included in interest income from loans receivable.
76 For the six months ended December 31, 2002 Components Inc./(Dec.) of Change (1) from ------------------ Prior Year Rate Volume ------------------------------ 2003 vs. 2002 ------------------------------ (Dollars in Thousands) INTEREST INCOME Federal funds sold ............................................................. $ (63) $ (146) $ 83 Certificates of deposit at other financial instituti(112) ...................... (6) (106) Investment securities (2) ...................................................... 278 (521) 799 Net loans receivable (2) (3) ................................................... 2,210 (3,330) 5,540 Other interest earning assets .................................................. (10) (350) 340 ----------------------------- Total change in interest income....................................... $ 2,303 $(4,353) $ 6,656 ----------------------------- INTEREST EXPENSE Interest-bearing demand deposits ............................................... $ (210) $ (814) $ 604 Savings deposits ............................................................... (12) (49) 37 Time deposits .................................................................. (363) (1,935) 1,572 Short-term borrowings .......................................................... (125) (314) 189 Federal Home Loan Bank advances ................................................ 544 (502) 1,046 Junior subordinated debentures ................................................. -- -- -- Other borrowings ............................................................... 16 (56) 72 ----------------------------- Total change in interest expense...................................... $ (150) $(3,670) $ 3,520 ----------------------------- Total change in net interest income ............................................ $ 2,453 $ (683) $ 3,136 ============================= For the years ended June 30, 2002 and 2001 2002 vs. 2001 ----------------------------- (Dollars in Thousands) INTEREST INCOME Federal funds sold ............................................................. $(1,009) $ (467) $ (542) Certificates of deposit at other financial instituti(112) ...................... 7 (119) Investment securities (2) ...................................................... 312.00 (292) 604 Net loans receivable (2) (3) ................................................... 747 (4,604) 5,351 Other interest earning assets .................................................. 141 (27) 168 ----------------------------- Total change in interest income ...................................... $ 79 $(5,383) $ 5,462 ----------------------------- INTEREST EXPENSE Interest-bearing demand deposits ............................................... $ (956) $(1,461) $ 505 Savings deposits ............................................................... (20) (52) 32 Time deposits .................................................................. (3,151) (3,438) 287 Short-term borrowings .......................................................... (400) (586) 186 Federal Home Loan Bank advances ................................................ 585 (293) 878 Junior subordinated debentures ................................................. (1) (1) -- Other borrowings ............................................................... 201 -- 201 ----------------------------- Total change in interest expense...................................... $(3,742) $(5,831) $ 2,089 ----------------------------- Total change in net interest income ............................................ $ 3,821 $ 448 $ 3,373 ============================= (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 determined on a tax equivalent basis using a 34% tax rate in each year presented. (3) Loan fees are not material and are included in interest income from loans receivable.
77 II. Investment Portfolio A. Investment Securities The following tables present the amortized cost and fair value of investment securities as of December 31, 2003 and 2002. Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------------------------------------- (Dollars in Thousands) December 31, 2003 - ----------------------------------- Securities held to maturity: Municipal securities .............. $ 250 $ 4 $ -- $ 254 Other bonds ....................... 150 13 -- 163 ------------------------------------------ Totals ....................... $ 400 $ 17 $ -- $ 417 ========================================== Securities available for sale: U.S. Treasury securities .......... $ 1,002 $ 3 $ -- $ 1,005 U.S. agency securities ............ 86,732 1,105 (64) 87,773 Mortgage-backed securities ........ 5,656 67 (8) 5,715 Municipal securities .............. 15,664 1,018 (1) 16,681 Corporate securities .............. 9,466 492 (4) 9,954 Trust preferred securities ........ 1,350 105 -- 1,455 Other securities .................. 5,688 173 (1) 5,860 ------------------------------------------ Totals ....................... $125,558 $ 2,963 $ (78) $128,443 ========================================== December 31, 2002 - ----------------------------------- Securities held to maturity: Municipal securities .............. $ 250 $ 9 $ -- $ 259 Other bonds ....................... 175 17 -- 192 ------------------------------------------ Totals ....................... $ 425 $ 26 $ -- $ 451 ========================================== Securities available for sale: U.S. Treasury securities .......... $ 1,017 $ 20 $ -- $ 1,037 U.S. agency securities ............ 47,535 1,702 (1) 49,236 Mortgage-backed securities ........ 5,601 170 0 5,771 Municipal securities .............. 13,941 978 -- 14,919 Corporate securities .............. 7,691 475 -- 8,166 Trust preferred securities ........ 1,350 93 (11) 1,432 Other securities .................. 659 20 (11) 668 ------------------------------------------ Totals ....................... $ 77,794 $ 3,458 $ (23) $ 81,229 ==========================================
78 The following tables present the amortized cost and fair value of investment securities as of June 30, 2002 and 2001. Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------------------------------------- (Dollars in Thousands) June 30, 2002 - ------------------------------------ Securities held to maturity: Municipal securities ............... $ 250 $ 8 $ -- $ 258 Other bonds ........................ 175 4 -- 179 ------------------------------------------ Totals ........................ $ 425 $ 12 $ -- $ 437 ========================================== Securities available for sale: U.S. Treasury securities ........... $ 1,024 $ 9 $ -- $ 1,033 U.S. agency securities ............. 42,251 1,088 -- 43,339 Mortgage-backed securities ......... 5,758 124 -- 5,882 Municipal securities ............... 13,664 538 (15) 14,187 Corporate securities ............... 9,291 191 (6) 9,476 Trust preferred securities ......... 1,350 111 (15) 1,446 Other securities ................... 408 39 (4) 443 ------------------------------------------ Totals ........................ $ 73,746 $ 2,100 $ (40) $ 75,806 ========================================== June 30, 2001 - ------------------------------------ Securities held to maturity: Municipal securities ............... $ 501 $ 5 $ -- $ 506 Other bonds ........................ 75 3 -- 78 ------------------------------------------ Totals ........................ $ 576 $ 8 $ -- $ 584 ========================================== Securities available for sale: U.S. agency securities ............. $ 31,788 $ 626 $ -- $ 32,414 Mortgage-backed securities ......... 5,509 18 (19) 5,508 Municipal securities ............... 11,893 144 (40) 11,997 Corporate securities ............... 4,578 31 (13) 4,596 Trust preferred securities ......... 1,148 95 (14) 1,229 Other securities ................... 394 19 (22) 391 ------------------------------------------ Totals ........................ $ 55,310 $ 933 $ (108) $ 56,135 ========================================== 79 B. Investment Securities, Maturities, and Yields The following table presents the maturity of securities held on December 31, 2003 and the weighted average stated coupon rates by range of maturity: Weighted Amortized Average Cost Yield ---------------------- (Dollars in Thousands) U.S. Treasury securities: Within 1 year ......................................... $ 1,002 3.20% ==================== U.S. Agency securities: Within 1 year .......................................... $12,563 3.58% After 1 but within 5 years ............................. 60,976 2.91% After 5 but within 10 years ............................ 13,193 2.94% -------------------- Total ......................................... $86,732 3.00% ==================== Mortgage-backed securities: After 1 but within 5 years ............................. $ 2,508 4.02% After 5 but within 10 years ............................ 3,148 4.67% -------------------- Total ......................................... $ 5,656 4.38% ==================== Municipal securities: Within 1 year .......................................... $ 750 6.25% After 1 but within 5 years ............................. 4,757 6.36% After 5 but within 10 years ............................ 5,599 6.83% After 10 years ......................................... 4,808 7.83% -------------------- Total ......................................... $15,914 6.96% ==================== Corporate securities: Within 1 year .......................................... $ 2,687 4.91% After 1 but within 5 years ............................. 6,779 5.19% -------------------- Total ......................................... $ 9,466 5.11% ==================== Trust preferred securities: After 10 years ......................................... $ 1,350 8.92% ==================== Other bonds: Within 1 year .......................................... $ 50 6.60% After 1 but within 5 years ............................. 50 5.30% After 5 but within 10 years ............................ 50 6.55% -------------------- Total ......................................... $ 150 6.15% ==================== Other securities with no maturity or stated face rate .... $ 5,688 ======= 80 The company does not use any financial instruments referred to as derivatives to manage interest rate risk. The following table presents the maturity of securities held on December 31, 2002 and the weighted average stated coupon rates by range of maturity: Weighted Amortized Average Cost Yield ---------------------- (Dollars in Thousands) U.S. Treasury securities: After 1 but within 5 years ......................... $ 1,017 3.20% ===================== U.S. Agency securities: Within 1 year ...................................... $11,756 4.42% After 1 but within 5 years ......................... 29,976 4.30% After 5 but within 10 years ........................ 5,803 5.80% --------------------- Total ..................................... $47,535 4.51% ===================== Mortgage-backed securities: Within 1 year ...................................... $ 68 5.81% After 1 but within 5 years ......................... 211 5.75% After 5 but within 10 years ........................ 3,299 4.80% After 10 years ..................................... 2,023 5.86% --------------------- Total ..................................... $ 5,601 5.23% ===================== Municipal securities: Within 1 year ...................................... $ 320 6.42% After 1 but within 5 years ......................... 4,151 6.20% After 5 but within 10 years ........................ 5,023 6.60% After 10 years ..................................... 4,698 7.73% --------------------- Total ..................................... $14,192 6.85% ===================== Corporate securities: After 1 but within 5 years ......................... $ 5,818 5.68% After 5 but within 10 years ........................ 1,873 6.10% --------------------- Total ..................................... $ 7,691 5.78% ===================== Trust preferred securities: After 10 years ..................................... $ 1,350 8.71% ===================== Other bonds: Within 1 year ...................................... $ 25 6.30% After 1 but within 5 years ......................... 100 5.95% After 5 but within 10 years ........................ 50 6.55% --------------------- Total ..................................... $ 175 6.17% ===================== Other securities with no maturity or stated face rate . $ 659 ======= 81 The company does not use any financial instruments referred to as derivatives to manage interest rate risk. C. Investment Concentrations At both December 31, 2003 and 2002, there were no securities in the investment portfolio above (other than U.S. Government, U.S. Government agencies, and corporations) that exceeded 10% of the stockholders' equity. III. Loan Portfolio A. Types of Loans The composition of the loan portfolio is presented as follows: December 31, June 30, -------------------- -------------------------------------------- 2003 2002 2002 2001 2000 1999 -------------------------------------------------------------------- (Dollars in Thousands) Commercial .............................................. $435,345 $350,206 $305,019 $209,933 $167,733 $136,258 Real estate loans held for sale - residential mortgage .. 3,790 23,691 8,498 5,824 1,122 2,033 Real estate - residential mortgage ...................... 29,604 28,761 34,034 32,191 35,180 25,559 Real estate - construction .............................. 2,254 2,230 2,861 2,568 3,464 3,368 Installment and other consumer .......................... 50,984 44,567 40,037 37,362 34,405 30,810 -------------------------------------------------------------------- Total loans ........................... 521,977 449,455 390,449 287,878 241,904 198,028 Deferred loan origination costs (fees), net ............. 494 281 145 (13) (51) (51) Less allowance for estimated losses on loans ....................................... (8,643) (6,879) (6,111) (4,248) (3,617) (2,895) ------------------------------------------------------------------- Net loans .............................. $513,828 $442,857 $384,483 $283,617 $238,236 $195,082 ===================================================================
December 31, ------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------- (Dollars in Thousands) Commercial .............................................. $435,345 $350,206 $255,486 $186,952 $142,219 Real estate loans held for sale - residential mortgage .. 3,790 23,691 13,470 1,627 1,177 Real estate - residential mortgage ...................... 29,604 28,761 30,457 37,388 31,360 Real estate - construction .............................. 2,254 2,230 3,399 2,117 2,668 Installment and other consumer .......................... 50,984 44,567 40,103 37,434 33,899 ------------------------------------------------------- Total loans ............................ 521,977 449,455 342,915 265,518 211,323 Deferred loan origination costs (fees), net ............. 494 281 84 100 53 Less allowance for estimated losses on loans ....................................... (8,643) (6,879) (4,939) (3,972) (3,341) ------------------------------------------------------- Net loans .............................. $513,828 $442,857 $338,060 $261,646 $208,035 =======================================================
82 B. Maturities and Sensitivities of Loans to Changes in Interest Rates Maturities After One Year ------------------------------ Due in One Due After One Due After Predetermined Adjustable Year or Less Through 5 Years 5 Years Interest Rates Interest Rates ------------------------------------------------------------------------ (Dollars in Thousands) At December 31, 2003 - ---------------------------------------------------------- Commercial ............................................... $ 116,545 $ 273,007 $ 45,793 $ 241,491 $ 77,309 Real estate loans held for sale - residential mortgage ... -- -- 3,790 3,790 -- Real estate - residential mortgage ....................... 964 218 28,422 7,241 21,399 Real estate - construction ............................... 2,174 80 -- 80 -- Installment and other consumer ........................... 13,675 34,490 2,819 26,436 10,873 ----------------------------------------------------------------------- Total loans ............................. $ 133,358 $307,795 $ 80,824 $ 279,038 $ 109,581 ======================================================================= At December 31, 2002 - ---------------------------------------------------------- Commercial ............................................... $ 105,187 $208,470 $ 36,549 $ 191,766 $ 53,253 Real estate loans held for sale - residential mortgage ... -- -- 23,691 23,691 -- Real estate - residential mortgage ....................... 1,714 269 26,778 3,669 23,377 Real estate - construction ............................... 2,149 81 -- 81 -- Installment and other consumer ........................... 14,116 28,214 2,237 23,715 6,737 ----------------------------------------------------------------------- Total loans ............................. $ 123,166 $237,034 $ 89,255 $ 242,922 $ 83,367 =======================================================================
C. Risk Elements 1. Nonaccrual, Past Due and Restructured Loans The following tables represent Nonaccrual, Past Due, Renegotiated Loans, and other Real Estate Owned: December 31, June 30, ---------------- --------------------------------- 2003 2002 2002 2001 2000 1999 ---------------------------------------------------- (Dollars in Thousands) Loans accounted for on nonaccrual basis ............. $4,204 $4,608 $1,560 $1,232 $ 383 $1,288 Accruing loans past due 90 days or more ............. 756 431 708 495 352 238 Other real estate owned ............................. -- -- -- 47 -- 120 Troubled debt restructurings ........................ -- -- -- -- -- -- ---------------------------------------------------- Totals ............................... $4,960 $5,039 $2,268 $1,774 $ 735 $1,646 ====================================================
December 31, ------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------- (Dollars in Thousands) Loans accounted for on nonaccrual basis ............. $4,204 $4,608 $1,846 $ 655 $1,178 Accruing loans past due 90 days or more ............. 756 431 1,765 1,197 200 Other real estate owned ............................. -- -- 47 -- -- Troubled debt restructurings ........................ -- -- -- -- -- ------------------------------------------- Totals ............................... $4,960 $5,039 $3,658 $1,852 $1,378 ===========================================
83 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 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. At December 31, 2003, there were no concentrations of loans exceeding 10% of the total loans which are not otherwise disclosed in Item III. A. 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 tables summarize activity in the allowance for estimated losses on loans of the Company: Six Months Year Ended Ended Years Ended December 31, December 31, June 30, -------------------------- --------------------------------------------------- 2003 2002 2002 2001 2000 1999 --------------------------------------------------------------------------------- (Dollars in Thousands) Average amount of loans outstanding, before allowance for estimated losses on loans .............................. $ 480,314 $ 419,104 $ 334,205 $ 265,350 $ 212,497 $ 184,757 Allowance for estimated losses on loans: Balance, beginning of fiscal period ..... 6,879 6,111 4,248 3,617 2,895 2,350 Charge-offs: Commercial .......................... (1,777) (1,349) (437) (87) (43) (105) Real Estate ......................... -- -- -- -- (7) (25) Installment and other consumer ...... (298) (105) (204) (213) (377) (349) ------------------------------------------------------------------------------- Subtotal charge-offs ......... (2,075) (1,454) (641) (300) (427) (479) ------------------------------------------------------------------------------- Recoveries: Commercial .......................... 192 0 101 2 1 53 Real Estate ......................... -- -- -- -- -- -- Installment and other consumer ...... 242 38 138 39 96 79 ------------------------------------------------------------------------------- Subtotal recoveries .......... 434 38 239 41 97 132 ------------------------------------------------------------------------------- Net charge-offs .............. (1,641) (1,416) (402) (259) (330) (347) Provision charged to expense ............ 3,405 2,184 2,265 890 1,052 892 ------------------------------------------------------------------------------- Balance, end of fiscal year ............. $ 8,643 $ 6,879 $ 6,111 $ 4,248 $ 3,617 $ 2,895 =============================================================================== Ratio of net charge-offs to average loans outstanding ........................... 0.34% 0.34% 0.12% 0.10% 0.16% 0.19%
84 Years ended December 31, ----------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------------------------------------------------------------- (Dollars in Thousands) Average amount of loans outstanding, before allowance for estimated losses on loans .............................. $ 480,314 $ 387,936 $ 294,708 $ 237,947 $ 199,401 Allowance for estimated losses on loans: Balance, beginning of fiscal period ..... 6,879 4,939 3,972 3,341 2,629 Charge-offs: Commercial .......................... (1,777) (1,455) (332) (87) (57) Real Estate ......................... -- -- -- -- (32) Installment and other consumer ...... (298) (214) (205) (355) (342) ----------------------------------------------------------------- Subtotal charge-offs ......... (2,075) (1,669) (537) (442) (431) ----------------------------------------------------------------- Recoveries: Commercial ........................... 192 73 29 2 4 Real Estate .......................... -- -- -- -- -- Installment and other consumer ....... 242 126 66 71 102 ----------------------------------------------------------------- Subtotal recoveries .......... 434 199 95 73 106 ----------------------------------------------------------------- Net charge-offs .............. (1,641) (1,470) (442) (369) (325) Provision charged to expense ............ 3,405 3,410 1,409 1,000 1,037 ----------------------------------------------------------------- Balance, end of fiscal year ............. $ 8,643 $ 6,879 $ 4,939 $ 3,972 $ 3,341 ================================================================= Ratio of net charge-offs to average loans outstanding ........................... 0.34% 0.38% 0.15% 0.16% 0.16%
B. Allocation of the Allowance for Estimated Losses on Loans The following tables present the allowance for the estimated losses on loans by type of loans and the percentage of loans in each category to total loans: ---------------------------------------------------------------------------- December 31, 2003 December 31, 2002 June 30, 2003 ----------------------- ------------------------ ------------------------ % of Loans % of Loans % of Loans Amount to Total Loans Amount to Total Loans Amount to Total Loans ---------------------------------------------------------------------------- (Dollars in Thousands) Commercial .......................................... $7,676 83.40% $6,176 77.91% $5,240 78.12% Real estate loans held for sale - residential mortgage .......................................... 4 0.73% 24 5.27% 1 2.18% Real estate - residential mortgage .................. 272 5.67% 159 6.40% 302 8.72% Real estate - construction .......................... 11 0.43% 11 0.50% 14 0.73% Installment and other consumer ...................... 678 9.77% 507 9.92% 554 10.25% Unallocated ......................................... 2 NA 2 NA -- NA ---------------------------------------------------------------------------- Total ................................... $8,643 100.00% $6,879 100.00% $6,111 100.00% ============================================================================
85 ---------------------------------------------------------------------------- June 30, 2001 June 30, 2000 June 30, 1999 ----------------------- ------------------------ ------------------------ % of Loans % of Loans % of Loans Amount to Total Loans Amount to Total Loans Amount to Total Loans ---------------------------------------------------------------------------- (Dollars in Thousands) Commercial .......................................... $3,231 72.92% $2,863 69.33% $2,165 68.80% Real estate loans held for sale - residential mortgage .......................................... -- 2.02% -- 0.46% -- 1.03% Real estate - residential mortgage .................. 182 11.18% 121 14.55% 94 12.91% Real estate - construction .......................... -- 0.89% 9 1.43% 8 1.70% Installment and other consumer ...................... 835 12.99% 618 14.23% 579 15.56% Unallocated ......................................... -- NA 6 NA 49 NA ---------------------------------------------------------------------------- Total .................................. $4,248 100.00% $3,617 100.00% $2,895 100.00% ============================================================================ ---------------------------------------------------------------------------- December 31, 2003 December 31, 2002 June 30, 2003 % of Loans % of Loans % of Loans Amount to Total Loans Amount to Total Loans Amount to Total Loans ---------------------------------------------------------------------------- (Dollars in Thousands) Commercial .......................................... $7,676 83.40% $6,176 77.91% $4,305 74.50% Real estate loans held for sale - residential mortgage .......................................... 4 0.73% 24 5.27% 14 3.93% Real estate - residential mortgage .................. 272 5.67% 159 6.40% 140 8.88% Real estate - construction .......................... 11 0.43% 11 0.50% 17 0.99% Installment and other consumer ...................... 678 9.77% 507 9.92% 461 11.70% Unallocated ......................................... 2 NA 2 NA 2 NA --------------------------------------------------------------------------- Total .................................. $8,643 100.00% $6,879 100.00% $4,939 100.00% =========================================================================== ------------------------------------------------- December 31, 2003 December 31, 2002 % of Loans % of Loans Amount to Total Loans Amount to Total Loans ------------------------------------------------- Commercial .......................................... $3,339 70.41% $2,674 67.30% Real estate loans held for sale - residential mortgage .......................................... 2 0.61% 1 0.56% Real estate - residential mortgage .................. 183 14.08% 62 14.84% Real estate - construction .......................... 11 0.80% 13 1.26% Installment and other consumer ...................... 437 14.10% 585 16.04% Unallocated ......................................... -- NA 6 NA ------------------------------------------------- Total .................................. $3,972 100.00% $3,341 100.00% =================================================
V. Deposits. The average amount of and average rate paid for the categories of deposits for the years ended December 31, 2003, 2002, and 2001, six months ended December 31, 2002 and 2001, and the years ended June 30, 2002 and 2001 are discussed in the consolidated average balance sheets and can be found on pages 2,3, and 4 of Appendix B. 86 Included in interest bearing deposits at December 31, 2003 and 2002, and June 30, 2002 and 2001 were certificates of deposit totaling $73,799,534, $69,373,970, $62,919,139, and $50,298,559 respectively, that were $100,000 or greater. Maturities of these certificates were as follows: December 31, June 30, ------------------------------------- 2003 2002 2002 2001 ------------------------------------- (Dollars in Thousands) One to three months .................... $28,120 $28,053 $18,223 $20,949 Three to six months .................... 21,176 20,713 11,202 11,488 Six to twelve months ................... 17,600 12,591 24,464 12,973 Over twelve months ..................... 6,904 8,017 9,030 4,889 ------------------------------------- Total certificates of deposit greater than $100,000 $73,800 $69,374 $62,919 $50,299 ===================================== December 31, ----------------------------- 2003 2002 2001 ----------------------------- (Dollars in Thousands) One to three months ........................... $28,120 $28,053 $33,024 Three to six months ........................... 21,176 20,713 20,360 Six to twelve months .......................... 17,600 12,591 3,640 Over twelve months ............................ 6,904 8,017 6,388 ----------------------------- Total certificates of deposit greater than $100,000 ....... $73,800 $69,374 $63,412 ============================= VI. Return on Equity and Assets. The following tables present the return on assets and equity and the equity to assets ratio of the Company: Six months Year ended ended Years ended December 31, December 31, June 30, -------------------------------------------- 2003 2002 2002 2001 -------------------------------------------- (Dollars in Thousands) Average total assets ................. $660,052 $567,017 $461,053 $384,890 Average equity ....................... 39,213 34,720 29,413 21,886 Net income ........................... 5,461 3,197 2,962 2,396 Return on average assets ............. 0.83% 1.13% 0.64% 0.62% Return on average equity ............. 13.93% 18.41% 10.07% 10.95% Dividend payout ratio ................ 5.61% 4.31% NA NA Average equity to average assets ratio 5.94% 6.12% 6.38% 5.69%
Years ended December 31, -------------------------------- 2003 2002 2001 -------------------------------- (Dollars in Thousands) Average total assets ................. $660,052 $531,480 $413,611 Average equity ....................... 39,213 32,939 25,440 Net income ........................... 5,461 4,821 2,729 Return on average assets ............. 0.83% 0.91% 0.66% Return on average equity ............. 13.93% 14.64% 10.73% Dividend payout ratio ................ 5.61% 2.86% NA Average equity to average assets ratio 5.94% 6.20% 6.15% 87 VII. Short Term Borrowings. The information requested is disclosed in the Notes to Consolidated Financial Statements in Note 7. 88 EX-10 3 qcrexhbt101.txt Exhibit 10.1 EMPLOYMENT AGREEMENT BETWEEN QCR HOLDINGS, INC., QUAD CITY BANK AND TRUST COMPANY AND MICHAEL A. BAUER THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of the 1st day of January, 2004, is between QCR Holdings, Inc. (the "Company") and QUAD CITY BANK AND TRUST COMPANY (the "Bank") (collectively, the "Employer"), and MICHAEL A. BAUER (the "Employee"). RECITALS WHEREAS, Employee is currently serving as an executive of the Company and the Bank pursuant to that certain Employment Agreement dated July 1, 2000 (the "Prior Employment Agreement"); and WHEREAS, the parties desire to amend and restate the Prior Employment Agreement on the terms hereinafter set forth. NOW, THEREFORE, in consideration of the promises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and among the parties hereto as follows: AGREEMENTS Section 1. Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. Section 2. Duties. The Employee agrees to provide all services necessary, incidental or convenient as the Chairman of the Company and President of the Bank. 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. Section 3. Term. The term of this Agreement shall commence on January 1, 2004 (the "Effective Date"), and shall continue for a period of three (3) years. This Agreement shall automatically extend for one (1) year on each anniversary of the Effective Date, unless terminated by either party effective as of the last day of the then current three (3) year extension by written notice to that effect delivered to the other not less than ninety (90) days prior to the anniversary of such Effective Date. Section 4. Compensation. As compensation for the services to be provided by the Employee hereunder: (a) Base Salary. The Bank shall pay Employee an annual base salary of one hundred and seventy-five thousand dollars ($175,000) ("Base Salary"). Base Salary shall be payable bi-weekly, in equal installments in accordance with the Employer's payroll practice. The Company shall reimburse the Bank for Employee's Base Salary attributable to services for the Company. The Employee's Base Salary shall be subject to review annually, commencing January 1, 2005, and shall be maintained or increased during the term hereof in accordance with the Employer's established management compensation policies and plan. (b) Bonuses. The Employee shall be entitled to receive cash bonuses ("Cash Bonus" or "Cash Bonuses"), based upon performance, which may be granted in the future in the discretion of the Employer, consistent with Employer's incentive bonus formula for executive management, as modified from time to time. In addition, the Employee may receive such additional bonuses or awards in the form of stock options, restricted stock or other equity compensation, as determined in the discretion of the Employer. (c) Non-Qualified Supplemental Executive Retirement Agreement. Employee shall participate in the Non-Qualified Supplemental Executive Retirement Agreement, as amended from time to time in accordance with its terms. (d) Benefits. The Employer shall provide the following additional benefits to the Employee: (i) Medical Insurance. Family medical insurance, provided that Employee shall be responsible for paying any portion of the premium in accordance with the Employer's policy applied to similarly situated employees. (ii) Reimbursements. Reimbursement of reasonable expenses advanced by the Employee in connection with performance of his duties hereunder, including, but not limited to, two (2) paid weeks of continuing education, a monthly automobile allowance of $500, fuel, maintenance and insurance expense of such automobile, and the annual reimbursement of club dues for the following clubs: Crow Valley Club and Velie Plantation Club. 1 (iii) Personal Days. The Employee will initially be entitled to five (5) weeks of personal days, which may be increased in accordance with the Employer's established policies and practices. (iv) Disability Coverage. Long-term and short-term disability coverage equal to 66-2/3% of Base Salary and Average Annual Bonus. For purposes of this Agreement, "Average Annual Bonus" shall mean the average of the three (3) most recent annual Cash Bonuses paid to the Employee immediately preceding the determination date. (v) Employee Benefits. Participation in a 401(k)/profit sharing plan, deferred compensation program and such other benefits as are specifically granted to Employee or in which he participates as an employee of the Employer. (vi) Life Insurance. Term life insurance of two (2) times Employee's Base Salary and Average Annual Bonus as of the date of this Agreement; which insurance may be provided through a group term carve-out plan at the Employer's election. The Employee will be allowed to purchase additional life insurance of at least that same amount through such plan. Section5. Time Requirement. The Employee shall devote his best efforts and full business time to his duties under this Agreement. The Employee shall be allowed to serve on outside boards subject to the consent of the Employer. Section 6. Termination upon Disability. In the event of the Employee's Disability (as defined below) during the employment term, payments based upon the Employee's then current annual Base Salary and Average Annual Bonus shall continue thereafter through the last day of the one (1) year period beginning on the date of such Disability, after which time Employee's employment shall terminate. Payments made in the event of the Employee's Disability shall be equal to 66-2/3% of Employee's Base Salary and Average Annual Bonus, less any amounts received under the Employer's short or long-term disability programs, as applicable. Disability for purposes of this Agreement shall mean that the Employee is limited from performing the material and substantial duties of the positions set forth in Section 2 due to the Employee's sickness or injury for a period of six (6) consecutive months. The Executive Committee of the Board of Directors of the Employer shall determine whether and when the Employee has incurred a Disability under this Agreement. Section 7. Payment upon Death. In the event of the Employee's death during the term of this Agreement, the Employee shall be paid his accrued and unpaid Base Salary, and his earned Cash Bonus for the year in which he died prorated on a per diem basis through the date of death. The earned Base Salary shall be paid in accordance with the Employer's regular payroll on the next regular payroll date following the Employee's death. The earned Cash Bonus for the year shall be paid when Cash Bonuses are paid to other executive officers of the Employer with respect to such year. Such amounts shall be payable to the persons designated in writing by the Employee, or if none, to his estate. Section 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. 2 Section 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 areas of the Employer's lending and deposit taking functions extends to the areas encompassing the sixty (60) mile radii from each of the offices of the Employer. Therefore, as an essential ingredient of and in consideration of this Agreement and the payment of the amounts described in Sections 4 and 10, the Employee hereby agrees that, except with the express prior written consent of the Employer, for a period of two (2) years 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, including, but not by way of limitation, by directly or indirectly owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of, or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Employer to terminate employment with the Employer and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates, a bank, savings and loan association, credit union or similar financial institution (a "Financial Institution") within the sixty (60) mile radii of each of the Employer's offices (the "Restrictive Covenant"). 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. 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 National Association of Securities Dealers Automated Quotation System which do not represent more than one percent (1%) of the outstanding capital stock of any Financial Institution. (b) Remedies for Breach of Restrictive Covenant. The Employee acknowledges that the restrictions contained in this Section 9 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. Section 10. Severance. (a) Termination Without Cause. If the Employee is terminated without "Cause" (as defined below), the Employer will pay the Employee a sum equal to his then current annual Base Salary plus his Average Annual Bonus. Such payment shall be made in a lump sum within 15 days of termination or in equal installments over the one (1) year period, at the Employer's option. In addition, the Employer shall provide reasonable out-placement services for up to three (3) months following termination. (b) Termination for Cause or Voluntary Termination. If the Employee is terminated for Cause (as defined below) or voluntarily terminates his employment, then the Employer shall pay Employee any accrued and unpaid Base Salary, and any accrued and unpaid personal days and shall have no further obligations to the Employee under this Agreement. For purposes of this Agreement, "Cause" shall mean: (i) a material violation by the Employee of any applicable material law or regulation respecting the business of the Employer; 3 (ii) the Employee being found guilty of a felony, an act of dishonesty in connection with the performance of his duties as an officer of the Employer, or which disqualifies the Employee from serving as an officer or director of the Employer; or (iii) the willful or negligent failure of the Employee to perform his duties hereunder in any material respect. The Employee shall be entitled to at least thirty (30) days' prior written notice of the Employer's intention to terminate his employment for any Cause 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. (c) Termination Upon Change in Control. If a Change in Control (as defined below) of the ownership of the Employer occurs and the Employee is terminated within one (1) year following the Change in Control or the Employee elects to terminate his employment within six (6) months following the Change in Control, a severance payment will be made within 15 days of termination equal to the sum of three (3) times the sum of his then current Base Salary and Average Annual Bonus. In addition, the Employer shall continue, or cause to be continued, Employee's health insurance as in effect on the date of termination (including, if applicable, family coverage) for three (3) years. For purposes of this paragraph, the term "Change in Control" shall mean the following: (i) 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 Company; or (ii) The individuals who, as of the date hereof, are members of the Board of Directors of the Company (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 (iii) Consummation by the Company of (i) 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 of the Company outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution or an agreement for the sale or other disposition of two-thirds or more of the consolidated assets of the Company. 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 of the Company is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company immediately prior to such acquisition. 4 (iv) If it is determined, in the opinion of the Company's independent accountants, in consultation, if necessary, with the Company's independent legal counsel, that any amount paid under this Agreement due to a Change in Control, either separately or in conjunction with any other payments, benefits and entitlements received by the Employee in respect of a Change in Control under any other plan or agreement under which the Employee participates or to which he is a party, would constitute an "Excess Parachute Payment" within the meaning of Section 280G of the Code, and thereby be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then in such event the Employer shall pay to the Employee a "grossing-up" amount equal to the amount of such Excise Tax, plus all federal and state income or other taxes with respect to the payment of the amount of such Excise Tax, including all such taxes with respect to any such grossing-up amount. If, at a later date, the Internal Revenue Service assesses a deficiency against the Employee for the Excise Tax which is greater than that which was determined at the time such amounts were paid, then the Employer shall pay to the Employee the amount of such unreimbursed Excise Tax plus any interest, penalties and reasonable professional fees or expenses incurred by the Employee as a result of such assessment, including all such taxes with respect to any such additional amount. The highest marginal tax rate applicable to individuals at the time of the payment of such amounts will be used for purposes of determining the federal and state income and other taxes with respect thereto. The Employer shall withhold from any amounts paid under this Agreement the amount of any Excise Tax or other federal, state or local taxes then required to be withheld with respect to the amount paid hereunder. Computations of the amount of any grossing-up supplemental compensation paid under this subparagraph shall be conclusively made by the Employer's independent accountants, in consultation, if necessary, with the Employer's independent legal counsel. If, after the Employee receives any gross-up payments or other amount pursuant to this Section 10, the Employee receives any refund with respect to the Excise Tax, the Employee shall promptly pay the Employer the amount of such refund within ten (10) days of receipt by the Employee. (v) If the Employer is not in compliance with its minimum capital requirements or if the payments required under this Section 10 would cause the Employer's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Employer is in capital compliance. At the election of the Employee, which election is to made within thirty (30) days of the Employee's termination, such payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the Employee's termination. In the event that no election is made, payment to the Employee will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the Employee obtains other employment following the termination of employment by the Employer. Section 11. 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 for 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 (i) 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 (ii) 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. 5 Section 12. Payment of Legal Fees. The Employer is aware that after a Change in Control, management of the Employer or its successor could cause or attempt to cause the Employer to refuse to comply with its obligations under this Agreement, including the possible pursuit of litigation to avoid its obligations under this Agreement. In these circumstances, the purpose of this Agreement would be frustrated. It is the Employer's intention that the Employee not be required to incur the expenses associated with the enforcement of his rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Employee hereunder. It is the Employer's intention that the Employee not be forced to negotiate settlement of his rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Employee that (a) the Employer has failed to comply with any of its obligations under this Agreement, or (b) the Employer or any other person has taken any action to avoid its obligations under this Agreement, the Employer irrevocably authorizes the Employee from time to time to retain counsel of his choice, at the expense of the Employer as provided in this Section 12, to represent the Employee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Employer or any director, officer, stockholder, or other person affiliated with the Employer, in any jurisdiction. Notwithstanding any existing or previous attorney-client relationship between the Employer and any counsel chosen by the Employee under this Section 12, the Employer irrevocably consents to the Employee entering into an attorney-client relationship with that counsel, and the Employer and the Employee agree that a confidential relationship shall exist between the Employee and that counsel. The fees and expenses of counsel selected from time to time by the Employee as provided in this Section 12 shall be paid or reimbursed to the Employee by the Employer on a regular, periodic basis upon presentation by the Employee of a statement or statements prepared by such counsel in accordance with such counsel's customary practices. The Employer's obligation to reimburse Employee for legal fees as provided under this Section 12 and any separate employment, deferred compensation, severance or other agreement between the Employee and the Employer shall not exceed $200,000 in the aggregate. Accordingly, the Employer's obligation to pay the Employee's legal fees provided by this Section 12 shall be offset by any legal fee reimbursement obligation the Employer may have with the Employee under any separate employment, deferred compensation, severance or other agreement between the Employee and the Employer. Section 13. Regulatory Suspension and Termination. (a) If the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the Employer's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, the Employer's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Employer shall (A) pay the Employee all of the compensation withheld while their contract obligations were suspended and (B) reinstate any of the obligations, which were suspended. (b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Employer's affairs by an order issued under Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (c) If the Employer is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations of the Employer under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution by the Federal Deposit Insurance Corporation (the "FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Employer under the authority contained in Section 13(c) (12 U.S.C. ss. 1823(c)) of the Federal Deposit Insurance Act, as amended, or when the Employer is determined by the FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) (12 U.S.C. ss. 1828(k)) of the Federal Deposit Insurance Act as amended, and any regulations promulgated thereunder. 6 Section 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. The Company agrees that it shall not merge or consolidate into or with another company, or reorganize, or sell substantially all its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company under this Agreement. (b) This Agreement is governed by and construed in accordance with the laws of the State of Iowa. (c) The provisions of Sections 8 and 9 shall survive the termination of this Agreement. (d) No amendment or modification of this Agreement is effective unless made in writing and signed by each party. (e) This Agreement may be signed in several counterparts, each of which will be an original and all of which will constitute one agreement. (Remainder of Page Intentionally Left Blank) 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above set forth. QCR HOLDINGS, INC. By: /s/ James J. Brownson /s/ Michael A. Bauer ----------------------------- --------------------------- James J. Brownson Michael A. Bauer Chairman, Executive Committee By: /s/ Douglas M. Hultquist ----------------------------- Douglas M. Hultquist, President QUAD CITY BANK AND TRUST COMPANY By: /s/ James J. Brownson ----------------------------- James J. Brownson Secretary By: /s/ Douglas M. Hultquist ----------------------------- Douglas M. Hultquist, Chairman 8 EX-10 4 qcrexhbt102.txt Exhibit 10.2 EMPLOYMENT AGREEMENT BETWEEN QCR HOLDINGS, INC., QUAD CITY BANK AND TRUST COMPANY AND DOUGLAS M. HULTQUIST THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of the 1st day of January, 2004, is between QCR Holdings, Inc. (the "Company") and QUAD CITY BANK AND TRUST COMPANY (the "Bank") (collectively, the "Employer"), and Douglas M. Hultquist (the "Employee"). RECITALS WHEREAS, Employee is currently serving as an executive of the Company and the Bank pursuant to that certain Employment Agreement dated July 1, 2000 (the "Prior Employment Agreement"); and WHEREAS, the parties desire to amend and restate the Prior Employment Agreement on the terms hereinafter set forth. NOW, THEREFORE, in consideration of the promises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and among the parties hereto as follows: AGREEMENTS Section 1. Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. Section 2. Duties. The Employee agrees to provide all services necessary, incidental or convenient as the President of the Company and as Chairman of the Bank. 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. Section 3. Term. The term of this Agreement shall commence on January 1, 2004 (the "Effective Date"), and shall continue for a period of three (3) years. This Agreement shall automatically extend for one (1) year on each anniversary of the Effective Date, unless terminated by either party effective as of the last day of the then current three (3) year extension by written notice to that effect delivered to the other not less than ninety (90) days prior to the anniversary of such Effective Date. Section 4. Compensation. As compensation for the services to be provided by the Employee hereunder: (a) Base Salary. The Bank shall pay Employee an annual base salary of one hundred and seventy-five thousand dollars ($175,000) ("Base Salary"). Base Salary shall be payable bi-weekly, in equal installments in accordance with the Employer's payroll practice. The Company shall reimburse the Bank for Employee's Base Salary attributable to services for the Company. The Employee's Base Salary shall be subject to review annually, commencing January 1, 2005, and shall be maintained or increased during the term hereof in accordance with the Employer's established management compensation policies and plan. (b) Bonuses. The Employee shall be entitled to receive cash bonuses ("Cash Bonus" or "Cash Bonuses"), based upon performance, which may be granted in the future in the discretion of the Employer, consistent with Employer's incentive bonus formula for executive management, as modified from time to time. In addition, the Employee may receive such additional bonuses or awards in the form of stock options, restricted stock or other equity compensation, as determined in the discretion of the Employer. (c) Non-Qualified Supplemental Executive Retirement Agreement. Employee shall participate in the Non-Qualified Supplemental Executive Retirement Agreement, as amended from time to time in accordance with its terms. (d) Benefits. The Employer shall provide the following additional benefits to the Employee: (i) Medical Insurance. Family medical insurance, provided that Employee shall be responsible for paying any portion of the premium in accordance with the Employer's policy applied to similarly situated employees. (ii) Reimbursements. Reimbursement of reasonable expenses advanced by the Employee in connection with performance of his duties hereunder, including, but not limited to, two (2) paid weeks of continuing education, a monthly automobile allowance of $500, fuel, maintenance and insurance expense of such automobile, and the annual reimbursement of club dues for the following clubs: Tournament Players Club, Short Hills Country Club and Velie Plantation Club. 1 (iii) Personal Days. The Employee will initially be entitled to five (5) weeks of personal days, which may be increased in accordance with the Employer's established policies and practices. (iv) Disability Coverage. Long-term and short-term disability coverage equal to 66-2/3% of Base Salary and Average Annual Bonus. For purposes of this Agreement, "Average Annual Bonus" shall mean the average of the three (3) most recent annual Cash Bonuses paid to the Employee immediately preceding the determination date. (v) Employee Benefits. Participation in a 401(k)/profit sharing plan, deferred compensation program and such other benefits as are specifically granted to Employee or in which he participates as an employee of the Employer. (vi) Life Insurance. Term life insurance of two (2) times Employee's Base Salary and Average Annual Bonus as of the date of this Agreement; which insurance may be provided through a group term carve-out plan at the Employer's election. The Employee will be allowed to purchase additional life insurance of at least that same amount through such plan. Section 5. Time Requirement. The Employee shall devote his best efforts and full business time to his duties under this Agreement. The Employee shall be allowed to serve on outside boards subject to the consent of the Employer. Section 6. Termination upon Disability. In the event of the Employee's Disability (as defined below) during the employment term, payments based upon the Employee's then current annual Base Salary and Average Annual Bonus shall continue thereafter through the last day of the one (1) year period beginning on the date of such Disability, after which time Employee's employment shall terminate. Payments made in the event of the Employee's Disability shall be equal to 66-2/3% of Employee's Base Salary and Average Annual Bonus, less any amounts received under the Employer's short or long-term disability programs, as applicable. Disability for purposes of this Agreement shall mean that the Employee is limited from performing the material and substantial duties of the positions set forth in Section 2 due to the Employee's sickness or injury for a period of six (6) consecutive months. The Executive Committee of the Board of Directors of the Employer shall determine whether and when the Employee has incurred a Disability under this Agreement. Section 7. Payment upon Death. In the event of the Employee's death during the term of this Agreement, the Employee shall be paid his accrued and unpaid Base Salary, and his earned Cash Bonus for the year in which he died prorated on a per diem basis through the date of death. The earned Base Salary shall be paid in accordance with the Employer's regular payroll on the next regular payroll date following the Employee's death. The earned Cash Bonus for the year shall be paid when Cash Bonuses are paid to other executive officers of the Employer with respect to such year. Such amounts shall be payable to the persons designated in writing by the Employee, or if none, to his estate. Section 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. 2 Section 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 areas of the Employer's lending and deposit taking functions extends to the areas encompassing the sixty (60) mile radii from each of the offices of the Employer. Therefore, as an essential ingredient of and in consideration of this Agreement and the payment of the amounts described in Sections 4 and 10, the Employee hereby agrees that, except with the express prior written consent of the Employer, for a period of two (2) years 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, including, but not by way of limitation, by directly or indirectly owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of, or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Employer to terminate employment with the Employer and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates, a bank, savings and loan association, credit union or similar financial institution (a "Financial Institution") within the sixty (60) mile radii of each of the Employer's offices (the "Restrictive Covenant"). 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. 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 National Association of Securities Dealers Automated Quotation System which do not represent more than one percent (1%) of the outstanding capital stock of any Financial Institution. (b) Remedies for Breach of Restrictive Covenant. The Employee acknowledges that the restrictions contained in this Section 9 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. Section 10. Severance. (a) Termination Without Cause. If the Employee is terminated without "Cause" (as defined below), the Employer will pay the Employee a sum equal to his then current annual Base Salary plus his Average Annual Bonus. Such payment shall be made in a lump sum within 15 days of termination or in equal installments over the one (1) year period, at the Employer's option. In addition, the Employer shall provide reasonable out-placement services for up to three (3) months following termination. 3 (b) Termination for Cause or Voluntary Termination. If the Employee is terminated for Cause (as defined below) or voluntarily terminates his employment, then the Employer shall pay Employee any accrued and unpaid Base Salary, and any accrued and unpaid personal days and shall have no further obligations to the Employee under this Agreement. For purposes of this Agreement, "Cause" shall mean: (i) a material violation by the Employee of any applicable material law or regulation respecting the business of the Employer; (ii) the Employee being found guilty of a felony, an act of dishonesty in connection with the performance of his duties as an officer of the Employer, or which disqualifies the Employee from serving as an officer or director of the Employer; or (iii) the willful or negligent failure of the Employee to perform his duties hereunder in any material respect. The Employee shall be entitled to at least thirty (30) days' prior written notice of the Employer's intention to terminate his employment for any Cause 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. (c) Termination Upon Change in Control. If a Change in Control (as defined below) of the ownership of the Employer occurs and the Employee is terminated within one (1) year following the Change in Control or the Employee elects to terminate his employment within six (6) months following the Change in Control, a severance payment will be made within 15 days of termination equal to the sum of three (3) times the sum of his then current Base Salary and Average Annual Bonus. In addition, the Employer shall continue, or cause to be continued, Employee's health insurance as in effect on the date of termination (including, if applicable, family coverage) for three (3) years. For purposes of this paragraph, the term "Change in Control" shall mean the following: (i) 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 Company; or (ii) The individuals who, as of the date hereof, are members of the Board of Directors of the Company (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 (iii) Consummation by the Company of (i) 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 of the Company outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution or an agreement for the sale or other disposition of two-thirds or more of the consolidated assets of the Company. 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 of the Company is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company immediately prior to such acquisition. 4 (iv) If it is determined, in the opinion of the Company's independent accountants, in consultation, if necessary, with the Company's independent legal counsel, that any amount paid under this Agreement due to a Change in Control, either separately or in conjunction with any other payments, benefits and entitlements received by the Employee in respect of a Change in Control under any other plan or agreement under which the Employee participates or to which he is a party, would constitute an "Excess Parachute Payment" within the meaning of Section 280G of the Code, and thereby be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then in such event the Employer shall pay to the Employee a "grossing-up" amount equal to the amount of such Excise Tax, plus all federal and state income or other taxes with respect to the payment of the amount of such Excise Tax, including all such taxes with respect to any such grossing-up amount. If, at a later date, the Internal Revenue Service assesses a deficiency against the Employee for the Excise Tax which is greater than that which was determined at the time such amounts were paid, then the Employer shall pay to the Employee the amount of such unreimbursed Excise Tax plus any interest, penalties and reasonable professional fees or expenses incurred by the Employee as a result of such assessment, including all such taxes with respect to any such additional amount. The highest marginal tax rate applicable to individuals at the time of the payment of such amounts will be used for purposes of determining the federal and state income and other taxes with respect thereto. The Employer shall withhold from any amounts paid under this Agreement the amount of any Excise Tax or other federal, state or local taxes then required to be withheld with respect to the amount paid hereunder. Computations of the amount of any grossing-up supplemental compensation paid under this subparagraph shall be conclusively made by the Employer's independent accountants, in consultation, if necessary, with the Employer's independent legal counsel. If, after the Employee receives any gross-up payments or other amount pursuant to this Section 10, the Employee receives any refund with respect to the Excise Tax, the Employee shall promptly pay the Employer the amount of such refund within ten (10) days of receipt by the Employee. (v) If the Employer is not in compliance with its minimum capital requirements or if the payments required under this Section 10 would cause the Employer's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Employer is in capital compliance. At the election of the Employee, which election is to made within thirty (30) days of the Employee's termination, such payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the Employee's termination. In the event that no election is made, payment to the Employee will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the Employee obtains other employment following the termination of employment by the Employer. Section 11. 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 for 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 (i) 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 (ii) 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. 5 Section 12. Payment of Legal Fees. The Employer is aware that after a Change in Control, management of the Employer or its successor could cause or attempt to cause the Employer to refuse to comply with its obligations under this Agreement, including the possible pursuit of litigation to avoid its obligations under this Agreement. In these circumstances, the purpose of this Agreement would be frustrated. It is the Employer's intention that the Employee not be required to incur the expenses associated with the enforcement of his rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Employee hereunder. It is the Employer's intention that the Employee not be forced to negotiate settlement of his rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Employee that (a) the Employer has failed to comply with any of its obligations under this Agreement, or (b) the Employer or any other person has taken any action to avoid its obligations under this Agreement, the Employer irrevocably authorizes the Employee from time to time to retain counsel of his choice, at the expense of the Employer as provided in this Section 12, to represent the Employee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Employer or any director, officer, stockholder, or other person affiliated with the Employer, in any jurisdiction. Notwithstanding any existing or previous attorney-client relationship between the Employer and any counsel chosen by the Employee under this Section 12, the Employer irrevocably consents to the Employee entering into an attorney-client relationship with that counsel, and the Employer and the Employee agree that a confidential relationship shall exist between the Employee and that counsel. The fees and expenses of counsel selected from time to time by the Employee as provided in this Section 12 shall be paid or reimbursed to the Employee by the Employer on a regular, periodic basis upon presentation by the Employee of a statement or statements prepared by such counsel in accordance with such counsel's customary practices. The Employer's obligation to reimburse Employee for legal fees as provided under this Section 12 and any separate employment, deferred compensation, severance or other agreement between the Employee and the Employer shall not exceed $200,000 in the aggregate. Accordingly, the Employer's obligation to pay the Employee's legal fees provided by this Section 12 shall be offset by any legal fee reimbursement obligation the Employer may have with the Employee under any separate employment, deferred compensation, severance or other agreement between the Employee and the Employer. Section 13. Regulatory Suspension and Termination. (a) If the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the Employer's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, the Employer's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Employer shall (A) pay the Employee all of the compensation withheld while their contract obligations were suspended and (B) reinstate any of the obligations, which were suspended. (b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Employer's affairs by an order issued under Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (c) If the Employer is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations of the Employer under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution by the Federal Deposit Insurance Corporation (the "FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Employer under the authority contained in Section 13(c) (12 U.S.C. ss. 1823(c)) of the Federal Deposit Insurance Act, as amended, or when the Employer is determined by the FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 6 (e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) (12 U.S.C. ss. 1828(k)) of the Federal Deposit Insurance Act as amended, and any regulations promulgated thereunder. Section 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. The Company agrees that it shall not merge or consolidate into or with another company, or reorganize, or sell substantially all its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company under this Agreement. (b) This Agreement is governed by and construed in accordance with the laws of the State of Iowa. (c) The provisions of Sections 8 and 9 shall survive the termination of this Agreement. (d) No amendment or modification of this Agreement is effective unless made in writing and signed by each party. (e) This Agreement may be signed in several counterparts, each of which will be an original and all of which will constitute one agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above set forth. QCR HOLDINGS, INC. By: /s/ James J. Brownson /s/ Douglas M. Hultquist ----------------------------- ---------------------------- James J. Brownson, Douglas M. Hultquist Chairman, Executive Committee By: /s/ Michael A. Bauer ----------------------------- Michael A. Bauer, Chairman QUAD CITY BANK AND TRUST COMPANY By: /s/ James J. Brownson ----------------------------- James J. Brownson, Secretary By: /s/ Michael A. Bauer ------------------------------ Michael A. Bauer, President 7 EX-10 5 qcrexhbt103.txt Exhibit 10.3 QUAD CITY BANK AND TRUST COMPANY EXECUTIVE DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT ("Agreement") is made this 1st day of January, 2004, by and between QUAD CITY BANK AND TRUST COMPANY, a state-chartered commercial bank located in Bettendorf, Iowa (the "Bank"), and MICHAEL A. BAUER (the "Executive"). INTRODUCTION The Executive and the Bank previously entered into that certain Quad City Bank and Trust Company Executive Deferred Compensation Agreement, to encourage the Executive to remain an employee of the Bank. The Bank is willing to continue to provide to the Executive a deferred compensation opportunity together with matching contributions by the Bank under the terms of this Agreement. The Bank will pay the Executive's benefits from the Bank's general assets. AGREEMENT The Executive and the Bank agree as follows: Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Anniversary Date" means December 31 of each year. 1.2 "Change of Control" means: a) 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 33 percent or more of the combined voting power of the then outstanding voting securities of the Company; or b) The individuals who, as of the date hereof, are members of the Board of Directors of the Company (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 a member of the Board; or c) Approval by stockholders of the Company of (1) a merger or consolidation if the stockholders, immediately before such a merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than 67 percent 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 (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of two-thirds or more of the consolidated assets of the Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33 percent or more of the combined voting power of the then outstanding securities of the Company are 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. 1.3 "Code" means the Internal Revenue Code of 1986, as amended. 1.4 "Company" means QCR Holdings, Inc. 1.5 "Compensation" means the total salary and bonus paid to the Executive during a Plan Year. 1 1.6 "Deferral Account" means the Bank's accounting of the Executive's accumulated Deferrals plus accrued interest. 1.7 "Deferrals" means the amount of the Executive's Compensation which the Executive elects to defer according to this Agreement. 1.8 "Disability" means, if the Executive is covered by a Bank or a Bank affiliate's sponsored disability policy, total disability as defined in such policy without regard to any waiting period. If the Executive is not covered by such a policy, Disability means the Executive suffering a sickness or injury which, in the judgment of the Executive Committee of the Board of Directors of the Company limits the Executive from performing the material and substantial duties of his position(s) with the Bank. As a condition to any Disability benefits, the Bank may require the Executive to submit to such physical or mental evaluations and tests as the Bank's Board of Directors deems appropriate. 1.9 "Election Form" means the Form attached as Exhibit 1. 1.10 "Normal Retirement Age" means the Executive's 65th birthday. 1.11 "Normal Retirement Date" means the later of the Normal Retirement Age or Termination of Employment. 1.12 "Original Effective Date" means June 28, 2000. 1.13 "Plan Year" means the calendar year. 1.14 "Termination of Employment" means that the Executive ceases to be employed by the Bank for any reason whatsoever other than by reason of a leave of absence which is approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of the Executive's Termination of Employment, the Bank shall have the sole and absolute right to decide the dispute. Article 2 Deferral Election 2.1 Initial Election. The Executive shall make an initial deferral election under this Agreement by filing with the Bank a signed Election Form within thirty (30) days after the Original Effective Date of this Agreement. The Election Form shall set forth the amount of Compensation to be deferred and shall be effective to defer only Compensation earned after the date the Election Form is received by the Bank. 2.2 Election Changes. 2.2.1 Generally. Upon the Bank's approval, the Executive may modify the amount of Compensation to be deferred annually by filing a new Election Form with the Bank prior to the beginning of the Plan Year in which the Compensation is to be deferred. The modified deferral election shall not be effective until the Plan Year following the year in which the subsequent Election Form is received and approved by the Bank. 2.2.2 Hardship. If an unforeseeable financial emergency arising from the death of a family member, divorce, sickness, injury, catastrophe or similar event outside the control of the Executive occurs, the Executive, by written instructions to the Bank, may reduce future deferrals under this Agreement. Article 3 Deferral Account 3.1 Establishing and Crediting. The Bank shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts: 3.1.1 Deferrals. The Compensation deferred by the Executive as of the time the Compensation would have otherwise been paid to the Executive. 2 3.1.2 Matching Contribution. A matching contribution equal to (and credited to the Deferral Account at the same time as) the amounts credited to the Deferral Account under Section 3.1.1, subject to an annual maximum matching contribution of 100 percent of the Compensation deferred by the Executive, said matching contribution not to exceed $20,000 (Twenty Thousand Dollars) annually. 3.1.3 Interest. On each Anniversary Date of this Agreement and immediately prior to the payment of any benefits, but only until commencement of the benefit payments under this Agreement, interest is to be accrued on the account balance and compounded at an annual rate equal to the Wall Street Journal Prime Rate on the first business day of the Plan Year. This interest rate shall have a minimum or floor of 8 percent and shall not exceed 10 percent. 3.2 Statement of Accounts. The Bank shall provide to the Executive, within one hundred twenty (120) days after each Anniversary Date, a statement setting forth the Deferral Account balance. 3.3 Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere Bank promise to pay such benefits. The Executive's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive's creditors. Article 4 Lifetime Benefits 4.1 Normal Retirement Benefit. Upon the Normal Retirement Date, the Bank shall pay to the Executive the benefit described in this Section 4.1 in lieu of any other benefit under this Agreement. 4.1.1 Amount of Benefit. The benefit under this Section 4.1 is the Deferral Account balance at the Executive's Normal Retirement Date. 4.1.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Normal Retirement Date. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4.2 Early Retirement Benefit. Upon Termination of Employment prior to the Normal Retirement Age for reasons other than death, Change of Control or Disability, the Bank shall pay to the Executive the benefit described in this Section 4.2 in lieu of any other benefit under this Agreement. 4.2.1 Amount of Benefit. The benefit under this Section 4.2 is the Deferral Account balance at the Executive's Termination of Employment. 4.2.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4.3 Disability Benefit. If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Bank shall pay to the Executive the benefit described in this Section 4.3 in lieu of any other benefit under this Agreement. 4.3.1 Amount of Benefit. The benefit under this Section 4.3 is the Deferral Account balance at the Executive's Termination of Employment. 4.3.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 3 4.4 Change of Control Benefit. Upon a Change of Control, the Bank shall pay to the Executive the benefit described in this Section 4.4 in lieu of any other benefit under this Agreement. 4.4.1 Amount of Benefit. The benefit under this Section 4.4 shall be the greater of: (a) the Deferral Account balance at the Executive's Termination of Employment; or (b) $898,399 (Eight Hundred Ninety Eight Thousand Three Hundred and Ninety-Nine Dollars). 4.4.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in a lump sum within 60 days following the Executive's Termination of Employment. 4.4.3 Obligation to Fund. Notwithstanding any provision to the contrary contained herein, no later than the date of a Change of Control, the Bank shall fund a "Rabbi Trust" (as such term is described in Revenue Procedure 92-64) in the amount of the payment required under Section 4.4.2, with the trustee of such trust being designated by the Board in its sole and absolute discretion. 4.5 Hardship Distribution. Upon the Board of Director's determination (following petition by the Executive) that the Executive has suffered an unforeseeable financial emergency as described in Section 2.2.2, the Bank shall distribute to the Executive all or a portion of the Deferral Account balance as determined by the Bank, but in no event shall the distribution be greater than is necessary to relieve the financial hardship. Article 5 Death Benefits 5.1 Death During Active Service. If the Executive dies while in the employment of the Bank, the Bank shall pay to the Executive's beneficiary the benefit described in this Section 5.1 in lieu of any other benefit under this Agreement. 5.1.1 Amount of Benefit. The benefit under Section 5.1 is the greater of: (a) the Deferral Account balance; or (b) $898,399 (Eight Hundred Ninety Eight Thousand Three Hundred and Ninety-Nine Dollars). 5.1.2 Payment of Benefit. The Bank shall pay the benefit to the beneficiary in the manner elected by the Executive on the attached Beneficiary Designation form, or as such form may have been amended by the Executive prior to his death. In the event that the death benefit hereunder is paid in installments, the Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 5.2 Death During Payment of a Lifetime Benefit. If the Executive dies after any Lifetime Benefit payments have commenced under this Agreement but before receiving all such payments, the Bank shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived. 5.3 Death After Termination of Employment But Before Payment of a Lifetime Benefit Commences. If the Executive is entitled to a Lifetime Benefit under this Agreement, but dies prior to the commencement of said benefit payments, the Bank shall pay the Lifetime Benefit to the Executive's beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive's death. Article 6 Beneficiaries 6.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Bank during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate. 4 6.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Bank may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit. Article 7 General Limitations 7.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement that is attributable to the Bank match credited under Section 3.1.2 of this Agreement and the interest earned on the Deferral Account if the Bank terminates the Executive's employment for: (a) A material violation by the Executive of any applicable material law or regulation respecting the business of the Bank; (b) The Executive being found guilty of a felony, an act of dishonesty in connection with the performance of his duties as an officer of the Bank, or which disqualifies the Executive from serving as an officer or director of the Bank or the Company; or (c) The willful or negligent failure of the Executive to perform his duties for the Bank or the Company in any material respect. 7.2 Suicide or Misstatement. The Bank shall not pay any death benefit under this Agreement exceeding the Deferral Account if the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Bank. Article 8 Claims and Review Procedures 8.1 Claims Procedure. The Bank shall notify any person or entity that makes a claim against the Agreement (the "Claimant") in writing, within 90 days of Claimant's written application for benefits, of his or her eligibility or non-eligibility for benefits under the Agreement. If the Bank determines that the Claimant is not eligible for benefits or full benefits, the written notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, (4) an explanation of the Agreement's claims review procedure, the time limits applicable and other appropriate information as to the steps to be taken if the Claimant wishes to have the claim reviewed, and (5) a statement of the Claimant's right to bring a civil action under Section 502(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") following an adverse benefit determination on review. If the Bank determines that there are special circumstances requiring additional time to make a decision, the Bank shall notify the Claimant, prior to the expiration of the initial 90-day period, of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional 90 days. 5 8.2 Review Procedure. If the Claimant is determined by the Bank not to be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Bank by filing a petition for review with the Bank within 60 days after receipt of the notice issued by the Bank. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt by the Bank of the petition, the Bank shall afford the Claimant (and counsel, if any) an opportunity to present his or her position to the Bank verbally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. In considering the review, the Bank shall take into account all materials and information submitted by Claimant, without regard to whether the information was submitted or considered in the initial benefit determination. The Bank shall notify the Claimant of its decision in writing within the 60-day period, which notice shall set forth (a) the specific basis of its decision, written in a manner calculated to be understood by the Claimant, (b) the specific provisions of the Agreement on which the decision is based, (c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records and other information (as defined in applicable ERISA regulations) to the Claimant's claim for benefits, and (d) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA. If, because of the need for a hearing, the 60-day period is not sufficient, the decision may be deferred for up to another 60 days at the election of the Bank, but notice of this deferral shall be given to the Claimant. Article 9 Amendments and Termination This Agreement may be amended or terminated only by a written agreement signed by the Bank and the Executive. Notwithstanding the previous paragraph, the Bank may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits). In no event shall this Agreement be terminated under this section without payment to the Executive of the Deferral Account balance attributable to the Executive's Deferrals and interest credited on such amounts. Article 10 Miscellaneous 10.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators and transferees. 10.2 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the shareholders' rights to replace the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 6 10.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 10.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. 10.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Iowa, except to the extent preempted by the laws of the United States of America. 10.6 Unfunded Arrangement. The Executive and the Executive's beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary have no preferred or secured claim. 10.7 Reorganization. The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. 10.8 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 10.9 Administration. The Bank shall have powers which are necessary to administer this Agreement, including but not limited to: (a) Interpreting the provisions of the Agreement; (b) Establishing and revising the method of accounting for the Agreement; (c) Maintaining a record of benefit payments; and (d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement. The decision or action of the Bank with respect to any question arising out of or in connection with the administration, interpretation, and application of this Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in this Agreement. 7 10.10 Payment of Legal Fees. The Bank is aware that after a Change of Control, management of the Bank or its successor could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement, including the possible pursuit of litigation to avoid its obligations under this Agreement. In these circumstances, the purpose of this Agreement would be frustrated. It is the Bank's intention that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. It is the Bank's intention that the Executive not be forced to negotiate settlement of his rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change of Control occurs it appears to the Executive that (a) the Bank has failed to comply with any of its obligations under this Agreement, or (b) the Bank or any other person has taken any action to avoid its obligations under this Agreement, the Bank irrevocably authorizes the Executive from time to time to retain counsel of his choice, at the expense of the Bank as provided in this Section 10.10, to represent the Executive in connection with the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Notwithstanding any existing or previous attorney-client relationship between the Bank and any counsel chosen by the Executive under this Section 10.10, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Bank and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this Section 10.10 shall be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with such counsel's customary practices. The Bank's obligation to reimburse Executive for legal fees as provided under this Section 10.10 and any separate employment, severance or other agreement between the Executive and the Bank shall not exceed $200,000 in the aggregate. Accordingly, the Bank's obligation to pay the Executive's legal fees provided by this Section 10.10 shall be offset by any legal fee reimbursement obligation the Bank may have with the Executive under any separate employment, severance or other agreement between the Executive and the Bank. 10.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals. IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement. BANK: EXECUTIVE: QCR HOLDINGS, INC. By: /s/ James J. Brownson /s/ Michael A. Bauer ------------------------------- --------------------------- James J. Brownson Michael A. Bauer Chairman, Executive Committee By: /s/ Douglas M. Hultquist ------------------------------- Douglas M. Hultquist, President QUAD CITY BANK AND TRUST COMPANY By: /s/ James J. Brownson ------------------------------- James J. Brownson Secretary By: /s/ Douglas M. Hultquist ------------------------------- Douglas M. Hultquist, Chairman 8 EXHIBIT 1 TO QUAD CITY BANK AND TRUST COMPANY EXECUTIVE DEFERRED COMPENSATION AGREEMENT Deferral Election I elect to defer my Compensation received under the Executive Deferred Compensation Agreement with the Bank, as follows: - -------------------------------------------------------------------------------- Amount of Deferral Duration ================================================================================ [Initial and Complete one] [Initial One] ____ I elect to defer ____% of my ____ One Year only Compensation. ____ For ______ [Insert I elect to defer $______ of all Number] Years - ------- Compensation. Until ------- ____ I elect not to defer any of my Termination Compensation. of Employment ____ Until ___________, ___________ (date) - -------------------------------------------------------------------------------- Upon the Bank's approval, I understand that I may change the amount and duration of my deferrals by filing a new election form with the Bank; provided, however, that any subsequent election will not be effective until the Plan Year following the year in which the new election is received by the Bank. Signature Date Accepted by the Bank this _____ day of ______________, 20____. By Title 9 Beneficiary Designation QUAD CITY BANK AND TRUST COMPANY EXECUTIVE DEFERRED COMPENSATION AGREEMENT I designate the following as beneficiary of benefits under the Executive Deferred Compensation Agreement payable following my death: Primary: Contingent: Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of ----- the trust agreement. I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved. FORM OF PRE-RETIREMENT DEATH BENEFIT, Article 5, Section 5.1.2 I elect to have my beneficiary receive benefits under the Agreement in the following form: [Initial One] Lump Sum Equal monthly installments for 180 months - ----------- -------------- Signature Date Accepted by the Bank this ____ day of ___________, 20____. By Title 10 EX-10 6 qcrexhbt104.txt Exhibit 10.4 QUAD CITY BANK AND TRUST COMPANY EXECUTIVE DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made this 1st day of January, 2004, by and between QUAD CITY BANK AND TRUST COMPANY, a state-chartered commercial bank located in Bettendorf, Iowa (the "Bank"), and DOUGLAS M. HULTQUIST (the "Executive"). INTRODUCTION The Executive and the Bank previously entered into that certain Quad City Bank and Trust Company Executive Deferred Compensation Agreement, to encourage the Executive to remain an employee of the Bank. The Bank is willing to continue to provide to the Executive a deferred compensation opportunity together with matching contributions by the Bank under the terms of this Agreement. The Bank will pay the Executive's benefits from the Bank's general assets. AGREEMENT The Executive and the Bank agree as follows: Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Anniversary Date" means December 31 of each year. 1.2 "Change of Control" means: a) 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 33 percent or more of the combined voting power of the then outstanding voting securities of the Company; or b) The individuals who, as of the date hereof, are members of the Board of Directors of the Company (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 a member of the Board; or c) Approval by stockholders of the Company of (1) a merger or consolidation if the stockholders, immediately before such a merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than 67 percent 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 (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of two-thirds or more of the consolidated assets of the Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33 percent or more of the combined voting power of the then outstanding securities of the Company are 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. 1.3 "Code" means the Internal Revenue Code of 1986, as amended. 1.4 "Company" means QCR Holdings, Inc. 1.5 "Compensation" means the total salary and bonus paid to the Executive during a Plan Year. 1 1.6 "Deferral Account" means the Bank's accounting of the Executive's accumulated Deferrals plus accrued interest. 1.7 "Deferrals" means the amount of the Executive's Compensation which the Executive elects to defer according to this Agreement. 1.8 "Disability" means, if the Executive is covered by a Bank or a Bank affiliate's sponsored disability policy, total disability as defined in such policy without regard to any waiting period. If the Executive is not covered by such a policy, Disability means the Executive suffering a sickness or injury which, in the judgment of the Executive Committee of the Board of Directors of the Company limits the Executive from performing the material and substantial duties of his position(s) with the Bank. As a condition to any Disability benefits, the Bank may require the Executive to submit to such physical or mental evaluations and tests as the Bank's Board of Directors deems appropriate. 1.9 "Election Form" means the Form attached as Exhibit 1. 1.10 "Normal Retirement Age" means the Executive's 65th birthday. 1.11 "Normal Retirement Date" means the later of the Normal Retirement Age or Termination of Employment. 1.12 "Original Effective Date" means June 28, 2000. 1.13 "Plan Year" means the calendar year. 1.14 "Termination of Employment" means that the Executive ceases to be employed by the Bank for any reason whatsoever other than by reason of a leave of absence which is approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of the Executive's Termination of Employment, the Bank shall have the sole and absolute right to decide the dispute. Article 2 Deferral Election 2.1 Initial Election. The Executive shall make an initial deferral election under this Agreement by filing with the Bank a signed Election Form within thirty (30) days after the Original Effective Date of this Agreement. The Election Form shall set forth the amount of Compensation to be deferred and shall be effective to defer only Compensation earned after the date the Election Form is received by the Bank. 2.2 Election Changes. 2.2.1 Generally. Upon the Bank's approval, the Executive may modify the amount of Compensation to be deferred annually by filing a new Election Form with the Bank prior to the beginning of the Plan Year in which the Compensation is to be deferred. The modified deferral election shall not be effective until the Plan Year following the year in which the subsequent Election Form is received and approved by the Bank. 2.2.2 Hardship. If an unforeseeable financial emergency arising from the death of a family member, divorce, sickness, injury, catastrophe or similar event outside the control of the Executive occurs, the Executive, by written instructions to the Bank, may reduce future deferrals under this Agreement. 2 Article 3 Deferral Account 3.1 Establishing and Crediting. The Bank shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts: 3.1.1 Deferrals. The Compensation deferred by the Executive as of the time the Compensation would have otherwise been paid to the Executive. 3.1.2 Matching Contribution. A matching contribution equal to (and credited to the Deferral Account at the same time as) the amounts credited to the Deferral Account under Section 3.1.1, subject to an annual maximum matching contribution of 100 percent of the Compensation deferred by the Executive, said matching contribution not to exceed $15,000 (Fifteen Thousand Dollars) annually. 3.1.3 Interest. On each Anniversary Date of this Agreement and immediately prior to the payment of any benefits, but only until commencement of the benefit payments under this Agreement, interest is to be accrued on the account balance and compounded at an annual rate equal to the Wall Street Journal Prime Rate on the first business day of the Plan Year. This interest rate shall have a minimum or floor of 8 percent and shall not exceed 10 percent. 3.2 Statement of Accounts. The Bank shall provide to the Executive, within one hundred twenty (120) days after each Anniversary Date, a statement setting forth the Deferral Account balance. 3.3 Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere Bank promise to pay such benefits. The Executive's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive's creditors. Article 4 Lifetime Benefits 4.1 Normal Retirement Benefit. Upon the Normal Retirement Date, the Bank shall pay to the Executive the benefit described in this Section 4.1 in lieu of any other benefit under this Agreement. 4.1.1 Amount of Benefit. The benefit under this Section 4.1 is the Deferral Account balance at the Executive's Normal Retirement Date. 4.1.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Normal Retirement Date. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 3 4.2 Early Retirement Benefit. Upon Termination of Employment prior to the Normal Retirement Age for reasons other than death, Change of Control or Disability, the Bank shall pay to the Executive the benefit described in this Section 4.2 in lieu of any other benefit under this Agreement. 4.2.1 Amount of Benefit. The benefit under this Section 4.2 is the Deferral Account balance at the Executive's Termination of Employment. 4.2.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4.3 Disability Benefit. If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Bank shall pay to the Executive the benefit described in this Section 4.3 in lieu of any other benefit under this Agreement. 4.3.1 Amount of Benefit. The benefit under this Section 4.3 is the Deferral Account balance at the Executive's Termination of Employment. 4.3.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4.4 Change of Control Benefit. Upon a Change of Control, the Bank shall pay to the Executive the benefit described in this Section 4.4 in lieu of any other benefit under this Agreement. 4.4.1 Amount of Benefit. The benefit under this Section 4.4 shall be the greater of: (a) the Deferral Account balance at the Executive's Termination of Employment; or (b) $1,427,500 (One Million Four Hundred Twenty Seven Thousand Five Hundred Dollars). 4.4.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in a lump sum within 60 days following the Executive's Termination of Employment. 4.4.3 Obligation to Fund. Notwithstanding any provision to the contrary contained herein, no later than the date of a Change of Control, the Bank shall fund a "Rabbi Trust" (as such term is described in Revenue Procedure 92-64) in the amount of the payment required under Section 4.4.2, with the trustee of such trust being designated by the Board in its sole and absolute discretion. 4.5 Hardship Distribution. Upon the Board of Director's determination (following petition by the Executive) that the Executive has suffered an unforeseeable financial emergency as described in Section 2.2.2, the Bank shall distribute to the Executive all or a portion of the Deferral Account balance as determined by the Bank, but in no event shall the distribution be greater than is necessary to relieve the financial hardship. Article 5 Death Benefits 5.1 Death During Active Service. If the Executive dies while in the employment of the Bank, the Bank shall pay to the Executive's beneficiary the benefit described in this Section 5.1 in lieu of any other benefit under this Agreement. 5.1.1 Amount of Benefit. The benefit under Section 5.1 is the greater of: (a) the Deferral Account balance; or (b) $1,472,500 (One Million Four Hundred Seventy Two Thousand Five Hundred Dollars). 5.1.2 Payment of Benefit. The Bank shall pay the benefit to the beneficiary in the manner elected by the Executive on the attached Beneficiary Designation form, or as such form may have been amended by the Executive prior to his death. In the event that the death benefit hereunder is paid in installments, the Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4 5.2 Death During Payment of a Lifetime Benefit. If the Executive dies after any Lifetime Benefit payments have commenced under this Agreement but before receiving all such payments, the Bank shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived. 5.3 Death After Termination of Employment But Before Payment of a Lifetime Benefit Commences. If the Executive is entitled to a Lifetime Benefit under this Agreement, but dies prior to the commencement of said benefit payments, the Bank shall pay the Lifetime Benefit to the Executive's beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive's death. Article 6 Beneficiaries 6.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Bank during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate. 6.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Bank may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit. Article 7 General Limitations 7.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement that is attributable to the Bank match credited under Section 3.1.2 of this Agreement and the interest earned on the Deferral Account if the Bank terminates the Executive's employment for: (a) A material violation by the Executive of any applicable material law or regulation respecting the business of the Bank; (b) The Executive being found guilty of a felony, an act of dishonesty in connection with the performance of his duties as an officer of the Bank, or which disqualifies the Executive from serving as an officer or director of the Bank or the Company; or (c) The willful or negligent failure of the Executive to perform his duties for the Bank or the Company in any material respect. 7.2 Suicide or Misstatement. The Bank shall not pay any death benefit under this Agreement exceeding the Deferral Account if the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Bank. 5 Article 8 Claims and Review Procedures 8.1 Claims Procedure. The Bank shall notify any person or entity that makes a claim against the Agreement (the "Claimant") in writing, within 90 days of Claimant's written application for benefits, of his or her eligibility or non-eligibility for benefits under the Agreement. If the Bank determines that the Claimant is not eligible for benefits or full benefits, the written notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, (4) an explanation of the Agreement's claims review procedure, the time limits applicable and other appropriate information as to the steps to be taken if the Claimant wishes to have the claim reviewed, and (5) a statement of the Claimant's right to bring a civil action under Section 502(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") following an adverse benefit determination on review. If the Bank determines that there are special circumstances requiring additional time to make a decision, the Bank shall notify the Claimant, prior to the expiration of the initial 90-day period, of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional 90 days. 8.2 Review Procedure. If the Claimant is determined by the Bank not to be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Bank by filing a petition for review with the Bank within 60 days after receipt of the notice issued by the Bank. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt by the Bank of the petition, the Bank shall afford the Claimant (and counsel, if any) an opportunity to present his or her position to the Bank verbally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. In considering the review, the Bank shall take into account all materials and information submitted by Claimant, without regard to whether the information was submitted or considered in the initial benefit determination. The Bank shall notify the Claimant of its decision in writing within the 60-day period, which notice shall set forth (a) the specific basis of its decision, written in a manner calculated to be understood by the Claimant, (b) the specific provisions of the Agreement on which the decision is based, (c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records and other information (as defined in applicable ERISA regulations) to the Claimant's claim for benefits, and (d) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA. If, because of the need for a hearing, the 60-day period is not sufficient, the decision may be deferred for up to another 60 days at the election of the Bank, but notice of this deferral shall be given to the Claimant. Article 9 Amendments and Termination This Agreement may be amended or terminated only by a written agreement signed by the Bank and the Executive. Notwithstanding the previous paragraph, the Bank may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits). In no event shall this Agreement be terminated under this section without payment to the Executive of the Deferral Account balance attributable to the Executive's Deferrals and interest credited on such amounts. 6 Article 10 Miscellaneous 10.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators and transferees. 10.2 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the shareholders' rights to replace the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 10.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 10.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. 10.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Iowa, except to the extent preempted by the laws of the United States of America. 10.6 Unfunded Arrangement. The Executive and the Executive's beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary have no preferred or secured claim. 10.7 Reorganization. The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. 10.8 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 10.9 Administration. The Bank shall have powers which are necessary to administer this Agreement, including but not limited to: (a) Interpreting the provisions of the Agreement; (b) Establishing and revising the method of accounting for the Agreement; (c) Maintaining a record of benefit payments; and (d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement. The decision or action of the Bank with respect to any question arising out of or in connection with the administration, interpretation, and application of this Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in this Agreement. 7 10.10 Payment of Legal Fees. The Bank is aware that after a Change of Control, management of the Bank or its successor could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement, including the possible pursuit of litigation to avoid its obligations under this Agreement. In these circumstances, the purpose of this Agreement would be frustrated. It is the Bank's intention that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. It is the Bank's intention that the Executive not be forced to negotiate settlement of his rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change of Control occurs it appears to the Executive that (a) the Bank has failed to comply with any of its obligations under this Agreement, or (b) the Bank or any other person has taken any action to avoid its obligations under this Agreement, the Bank irrevocably authorizes the Executive from time to time to retain counsel of his choice, at the expense of the Bank as provided in this Section 10.10, to represent the Executive in connection with the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Notwithstanding any existing or previous attorney-client relationship between the Bank and any counsel chosen by the Executive under this Section 10.10, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Bank and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this Section 10.10 shall be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with such counsel's customary practices. The Bank's obligation to reimburse Executive for legal fees as provided under this Section 10.10 and any separate employment, severance or other agreement between the Executive and the Bank shall not exceed $200,000 in the aggregate. Accordingly, the Bank's obligation to pay the Executive's legal fees provided by this Section 10.10 shall be offset by any legal fee reimbursement obligation the Bank may have with the Executive under any separate employment, severance or other agreement between the Executive and the Bank. 10.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals. IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement. BANK: EXECUTIVE: QCR HOLDINGS, INC. By: /s/ James F. Brownson /s/ Douglas M. Hultquist ----------------------------- --------------------------- James J. Brownson, Douglas M. Hultquist Chairman, Executive Committee By: /s/ Michael A. Bauer ----------------------------- Michael A. Bauer, Chairman QUAD CITY BANK AND TRUST COMPANY By: /s/ James J. Brownson ------------------------------ James J. Brownson, Secretary By: /s/ Michael A. Bauer ------------------------------ Michael A. Bauer, President 8 EXHIBIT 1 TO QUAD CITY BANK AND TRUST COMPANY EXECUTIVE DEFERRED COMPENSATION AGREEMENT Deferral Election I elect to defer my Compensation received under the Executive Deferred Compensation Agreement with the Bank, as follows: - -------------------------------------------------------------------------------- Amount of Deferral Duration ================================================================================ [Initial and Complete one] [Initial One] ____ I elect to defer ____% of my ____ One Year only Compensation. ____ For ______ [Insert I elect to defer $______ of all Number] Years - ------- Compensation. Until ------- ____ I elect not to defer any of my Termination Compensation. of Employment ____ Until ___________, ___________ (date) - -------------------------------------------------------------------------------- Upon the Bank's approval, I understand that I may change the amount and duration of my deferrals by filing a new election form with the Bank; provided, however, that any subsequent election will not be effective until the Plan Year following the year in which the new election is received by the Bank. Signature Date Accepted by the Bank this _____ day of ______________, 20____. By Title 9 Beneficiary Designation QUAD CITY BANK AND TRUST COMPANY EXECUTIVE DEFERRED COMPENSATION AGREEMENT I designate the following as beneficiary of benefits under the Executive Deferred Compensation Agreement payable following my death: Primary: Contingent: Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement. I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved. FORM OF PRE-RETIREMENT DEATH BENEFIT, Article 5, Section 5.1.2 I elect to have my beneficiary receive benefits under the Agreement in the following form: [Initial One] Lump Sum Equal monthly installments for 180 months - ----------- -------------- Signature Date Accepted by the Bank this ____ day of ___________, 20____. By Title 10 EX-10 7 qcrexhbt106.txt Exhibit 10.6 EMPLOYMENT AGREEMENT BETWEEN CEDAR RAPIDS BANK AND TRUST COMPANY AND LARRY HELLING THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of the 1st day of January, 2004, is between CEDAR RAPIDS BANK AND TRUST COMPANY (the "Employer") and LARRY HELLING (the "Employee"). RECITALS WHEREAS, Employee is currently serving as an executive of the Employer pursuant to that certain Employment Agreement dated April 11, 2001 (the "Prior Employment Agreement"); and WHEREAS, the parties desire to amend and restate the Prior Employment Agreement on the terms hereinafter set forth. NOW, THEREFORE, in consideration of the promises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and among the parties hereto as follows: AGREEMENTS Section 1. Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. Section 2. Duties. The Employee agrees to provide all services necessary, incidental or convenient as a President and Chief Executive Officer 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. Section 3. Term. The term of this Agreement shall commence on January 1, 2004 (the "Effective Date"), and shall continue for a period of two (2) years. This Agreement shall automatically extend for one (1) year on each anniversary of the Effective Date, unless terminated by either party effective as of the last day of the then current two (2) year term by written notice to that effect delivered to the other not less than ninety (90) days prior to the anniversary of such Effective Date. Section 4. Compensation. (a) Base Salary. The annual base salary ("Base Salary") of the Employee shall be One Hundred and Sixty Seven Thousand Dollars ($167,000). Base Salary shall be payable bi-weekly, in equal installments. The Employee's Base Salary shall be subject to review annually, with the first such review period to commence during the first quarter of 2005, and shall be maintained or increased during the term hereof in accordance with the Employer's established management compensation policies and plan. (b) Bonuses. The Employee shall be entitled to receive cash bonuses ("Cash Bonus" or "Cash Bonuses"), based upon performance, which may be granted in the future in the discretion of the Employer, consistent with Employer's incentive bonus formula for executive management, as modified from time to time. In addition, the Employee may receive such additional bonuses or awards in the form of stock options, restricted stock or other equity compensation, as determined in the discretion of the Employer. (c) Cedar Rapids Incentive Programs. The Employee shall be eligible to participate in the following: "Cedar Rapids Short-term Cash Incentive Compensation Program" and "Cedar Rapids Long-term Deferred Incentive Compensation Program" (collectively referred to as the "Incentive Programs"). All references to goals, thresholds, assets, losses, earnings and similar terms under the Incentive Programs shall be based solely upon application of such terms to the Employer. The Incentive Programs shall be administered by the Executive Committee of the Board of Directors of QCR Holdings, Inc. (the "Executive Committee") and the Executive Committee shall have the authority to make all determinations in the interpretation and administration of the Incentive Programs and all decisions of the Executive Committee shall be binding on the Employee; provided however, that the amounts paid pursuant to the Incentive Programs shall be allocated among the following eligible employees in the percentages set forth: Larry Helling forty percent (40%), Mitch McElree twenty percent (20%), Dana Nichols twenty percent (20%) and John Rodriguez twenty percent (20%) (the "Eligible Employees"). If an Eligible Employee is no longer employed by the Employer at the time any amount would otherwise be allocated and paid to such employee, then the amount allocable to such employee shall be forfeited and will not be paid to any other Eligible Employee. 1 (i) Under the Short-Term Cash Incentive Compensation Program, with respect to the years ending June 30, 2002 through December 31, 2005, the Employer shall pay the Eligible Employees, as allocated as provided above, the aggregate amount set forth in the schedule below with respect to each year if the following Assets Target and Losses/Earnings Target for such year are met; provided however, that fifty percent (50%) of the aggregate amount shall be allocated to the Assets Target and fifty percent (50%) shall be allocated to the Losses/Earnings Target. The incentive amount payable hereunder shall be paid within ninety (90) days after the end of such year. Year Ending Incentive Amount Assets Target Losses/Earnings Target ---------------------------------------------------------------------------------------------------- June 30, 2002 $40,000* $50 million losses no more than $629,000 December 31, 2002 $25,000* $85 million losses no more than $389,000 December 31, 2003 $55,000 $150 million earnings at least $58,000 December 31, 2004 $65,000 $214 million earnings at least $994,000 December 31, 2005 $75,000 $271 million earnings at least $1,929,000
In the event either the Assets Target or the Losses/Earnings Target is not met, then a prorata portion of the incentive amount payable with respect to that Target shall be payable according to the following schedule: Result Incentive Amount Paid ----------------------------------------------------------------- Reach or exceed Target 100% Within 5% of Target 90% Within 10% of Target 80% Within 15% of Target 65% Within 20% of Target 50% Less than 20% of Target None By way of example, if as of December 31, 2004, 100% of the Asset Target was met but only 90% of the Losses/Earning Target was met, then 95% of the aggregate incentive amount ($61,750) would be payable (100% of $32,500 plus 90% of $32,500). It is the agreement of the parties that the Incentive Targets above do not include the impact of changes in the Employer business model that are not reflected in the initial underlying projections prepared in August, 2001. (ii) Under the Long-term Deferred Incentive Compensation Program, with respect to years ending December 31, 2006 through December 31, 2011, the Employer shall contribute to a deferred compensation plan for the benefit of the Eligible Employees, as allocated as provided above, the aggregate amount of the "Long Term Incentive Award" for the attained level of Return on Equity Result and Ending Total Assets set forth in Exhibit A hereto. In the event of a Change in Control (as defined below), the Employer agrees to contribute the amount set forth below with respect to the year in which the Change in Control occurs and each and all subsequent years remaining, such amounts to be discounted to their present values using the prime rate of interest as of the date five (5) business days prior to the date of the Change in Control: Year Ending Amount -------------------------------------------------- December 31, 2006 $ 60,000 December 31, 2007 $ 80,000 December 31, 2008 $100,000 December 31, 2009 $155,000 December 31, 2010 $185,000 December 31, 2011 $215,000 (d) Non-Qualified Supplemental Executive Retirement Agreement. Employee shall participate in the Non-Qualified Supplemental Executive Retirement Agreement, as amended from time to time in accordance with its terms. (e) Benefits. The Employer shall provide the following additional benefits to the Employee: (1) Medical Insurance. Family medical insurance, provided that Employee shall be responsible for paying any portion of the premium in accordance with the Employer's policy applied to similarly situated employees. (2) Reimbursements. Reimbursement of reasonable expenses advanced by the Employee in connection with the performance of his duties hereunder, including, but not limited to, two (2) paid weeks of continuing education. (3) Club Dues. Payment of membership dues at each of Elmcrest County Club and Cedar Rapids Country Club. (4) Car Allowance. Payment of car allowance of $500 per month. 2 (5) Personal Days. The Employee will initially be entitled to twenty-five (25) personal days which may be increased in accordance with the Employer's established policies and practices. (6) Disability Coverage. Long-term and short-term disability coverage equal to approximately 66-2/3% of Base Salary and Average Annual Bonus. For purposes of this Agreement, "Average Annual Bonus" shall mean the average of the three (3) most recent annual Cash Bonuses paid to the Employee immediately preceding the determination date. (7) Employee Benefits. Participation in a 401(k)/profit sharing plan, deferred compensation program and such other benefits as are specifically granted to Employee or in which he participates as an employee of the Employer. (8) Life Insurance. Term life insurance of two (2) times Employee's Base Salary and Average Annual Bonus as of the date of this Agreement; which insurance may be provided through a group term carve-out plan at the Employer's election. The Employee will be allowed to purchase additional life insurance of at least that same amount through such plan. (9) Deferred Compensation. Participation under a deferred compensation agreement under which the Employee will be permitted to annually contribute and defer up to twelve thousand dollars ($12,000) and the Employer shall make a matching contribution equal to the contribution made by the Employee up to a maximum contribution of twelve thousand dollars ($12,000). Section 5. Time Requirement. The Employee shall devote his best efforts and full business time to his duties under this Agreement. The Employee shall be allowed to serve on outside boards subject to the consent of the Employer. Section 6. Termination upon Disability. In the event of the Employee's Disability (as defined below) during the employment term, payments based upon the Employee's then current annual Base Salary and Average Annual Bonus shall continue thereafter through the last day of the one (1) year period beginning on the date of such Disability, after which time Employee's employment shall terminate. Payments made in the event of the Employee's Disability shall be equal to 66-2/3% of Employee's Base Salary and Average Annual Bonus, less any amounts received under the Employer's short or long-term disability programs, as applicable. Disability for purposes of this Agreement shall mean that the Employee is limited from performing the material and substantial duties of the positions set forth in Section 2 due to the Employee's sickness or injury for a period of six (6) consecutive months. The Executive Committee of the Board of Directors of QCR Holdings, Inc. shall determine whether and when the Employee has incurred a Disability under this Agreement. Section 7. Termination upon Death. In the event of the Employee's death during the term of this Agreement, the Employee shall be paid his accrued and unpaid Base Salary, and his earned Cash Bonus for the year in which he died prorated on a per diem basis through the date of death. The earned Base Salary shall be paid in accordance with the Employer's regular payroll on the next regular payroll date following the Employee's death. The earned Cash Bonus for the year shall be paid when Cash Bonuses are paid to other executive officers of the Employer with respect to such year. Such amounts shall be payable to the persons designated in writing by the Employee, or if none, to his estate. Section 8. Confidentiality and Loyalty. The Employee acknowledges that during the course of his employment he will produce and have access to material, records, data, trade secrets and information not generally available to the public regarding the Employer and its subsidiaries and affiliates (collectively, "Confidential Information"). 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 business of Employer and its subsidiaries and affiliates 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 and its subsidiaries and affiliates. 3 Section 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 lending and deposit-taking functions extends to an area encompassing a sixty (60) mile radii from each of the offices of QCR Holdings, Inc. and its subsidiaries. Therefore, as an essential ingredient of and in consideration of this Agreement and the payment of the amounts described in Section 4 and Section 10, the Employee hereby agrees that, except with the express prior written consent of the Employer, for a period of two (2) years 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, including, but not by way of limitation, by directly or indirectly owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of, or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Employer to terminate employment with the Employer and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates an office or other business location of: (i) a bank, savings and loan association, credit union or similar financial institution, or (ii) an insurance company or agency, investment brokerage firm or other entity or organization involved in the retail sale of investment products or the making of retail or commercial loans (any of the foregoing referred to in clauses (i) or (ii) collectively referred to as a "Financial Institution") within a sixty (60) mile radii from each of the offices of QCR Holdings, Inc. and its subsidiaries (the "Restrictive Covenant"). 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. 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 Financial Institution. (b) Remedies for Breach of Restrictive Covenant. The Employee acknowledges that the restrictions contained in this Section 9 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. Section 10. Severance. (a) Termination Without Cause. If the Employee is involuntarily terminated without Cause (as defined below), a severance payment will be made equal to six (6) months of Base Salary. Such payment 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 Employer's option. (b) Termination for Cause or Voluntary Termination. If the Employee is terminated for Cause (as defined below) or voluntarily terminates his employment, then the Employer shall pay Employee any accrued and unpaid Base Salary, and any accrued and unpaid personal days and shall have no further obligations to the Employee under this Agreement. For purposes of this Agreement, "Cause" shall mean: (1) a material violation by the Employee of any applicable material law or regulation respecting the business of the Employer; (2) the Employee being found guilty of a felony, an act of dishonesty in connection with the performance of his duties as an officer of the Employer, or which disqualifies the Employee from serving as an officer or director of the Employer; or 4 (3) the willful or negligent failure of the Employee to perform his duties hereunder in any material respect. The Employee shall be entitled to at least thirty (30) days' prior written notice of the Employer's intention to terminate his employment for any Cause 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 of Directors of QCR Holdings, Inc. his position regarding any dispute relating to the existence of such Cause. (c) Termination Upon Change in Control. If a Change in Control (as defined below) occurs and the Employee is terminated within one (1) year following the Change in Control or the Employee elects within six (6) months following the Change in Control to terminate his employment, a severance payment will be made within fifteen (15) days of termination equal to two (2) years of Base Salary plus the amount set forth in Section 4(c)(ii) related to a Change in Control. 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 QCR Holdings, Inc.; or (2) The individuals who, as of the date hereof, are members of the board of directors of QCR Holdings, Inc. (the "Holding Company Board") cease for any reason to constitute a majority of the Holding Company 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 Holding Company Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Holding Company Board; or (3) consummation of: (A) a merger or consolidation of QCR Holdings, Inc. 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 the sale or other disposition of all or substantially all of the assets or stock of the Employer or QCR Holdings, Inc. 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 of either the Employer or QCR Holdings, Inc. 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. 5 (4) If it is determined, in the opinion of the Employer's independent accountants, in consultation, if necessary, with the Employer's independent legal counsel, that any amount paid under this Agreement due to a Change in Control, either separately or in conjunction with any other payments, benefits and entitlements received by the Employee in respect of a Change in Control under any other plan or agreement under which the Employee participates or to which he is a party, would constitute an "Excess Parachute Payment" within the meaning of Section 280G of the Code, and thereby be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then in such event the Employer shall pay to the Employee a "grossing-up" amount equal to the amount of such Excise Tax, plus all federal and state income or other taxes with respect to the payment of the amount of such Excise Tax, including all such taxes with respect to any such grossing-up amount. If, at a later date, the Internal Revenue Service assesses a deficiency against the Employee for the Excise Tax which is greater than that which was determined at the time such amounts were paid, then the Employer shall pay to the Employee the amount of such unreimbursed Excise Tax plus any interest, penalties and reasonable professional fees or expenses incurred by the Employee as a result of such assessment, including all such taxes with respect to any such additional amount. The highest marginal tax rate applicable to individuals at the time of the payment of such amounts will be used for purposes of determining the federal and state income and other taxes with respect thereto. The Employer shall withhold from any amounts paid under this Agreement the amount of any Excise Tax or other federal, state or local taxes then required to be withheld with respect to the amount paid hereunder. Computations of the amount of any grossing-up supplemental compensation paid under this subparagraph shall be conclusively made by the Employer's independent accountants, in consultation, if necessary, with the Employer's independent legal counsel. If, after the Employee receives any gross-up payments or other amount pursuant to this Section 10, the Employee receives any refund with respect to the Excise Tax, the Employee shall promptly pay the Employer the amount of such refund within ten (10) days of receipt by the Employee. (5) 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. At the election of the Employee, which election is to made within thirty (30) days of the Employee's termination, such payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the Employee's termination. In the event that no election is made, payment to the Employee will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the Employee obtains other employment following the termination of employment by the Employer. Section 11. Indemnification. (a) The Employer, at its expense, 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. (b) In addition to the insurance coverage provided for 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, such indemnification to include any action, suit or proceeding related to the Employee leaving a prior employer and becoming employed by the Employer unless, and in which case the Employer does not agree to hold harmless and indemnify the Employee, liability, either equitable or legal, is imposed on the Employer or the Employee and such liability is imposed in material part as a result of the Employee's failure to disclose, as of the Effective Date, any fact or action related thereto or the Employee's material malfeasance or misfeasance in connection with or related to his leaving his prior employer. 6 (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. Section 12. Payment of Legal Fees. The Employer is aware that after a Change in Control, management of the Employer or its successor could cause or attempt to cause the Employer to refuse to comply with its obligations under this Agreement, including the possible pursuit of litigation to avoid its obligations under this Agreement. In these circumstances, the purpose of this Agreement would be frustrated. It is the Employer's intention that the Employee not be required to incur the expenses associated with the enforcement of his rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Employee hereunder. It is the Employer's intention that the Employee not be forced to negotiate settlement of his rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Employee that (a) the Employer has failed to comply with any of its obligations under this Agreement, or (b) the Employer or any other person has taken any action to avoid its obligations under this Agreement, the Employer irrevocably authorizes the Employee from time to time to retain counsel of his choice, at the expense of the Employer as provided in this Section 12, to represent the Employee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Employer or any director, officer, stockholder, or other person affiliated with the Employer, in any jurisdiction. Notwithstanding any existing or previous attorney-client relationship between the Employer and any counsel chosen by the Employee under this Section 12, the Employer irrevocably consents to the Employee entering into an attorney-client relationship with that counsel, and the Employer and the Employee agree that a confidential relationship shall exist between the Employee and that counsel. The fees and expenses of counsel selected from time to time by the Employee as provided in this Section 12 shall be paid or reimbursed to the Employee by the Employer on a regular, periodic basis upon presentation by the Employee of a statement or statements prepared by such counsel in accordance with such counsel's customary practices. The Employer's obligation to reimburse Employee for legal fees as provided under this Section 12 and any separate employment, deferred compensation, severance or other agreement between the Employee and the Employer shall not exceed $200,000 in the aggregate. Accordingly, the Employer's obligation to pay the Employee's legal fees provided by this Section 12 shall be offset by any legal fee reimbursement obligation the Employer may have with the Employee under any separate employment, deferred compensation, severance or other agreement between the Employee and the Employer. Section 13. Regulatory Suspension and Termination. (a) If the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the Employer's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, the Employer's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Employer shall (A) pay the Employee all of the compensation withheld while their contract obligations were suspended and (B) reinstate any of the obligations, which were suspended. (b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Employer's affairs by an order issued under Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. 7 (c) If the Employer is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations of the Employer under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution by the Federal Deposit Insurance Corporation (the "FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Employer under the authority contained in Section 13(c) (12 U.S.C. ss. 1823(c)) of the Federal Deposit Insurance Act, as amended, or when the Employer is determined by the FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) (12 U.S.C. ss. 1828(k)) of the Federal Deposit Insurance Act as amended, and any regulations promulgated thereunder. Section 14. General Provisions and Representations. (a) The Employee represents and warrants that he is not subject to a binding non-competition agreement that would prevent him, for any period of time, from providing the services contemplated by this Agreement. The Company agrees that it shall not merge or consolidate into or with another company, or reorganize, or sell substantially all its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company under this Agreement. (b) 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. (c) This Agreement is governed by and construed in accordance with the laws of the State of Iowa. (d) The provisions of Sections 8 and 9 shall survive the termination of this Agreement. (e) No amendment or modification of this Agreement is effective unless made in writing and signed by each party. (f) This Agreement may be signed in several counterparts, each of which will be an original and all of which will constitute one agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above set forth. CEDAR RAPIDS BANK AND TRUST COMPANY By: /s/ James J. Brownson /s/ Larry Helling ------------------------------------------ ------------------------- James J. Brownson, LARRY HELLING Chairman, Executive Committee of the Board of Directors of QCR Holdings, Inc., the parent company of the Employer By: /s/ Douglas M. Hultquist ------------------------------------------ Douglas M. Hultquist, President, QCR Holdings, Inc., the parent company of the Employer 8 EXHIBIT A Cedar Rapids Bank & Trust Company Cedar Rapids Long-Term Incentive Compensation Program Deferred Incentive Years ending December 31, 2006 through December 31, 2011 Return on Equity (See Note # ) Ending Total Ending Total Assets Ending Total Assets Result Assets $300,000,000 $400,000,000 $500,000,000 - ----------------------------------------------------------------------------------------------------------------- 12.00% Long-Term Incentive Award $ 40,000 $ 60,000 $ 80,000 13.00% Long-Term Incentive Award $ 60,000 $ 80,000 $100,000 14.00% Long-Term Incentive Award $ 80,000 $105,000 $130,000 15.00% Long-Term Incentive Award $100,000 $130,000 $160,000 16.00% Long-Term Incentive Award $120,000 $155,000 $200,000 17.00% Long-Term Incentive Award $140,000 $185,000 $240,000 18.00% Long-Term Incentive Award $160,000 $215,000 $300,000 * Amounts have been paid to Employee prior to the Effective Date of this Agreement. Note #: Assumes Equity of 7.00% of Assets 9
EX-10 8 qcrexhbt108.txt Exhibit 10.8 QCR HOLDINGS, INC. EXECUTIVE DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT ("Agreement") is made this 1st day of January, 2004, by and between QCR Holdings, Inc., a Delaware corporation (the "Company"), and TODD A. GIPPLE (the "Executive"). INTRODUCTION The Executive and the Company previously entered into that certain QCR Holding, Inc. Executive Deferred Compensation Agreement dated January 1, 2002, to encourage the Executive to remain an employee of the Company. The Company is willing to continue to provide to the Executive a deferred compensation opportunity together with matching contributions by the Company under the terms of this Agreement. The Company will pay the Executive's benefits from the Company's general assets. AGREEMENT The Executive and the Company agree as follows: Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Anniversary Date" means December 31 of each year. 1.2 "Change of Control" means: a) 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 33 percent or more of the combined voting power of the then outstanding voting securities of the Company; or b) The individuals who, as of the date hereof, are members of the Board of Directors of the Company (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 a member of the Board; or c) Approval by stockholders of the Company of (1) a merger or consolidation if the stockholders, immediately before such a merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than 67 percent 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 (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of two-thirds or more of the consolidated assets of the Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33 percent or more of the combined voting power of the then outstanding securities of the Company are 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. 1.3 "Code" means the Internal Revenue Code of 1986, as amended. 1.4 "Company" means QCR Holdings, Inc. 1.5 "Compensation" means the total salary and bonus paid to the Executive during a Plan Year. 1 1.6 "Deferral Account" means the Company's accounting of the Executive's accumulated Deferrals plus accrued interest. 1.7 "Deferrals" means the amount of the Executive's Compensation which the Executive elects to defer according to this Agreement. 1.8 "Disability" means, if the Executive is covered by a Company or a Company affiliate's sponsored disability policy, total disability as defined in such policy without regard to any waiting period. If the Executive is not covered by such a policy, Disability means the Executive suffering a sickness or injury which, in the judgment of the Executive Committee of the Board of Directors of the Company limits the Executive from performing the material and substantial duties of his position(s) with the Company. As a condition to any Disability benefits, the Company may require the Executive to submit to such physical or mental evaluations and tests as the Company's Board of Directors deems appropriate. 1.9 "Election Form" means the Form attached as Exhibit 1. 1.10 "Normal Retirement Age" means the Executive's 65th birthday. 1.11 "Normal Retirement Date" means the later of the Normal Retirement Age or Termination of Employment. 1.12 "Original Effective Date" means January 1, 2002. 1.13 "Plan Year" means the calendar year. 1.14 "Termination of Employment" means that the Executive ceases to be employed by the Company for any reason whatsoever other than by reason of a leave of absence which is approved by the Company. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of the Executive's Termination of Employment, the Company shall have the sole and absolute right to decide the dispute. Article 2 Deferral Election 2.1 Initial Election. The Executive shall make an initial deferral election under this Agreement by filing with the Company a signed Election Form within thirty (30) days after the Original Effective Date of this Agreement. The Election Form shall set forth the amount of Compensation to be deferred and shall be effective to defer only Compensation earned after the date the Election Form is received by the Company. 2.2 Election Changes. 2.2.1 Generally. Upon the Company's approval, the Executive may modify the amount of Compensation to be deferred annually by filing a new Election Form with the Company prior to the beginning of the Plan Year in which the Compensation is to be deferred. The modified deferral election shall not be effective until the Plan Year following the year in which the subsequent Election Form is received and approved by the Company. 2.2.2 Hardship. If an unforeseeable financial emergency arising from the death of a family member, divorce, sickness, injury, catastrophe or similar event outside the control of the Executive occurs, the Executive, by written instructions to the Company, may reduce future deferrals under this Agreement. Article 3 Deferral Account 3.1 Establishing and Crediting. The Company shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts: 3.1.1 Deferrals. The Compensation deferred by the Executive as of the time the Compensation would have otherwise been paid to the Executive. 2 3.1.2 Matching Contribution. A matching contribution equal to (and credited to the Deferral Account at the same time as) the amounts credited to the Deferral Account under Section 3.1.1, subject to an annual maximum matching contribution of 100 percent of the Compensation deferred by the Executive, said matching contribution not to exceed $10,000 (Ten Thousand Dollars) annually. 3.1.3 Interest. On each Anniversary Date of this Agreement and continuing until all benefit payments under this Agreement have been made, interest is to be accrued on the account balance and compounded at an annual rate equal to the Wall Street Journal Prime Rate on the first business day of the Plan Year. This interest rate shall have a minimum or floor of 6% and shall not exceed 12%. 3.2 Statement of Accounts. The Company shall provide to the Executive, within one hundred twenty (120) days after each Anniversary Date, a statement setting forth the Deferral Account balance. 3.3 Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Executive is a general unsecured creditor of the Company for the payment of benefits. The benefits represent the mere Company promise to pay such benefits. The Executive's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive's creditors. Article 4 Lifetime Benefits 4.1 Normal Retirement Benefit. Upon the Normal Retirement Date, the Company shall pay to the Executive the benefit described in this Section 4.1 in lieu of any other benefit under this Agreement. 4.1.1 Amount of Benefit. The benefit under this Section 4.1 is the Deferral Account balance at the Executive's Normal Retirement Date. 4.1.2 Payment of Benefit. The Company shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Normal Retirement Date. The Company shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4.2 Early Retirement Benefit. Upon Termination of Employment prior to the Normal Retirement Age for reasons other than death, Change of Control or Disability, the Company shall pay to the Executive the benefit described in this Section 4.2 in lieu of any other benefit under this Agreement. 4.2.1 Amount of Benefit. The benefit under this Section 4.2 is the Deferral Account balance at the Executive's Termination of Employment. 4.2.2 Payment of Benefit. The Company shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Company shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 3 4.3 Disability Benefit. If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 4.3 in lieu of any other benefit under this Agreement. 4.3.1 Amount of Benefit. The benefit under this Section 4.3 is the Deferral Account balance at the Executive's Termination of Employment. 4.3.2 Payment of Benefit. The Company shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Company shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4.4 Change of Control Benefit. Upon a Change of Control, the Company shall pay to the Executive the benefit described in this Section 4.4 in lieu of any other benefit under this Agreement. 4.4.1 Amount of Benefit. The benefit under this Section 4.4 shall be the greater of: (a) the Deferral Account balance at the Executive's Termination of Employment; or (b) $1,288,000 (One Million Two Hundred Eighty-Eight Thousand Dollars). 4.4.2 Payment of Benefit. The Company shall pay the benefit to the Executive in a lump sum within 60 days following the Executive's Termination of Employment. 4.4.3 Obligation to Fund. Notwithstanding any provision to the contrary contained herein, no later than the date of a Change of Control, the Company shall fund a "Rabbi Trust" (as such term is described in Revenue Procedure 92-64) in the amount of the payment required under Section 4.4.2, with the trustee of such trust being designated by the Board in its sole and absolute discretion. 4.5 Hardship Distribution. Upon the Board of Director's determination (following petition by the Executive) that the Executive has suffered an unforeseeable financial emergency as described in Section 2.2.2, the Company shall distribute to the Executive all or a portion of the Deferral Account balance as determined by the Company, but in no event shall the distribution be greater than is necessary to relieve the financial hardship. Article 5 Death Benefits 5.1 Death During Active Service. If the Executive dies while in the employment of the Company, the Company shall pay to the Executive's beneficiary the benefit described in this Section 5.1 in lieu of any other benefit under this Agreement. 5.1.1 Amount of Benefit. The benefit under Section 5.1 is the greater of: (a) the Deferral Account balance; or (b) $1,288,000 (One Million Two Hundred Eighty-Eight Thousand Dollars). 5.1.2 Payment of Benefit. The Company shall pay the benefit to the beneficiary in the manner elected by the Executive on the attached Beneficiary Designation form, or as such form may have been amended by the Executive prior to his death. In the event that the death benefit hereunder is paid in installments, the Company shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4 5.2 Death During Payment of a Lifetime Benefit. If the Executive dies after any Lifetime Benefit payments have commenced under this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived. 5.3 Death After Termination of Employment But Before Payment of a Lifetime Benefit Commences. If the Executive is entitled to a Lifetime Benefit under this Agreement, but dies prior to the commencement of said benefit payments, the Company shall pay the Lifetime Benefit to the Executive's beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive's death. Article 6 Beneficiaries 6.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Company. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Company during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate. 6.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit. Article 7 General Limitations 7.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement that is attributable to the Company match credited under Section 3.1.2 of this Agreement and the interest earned on the Deferral Account if the Company terminates the Executive's employment for: (a) A material violation by the Executive of any applicable material law or regulation respecting the business of the Company or any subsidiary of the Company; (b) The Executive being found guilty of a felony, an act of dishonesty in connection with the performance of his duties as an officer of the Company, or which disqualifies the Executive from serving as an officer or director of the Company or the or any subsidiary of the Company; or (c) The willful or negligent failure of the Executive to perform his duties for the Company or any subsidiary of the Company in any material respect. 7.2 Suicide or Misstatement. The Company shall not pay any death benefit under this Agreement exceeding the Deferral Account if the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Company. 5 Article 8 Claims and Review Procedures 8.1 Claims Procedure. The Company shall notify any person or entity that makes a claim against the Agreement (the "Claimant") in writing, within 90 days of Claimant's written application for benefits, of his or her eligibility or non-eligibility for benefits under the Agreement. If the Company determines that the Claimant is not eligible for benefits or full benefits, the written notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, (4) an explanation of the Agreement's claims review procedure, the time limits applicable and other appropriate information as to the steps to be taken if the Claimant wishes to have the claim reviewed, and (5) a statement of the Claimant's right to bring a civil action under Section 502(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") following an adverse benefit determination on review. If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the Claimant, prior to the expiration of the initial 90-day period, of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional 90 days. 8.2 Review Procedure. If the Claimant is determined by the Company not to be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within 60 days after receipt of the notice issued by the Company. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an opportunity to present his or her position to the Company verbally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. In considering the review, the Company shall take into account all materials and information submitted by Claimant, without regard to whether the information was submitted or considered in the initial benefit determination. The Company shall notify the Claimant of its decision in writing within the 60-day period, which notice shall set forth (a) the specific basis of its decision, written in a manner calculated to be understood by the Claimant, (b) the specific provisions of the Agreement on which the decision is based, (c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records and other information (as defined in applicable ERISA regulations) to the Claimant's claim for benefits, and (d) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA. If, because of the need for a hearing, the 60-day period is not sufficient, the decision may be deferred for up to another 60 days at the election of the Company, but notice of this deferral shall be given to the Claimant. Article 9 Amendments and Termination This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive. Notwithstanding the previous paragraph, the Company may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits). In no event shall this Agreement be terminated under this section without payment to the Executive of the Deferral Account balance attributable to the Executive's Deferrals and interest credited on such amounts. 6 Article 10 Miscellaneous 10.1 Binding Effect. This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, administrators and transferees. 10.2 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the shareholders' rights to replace the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 10.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 10.4 Tax Withholding. The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. 10.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Iowa, except to the extent preempted by the laws of the United States of America. 10.6 Unfunded Arrangement. The Executive and the Executive's beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Company to which the Executive and the Executive's beneficiary have no preferred or secured claim. 10.7 Reorganization. The Company shall not merge or consolidate into or with another Company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement. 10.8 Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 10.9 Administration. The Company shall have powers which are necessary to administer this Agreement, including but not limited to: (a) Interpreting the provisions of the Agreement; (b) Establishing and revising the method of accounting for the Agreement; (c) Maintaining a record of benefit payments; and (d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement. The decision or action of the Company with respect to any question arising out of or in connection with the administration, interpretation, and application of this Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in this Agreement. 7 10.10 Payment of Legal Fees. The Company is aware that after a Change of Control, management of the Company or its successor could cause or attempt to cause the Company to refuse to comply with its obligations under this Agreement, including the possible pursuit of litigation to avoid its obligations under this Agreement. In these circumstances, the purpose of this Agreement would be frustrated. It is the Company's intention that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. It is the Company's intention that the Executive not be forced to negotiate settlement of his rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change of Control occurs it appears to the Executive that (a) the Company has failed to comply with any of its obligations under this Agreement, or (b) the Company or any other person has taken any action to avoid its obligations under this Agreement, the Company irrevocably authorizes the Executive from time to time to retain counsel of his choice, at the expense of the Company as provided in this Section 10.10, to represent the Executive in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder, or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or previous attorney-client relationship between the Company and any counsel chosen by the Executive under this Section 10.10, the Company irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Company and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this Section 10.10 shall be paid or reimbursed to the Executive by the Company on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with such counsel's customary practices. The Company's obligation to reimburse Executive for legal fees as provided under this Section 10.10 and any separate employment, severance or other agreement between the Executive and the Company shall not exceed $200,000 in the aggregate. Accordingly, the Company's obligation to pay the Executive's legal fees provided by this Section 10.10 shall be offset by any legal fee reimbursement obligation the Company may have with the Executive under any separate employment, severance or other agreement between the Executive and the Company. 10.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Company shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals. IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement. COMPANY: EXECUTIVE: QCR HOLDINGS, INC. By: /s/ James J. Brownson /s/ Todd A. Gipple ------------------------------ --------------------------- James J. Brownson, Todd A. Gipple Chairman, Executive Committee of the Board By: /s/ Douglas M. Hultquist ------------------------------ Douglas M. Hultquist, President 8 EXHIBIT 1 TO QCR HOLDINGS, INC. EXECUTIVE DEFERRED COMPENSATION AGREEMENT Deferral Election I elect to defer my Compensation received under the Executive Deferred Compensation Agreement with the Company, as follows: - -------------------------------------------------------------------------------- Amount of Deferral Duration ================================================================================ [Initial and Complete one] [Initial One] ____ I elect to defer ____% of my ____ One Year only Compensation. ____ For ______ [Insert I elect to defer $______ of all Number] Years - ------- Compensation. Until ------- ____ I elect not to defer any of my Termination Compensation. of Employment ____ Until ___________, ___________ (date) - -------------------------------------------------------------------------------- Upon the Company's approval, I understand that I may change the amount and duration of my deferrals by filing a new election form with the Company; provided, however, that any subsequent election will not be effective until the Plan Year following the year in which the new election is received by the Company. Signature Date Accepted by the Company this _____ day of ______________, 20___. By Title 9 Beneficiary Designation QCR HOLDINGS, INC. EXECUTIVE DEFERRED COMPENSATION AGREEMENT I designate the following as beneficiary of benefits under the Executive Deferred Compensation Agreement payable following my death: Primary: ---------------------------------------------------------------------- - -------------------------------------------------------------------------------- Contingent: -------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement. I understand that I may change these beneficiary designations by filing a new written designation with the Company. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved. FORM OF PRE-RETIREMENT DEATH BENEFIT, Article 5, Section 5.1.2 I elect to have my beneficiary receive benefits under the Agreement in the following form: [Initial One] Lump Sum Equal monthly installments for 180 months - ----------- -------------- Signature Date Accepted by the Company this ____ day of ___________, 20___. By Title 10 EX-10 9 qcrexhbt109.txt Exhibit 10.9 CEDAR RAPIDS BANK AND TRUST EXECUTIVE DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT ("Agreement") is made this 1st day of January, 2004, by and between CEDAR RAPIDS BANK AND TRUST, a state-chartered commercial bank located in Bettendorf, Iowa (the "Bank"), and LARRY J. HELLING (the "Executive"). INTRODUCTION The Executive and Quad City Bank and Trust Company previously entered into that certain Quad City Bank and Trust Company Executive Deferred Compensation Agreement, to encourage the Executive to become an employee of Quad City Bank and Trust Company and eventually, the Bank. The Bank is willing to continue to provide to the Executive a deferred compensation opportunity together with matching contributions by the Bank under the terms of this Agreement. The Bank will pay the Executive's benefits from the Bank's general assets. AGREEMENT The Executive and the Bank agree as follows: Article 1 Definitions Whenever used in this Agreement, the following words and phrases shall have the meanings specified: 1.1 "Anniversary Date" means December 31 of each year. 1.2 "Change of Control" means: a) 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 33 percent or more of the combined voting power of the then outstanding voting securities of the Company; or b) The individuals who, as of the date hereof, are members of the Board of Directors of the Company (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 a member of the Board; or c) Approval by stockholders of the Company of (1) a merger or consolidation if the stockholders, immediately before such a merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than 67 percent 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 (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of two-thirds or more of the consolidated assets of the Company or the Bank. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33 percent or more of the combined voting power of the then outstanding securities of the Company are 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. 1.3 "Code" means the Internal Revenue Code of 1986, as amended. 1.4 "Company" means QCR Holdings, Inc. 1.5 "Compensation" means the total salary and bonus paid to the Executive during a Plan Year. 1 1.6 "Deferral Account" means the Bank's accounting of the Executive's accumulated Deferrals plus accrued interest. 1.7 "Deferrals" means the amount of the Executive's Compensation which the Executive elects to defer according to this Agreement. 1.8 "Disability" means if the Executive is covered by a Bank or a Bank affiliate's sponsored disability policy, total disability as defined in such policy without regard to any waiting period. If the Executive is not covered by such a policy, Disability means the Executive suffering a sickness or injury which, in the judgment of the Executive Committee of the Board of Directors of the Company limits the Executive from performing the material and substantial duties of his position(s) with the Bank. As a condition to any Disability benefits, the Bank may require the Executive to submit to such physical or mental evaluations and tests as the Board of Directors of the Bank deems appropriate. 1.9 "Election Form" means the Form attached as Exhibit 1. 1.10 "Normal Retirement Age" means the Executive's 65th birthday. 1.11 "Normal Retirement Date" means the later of the Normal Retirement Age or Termination of Employment. 1.12 "Original Effective Date" means June 29, 2001. 1.13 "Plan Year" means the calendar year. 1.14 "Termination of Employment" means that the Executive ceases to be employed by the Bank for any reason whatsoever other than by reason of a leave of absence which is approved by the Bank. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of the Executive's Termination of Employment, the Bank shall have the sole and absolute right to decide the dispute. Article 2 Deferral Election 2.1 Initial Election. The Executive shall make an initial deferral election under this Agreement by filing with the Bank a signed Election Form within thirty (30) days after the Original Effective Date of this Agreement. The Election Form shall set forth the amount of Compensation to be deferred and shall be effective to defer only Compensation earned after the date the Election Form is received by the Bank. 2.2 Election Changes. 2.2.1 Generally. Upon the Bank's approval, the Executive may modify the amount of Compensation to be deferred annually by filing a new Election Form with the Bank prior to the beginning of the Plan Year in which the Compensation is to be deferred. The modified deferral election shall not be effective until the Plan Year following the year in which the subsequent Election Form is received and approved by the Bank. 2.2.2 Hardship. If an unforeseeable financial emergency arising from the death of a family member, divorce, sickness, injury, catastrophe or similar event outside the control of the Executive occurs, the Executive, by written instructions to the Bank, may reduce future deferrals under this Agreement. Article 3 Deferral Account 3.1 Establishing and Crediting. The Bank shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts: 3.1.1 Deferrals. The Compensation deferred by the Executive as of the time the Compensation would have otherwise been paid to the Executive. 2 3.1.2 Matching Contribution. A matching contribution equal to (and credited to the Deferral Account at the same time as) the amounts credited to the Deferral Account under Section 3.1.2, subject to an annual maximum matching contribution of 100 percent of the Compensation deferred by the Executive, said matching contribution not to exceed $12,000 (Twelve Thousand Dollars) annually (prorated for any partial year of participation). 3.1.3 Interest. On each Anniversary Date of this Agreement and immediately prior to the payment of any benefits, but only until commencement of the benefit payments under this Agreement, interest is to be accrued on the account balance and compounded at an annual rate equal to the Wall Street Journal Prime Rate on the first business day of the Plan Year. This interest rate shall have a minimum or floor of 6 percent and shall not exceed 12 percent. 3.2 Statement of Accounts. The Bank shall provide to the Executive, within one hundred twenty (120) days after each Anniversary Date, a statement setting forth the Deferral Account balance. 3.3 Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere Bank promise to pay such benefits. The Executive's rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive's creditors. Article 4 Lifetime Benefits 4.1 Normal Retirement Benefit. Upon the Normal Retirement Date, the Bank shall pay to the Executive the benefit described in this Section 4.1 in lieu of any other benefit under this Agreement. 4.1.1 Amount of Benefit. The benefit under this Section 4.1 is the Deferral Account balance at the Executive's Normal Retirement Date. 4.1.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Normal Retirement Date. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4.2 Early Retirement Benefit. Upon Termination of Employment prior to the Normal Retirement Age for reasons other than death, Change of Control or Disability, the Bank shall pay to the Executive the benefit described in this Section 4.2 in lieu of any other benefit under this Agreement. 4.2.1 Amount of Benefit. The benefit under this Section 4.2 is the Deferral Account balance at the Executive's Termination of Employment. 4.2.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 3 4.3 Disability Benefit. If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Bank shall pay to the Executive the benefit described in this Section 4.3 in lieu of any other benefit under this Agreement. 4.3.1 Amount of Benefit. The benefit under this Section 4.3 is the Deferral Account balance at the Executive's Termination of Employment. 4.3.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in 180 equal monthly installments commencing on the first day of the month following the Executive's Termination of Employment. The Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 4.4 Change of Control Benefit. Upon a Change of Control, the Bank shall pay to the Executive the benefit described in this Section 4.4 in lieu of any other benefit under this Agreement. 4.4.1 Amount of Benefit. The benefit under this Section 4.4 shall be the greater of: (a) the Deferral Account balance at the Executive's Termination of Employment; or (b) $1,130,000 (One Million One Hundred and Thirty Thousand Dollars). 4.4.2 Payment of Benefit. The Bank shall pay the benefit to the Executive in a lump sum within 60 days following the Executive's Termination of Employment. 4.4.3 Obligation to Fund. Notwithstanding any provision to the contrary contained herein, no later than the date of a Change of Control, the Bank shall fund a "Rabbi Trust" (as such term is described in Revenue Procedure 92-64) in the amount of the payment required under Section 4.4.2, with the trustee of such trust being designated by the Board in its sole and absolute discretion. 4.5 Hardship Distribution. Upon the Board of Director's determination (following petition by the Executive) that the Executive has suffered an unforeseeable financial emergency as described in Section 2.2.2, the Bank shall distribute to the Executive all or a portion of the Deferral Account balance as determined by the Bank, but in no event shall the distribution be greater than is necessary to relieve the financial hardship. Article 5 Death Benefits 5.1 Death During Active Service. If the Executive dies while in the employment of the Bank, the Bank shall pay to the Executive's beneficiary the benefit described in this Section 5.1 in lieu of any other benefit under this Agreement. 5.1.1 Amount of Benefit. The benefit under Section 5.1 is the greater of: (a) the Deferral Account balance; or (b) $1,130,000 (One Million One Hundred and Thirty Thousand Dollars). 5.1.2 Payment of Benefit. The Bank shall pay the benefit to the beneficiary in the manner elected by the Executive on the attached Beneficiary Designation form, or as such form may have been amended by the Executive prior to his death. In the event that the death benefit hereunder is paid in installments, the Bank shall credit interest pursuant to Section 3.1.3 on the remaining account balance during any applicable installment period. 5.2 Death During Payment of a Lifetime Benefit. If the Executive dies after any Lifetime Benefit payments have commenced under this Agreement but before receiving all such payments, the Bank shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived. 5.3 Death After Termination of Employment But Before Payment of a Lifetime Benefit Commences. If the Executive is entitled to a Lifetime Benefit under this Agreement, but dies prior to the commencement of said benefit payments, the Bank shall pay the Lifetime Benefit to the Executive's beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive's death. 4 Article 6 Beneficiaries 6.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Bank during the Executive's lifetime. The Executive's beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive's estate. 6.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Bank may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit. Article 7 General Limitations 7.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement that is attributable to the Bank match credited under Section 3.1.2 of this Agreement and the interest earned on the Deferral Account if the Bank terminates the Executive's employment for: (a) A material violation by the Executive of any applicable material law or regulation respecting the business of the Bank; (b) The Executive being found guilty of a felony, an act of dishonesty in connection with the performance of his duties as an officer of the Bank, or which disqualifies the Executive from serving as an officer or director of the Bank or the Company; or (c) The willful or negligent failure of the Executive to perform his duties for the Bank or the Company in any material respect. 7.2 Suicide or Misstatement. The Bank shall not pay any death benefit under this Agreement exceeding the Deferral Account if the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Bank. Article 8 Claims and Review Procedures 8.1 Claims Procedure. The Bank shall notify any person or entity that makes a claim against the Agreement (the "Claimant") in writing, within 90 days of Claimant's written application for benefits, of his or her eligibility or non-eligibility for benefits under the Agreement. If the Bank determines that the Claimant is not eligible for benefits or full benefits, the written notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, (4) an explanation of the Agreement's claims review procedure, the time limits applicable and other appropriate information as to the steps to be taken if the Claimant wishes to have the claim reviewed, and (5) a statement of the Claimant's right to bring a civil action under Section 502(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") following an adverse benefit determination on review. If the Bank determines that there are special circumstances requiring additional time to make a decision, the Bank shall notify the Claimant, prior to the expiration of the initial 90-day period, of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional 90 days. 5 8.2 Review Procedure. If the Claimant is determined by the Bank not to be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Bank by filing a petition for review with the Bank within 60 days after receipt of the notice issued by the Bank. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or different benefits. Within 60 days after receipt by the Bank of the petition, the Bank shall afford the Claimant (and counsel, if any) an opportunity to present his or her position to the Bank verbally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. In considering the review, the Bank shall take into account all materials and information submitted by Claimant, without regard to whether the information was submitted or considered in the initial benefit determination. The Bank shall notify the Claimant of its decision in writing within the 60-day period, which notice shall set forth (a) the specific basis of its decision, written in a manner calculated to be understood by the Claimant, (b) the specific provisions of the Agreement on which the decision is based, (c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records and other information (as defined in applicable ERISA regulations) to the Claimant's claim for benefits, and (d) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA. If, because of the need for a hearing, the 60-day period is not sufficient, the decision may be deferred for up to another 60 days at the election of the Bank, but notice of this deferral shall be given to the Claimant. Article 9 Amendments and Termination This Agreement may be amended or terminated only by a written agreement signed by the Bank and the Executive. Notwithstanding the previous paragraph, the Bank may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Bank (other than the financial impact of paying the benefits). In no event shall this Agreement be terminated under this section without payment to the Executive of the Deferral Account balance attributable to the Executive's Deferrals and interest credited on such amounts. Article 10 Miscellaneous 10.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators and transferees. 10.2 No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the shareholders' rights to replace the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive's right to terminate employment at any time. 10.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 10.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. 10.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Iowa, except to the extent preempted by the laws of the United States of America. 6 10.6 Unfunded Arrangement. The Executive and the Executive's beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive's life is a general asset of the Bank to which the Executive and the Executive's beneficiary have no preferred or secured claim. 10.7 Reorganization. The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. 10.8 Entire Agreement. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein. 10.9 Administration. The Bank shall have powers which are necessary to administer this Agreement, including but not limited to: (a) Interpreting the provisions of the Agreement; (b) Establishing and revising the method of accounting for the Agreement; (c) Maintaining a record of benefit payments; and (d) Establishing rules and prescribing any forms necessary or desirable to administer the Agreement. The decision or action of the Bank with respect to any question arising out of or in connection with the administration, interpretation, and application of this Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in this Agreement. 7 10.10 Payment of Legal Fees. The Bank is aware that after a Change of Control, management of the Bank or its successor could cause or attempt to cause the Bank to refuse to comply with its obligations under this Agreement, including the possible pursuit of litigation to avoid its obligations under this Agreement. In these circumstances, the purpose of this Agreement would be frustrated. It is the Bank's intention that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Executive hereunder. It is the Bank's intention that the Executive not be forced to negotiate settlement of his rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change of Control occurs it appears to the Executive that (a) the Bank has failed to comply with any of its obligations under this Agreement, or (b) the Bank or any other person has taken any action to avoid its obligations under this Agreement, the Bank irrevocably authorizes the Executive from time to time to retain counsel of his choice, at the expense of the Bank as provided in this Section 10.10, to represent the Executive in connection with the initiation or defense of any litigation or other legal action, whether by or against the Bank or any director, officer, stockholder, or other person affiliated with the Bank, in any jurisdiction. Notwithstanding any existing or previous attorney-client relationship between the Bank and any counsel chosen by the Executive under this Section 10.10, the Bank irrevocably consents to the Executive entering into an attorney-client relationship with that counsel, and the Bank and the Executive agree that a confidential relationship shall exist between the Executive and that counsel. The fees and expenses of counsel selected from time to time by the Executive as provided in this Section 10.10 shall be paid or reimbursed to the Executive by the Bank on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with such counsel's customary practices. The Bank's obligation to reimburse Executive for legal fees as provided under this Section 10.10 and any separate employment, severance or other agreement between the Executive and the Bank shall not exceed $200,000 in the aggregate. Accordingly, the Bank's obligation to pay the Executive's legal fees provided by this Section 10.10 shall be offset by any legal fee reimbursement obligation the Bank may have with the Executive under any separate employment, severance or other agreement between the Executive and the Bank. 10.11 Named Fiduciary. For purposes of the Employee Retirement Income Security Act of 1974, if applicable, the Bank shall be the named fiduciary and plan administrator under the Agreement. The named fiduciary may delegate to others certain aspects of the management and operation responsibilities of the plan including the employment of advisors and the delegation of ministerial duties to qualified individuals. IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement. BANK: EXECUTIVE: CEDAR RAPIDS BANK AND TRUST By: /s/ James J. Brownson /s/ Larry Helling ------------------------------------- ----------------------------- James J. Brownson, Chairman, Executive Committee of the Board of Directors of QCR Holdings, Inc., the parent company of the Employer By: /s/ Douglas M. Hultquist ------------------------------------- Douglas M. Hultquist, President, QCR Holdings, Inc., the parent company of the Employer 8 EXHIBIT 1 TO CEDAR RAPIDS BANK AND TRUST EXECUTIVE DEFERRED COMPENSATION AGREEMENT Deferral Election I elect to defer my Compensation received under the Executive Deferred Compensation Agreement with the Bank, as follows: - -------------------------------------------------------------------------------- Amount of Deferral Duration ================================================================================ [Initial and Complete one] [Initial One] ____ I elect to defer ____% of my ____ One Year only Compensation. ____ For ______ [Insert I elect to defer $______ of all Number] Years - ------- Compensation. Until ------- ____ I elect not to defer any of my Termination Compensation. of Employment ____ Until ___________, ___________ (date) - -------------------------------------------------------------------------------- Upon the Bank's approval, I understand that I may change the amount and duration of my deferrals by filing a new election form with the Bank; provided, however, that any subsequent election will not be effective until the Plan Year following the year in which the new election is received by the Bank. Signature Date Accepted by the Bank this _____ day of ______________, 20_____. By Title 9 Beneficiary Designation CEDAR RAPIDS BANK AND TRUST EXECUTIVE DEFERRED COMPENSATION AGREEMENT I designate the following as beneficiary of benefits under the Executive Deferred Compensation Agreement payable following my death: Primary: ----------------------------------------------------------------------- - -------------------------------------------------------------------------------- Contingent: ------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note: To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement. I understand that I may change these beneficiary designations by filing a new written designation with the Bank. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved. FORM OF PRE-RETIREMENT DEATH BENEFIT, Article 5, Section 5.1.2 I elect to have my beneficiary receive benefits under the Agreement in the following form: [Initial One] Lump Sum Equal monthly installments for 180 months - ----------- -------------- Signature Date Accepted by the Bank this ____ day of ___________, 20_____. By Title 10 EX-10 10 qcrexhbt1011.txt Exhibit 10.11 EMPLOYMENT AGREEMENT BETWEEN QCR HOLDINGS, INC. AND TODD A. GIPPLE THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of the 1st day of January, 2004, is between QCR Holdings, Inc. (the "Employer") and TODD A. GIPPLE (the "Employee"). RECITALS WHEREAS, Employee is currently serving as an executive of the Employer pursuant to that certain Employment Agreement dated January 5, 2000 (the "Prior Employment Agreement"); and WHEREAS, the parties desire to amend and restate the Prior Employment Agreement on the terms hereinafter set forth. NOW, THEREFORE, in consideration of the promises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and among the parties hereto as follows: AGREEMENTS Section 1. Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. Section 2. Duties. The Employee agrees to provide all services necessary, incidental or convenient as Executive Vice President and Chief Financial Officer of the Employer, and such similar duties for the Employer's subsidiaries as a dual employee of the Employer's subsidiaries. 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. Section 3. Term. The term of this Agreement shall commence on January 1, 2004 (the "Effective Date"), and shall continue for a period of three (3) years. This Agreement shall automatically extend for one (1) year on each anniversary of the Effective Date, unless terminated by either party effective as of the last day of the then current three (3) year extension by written notice to that effect delivered to the other not less than ninety (90) days prior to the anniversary of such Effective Date. Section 4. Compensation. As compensation for the services to be provided by the Employee hereunder: (a) Base Salary. The Employer shall pay Employee an annual base salary of one hundred and forty thousand five hundred dollars ($140,500) ("Base Salary"). Base Salary shall be payable bi-weekly, in equal installments in accordance with the Employer's payroll practice. The Employee's Base Salary shall be subject to review annually, commencing January 1, 2005, and shall be maintained or increased during the term hereof in accordance with the Employer's established management compensation policies and plan. (b) Bonuses. The Employee shall be entitled to receive cash bonuses ("Cash Bonus" or "Cash Bonuses"), based upon performance, which may be granted in the future in the discretion of the Employer, consistent with Employer's incentive bonus formula for executive management, as modified from time to time. In addition, the Employee may receive such additional bonuses or awards in the form of stock options, restricted stock or other equity compensation, as determined in the discretion of the Employer. (c) Non-Qualified Supplemental Executive Retirement Agreement. Employee shall participate in the Non-Qualified Supplemental Executive Retirement Agreement, as amended from time to time in accordance with its terms. (d) Benefits. The Employer shall provide the following additional benefits to the Employee: (i) Medical Insurance. Family medical insurance, provided that Employee shall be responsible for paying any portion of the premium in accordance with the Employer's policy applied to similarly situated employees. (ii) Reimbursements. Reimbursement of reasonable expenses advanced by the Employee in connection with performance of his duties hereunder, including, but not limited to, two (2) paid weeks of continuing education, a monthly automobile allowance of $500, fuel, maintenance and insurance expense of such automobile, and the annual reimbursement of club dues for the Davenport Country Club. (iii) Personal Days. The Employee will initially be entitled to twenty-five (25) personal days, which may be increased in accordance with the Employer's established policies and practices. 1 (iv) Disability Coverage. Long-term and short-term disability coverage equal to 66-2/3% of Base Salary and Average Annual Bonus. For purposes of this Agreement, "Average Annual Bonus" shall mean the average of the three (3) most recent annual Cash Bonuses paid to the Employee immediately preceding the determination date. (v) Employee Benefits. Participation in a 401(k)/profit sharing plan, deferred compensation program and such other benefits as are specifically granted to Employee or in which he participates as an employee of the Employer. (vi) Life Insurance. Term life insurance of two (2) times Base Salary and Average Annual Bonus as of the date of this Agreement; which insurance may be provided through a group term carve-out plan at the Employer's election. The Employee will be allowed to purchase additional life insurance of at least two (2) times that same amount through such plan. (vii) Stock Options. Non-qualified options in accordance with the Employer's current stock incentive plan enabling the Employee to acquire 1,500 shares of the Employer's stock on each of January 5, 2004 and January 5, 2005, with an exercise price for all such options equal to the market price of the Employer's stock as of the close of business on the day prior to the date of grant and, concurrently with each grant of such options, 1,500 tax benefit rights. Section 5. Time Requirement. The Employee shall devote his best efforts and full business time to his duties under this Agreement. The Employee shall be allowed to serve on outside boards subject to the consent of the Employer. Section 6. Termination upon Disability. In the event of the Employee's Disability (as defined below) during the employment term, payments based upon the Employee's then current annual Base Salary and Average Annual Bonus shall continue thereafter through the last day of the one (1) year period beginning on the date of such Disability, after which time Employee's employment shall terminate. Payments made in the event of the Employee's Disability shall be equal to 66-2/3% of Employee's Base Salary and Average Annual Bonus, less any amounts received under the Employer's short or long-term disability programs, as applicable. Disability for purposes of this Agreement shall mean that the Employee is limited from performing the material and substantial duties of the positions set forth in Section 2 due to the Employee's sickness or injury for a period of six (6) consecutive months. The Executive Committee of the Board of Directors of the Employer shall determine whether and when the Employee has incurred a Disability under this Agreement. Section 7. Payment upon Death. In the event of the Employee's death during the term of this Agreement, the Employee shall be paid his accrued and unpaid Base Salary, and his earned Cash Bonus for the year in which he died prorated on a per diem basis through the date of death. The earned Base Salary shall be paid in accordance with the Employer's regular payroll on the next regular payroll date following the Employee's death. The earned Cash Bonus for the year shall be paid when Cash Bonuses are paid to other executive officers of the Employer with respect to such year. Such amounts shall be payable to the persons designated in writing by the Employee, or if none, to his estate. Section 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. 2 Section 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 areas of the Employer's lending and deposit taking functions extends to the areas encompassing the sixty (60) mile radii from each of the offices of the Employer. Therefore, as an essential ingredient of and in consideration of this Agreement and the payment of the amounts described in Sections 4 and 10, the Employee hereby agrees that, except with the express prior written consent of the Employer, for a period of two (2) years 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, including, but not by way of limitation, by directly or indirectly owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of, or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Employer to terminate employment with the Employer and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates, a bank, savings and loan association, credit union or similar financial institution (a "Financial Institution") within the sixty (60) mile radii of each of the Employer's offices (the "Restrictive Covenant"). 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. 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 National Association of Securities Dealers Automated Quotation System which do not represent more than one percent (1%) of the outstanding capital stock of any Financial Institution. Notwithstanding anything contained herein to the contrary, the Employee shall be permitted to remain as a director and a shareholder of Buffalo Savings Bank, Buffalo, Iowa. (b) Remedies for Breach of Restrictive Covenant. The Employee acknowledges that the restrictions contained in this Section 9 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. Section 10. Severance. (a) Termination Without Cause. If the Employee is terminated without "Cause" (as defined below), the Employer will pay the Employee a sum equal to one-half of his then current annual Base Salary plus one-half of his Average Annual Bonus. Such payment shall be made in a lump sum within 15 days of termination or in equal installments over the six (6) month period, at the Employer's option. In addition, the Employer shall provide reasonable out-placement services for up to three (3) months following termination. (b) Termination for Cause or Voluntary Termination. If the Employee is terminated for Cause (as defined below) or voluntarily terminates his employment, then the Employer shall pay Employee any accrued and unpaid Base Salary, and any accrued and unpaid personal days and shall have no further obligations to the Employee under this Agreement. For purposes of this Agreement, "Cause" shall mean: (i) a material violation by the Employee of any applicable material law or regulation respecting the business of the Employer; (ii) the Employee being found guilty of a felony, an act of dishonesty in connection with the performance of his duties as an officer of the Employer, or which disqualifies the Employee from serving as an officer or director of the Employer; or (iii) the willful or negligent failure of the Employee to perform his duties hereunder in any material respect. 3 The Employee shall be entitled to at least thirty (30) days' prior written notice of the Employer's intention to terminate his employment for any Cause 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. (c) Termination Upon Change in Control. If a Change in Control (as defined below) of the ownership of the Employer occurs and the Employee is terminated within one (1) year following the Change in Control or the Employee elects to terminate his employment within six (6) months following the Change in Control, a severance payment will be made within 15 days of termination equal to the sum of two (2) times the sum of his then current Base Salary and Average Annual Bonus. In addition, the Employer shall continue, or cause to be continued, Employee's health insurance as in effect on the date of termination (including, if applicable, family coverage) for three (3) years. For purposes of this paragraph, the term "Change in Control" shall mean the following: (i) 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 (ii) The individuals who, as of the date hereof, are members of the Board of Directors of the Employer (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 (iii) Consummation by the Employer of (i) 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 of the Employer outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution or an agreement for the sale or other disposition of two-thirds or more of the consolidated assets of the Employer. 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 of the Employer is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Employer in substantially the same proportion as their ownership of stock of the Employer immediately prior to such acquisition. 4 (iv) If it is determined, in the opinion of the Employer's independent accountants, in consultation, if necessary, with the Employer's independent legal counsel, that any amount paid under this Agreement due to a Change in Control, either separately or in conjunction with any other payments, benefits and entitlements received by the Employee in respect of a Change in Control under any other plan or agreement under which the Employee participates or to which he is a party, would constitute an "Excess Parachute Payment" within the meaning of Section 280G of the Code, and thereby be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then in such event the Employer shall pay to the Employee a "grossing-up" amount equal to the amount of such Excise Tax, plus all federal and state income or other taxes with respect to the payment of the amount of such Excise Tax, including all such taxes with respect to any such grossing-up amount. If, at a later date, the Internal Revenue Service assesses a deficiency against the Employee for the Excise Tax which is greater than that which was determined at the time such amounts were paid, then the Employer shall pay to the Employee the amount of such unreimbursed Excise Tax plus any interest, penalties and reasonable professional fees or expenses incurred by the Employee as a result of such assessment, including all such taxes with respect to any such additional amount. The highest marginal tax rate applicable to individuals at the time of the payment of such amounts will be used for purposes of determining the federal and state income and other taxes with respect thereto. The Employer shall withhold from any amounts paid under this Agreement the amount of any Excise Tax or other federal, state or local taxes then required to be withheld with respect to the amount paid hereunder. Computations of the amount of any grossing-up supplemental compensation paid under this subparagraph shall be conclusively made by the Employer's independent accountants, in consultation, if necessary, with the Employer's independent legal counsel. If, after the Employee receives any gross-up payments or other amount pursuant to this Section 10, the Employee receives any refund with respect to the Excise Tax, the Employee shall promptly pay the Employer the amount of such refund within ten (10) days of receipt by the Employee. (v) If the Employer is not in compliance with its minimum capital requirements or if the payments required under this Section 10 would cause the Employer's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Employer is in capital compliance. At the election of the Employee, which election is to made within thirty (30) days of the Employee's termination, such payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the Employee's termination. In the event that no election is made, payment to the Employee will be made on a monthly basis during the remaining term of this Agreement. Such payments shall not be reduced in the event the Employee obtains other employment following the termination of employment by the Employer. Section 11. 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 for 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 (i) 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 (ii) 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. 5 Section 12. Payment of Legal Fees. The Employer is aware that after a Change in Control, management of the Employer or its successor could cause or attempt to cause the Employer to refuse to comply with its obligations under this Agreement, including the possible pursuit of litigation to avoid its obligations under this Agreement. In these circumstances, the purpose of this Agreement would be frustrated. It is the Employer's intention that the Employee not be required to incur the expenses associated with the enforcement of his rights under this Agreement, whether by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be granted to the Employee hereunder. It is the Employer's intention that the Employee not be forced to negotiate settlement of his rights under this Agreement under threat of incurring expenses. Accordingly, if after a Change in Control occurs it appears to the Employee that (a) the Employer has failed to comply with any of its obligations under this Agreement, or (b) the Employer or any other person has taken any action to avoid its obligations under this Agreement, the Employer irrevocably authorizes the Employee from time to time to retain counsel of his choice, at the expense of the Employer as provided in this Section 12, to represent the Employee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Employer or any director, officer, stockholder, or other person affiliated with the Employer, in any jurisdiction. Notwithstanding any existing or previous attorney-client relationship between the Employer and any counsel chosen by the Employee under this Section 12, the Employer irrevocably consents to the Employee entering into an attorney-client relationship with that counsel, and the Employer and the Employee agree that a confidential relationship shall exist between the Employee and that counsel. The fees and expenses of counsel selected from time to time by the Employee as provided in this Section 12 shall be paid or reimbursed to the Employee by the Employer on a regular, periodic basis upon presentation by the Employee of a statement or statements prepared by such counsel in accordance with such counsel's customary practices. The Employer's obligation to reimburse Employee for legal fees as provided under this Section 12 and any separate employment, deferred compensation, severance or other agreement between the Employee and the Employer shall not exceed $200,000 in the aggregate. Accordingly, the Employer's obligation to pay the Employee's legal fees provided by this Section 12 shall be offset by any legal fee reimbursement obligation the Employer may have with the Employee under any separate employment, deferred compensation, severance or other agreement between the Employee and the Employer. Section 13. Regulatory Suspension and Termination. (a) If the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the Employer's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, the Employer's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Employer shall (A) pay the Employee all of the compensation withheld while their contract obligations were suspended and (B) reinstate any of the obligations, which were suspended. 6 (b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Employer's affairs by an order issued under Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (c) If the Employer is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations of the Employer under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution by the Federal Deposit Insurance Corporation (the "FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Employer under the authority contained in Section 13(c) (12 U.S.C. ss. 1823(c)) of the Federal Deposit Insurance Act, as amended, or when the Employer is determined by the FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) (12 U.S.C. ss. 1828(k)) of the Federal Deposit Insurance Act as amended, and any regulations promulgated thereunder. Section 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. The Company agrees that it shall not merge or consolidate into or with another company, or reorganize, or sell substantially all its assets to another company, firm or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Company under this Agreement. (b) This Agreement is governed by and construed in accordance with the laws of the State of Iowa. (c) The provisions of Sections 8 and 9 shall survive the termination of this Agreement. (d) No amendment or modification of this Agreement is effective unless made in writing and signed by each party. (e) This Agreement may be signed in several counterparts, each of which will be an original and all of which will constitute one agreement. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above set forth. QCR HOLDINGS, INC. By: /s/ James J. Brownson /s/ Todd A. Gipple ------------------------------ ------------------------ James J. Brownson, Todd A. Gipple Chairman, Executive Committee of the Board By: /s/ Douglas M. Hultquist ------------------------------ Douglas M. Hultquist, President 8 EX-10 11 qcrexhbt1018.txt Exhibit 10.18 QCR HOLDINGS, INC., as Issuer INDENTURE Dated as of February 18, 2004 U.S. BANK NATIONAL ASSOCIATION, as Trustee JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES DUE 2034 1 TABLE OF CONTENTS Page ARTICLE I. Definitions.........................................................1 Section 1.1 Definitions.........................................1 ARTICLE II. Debentures.........................................................8 Section 2.1 Authentication and Dating...........................8 Section 2.2 Form of Trustee's Certificate of Authentication.....9 Section 2.3 Form and Denomination of Debentures.................9 Section 2.4 Execution of Debentures............................10 Section 2.5 Exchange and Registration of Transfer of Debentures.......................................10 Section 2.6 Mutilated, Destroyed, Lost or Stolen Debentures....12 Section 2.7 Temporary Debentures...............................13 Section 2.8 Payment of Interest and Additional Interest........14 Section 2.9 Cancellation of Debentures Paid, etc...............15 Section 2.10 Computation of Interest Rate.......................15 Section 2.11 Extension of Interest Payment Period...............17 Section 2.12 CUSIP Numbers......................................18 Section 2.13 Global Debentures..................................19 ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY..............................21 Section 3.1 Payment of Principal, Premium and Interest; Agreed Treatment of the Debentures...............21 Section 3.2 Offices for Notices and Payments, etc..............22 Section 3.3 Appointments to Fill Vacancies in Trustee's Office...........................................22 Section 3.4 Provision as to Paying Agent.......................22 Section 3.5 Certificate to Trustee.............................23 Section 3.6 Additional Sums....................................23 Section 3.7 Compliance with Consolidation Provisions...........24 Section 3.8 Limitation on Dividends............................24 Section 3.9 Covenants as to the Trust..........................24 Section 3.10 Additional Junior Indebtedness.....................25 ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE....................................................................25 Section 4.1 Securityholders' Lists.............................25 Section 4.2 Preservation and Disclosure of Lists...............25 ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT....................................................................27 Section 5.1 Events of Default..................................27 Section 5.2 Payment of Debentures on Default, Suit Therefor....28 Section 5.3 Application of Monies Collected by Trustee.........30 Section 5.4 Proceedings by Securityholders.....................30 Section 5.5 Proceedings by Trustee.............................31 Section 5.6 Remedies Cumulative and Continuing; Delay or Omission Not a Waiver............................31 Section 5.7 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders...................31 Section 5.8 Notice of Defaults.................................32 Section 5.9 Undertaking to Pay Costs...........................32 ARTICLE VI. CONCERNING THE TRUSTEE............................................33 Section 6.1 Duties and Responsibilities of Trustee.............33 Section 6.2 Reliance on Documents, Opinions, etc...............34 Section 6.3 No Responsibility for Recitals, etc................35 Section 6.4 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debentures..35 Section 6.5 Monies to be Held in Trust.........................35 Section 6.6 Compensation and Expenses of Trustee...............36 Section 6.7 Officers' Certificate as Evidence..................36 Section 6.8 Eligibility of Trustee.............................36 Section 6.9 Resignation or Removal of Trustee..................37 Section 6.10 Acceptance by Successor Trustee....................38 Section 6.11 Succession by Merger, etc..........................39 Section 6.12 Authenticating Agents..............................39 2 ARTICLE VII. CONCERNING THE SECURITYHOLDERS...................................40 Section 7.1 Action by Securityholders..........................40 Section 7.2 Proof of Execution by Securityholders..............41 Section 7.3 Who Are Deemed Absolute Owners.....................41 Section 7.4 Debentures Not Outstanding.........................42 Section 7.5 Revocation of Consents; Future Holders Bound.......42 ARTICLE VIII. SECURITYHOLDERS' MEETINGS.......................................42 Section 8.1 Purposes of Meetings...............................42 Section 8.2 Call of Meetings by Trustee........................43 Section 8.3 Call of Meetings by Company or Securityholders.....43 Section 8.4 Qualifications for Voting..........................43 Section 8.5 Regulations........................................43 Section 8.6 Voting.............................................44 Section 8.7 Quorum; Actions....................................44 ARTICLE IX. SUPPLEMENTAL INDENTURES...........................................45 Section 9.1 Supplemental Indentures without Consent of Securityholders..................................45 Section 9.2 Supplemental Indentures with Consent of Securityholders..................................46 Section 9.3 Effect of Supplemental Indentures..................47 Section 9.4 Notation on Debentures.............................47 Section 9.5 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee.......................48 ARTICLE X. REDEMPTION OF SECURITIES...........................................48 Section 10.1 Optional Redemption................................48 Section 10.2 Special Event Redemption...........................48 Section 10.3 Notice of Redemption; Selection of Debentures......48 Section 10.4 Payment of Debentures Called for Redemption........49 ARTICLE XI. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE.................49 Section 11.1 Company May Consolidate, etc., on Certain Terms....49 Section 11.2 Successor Entity to be Substituted.................50 Section 11.3 Opinion of Counsel to be Given to Trustee..........50 ARTICLE XII. SATISFACTION AND DISCHARGE OF INDENTURE..........................51 Section 12.1 Discharge of Indenture.............................51 Section 12.2 Deposited Monies to be Held in Trust by Trustee....51 Section 12.3 Paying Agent to Repay Monies Held..................51 Section 12.4 Return of Unclaimed Monies.........................52 ARTICLE XIII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS..................................................................52 Section 13.1 Indenture and Debentures Solely Corporate Obligations......................................52 ARTICLE XIV. MISCELLANEOUS PROVISIONS.........................................52 Section 14.1 Successors.........................................52 Section 14.2 Official Acts by Successor Entity..................52 Section 14.3 Surrender of Company Powers........................52 Section 14.4 Addresses for Notices, etc.........................53 Section 14.5 Governing Law......................................53 Section 14.6 Evidence of Compliance with Conditions Precedent...53 Section 14.7 Non-Business Days..................................53 Section 14.8 Table of Contents, Headings, etc...................54 Section 14.9 Execution in Counterparts..........................54 Section 14.10 Separability.......................................54 Section 14.11 Assignment.........................................54 Section 14.12 Acknowledgment of Rights...........................54 3 ARTICLE XV. SUBORDINATION OF DEBENTURES.......................................54 Section 15.1 Agreement to Subordinate...........................54 Section 15.2 Default on Senior Indebtedness.....................55 Section 15.3 Liquidation, Dissolution, Bankruptcy...............55 Section 15.4 Subrogation........................................56 Section 15.5 Trustee to Effectuate Subordination................57 Section 15.6 Notice by the Company..............................57 Section 15.7 Rights of the Trustee; Holders of Senior Indebtedness.....................................58 Section 15.8 Subordination May Not Be Impaired..................58 4 INDENTURE THIS INDENTURE, dated as of February 18, 2004, between QCR HOLDINGS, INC., a Delaware corporation (the "Company"), and U.S. Bank National Association, a national banking association organized under the laws of the United States of America, as debenture trustee (the "Trustee"). W I T N E S S E T H: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Junior Subordinated Deferrable Interest Debentures due 2034 (the "Debentures") under this Indenture to provide, among other things, for the execution and authentication, delivery and administration thereof, and the Company has duly authorized the execution of this Indenture; and WHEREAS, all acts and things necessary to make this Indenture a valid agreement according to its terms, have been done and performed; NOW, THEREFORE, This Indenture Witnesseth: In consideration of the premises, and the purchase of the Debentures by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debentures as follows: ARTICLE I. Definitions Section 1.1 Definitions. The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted in the United States at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Additional Interest" means interest, if any, that shall accrue on any interest on the Debentures the payment of which has not been made on the applicable Interest Payment Date and which shall accrue at the Interest Rate, compounded quarterly (to the extent permitted by law). "Additional Junior Indebtedness" means, without duplication and other than the Debentures, any indebtedness, liabilities or obligations of the Company, or any Affiliate of the Company, under debt securities (or guarantees in respect of debt securities) initially issued to any trust, or a trustee of a trust, partnership or other entity affiliated with the Company that is, directly or indirectly, a finance subsidiary (as such term is defined in Rule 3a-5 under the Investment Company Act of 1940) or other financing vehicle of the Company or any Affiliate of the Company in connection with the issuance by that entity of preferred securities or other securities that are eligible to qualify for Tier 1 capital treatment (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company (or, if the Company is not a bank holding company, such guidelines applied to the Company as if the Company were subject to such guidelines); provided, however, that the inability of the Company to treat all or any portion of the Additional Junior Indebtedness as Tier 1 capital shall not disqualify it as Additional Junior Indebtedness if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve now or may hereafter accord Tier 1 capital treatment (including the Debentures) in excess of the amount which may qualify for treatment as Tier 1 capital under applicable capital adequacy guidelines. "Additional Sums" has the meaning set forth in Section 3.6. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder. "Applicable Depository Procedures" means, with respect to any transfer or transaction involving a Global Debenture or beneficial interest therein, the rules and procedures of the Depositary for such Debenture, in each case to the extent applicable to such transaction and as in effect from time to time. 5 "Authenticating Agent" means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.12. "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors or the executive committee or any other duly authorized designated officers of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in the city in which the Company's principal place of business is located, New York City or Hartford, Connecticut are permitted or required by any applicable law to close. "Capital Securities" means undivided beneficial interests in the assets of QCR Holdings Statutory Trust II which rank pari passu with Common Securities issued by the Trust; provided, however, that upon the occurrence of an Event of Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Capital Securities Guarantee" means the guarantee agreement that the Company enters into with U.S. Bank National Association, as guarantee trustee, or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust. "Capital Treatment Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of any amendment to, or change (including any announced prospective change) in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that the Company will not, within 90 days of the date of such opinion be entitled to treat an amount equal to the aggregate liquidation amount of the Debentures as "Tier 1 Capital" (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company (or if the Company is not a bank holding company, such guidelines applied to the Company as if the Company were subject to such guidelines); provided, however, that the inability of the Company to treat all or any portion of the liquidation amount of the Debentures as Tier 1 Capital shall not constitute the basis for a Capital Treatment Event, if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve or OTS, as applicable, may now or hereafter accord Tier 1 Capital treatment in excess of the amount which may now or hereafter qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines; provided further, however, that the distribution of Debentures in connection with the liquidation of the Trust shall not in and of itself constitute a Capital Treatment Event unless such liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Certificate" means a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company. "Common Securities" means undivided beneficial interests in the assets of the Trust which rank pari passu with Capital Securities issued by the Trust; provided, however, that upon the occurrence of an Event of Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Company" means QCR Holdings, Inc., a Delaware corporation, and, subject to the provisions of Article XI, shall include its successors and assigns. "Company Order" means a written order signed in the name of the Company by its Chairman of the Board of Directors, Vice Chairman, Chief Executive Officer, President, Chief Financial Officer, one of its Managing Directors or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents, and delivered to the Trustee. 6 "Coupon Rate" has the meaning set forth in Section 2.8. "Debenture" or "Debentures" has the meaning stated in the first recital of this Indenture. "Debenture Register" has the meaning specified in Section 2.5. "Declaration" means the Amended and Restated Declaration of Trust of the Trust, as amended or supplemented from time to time. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Interest" has the meaning set forth in Section 2.8. "Depositary" means an organization registered as a clearing agency under the Exchange Act that is designated as Depositary by the Company or any successor thereto. DTC will be the initial Depositary. "Distribution Period" has the meaning set forth in Section 2.8. "Determination Date" has the meaning set forth in Section 2.10. "Depository Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Depositary effects book-entry transfers and pledges of securities deposited with the Depositary. "DTC" means The Depository Trust Company, a New York corporation. --- "Event of Default" means any event specified in Section 5.1, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Extension Period" has the meaning set forth in Section 2.11. "Federal Reserve" means the Board of Governors of the Federal Reserve System and any successor federal agency that is primarily responsible for regulating the activities of bank holding companies. "Global Debenture" means a security that evidences all or part of the Debentures, the ownership and transfers of which shall be made through book entries by a Depositary. "Indenture" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both. "Institutional Trustee" has the meaning set forth in the Declaration. "Interest Payment Date" means each March 31, June 30, September 30 and December 31 during the term of this Indenture and on the Maturity Date. "Interest Rate" means for the period beginning on (and including) the date of original issuance and ending on (but excluding) March 31, 2011 the fixed rate per annum of 6.93% and for each Distribution Period thereafter, the Coupon Rate. "Investment Company Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Debentures. "Liquidation Amount" means the stated amount of $1,000.00 per Trust Security. "Maturity Date" means February 18, 2034. 7 "Officers' Certificate" means a certificate signed by the Chairman of the Board, the Vice Chairman, the Chief Executive Officer, the President, the Chief Financial Officer, any Managing Director or any Vice President, and by the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section. "Opinion of Counsel" means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section. "OTS" means the Office of Thrift Supervision and any successor federal agency that is primarily responsible for regulating the activities of savings and loan holding companies. "Outstanding" means, when used with reference to Debentures, subject to the provisions of Section 7.4, as of any particular time, all Debentures authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except: (a) Debentures theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Debentures, or portions thereof, for the payment or redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, however, that, if such Debentures, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Section 10.3 or provision satisfactory to the Trustee shall have been made for giving such notice; (c) Debentures paid pursuant to Section 2.6 or in lieu of or in substitution for which other Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Company and the Trustee is presented that any such Debentures are held by bona fide holders in due course; and (d) Debentures held in accordance with Section 7.4 hereof. "Person" means an individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture. "Principal Office of the Trustee," or other similar term, means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at the time of the execution of this Indenture shall be 225 Asylum Street, Goodwin Square, Hartford, Connecticut 06103. "Redemption Date" means the Interest Payment Date fixed for the redemption of Debentures. "Redemption Price" means 100% of the principal amount of the Debentures being redeemed, plus accrued and unpaid interest on such Debentures to the Redemption Date; provided, however, that if the redemption is the result of a Capital Treatment Event that occurs on or prior to June 1, 2004, the Redemption Price shall be 98% of the principal amount of the Debentures being redeemed, plus accrued and unpaid interest on such Debentures to the Redemption Date. 8 "Responsible Officer" means, with respect to the Trustee, any officer within the Principal Office of the Trustee, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Securities Act" means the Securities Act of 1933, as amended from time to time or any successor legislation. "Securityholder," "holder of Debentures," or other similar terms, means any Person in whose name at the time a particular Debenture is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. "Senior Indebtedness" means, with respect to the Company, whether incurred on or prior to the date of this Indenture or thereafter incurred, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement; (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker's acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company). Notwithstanding the foregoing, "Senior Indebtedness" shall not include (1) any Additional Junior Indebtedness, (2) Debentures issued pursuant to this Indenture and guarantees in respect of such Debentures, (3) trade accounts payable of the Company arising in the ordinary course of business (such trade accounts payable being pari passu in right of payment to the Debentures), or (4) obligations with respect to which (a) in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are pari passu, junior or otherwise not superior in right of payment to the Debentures and (b) the Company, prior to the issuance thereof, has notified (and, if then required under the applicable guidelines of the regulating entity, has received approval from) the Federal Reserve (if the Company is a bank holding company) or the OTS (if the Company is a savings and loan holding company). Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness. "Special Event" means any of a Capital Treatment Event, an Investment Company Event or a Tax Event. "Subsidiary" means with respect to any Person, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture, limited liability company or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. 9 "Tax Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, field service advice, regulatory procedure, notice or announcement, including any notice or announcement of intent to adopt such procedures or regulations (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) interest payable by the Company on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. Provided, however, if the Company may eliminate the results described in (i) through (iii) of such Administrative Action or judicial decision interpreting or applying such laws or regulations by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure which has no adverse effect on the Company, the Trustee, the Trust or the Holders of the Capital Securities issued by the Trust, such Administrative Action or judicial decision shall not be deemed a Tax Event. "3-Month LIBOR" has the meaning set forth in Section 2.10. "Telerate Page 3750" has the meaning set forth in Section 2.10. "Trust" shall mean QCR Holdings Statutory Trust II, a Connecticut statutory trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debentures under this Indenture, of which the Company is the sponsor. "Trust Agreement" means the Amended and Restated Declaration of Trust, dated February 18, 2004, by and among U.S. Bank National Association, as Institutional Trustee, the Company, as Sponsor, and the Administrators named therein, and any amendments or supplements thereto. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Trust Securities" means Common Securities and Capital Securities of the Trust. "Trustee" means U.S. Bank National Association, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. ARTICLE II. Debentures Section 2.1 Authentication and Dating. Upon the execution and delivery of this Indenture, or from time to time thereafter, Debentures in an aggregate principal amount not in excess of $12,372,000 may be executed and delivered by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debentures to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Vice Chairman, the Chief Executive Officer, the President, the Chief Financial Officer, one of its Managing Directors or one of its Vice Presidents without any further action by the Company hereunder. In authenticating such Debentures, and accepting the additional responsibilities under this Indenture in relation to such Debentures, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon: (a) a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company, as the case may be, and 10 (b) an Opinion of Counsel prepared in accordance with Section 14.6 which shall also state: (1) that such Debentures, when authenticated and delivered by the Trustee and issued by the Company in each case in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, subject to or limited by applicable bankruptcy, insolvency, reorganization, conservatorship, receivership, moratorium and other statutory or decisional laws relating to or affecting creditors' rights or the reorganization of financial institutions (including, without limitation, preference and fraudulent conveyance or transfer laws), heretofore or hereafter enacted or in effect, affecting the rights of creditors generally; and (2) that all laws and requirements in respect of the execution and delivery by the Company of the Debentures have been complied with and that authentication and delivery of the Debentures by the Trustee will not violate the terms of this Indenture. The Trustee shall have the right to decline to authenticate and deliver any Debentures under this Section if the Trustee, being advised in writing by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing holders. The definitive Debentures shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debentures, as evidenced by their execution of such Debentures. Section 2.2 Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication on all Debentures shall be in substantially the following form: This is one of the Debentures referred to in the within-mentioned Indenture. U.S. Bank National Association, as Trustee By ---------------- Authorized Signer Section 2.3 Form and Denomination of Debentures. The Debentures shall be substantially in the form of Exhibit A attached hereto. The Debentures shall be in registered, certificated form without coupons and in minimum denominations of $500,000.00 and any multiple of $1,000.00 in excess thereof. Any attempted transfer of the Debentures in a block having an aggregate principal amount of less than $500,000.00 shall be deemed to be void and of no legal effect whatsoever. Any such purported transferee shall be deemed not to be a holder of such Debentures for any purpose, including, but not limited to the receipt of payments on such Debentures, and such purported transferee shall be deemed to have no interest whatsoever in such Debentures. The Debentures shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Section 2.4 Execution of Debentures. The Debentures shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Vice Chairman, Chief Executive Officer, President, Chief Financial Officer, one of its Managing Directors or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents. Only such Debentures as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized signer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debenture executed by the Company shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Debentures shall cease to be such officer before the Debentures so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debentures nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debentures had not ceased to be such officer of the Company; and any Debenture may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debenture, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. 11 Every Debenture shall be dated the date of its authentication. Section 2.5 Exchange and Registration of Transfer of Debentures. The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.2, a register (the "Debenture Register") for the Debentures issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debentures as in this Article II provided. The Debenture Register shall be in written form or in any other form capable of being converted into written form within a reasonable time. Debentures to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.2, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debenture or Debentures which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount. Registration or registration of transfer of any Debenture by the Trustee or by any agent of the Company appointed pursuant to Section 3.2, and delivery of such Debenture, shall be deemed to complete the registration or registration of transfer of such Debenture. All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of any Debenture for a period of 15 days next preceding the date of selection of Debentures for redemption. Notwithstanding anything herein to the contrary, Debentures may not be transferred except in compliance with the restricted securities legend set forth below, unless otherwise determined by the Company, upon the advice of counsel experienced in securities law, in accordance with applicable law: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. 12 THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $500,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $500,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. Section 2.6 Mutilated, Destroyed, Lost or Stolen Debentures. In case any Debenture shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debenture bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in substitution for the Debenture so destroyed, lost or stolen. In every case the applicant for a substituted Debenture shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debenture and of the ownership thereof. The Trustee may authenticate any such substituted Debenture and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debenture which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debenture) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Debenture and of the ownership thereof. Every substituted Debenture issued pursuant to the provisions of this Section 2.6 by virtue of the fact that any such Debenture is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. All Debentures shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. 13 Section 2.7 Temporary Debentures. Pending the preparation of definitive Debentures, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debentures that are typed, printed or lithographed. Temporary Debentures shall be issuable in any authorized denomination, and substantially in the form of the definitive Debentures in lieu of which they are issued but with such omissions, insertions and variations as may be appropriate for temporary Debentures, all as may be determined by the Company. Every such temporary Debenture shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debentures. Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debentures and thereupon any or all temporary Debentures may be surrendered in exchange therefor, at the principal corporate trust office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.2, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debentures a like aggregate principal amount of such definitive Debentures. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debentures shall in all respects be entitled to the same benefits under this Indenture as definitive Debentures authenticated and delivered hereunder. Section 2.8 Payment of Interest and Additional Interest. Interest at the Interest Rate and any Additional Interest on any Debenture that is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Debentures shall be paid to the Person in whose name said Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment except that interest and any Additional Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. In the event that any Debenture or portion thereof is called for redemption and the Redemption Date is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Debenture will be paid upon presentation and surrender of such Debenture. Each Debenture shall bear interest (i) for the period beginning on (and including) the date of original issuance and ending on (but excluding) March 31, 2011 at a fixed rate per annum of 6.93%, and (ii) for each successive period beginning on (and including) March 31, 2011, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each, a "Distribution Period") at a rate per annum equal to the 3-Month LIBOR, determined as described in Section 2.10, plus 2.85% (the "Coupon Rate"), applied to the principal amount thereof, until the principal thereof becomes due and payable, and on any overdue principal and to the extent that payment of such interest is enforceable under applicable law (without duplication) on any overdue installment of interest at the Interest Rate compounded quarterly. Interest shall be payable (subject to any relevant Extension Period) quarterly in arrears on each Interest Payment Date with the first installment of interest to be paid on March 31, 2004. In the event that the 3-Month LIBOR is indeterminable by the methods described in Section 2.10, the Coupon Rate shall equal the 3-Month LIBOR in effect on the most recent Determination Date (whether or not 3-Month LIBOR for such period was in fact determined on such Determination Date) plus 2.85%. 14 Any interest on any Debenture, including Additional Interest, that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing at least 25 days prior to the date of the proposed payment of the amount of Defaulted Interest proposed to be paid on each such Debenture and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payments. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at its address as it appears in the Debenture Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable. The Company may make payment of any Defaulted Interest on any Debentures in any other lawful manner after notice given by the Company to the Trustee of the proposed payment method, provided, however, the Trustee in its sole discretion deems such payment method to be practical. Any interest scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debentures. The term "regular record date" as used in this Section shall mean the close of business on the 15th day next preceding the applicable Interest Payment Date. Subject to the foregoing provisions of this Section, each Debenture delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debenture. Section 2.9 Cancellation of Debentures Paid, etc. All Debentures surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debentures shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debentures canceled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy all canceled Debentures unless the Company otherwise directs the Trustee in writing. If the Company shall acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are surrendered to the Trustee for cancellation. Section 2.10 Computation of Interest Rate. The amount of interest payable for the Distribution Period commencing on March 31, 2004 and each succeeding Distribution Period will be calculated by applying the Interest Rate to the principal amount outstanding at the commencement of the Distribution Period and multiplying each such amount by the actual number of days in the Distribution Period concerned divided by 360. In the event that any date on which interest is payable on the Debentures is not a Business Day, then payment of interest payable on such date shall be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on the date such payment was originally payable. All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% or .09876545 being rounded to 9.87655% or .0987655) and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent, with one-half cent being rounded upward. 15 (a) "3-Month LIBOR" means the London interbank offered rate for three-month, U.S. dollar deposits determined by the Trustee in the following order of priority: (1) the rate (expressed as a percentage per annum) for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the particular Determination Date (as defined below). "Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollars deposits; (2) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. (London time) on the Determination Date, 3-Month LIBOR will be the arithmetic mean of the rates (expressed as percentages per annum) for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that appear on Reuters Monitor Money Rates Page LIBO ("Reuters Page LIBO") as of 11:00 a.m. (London time) on such Determination Date; (3) if such rate does not appear on Reuters Page LIBO as of 11:00 a.m. (London time) on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (4) if fewer than two such quotations are provided as requested in clause (3) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars of an amount equal or comparable to the aggregate liquidation amount of the Debentures as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations. If the rate for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that initially appears on Telerate Page 3750 or Reuters Page LIBO, as the case may be, as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate page 3750 or Reuters Page LIBO, as the case may be, by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. (5) The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the particular Distribution Period for which a Coupon Rate is being determined. (b) The Trustee shall notify the Company, the Institutional Trustee and any securities exchange or interdealer quotation system on which the Capital Securities are listed, of the Coupon Rate and the Determination Date for each Distribution Period, in each case as soon as practicable after the determination thereof but in no event later than the thirtieth (30th) Business Day of the relevant Distribution Period. Failure to notify the Company, the Institutional Trustee or any securities exchange or interdealer quotation system, or any defect in said notice, shall not affect the obligation of the Company to make payment on the Debentures at the applicable Coupon Rate. Any error in the calculation of the Coupon Rate by the Institutional Trustee may be corrected at any time by notice delivered as above provided. Upon the request of a holder of a Debenture, the Trustee shall provide the Coupon Rate then in effect and, if determined, the Coupon Rate for the next Distribution Period. 16 (c) Subject to the corrective rights set forth above, all certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions relating, to the payment and calculation of interest on the Debentures and distributions on the Capital Securities by the Trustee or the Institutional Trustee will (in the absence of willful default, bad faith or manifest error) be final, conclusive and binding on the Trust, the Company and all of the holders of the Debentures and the Capital Securities, and no liability shall (in the absence of willful default, bad faith or manifest error) attach to the Trustee or the Institutional Trustee in connection with the exercise or non-exercise by either of them or their respective powers, duties and discretion. Section 2.11 Extension of Interest Payment Period. So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest (including Additional Interest) shall be due and payable. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date; provided, further, however, that during any such Extension Period, the Company shall not and shall not permit any Affiliate to (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's or such Affiliate's capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (ii) make any payment of principal or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (i) or (ii) above, (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (f) payments under the Capital Securities Guarantee). Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest to the extent permitted by applicable law. The Company must give the Trustee notice of its election to begin or extend such Extension Period at least 5 Business Days prior to the regular record date (as such term is used in Section 2.8) immediately preceding the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period. 17 Section 2.12 CUSIP Numbers. The Company in issuing the Debentures may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to Securityholders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debentures or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debentures, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers. Section 2.13 Global Debentures. (a) Upon the election of the holder of Outstanding Debentures, which election need not be in writing, the Debentures owned by such holder shall be issued in the form of one or more Global Debentures registered in the name of the Depositary or its nominee. Each Global Debenture issued under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global Debenture or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Debenture shall constitute a single Debenture for all purposes of this Indenture. (b) Notwithstanding any other provision in this Indenture, no Global Debenture may be exchanged in whole or in part for Debentures registered, and no transfer of a Global Debenture in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Debenture or a nominee thereof unless (i) such Depositary advises the Trustee and the Company in writing that such Depositary is no longer willing or able to properly discharge its responsibilities as Depositary with respect to such Global Debenture, and no qualified successor is appointed by the Company within ninety (90) days of receipt by the Company of such notice, (ii) such Depositary ceases to be a clearing agency registered under the Exchange Act and no successor is appointed by the Company within ninety (90) days after obtaining knowledge of such event, (iii) the Company executes and delivers to the Trustee a Company Order stating that the Company elects to terminate the book-entry system through the Depositary or (iv) an Event of Default shall have occurred and be continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Trustee shall notify the Depositary and instruct the Depositary to notify all owners of beneficial interests in such Global Debenture of the occurrence of such event and of the availability of Debentures to such owners of beneficial interests requesting the same. Upon the issuance of such Debentures and the registration in the Debenture Register of such Debentures in the names of the Holders of the beneficial interests therein, the Trustee shall recognize such holders of beneficial interests as Holders. (c) If any Global Debenture is to be exchanged for other Debentures or canceled in part, or if another Debenture is to be exchanged in whole or in part for a beneficial interest in any Global Debenture, then either (i) such Global Debenture shall be so surrendered for exchange or cancellation as provided in this Article II or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Debenture to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Debenture registrar, whereupon the Trustee, in accordance with the Applicable Depository Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Debenture by the Depositary, accompanied by registration instructions, the Company shall execute and the Trustee shall authenticate and deliver any Debentures issuable in exchange for such Global Debenture (or any portion thereof) in accordance with the instructions of the Depositary. The Trustee shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions. (d) Every Debenture authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Debenture or any portion thereof shall be authenticated and delivered in the form of, and shall be, a Global Debenture, unless such Debenture is registered in the name of a Person other than the Depositary for such Global Debenture or a nominee thereof. 18 (e) Debentures distributed to holders of Book-Entry Capital Securities (as defined in the Trust Agreement) upon the dissolution of the Trust shall be distributed in the form of one or more Global Debentures registered in the name of a Depositary or its nominee, and deposited with the Debentures registrar, as custodian for such Depositary, or with such Depositary, for credit by the Depositary to the respective accounts of the beneficial owners of the Debentures represented thereby (or such other accounts as they may direct). Debentures distributed to holders of Capital Securities other than Book-Entry Capital Securities upon the dissolution of the Trust shall not be issued in the form of a Global Debenture or any other form intended to facilitate book-entry trading in beneficial interests in such Debentures. (f) The Depositary or its nominee, as the registered owner of a Global Debenture, shall be the Holder of such Global Debenture for all purposes under this Indenture and the Debentures, and owners of beneficial interests in a Global Debenture shall hold such interests pursuant to the Applicable Depository Procedures. Accordingly, any such owner's beneficial interest in a Global Debenture shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Depositary Participants. The Debentures registrar and the Trustee shall be entitled to deal with the Depositary for all purposes of this Indenture relating to a Global Debenture (including the payment of principal and interest thereon and the giving of instructions or directions by owners of beneficial interests therein and the giving of notices) as the sole Holder of the Debenture and shall have no obligations to the owners of beneficial interests therein. Neither the Trustee nor the Debentures registrar shall have any liability in respect of any transfers effected by the Depositary. (g) The rights of owners of beneficial interests in a Global Debenture shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such owners and the Depositary and/or its Depositary Participants. (h) No holder of any beneficial interest in any Global Debenture held on its behalf by a Depositary shall have any rights under this Indenture with respect to such Global Debenture, and such Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the owner of such Global Debenture for all purposes whatsoever. None of the Company, the Trustee nor any agent of the Company or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Debenture or maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominee) as holder of any Debenture. 19 ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY Section 3.1 Payment of Principal, Premium and Interest; Agreed Treatment of the Debentures. (a) The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and Interest and any Additional Interest on the Debentures at the place, at the respective times and in the manner provided in this Indenture and the Debentures. Each installment of interest on the Debentures may be paid (i) by mailing checks for such interest payable to the order of the holder of Debentures entitled thereto as they appear on the registry books of the Company if a request for a wire transfer has not been received by the Company or (ii) by wire transfer to any account with a banking institution located in the United States designated in writing by such Person to the paying agent no later than the related record date. Notwithstanding the foregoing, so long as the Institutional Trustee, not in its individual capacity but solely as Institutional Trustee for QCR Holdings Statutory Trust II, is the holder of the Debentures, the payment of the principal and Interest on the Debentures shall be made by wire transfer of immediately available funds to the Institutional Trustee, to be received not later than 1:00 p.m., New York City time, on the Interest Payment Date of such payment at the Principal Office of the Trustee for distribution to the holders of the Capital Securities. Notwithstanding any other provision of this Indenture to the contrary, the Institutional Trustee shall not be required to make, or cause to be made, distributions to the holders of the Capital Securities, as aforesaid prior to the first Business Day on which it is practicable for the Institutional Trustee to do so in view of the time of day when the funds to be so transferred were received by it if such funds were received after 1:00 p.m., New York City time. (b) The Company will treat the Debentures as indebtedness, and the amounts payable in respect of the principal amount of such Debentures as interest, for all United States federal income tax purposes. All payments in respect of such Debentures will be made free and clear of United States withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W8 BEN (or any substitute or successor form) establishing its non-United States status for United States federal income tax purposes. (c) As of the date of this Indenture, the Company has no present intention to exercise its right under Section 2.11 to defer payments of interest on the Debentures by commencing an Extension Period. (d) As of the date of this Indenture, the Company believes that the likelihood that it would exercise its right under Section 2.11 to defer payments of interest on the Debentures by commencing an Extension Period at any time during which the Debentures are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase or make a liquidation payment with respect to, any of its outstanding equity and on the Company's ability to make any payments of principal of or interest on, or repurchase or redeem, any of its debt securities that rank pari passu in all respects with (or junior in interest to) the Debentures. Section 3.2 Offices for Notices and Payments, etc. So long as any of the Debentures remain outstanding, the Company will maintain in Hartford, Connecticut, an office or agency where the Debentures may be presented for payment, an office or agency where the Debentures may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Debentures or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.5, such office or agency for all of the above purposes shall be the office or agency of the Trustee. In case the Company shall fail to maintain any such office or agency in Hartford, Connecticut, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee. 20 In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Hartford, Connecticut, where the Debentures may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and, the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Hartford, Connecticut, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. Section 3.3 Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.9, a Trustee, so that there shall at all times be a Trustee hereunder. Section 3.4 Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.4: (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest, if any, on the Debentures (whether such sums have been paid to it by the Company or by any other obligor on the Debentures) in trust for the benefit of the holders of the Debentures; (2) that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debentures) to make any payment of the principal of and premium, if any, or interest, if any, on the Debentures when the same shall be due and payable; and (3) that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest, if any, on the Debentures, set aside, segregate and hold in trust for the benefit of the holders of the Debentures a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debentures) to make any payment of the principal of and premium, if any, or interest, if any, on the Debentures when the same shall become due and payable. Whenever the Company shall have one or more paying agents for the Debentures, it will, on or prior to each due date of the principal of and premium, if any, or interest, if any, on the Debentures, deposit with a paying agent a sum sufficient to pay the principal, premium or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act. (c) Anything in this Section 3.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Debentures, or for any other reason pay, or direct any paying agent to pay to the Trustee all sums held in trust by the Company or any such paying agent, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.4 is subject to Sections 12.3 and 12.4. Section 3.5 Certificate to Trustee. The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year, so long as Debentures are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default during such fiscal year by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature and status thereof. The Trustee shall provide a copy of such Certificate to any collateral manager for a securitized pool that owns any of the Capital Securities upon request by or on behalf of such manager. 21 Section 3.6 Additional Sums. If and for so long as the Trust is the holder of all Debentures and the Trust is required to pay any additional taxes, duties, assessments or other governmental charges as a result of a Tax Event, the Company will pay such additional amounts ("Additional Sums") on the Debentures as shall be required so that the net amounts received and retained by the Trust after paying taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust would have received if no such taxes, duties, assessments or other governmental charges had been imposed. Whenever in this Indenture or the Debentures there is a reference in any context to the payment of principal of or interest on the Debentures, such mention shall be deemed to include mention of payments of the Additional Sums provided for in this paragraph to the extent that, in such context, Additional Sums are, were or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Sums in those provisions hereof where such express mention is not made; provided, however, that the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Sums that may be due and payable. Section 3.7 Compliance with Consolidation Provisions. The Company will not, while any of the Debentures remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article XI hereof are complied with. Section 3.8 Limitation on Dividends. If Debentures are initially issued to the Trust or a trustee of such trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such period, or any extension thereof, shall be continuing, then the Company shall not, and shall not allow any Affiliate of the Company to, (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or its Affiliates' capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, if any, (2) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (3) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee). Section 3.9 Covenants as to the Trust. For so long as the Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company's ownership of such Common Securities. The Company, as owner of the Common Securities, shall, except in connection with a distribution of Debentures to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, take all steps necessary for the Company to cause the Trust (a) to remain a statutory trust, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes, and (c) to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debentures. 22 Section 3.10 Additional Junior Indebtedness. The Company shall not, and it shall not cause or permit any Affiliate of the Company to, incur, issue or be obligated on any Additional Junior Indebtedness, either directly or indirectly, by way of guarantee, suretyship or otherwise, other than: (i) Additional Junior Indebtedness that, by its terms, is expressly stated to be either junior and subordinate or pari passu in all respects to the Debentures, and (ii) Additional Junior Indebtedness of which the Company has notified (and, if then required under the applicable guidelines of the regulating entity, has received approval from) the Federal Reserve, if the Company is a bank holding company, or the OTS, if the Company is a savings and loan holding company. ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE Section 4.1 Securityholders' Lists. The Company covenants and agrees that it will furnish or caused to be furnished to the Trustee: (a) on each regular record date for the Debentures, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of the Debentures as of such record date; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; except that no such lists need be furnished under this Section 4.1 so long as the Trustee is in possession thereof by reason of its acting as Debenture registrar. Section 4.2 Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debentures (1) contained in the most recent list furnished to it as provided in Section 4.1 or (2) received by it in the capacity of Debentures registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished. (b) In case three or more holders of Debentures (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Debenture for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debentures with respect to their rights under this Indenture or under such Debentures and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within 5 Business Days after the receipt of such application, at its election, either: (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, or (2) inform such applicants as to the approximate number of holders of Debentures whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. 23 If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Debentures, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Debentures, by receiving and holding the same, agrees with Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debentures in accordance with the provisions of subsection (b) of this Section 4.2, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT Section 5.1 Events of Default. "Event of Default" wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the Company defaults in the payment of any interest upon any Debenture when it becomes due and payable, and fails to cure such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms of this Indenture shall not constitute a default in the payment of interest for this purpose; or (b) the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debentures as and when the same shall become due and payable either at maturity, upon redemption, by declaration of acceleration or otherwise; or (c) the Company defaults in the performance of, or breaches, any of its covenants or agreements in this Indenture or in the terms of the Debentures established as contemplated in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the Outstanding Debentures, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) a court of competent jurisdiction shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or 24 (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (f) the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (i) the distribution of the Debentures to holders of such Trust Securities in liquidation of their interests in the Trust, (ii) the redemption of all of the outstanding Trust Securities or (iii) certain mergers, consolidations or amalgamations, each as permitted by the Declaration. If an Event of Default occurs and is continuing with respect to the Debentures, then, and in each and every such case, unless the principal of the Debentures shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then Outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debentures and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debentures and the principal of and premium, if any, on the Debentures which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and Additional Interest) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.6, and if any and all Events of Default under this Indenture, other than the non-payment of the principal of or premium, if any, on Debentures which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of the Debentures then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debentures shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debentures shall continue as though no such proceeding had been taken. Section 5.2 Payment of Debentures on Default, Suit Therefor. The Company covenants that upon the occurrence of an Event of Default pursuant to Section 5.1(a) or Section 5.1(b) then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debentures the whole amount that then shall have become due and payable on all Debentures for principal and premium, if any, or interest, or both, as the case may be, with Additional Interest accrued on the Debentures (to the extent that payment of such interest is enforceable under applicable law and, if the Debentures are held by the Trust or a trustee of such Trust, without duplication of any other amounts paid by the Trust or a trustee in respect thereof); and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.6. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debentures and collect in the manner provided by law out of the property of the Company or any other obligor on such Debentures wherever situated the monies adjudged or decreed to be payable. 25 In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debentures under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debentures, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.2, shall be entitled and empowered, by intervention in such proceedings or otherwise, (i) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Debentures and, in case of any judicial proceedings, (ii) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.6), and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debentures, or to the creditors or property of the Company or such other obligor, and unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debentures in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, (iii) to collect and receive any monies or other property payable or deliverable on any such claims, and (iv) to distribute the same after the deduction of its charges and expenses. Any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.6. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Debentures, may be enforced by the Trustee without the possession of any of the Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debentures. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the holders of the Debentures, and it shall not be necessary to make any holders of the Debentures parties to any such proceedings. Section 5.3 Application of Monies Collected by Trustee. Any monies collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Debentures in respect of which monies have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.6; 26 Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Debentures for principal (and premium, if any), and interest on the Debentures, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debentures for principal (and premium, if any) and interest, respectively; and Fourth: The balance, if any, to the Company. Section 5.4 Proceedings by Securityholders. No holder of any Debenture shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debentures and unless the holders of not less than 25% in aggregate principal amount of the Debentures then Outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debenture to receive payment of the principal of, premium, if any, and interest, on such Debenture when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder and by accepting a Debenture hereunder it is expressly understood, intended and covenanted by the taker and holder of every Debenture with every other such taker and holder and the Trustee, that no one or more holders of Debentures shall have any right in any manner whatsoever by virtue or by availing itself of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debentures. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Section 5.5 Proceedings by Trustee. In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Section 5.6 Remedies Cumulative and Continuing; Delay or Omission Not a Waiver. Except as otherwise provided in Section 2.6, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debentures, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Debentures, and no delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.4, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. No delay or omission of the Trustee or any Securityholder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to any Securityholder may be exercised from time to time, and as often as may be deemed expedient, by the Trustee (in accordance with its duties under Section 6.1 hereof) or by such holder, as the case may be. 27 Section 5.7 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. The holders of a majority in aggregate principal amount of the Debentures affected (voting as one class) at the time Outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debentures; provided, however, that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability. The holders of a majority in aggregate principal amount of the Debentures at the time outstanding may on behalf of the holders of all of the Debentures waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debentures, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9; provided, however, that if the Debentures are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver, provided, further, that if the consent of the holder of each Outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section, said default or Event of Default shall for all purposes of the Debentures and this Indenture be deemed to have been cured and to be not continuing. Section 5.8 Notice of Defaults. The Trustee shall, within 90 days after the actual knowledge by a Responsible Officer of the Trustee of the occurrence of a Default with respect to the Debentures, mail to all Securityholders, as the names and addresses of such holders appear upon the Debenture Register, notice of all Defaults with respect to the Debentures known to the Trustee, unless such Defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.8 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.1, not including periods of grace, if any, provided for therein); provided, however, that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Debentures, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders. Section 5.9 Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Debenture by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, however, that the provisions of this Section 5.9 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Debentures Outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of, or premium, if any, or interest on any Debenture against the Company on or after the same shall have become due and payable. ARTICLE VI. CONCERNING THE TRUSTEE 28 Section 6.1 Duties and Responsibilities of Trustee. With respect to the holders of Debentures issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debentures and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debentures, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default with respect to the Debentures has occurred (which has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default with respect to Debentures and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee with respect to Debentures shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Debentures as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.7, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is ground for believing that the repayment of such funds or liability is not assured to it under the terms of this Indenture or indemnity satisfactory to the Trustee against such risk is not reasonably assured to it. The Trustee shall provide the Company with written notice of the Interest Rate for each Distribution Period no later than the thirtieth (30th) Business Day of the relevant Distribution Period. Section 6.2 Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.1: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed), and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; 29 (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debentures (that has not been cured or waived) to exercise with respect to Debentures such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in aggregate principal amount of the outstanding Debentures affected thereby; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care; and (h) with the exceptions of defaults under Sections 5.1(a) or 5.1(b), the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debentures unless a written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debentures or by any holder of the Debentures. Section 6.3 No Responsibility for Recitals, etc. The recitals contained herein and in the Debentures (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debentures. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debentures or the proceeds of any Debentures authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. Section 6.4 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debentures. The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Debenture registrar, in its individual or any other capacity, may become the owner or pledgee of Debentures with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Debenture registrar. Section 6.5 Monies to be Held in Trust. Subject to the provisions of Section 12.4, all monies received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such monies shall be paid from time to time upon the written order of the Company, signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, a Managing Director, a Vice President, the Treasurer or an Assistant Treasurer of the Company. 30 Section 6.6 Compensation and Expenses of Trustee. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or willful misconduct. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee) incurred without negligence or willful misconduct on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability. The obligations of the Company under this Section 6.6 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Sections 5.1(d), 5.1(e) or 5.1(f), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture. Notwithstanding anything in this Indenture or any Debenture to the contrary, the Trustee shall have no obligation whatsoever to advance funds to pay any principal of or interest on or other amounts with respect to the Debentures or otherwise advance funds to or on behalf of the Company. Section 6.7 Officers' Certificate as Evidence. Except as otherwise provided in Sections 6.1 and 6.2, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or willful misconduct on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. Section 6.8 Eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person authorized under such laws to exercise corporate trust powers, having (or whose obligations under this Indenture are guaranteed by an affiliate having) a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000.00) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.8 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.8, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.9. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner described by this Indenture. 31 Section 6.9 Resignation or Removal of Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company's expense, to the holders of the Debentures at their addresses as they shall appear on the Debenture Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor Trustee or Trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee. If no successor Trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, or any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, subject to the provisions of Section 5.9, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee. (b) In case at any time any of the following shall occur -- (1) the Trustee shall fail to comply with the provisions of Section 6.8 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.8 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, - then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.9, any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint successor Trustee. (c) Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debentures at the time Outstanding may at any time remove the Trustee and nominate a successor Trustee, which shall be deemed appointed as successor Trustee unless within ten (10) Business Days after such nomination the Company objects thereto, in which case, or in the case of a failure by such holders to nominate a successor Trustee, the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.9 provided, may petition any court of competent jurisdiction for an appointment of a successor. (d) Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor Trustee as provided in Section 6.10. 32 Section 6.10 Acceptance by Successor Trustee. Any successor Trustee appointed as provided in Section 6.9 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.6, execute and deliver an instrument transferring to such successor Trustee all the rights and powers of the Trustee so ceasing to act and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee thereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. If a successor Trustee is appointed, the Company, the retiring Trustee and the successor Trustee shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debentures as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. No successor Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Trustee shall be eligible under the provisions of Section 6.8. In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder. Upon acceptance of appointment by a successor Trustee as provided in this Section 6.10, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debentures at their addresses as they shall appear on the Debenture Register. If the Company fails to mail such notice within 10 Business Days after the acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Company. Section 6.11 Succession by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided such corporation shall be otherwise eligible and qualified under this Article. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debentures shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debentures so authenticated; and in case at that time any of the Debentures shall not have been authenticated, any successor to the Trustee may authenticate such Debentures either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debentures or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debentures in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. 33 Section 6.12 Authenticating Agents. There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debentures issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debentures; provided, however, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debentures. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000.00 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.12 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder if such successor corporation is otherwise eligible under this Section 6.12 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debentures by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.12, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.12, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debentures as the names and addresses of such holders appear on the Debenture Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII. CONCERNING THE SECURITYHOLDERS Section 7.1 Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debentures voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders or (d) by any other method the Trustee deems satisfactory. 34 If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such Debentures for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debentures have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debentures shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six (6) months after the record date. Section 7.2 Proof of Execution by Securityholders. Subject to the provisions of Section 6.1, 6.2 and 8.5, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debentures shall be proved by the Debenture Register or by a certificate of the Debenture registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.6. Section 7.3 Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Debenture. Section 7.4 Debentures Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Debentures have concurred in any direction, consent or waiver under this Indenture, Debentures which are owned by the Company or any other obligor on the Debentures or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debentures shall be disregarded and deemed not to be Outstanding for the purpose of any such determination; provided, however, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debentures which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of this Section 7.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debentures and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. 35 Section 7.5 Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.1) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.1) of a Debenture (or any Debenture issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debentures the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.2, revoke such action so far as concerns such Debenture (or so far as concerns the principal amount represented by any exchanged or substituted Debenture). Except as aforesaid any such action taken by the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture, and of any Debenture issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debenture or any Debenture issued in exchange or substitution therefor. ARTICLE VIII. SECURITYHOLDERS' MEETINGS Section 8.1 Purposes of Meetings. A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Trustee and nominate a successor Trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.2; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Debentures under any other provision of this Indenture or under applicable law. Section 8.2 Call of Meetings by Trustee. The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.1, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debentures affected at their addresses as they shall appear on the Debentures Register and, if the Company is not a holder of Debentures, to the Company. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. Section 8.3 Call of Meetings by Company or Securityholders. In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debentures, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 8.1, by mailing notice thereof as provided in Section 8.2. Section 8.4 Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a Person shall (a) be a holder of one or more Debentures with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debentures. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. Section 8.5 Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debentures and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. 36 The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.3, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 7.4, at any meeting each holder of Debentures with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000.00 principal amount of Debentures held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debenture challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debentures held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.2 or 8.3 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. Section 8.6 Voting. The vote upon any resolution submitted to any meeting of holders of Debentures with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debentures held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.2. The record shall show the serial numbers of the Debentures voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 8.7 Quorum; Actions. The Persons entitled to vote a majority in principal amount of the Debentures then outstanding shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in principal amount of the Debentures then outstanding, the Persons holding or representing such specified percentage in principal amount of the Debentures then outstanding will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.2, except that such notice need be given only once not less than 5 days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Debentures then outstanding which shall constitute a quorum. Except as limited by the provisos in the first paragraph of Section 9.2, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of a majority in principal amount of the Debentures then outstanding; provided, however, that, except as limited by the provisos in the first paragraph of Section 9.2, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be given by the holders of not less than a specified percentage in principal amount of the Debentures then outstanding may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of a not less than such specified percentage in principal amount of the Debentures then outstanding. 37 Any resolution passed or decision taken at any meeting of holders of Debentures duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting. ARTICLE IX. SUPPLEMENTAL INDENTURES Section 9.1 Supplemental Indentures without Consent of Securityholders. The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another Person to the Company, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Company, pursuant to Article XI hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of Debentures as the Board of Directors shall consider to be for the protection of the holders of such Debentures, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not materially adversely affect the interests of the holders of the Debentures; (d) to add to, delete from, or revise the terms of Debentures, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debentures, including to provide for transfer procedures and restrictions substantially similar to those applicable to the Capital Securities as required by Section 2.5 (for purposes of assuring that no registration of Debentures is required under the Securities Act); provided however, that any such action shall not adversely affect the interests of the holders of the Debentures then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debentures substantially similar to those that were applicable to Capital Securities shall not be deemed to materially adversely affect the holders of the Debentures); (e) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debentures and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; (f) to make any change (other than as elsewhere provided in this paragraph) that does not adversely affect the rights of any Securityholder in any material respect; or (g) to provide for the issuance of and establish the form and terms and conditions of the Debentures, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or the Debentures, or to add to the rights of the holders of Debentures. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 9.2. 38 Section 9.2 Supplemental Indentures with Consent of Securityholders. With the consent (evidenced as provided in Section 7.1) of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture; provided further, however, that if the Debentures are held by a trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities shall have consented to such supplemental indenture; provided further, however, that if the consent of the Securityholder of each outstanding Debenture is required, such supplemental indenture shall not be effective until each holder of the Trust Securities shall have consented to such supplemental indenture. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Debenture Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Section 9.3 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 9.4 Notation on Debentures. Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debentures so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debentures then Outstanding. Section 9.5 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, shall, in addition to the documents required by Section 14.6, receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee shall receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof. 39 ARTICLE X. REDEMPTION OF SECURITIES Section 10.1 Optional Redemption. The Company shall have the right (subject to the receipt by the Company of prior approval (i) if the Company is a bank holding company, from the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve or (ii) if the Company is a savings and loan holding company, from the OTS if then required under applicable capital guidelines or policies of the OTS), to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of $1,000.00, on any Interest Payment Date on or after February 18, 2011, at the Redemption Price. Section 10.2 Special Event Redemption. If a Special Event shall occur and be continuing, the Company shall have the right (subject to the receipt by the Company of prior approval (i) if the Company is a bank holding company, from the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve or (ii) if the Company is a savings and loan holding company, from the OTS if then required under applicable capital guidelines or policies of the OTS) to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event at the Redemption Price. Section 10.3 Notice of Redemption; Selection of Debentures. In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debentures, it shall cause to be mailed a notice of such redemption at least 30 and not more than 60 days prior to the Redemption Date to the holders of Debentures so to be redeemed as a whole or in part at their last addresses as the same appear on the Debenture Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debenture designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debenture. Each such notice of redemption shall specify the CUSIP number, if any, of the Debentures to be redeemed, the Redemption Date, the Redemption Price at which Debentures are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debentures, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In the event that any date on which the Redemption Price is payable is not a Business Day, then payment of the Redemption Price payable on such date shall be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on the date such payment was originally payable. If less than all the Debentures are to be redeemed, the notice of redemption shall specify the number of the Debentures to be redeemed. In case the Debentures are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion thereof will be issued. Prior to 10:00 a.m. New York City time on the Redemption Date, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Redemption Date all the Debentures so called for redemption at the appropriate Redemption Price, together with accrued interest to the Redemption Date. If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the Redemption Date, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed. Section 10.4 Payment of Debentures Called for Redemption. If notice of redemption has been given as provided in Section 10.3, the Debentures or portions of Debentures with respect to which such notice has been given shall become due and payable on the Redemption Date and at the place or places stated in such notice at the applicable Redemption Price, together with interest accrued to the Redemption Date, and on and after said date (unless the Company shall default in the payment of such Debentures at the Redemption Price, together with interest accrued to said date) interest on the Debentures or portions of Debentures so called for redemption shall cease to accrue. On presentation and surrender of such Debentures at a place of payment specified in said notice, such Debentures or the specified portions thereof shall be paid and redeemed by the Company at the applicable Redemption Price, together with interest accrued thereon to the Redemption Date. 40 Upon presentation of any Debenture redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debenture or Debentures of authorized denominations, in principal amount equal to the unredeemed portion of the Debenture so presented. ARTICLE XI. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE Section 11.1 Company May Consolidate, etc., on Certain Terms. Nothing contained in this Indenture or in the Debentures shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property or capital stock of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Debentures in accordance with their terms, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company, shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have merged, or by the entity which shall have acquired such property. Section 11.2 Successor Entity to be Substituted. In case of any such consolidation, merger, sale, conveyance, transfer or other disposition by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium if any, and interest on all of the Debentures and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debentures. Such successor entity thereupon may cause to be signed, and may issue in its own name, any or all of the Debentures issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debentures which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debentures which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debentures so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debentures theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debentures had been issued at the date of the execution hereof. Section 11.3 Opinion of Counsel to be Given to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, shall receive, in addition to the Opinion of Counsel required by Section 9.5, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI. ARTICLE XII. SATISFACTION AND DISCHARGE OF INDENTURE Section 12.1 Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Debentures theretofore authenticated (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) and not theretofore canceled, or 41 (b) all the Debentures not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within 1 year or are to be called for redemption within one (1) year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debentures (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any monies for the payment of principal of, and premium, if any, or interest on the Debentures (1) theretofore repaid to the Company in accordance with the provisions of Section 12.4, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.5, 2.6, 2.8, 3.1, 3.2, 3.4, 6.6, 6.8, 6.9 and 12.4 hereof shall survive until such Debentures shall mature and be paid. Thereafter, Sections 6.6 and 12.4 shall and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. The Company agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debentures. Section 12.2 Deposited Monies to be Held in Trust by Trustee. Subject to the provisions of Section 12.4, all monies deposited with the Trustee pursuant to Section 12.1 shall be held in trust in a non-interest bearing account and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debentures for the payment of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest. Section 12.3 Paying Agent to Repay Monies Held. Upon the satisfaction and discharge of this Indenture all monies then held by any paying agent of the Debentures (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. Section 12.4 Return of Unclaimed Monies. Any monies deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Debentures and not applied but remaining unclaimed by the holders of Debentures for two (2) years after the date upon which the principal of, and premium, if any, or interest on such Debentures, as the case may be, shall have become due and payable, shall, subject to applicable escheatment laws, be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Debentures shall thereafter look only to the Company for any payment which such holder may be entitled to collect, and all liability of the Trustee or such paying agent with respect to such monies shall thereupon cease. ARTICLE XIII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 13.1 Indenture and Debentures Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debentures. 42 ARTICLE XIV. MISCELLANEOUS PROVISIONS Section 14.1 Successors. All the covenants, stipulations, promises and agreements of the Company in this Indenture shall bind its successors and assigns whether so expressed or not. Section 14.2 Official Acts by Successor Entity. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company. Section 14.3 Surrender of Company Powers. The Company by instrument in writing executed by authority of at least 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company, and as to any permitted successor. Section 14.4 Addresses for Notices, etc. Any notice, consent, direction, request, authorization, waiver or demand which by any provision of this Indenture is required or permitted to be given, made, furnished or served by the Trustee or by the Securityholders on or to the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company, with the Trustee for the purpose) to the Company at 3551 Seventh Street, Suite 204, Moline, Illinois 61265, Attention: Todd A. Gipple. Any notice, consent, direction, request, authorization, waiver or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, 225 Asylum Street, Goodwin Square, Hartford, Connecticut, 06103 Attention: Vice President, Corporate Trust Services, with a copy to U.S. Bank National Association, P.O. Box 778, Boston, Massachusetts 02102-0778, Attention: Earl W. Dennison, Corporate Trust Services. Any notice, consent, direction, request, authorization, waiver or demand on or to any Securityholder shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the address set forth in the Debenture Register. Section 14.5 Governing Law. This Indenture and each Debenture shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed in accordance with the law of said State, without regard to conflict of laws principles thereof. Section 14.6 Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not in the opinion of such person, such condition or covenant has been complied with. Section 14.7 Non-Business Days. In any case where the date of payment of interest on or principal of the Debentures will be a day that is not a Business Day, the payment of such interest on or principal of the Debentures need not be made on such date but may be made on the next succeeding Business Day with the same force and effect as if made on the original date of payment, and no interest shall accrue for the period from and after such date. Section 14.8 Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. 43 Section 14.9 Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. Section 14.10 Separability. In case any one or more of the provisions contained in this Indenture or in the Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debentures, but this Indenture and such Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. Section 14.11 Assignment. The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties hereto. Section 14.12 Acknowledgment of Rights. The Company agrees that, with respect to any Debentures held by the Trust or the Institutional Trustee of the Trust, if the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debentures held as the assets of such Trust after the holders of a majority in Liquidation Amount of the Capital Securities of such Trust have so directed such Institutional Trustee, a holder of record of such Capital Securities may, to the fullest extent permitted by law, institute legal proceedings directly against the Company to enforce such Institutional Trustee's rights under this Indenture without first instituting any legal proceedings against such trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the Debentures on the date such interest (or premium, if any) or principal is otherwise payable (or in the case of redemption, on the redemption date), the Company agrees that a holder of record of Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of, or premium, if any, or interest on the Debentures having an aggregate principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such holder on or after the respective due date specified in the Debentures. ARTICLE XV. SUBORDINATION OF DEBENTURES Section 15.1 Agreement to Subordinate. The Company covenants and agrees, and each holder of Debentures by such Securityholder's acceptance thereof likewise covenants and agrees, that all Debentures shall be issued subject to the provisions of this Article XV; and each holder of a Debenture whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, and premium, if any, and interest on all Debentures shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XV shall prevent the occurrence of any Default or Event of Default hereunder. Section 15.2 Default on Senior Indebtedness. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption) of, or premium, if any, or interest on the Debentures. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.2, such payment shall, subject to Section 15.7, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness. 44 Section 15.3 Liquidation, Dissolution, Bankruptcy. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company, on account of the principal (and premium, if any) or interest on the Debentures. Upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued. as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debentures to the payment of all Senior Indebtedness, that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XI of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XI of this Indenture. Nothing in Section 15.2 or in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6 of this Indenture. Section 15.4 Subrogation. Subject to the payment in full of all Senior Indebtedness, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Debentures shall be paid in full. For the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debentures be deemed to be a payment or distribution by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand. 45 Nothing contained in this Article XV or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debentures the principal of (and premium, if any) and interest on the Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debentures and creditors of the Company, other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order, or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. Section 15.5 Trustee to Effectuate Subordination. Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. Section 15.6 Notice by the Company. The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least two (2) Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of, or premium, if any, or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two (2) Business Days prior to such date. The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 15.7 Rights of the Trustee; Holders of Senior Indebtedness. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. 46 With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6. Section 15.8 Subordination May Not Be Impaired. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debentures to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, and any other Person. Signatures appear on the following page 47 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. QCR HOLDINGS, INC. By: Name: Douglas M. Hultquist Title: President and Chief Executive Officer U.S. BANK NATIONAL ASSOCIATION, as Trustee By: Name: Earl W. Dennison, Jr. Title: Vice President 48 A - 7 EXHIBIT A FORM OF JUNIOR SUBORDINATED DEBENTURE THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE- CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR 49 PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $500,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $500,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. 50 Junior Subordinated Deferrable Interest Debenture of QCR HOLDINGS, INC. February 18, 2004 QCR HOLDINGS, INC., a Delaware corporation (the "Company" which term includes any successor Person under the Indenture hereinafter referred to), for value received promises to pay to U.S. Bank National Association, not in its individual capacity but solely as Institutional Trustee for QCR Holdings Statutory Trust II (the "Holder") or registered assigns, the principal sum of Twelve Million Three Hundred Seventy-Two Thousand Dollars ($12,372,000) on February 18, 2034, and to pay interest on said principal sum from the date of original issuance, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30 and December 31 of each year commencing March 31, 2004, at an annual fixed rate equal to 6.93% beginning on (and including) the date of original issuance and ending on (but excluding) March 31, 2011 and at an annual rate for each successive period beginning on (and including) March 31, 2011, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 2.85% (the "Coupon Rate"), applied to the principal amount hereof, until the principal hereof is paid or duly provided for or made available for payment, and on any overdue principal and (without duplication) on any overdue installment of interest at the same rate per annum, compounded quarterly, from the dates such amounts are due until they are paid or made available for payment. The amount of interest payable for any period will be computed on the basis of the actual number of days in the Distribution Period concerned divided by 360. In the event that any date on which interest is payable on this Debenture is not a Business Day, then a payment of the interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on the date the payment was originally payable. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, which shall be fifteen days prior to the day on which the relevant Interest Payment Date occurs. Any such interest installment not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such regular record date and may be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date. 51 "3-Month LIBOR" as used herein, means the London interbank offered rate for three-month U.S. dollar deposits determined by the Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the particular Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollars deposits); (ii) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. (London time) on the Determination Date, 3-Month LIBOR will be the arithmetic mean of the rates (expressed as percentages per annum) for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that appear on Reuters Monitor Money Rates Page LIBOR ("Reuters Page LIBO") as of 11:00 a.m. (London time) on such Determination Date; (iii) if such rate does not appear on Reuters Page LIBO as of 11:00 a.m. (London time) on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date, and if at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars of an amount equal or comparable to the aggregate liquidation amount of the Debentures as of 11:00 a.m. (London time) on such Determination Date, and if at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations. If the rate for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that initially appears on Telerate Page 3750 or Reuters Page LIBO, as the case may be, as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 or Reuters Page LIBO, as the case may be, by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. In the event that the 3-Month LIBOR is indeterminable by the methods described above, the Coupon Rate shall equal the 3-Month LIBOR in effect on the most recent Determination Date (whether or not 3-Month LIBOR for such period was in fact determined on such Determination Date) plus 2.85%. The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% or .09876545 being rounded to 9.87655% or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). The principal of and interest on this Debenture shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made by check mailed to the registered holder at such address as shall appear in the Debenture Register if a request for a wire transfer by such holder has not been received by the Company or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Trustee. 52 So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest (including Additional Interest) shall be due and payable. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date; provided, further, however, that during any such Extension Period, the Company shall not and shall not permit any Affiliate to (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's or such Affiliate's capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (i) and (ii) above, (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (f) payments under the Capital Securities Guarantee). Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. The Company must give the Trustee notice of its election to begin or extend such Extension Period at least five (5) Business Days prior to the regular record date (as such term is used in Section 2.8 of the Indenture) immediately preceding the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period. Subject to the Company having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, the Company may redeem this Debenture prior to the Maturity Date in the manner and at the times set forth in the Indenture. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. 53 This Debenture shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed with the law of said State, without regard to conflict of laws principles thereof. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. Capitalized terms used and not defined in this Debenture shall have the meanings assigned in the Indenture duly executed and dated as of the date of original issuance of this Debenture between the Trustee and the Company. The Indenture contains a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures and of the terms upon which the Debentures are, and are to be, authenticated and delivered. (continued) IN WITNESS WHEREOF, the Company has duly executed this certificate. QCR HOLDINGS, INC. By: Name: Douglas M. Hultquist Title: President and Chief Executive Officer CERTIFICATE OF AUTHENTICATION This is one of the Debentures referred to in the within-mentioned Indenture. U.S. Bank National Association, as Trustee By: Authorized Officer 54 EX-10 12 qcrexhbt1019.txt QCR HOLDINGS, INC., as Issuer INDENTURE Dated as of February 18, 2004 U.S. BANK NATIONAL ASSOCIATION, as Trustee FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES DUE 2034 1 TABLE OF CONTENTS Page ARTICLE I. Definitions.........................................................1 Section 1.1 Definitions.........................................1 ARTICLE II. Debentures.........................................................8 Section 2.1 Authentication and Dating...........................8 Section 2.2 Form of Trustee's Certificate of Authentication.....9 Section 2.3 Form and Denomination of Debentures.................9 Section 2.4 Execution of Debentures............................10 Section 2.5 Exchange and Registration of Transfer of Debentures.......................................10 Section 2.6 Mutilated, Destroyed, Lost or Stolen Debentures....12 Section 2.7 Temporary Debentures...............................13 Section 2.8 Payment of Interest and Additional Interest........14 Section 2.9 Cancellation of Debentures Paid, etc...............15 Section 2.10 Computation of Interest Rate.......................15 Section 2.11 Extension of Interest Payment Period...............17 Section 2.12 CUSIP Numbers......................................18 Section 2.13 Global Debentures..................................19 ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY..............................21 Section 3.1 Payment of Principal, Premium and Interest; Agreed Treatment of the Debentures...............21 Section 3.2 Offices for Notices and Payments, etc..............22 Section 3.3 Appointments to Fill Vacancies in Trustee's Office...........................................22 Section 3.4 Provision as to Paying Agent.......................22 Section 3.5 Certificate to Trustee.............................23 Section 3.6 Additional Sums....................................23 Section 3.7 Compliance with Consolidation Provisions...........24 Section 3.8 Limitation on Dividends............................24 Section 3.9 Covenants as to the Trust..........................24 Section 3.10 Additional Junior Indebtedness.....................25 ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE....................................................................25 Section 4.1 Securityholders' Lists.............................25 Section 4.2 Preservation and Disclosure of Lists...............25 ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT....................................................................27 Section 5.1 Events of Default..................................27 Section 5.2 Payment of Debentures on Default, Suit Therefor....28 Section 5.3 Application of Monies Collected by Trustee.........30 Section 5.4 Proceedings by Securityholders.....................30 Section 5.5 Proceedings by Trustee.............................31 Section 5.6 Remedies Cumulative and Continuing; Delay or Omission Not a Waiver............................31 Section 5.7 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders...................31 Section 5.8 Notice of Defaults.................................32 Section 5.9 Undertaking to Pay Costs...........................32 ARTICLE VI. CONCERNING THE TRUSTEE............................................33 Section 6.1 Duties and Responsibilities of Trustee.............33 Section 6.2 Reliance on Documents, Opinions, etc...............34 Section 6.3 No Responsibility for Recitals, etc................35 Section 6.4 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debentures..35 Section 6.5 Monies to be Held in Trust.........................35 Section 6.6 Compensation and Expenses of Trustee...............36 Section 6.7 Officers' Certificate as Evidence..................36 Section 6.8 Eligibility of Trustee.............................36 Section 6.9 Resignation or Removal of Trustee..................37 Section 6.10 Acceptance by Successor Trustee....................38 Section 6.11 Succession by Merger, etc..........................39 Section 6.12 Authenticating Agents..............................39 ARTICLE VII. CONCERNING THE SECURITYHOLDERS...................................40 Section 7.1 Action by Securityholders..........................40 Section 7.2 Proof of Execution by Securityholders..............41 Section 7.3 Who Are Deemed Absolute Owners.....................41 Section 7.4 Debentures Not Outstanding.........................42 Section 7.5 Revocation of Consents; Future Holders Bound.......42 2 ARTICLE VIII. SECURITYHOLDERS' MEETINGS.......................................42 Section 8.1 Purposes of Meetings...............................42 Section 8.2 Call of Meetings by Trustee........................43 Section 8.3 Call of Meetings by Company or Securityholders.....43 Section 8.4 Qualifications for Voting..........................43 Section 8.5 Regulations........................................43 Section 8.6 Voting.............................................44 Section 8.7 Quorum; Actions....................................44 ARTICLE IX. SUPPLEMENTAL INDENTURES...........................................45 Section 9.1 Supplemental Indentures without Consent of Securityholders..................................45 Section 9.2 Supplemental Indentures with Consent of Securityholders..................................46 Section 9.3 Effect of Supplemental Indentures..................47 Section 9.4 Notation on Debentures.............................47 Section 9.5 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee.......................48 ARTICLE X. REDEMPTION OF SECURITIES...........................................48 Section 10.1 Optional Redemption................................48 Section 10.2 Special Event Redemption...........................48 Section 10.3 Notice of Redemption; Selection of Debentures......48 Section 10.4 Payment of Debentures Called for Redemption........49 ARTICLE XI. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE.................49 Section 11.1 Company May Consolidate, etc., on Certain Terms....49 Section 11.2 Successor Entity to be Substituted.................50 Section 11.3 Opinion of Counsel to be Given to Trustee..........50 ARTICLE XII. SATISFACTION AND DISCHARGE OF INDENTURE..........................50 Section 12.1 Discharge of Indenture.............................50 Section 12.2 Deposited Monies to be Held in Trust by Trustee....51 Section 12.3 Paying Agent to Repay Monies Held..................51 Section 12.4 Return of Unclaimed Monies.........................51 ARTICLE XIII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS..................................................................52 Section 13.1 Indenture and Debentures Solely Corporate Obligations......................................52 ARTICLE XIV. MISCELLANEOUS PROVISIONS.........................................52 Section 14.1 Successors.........................................52 Section 14.2 Official Acts by Successor Entity..................52 Section 14.3 Surrender of Company Powers........................52 Section 14.4 Addresses for Notices, etc.........................52 Section 14.5 Governing Law......................................53 Section 14.6 Evidence of Compliance with Conditions Precedent...53 Section 14.7 Non-Business Days..................................53 Section 14.8 Table of Contents, Headings, etc...................53 Section 14.9 Execution in Counterparts..........................54 Section 14.10 Separability.......................................54 Section 14.11 Assignment.........................................54 Section 14.12 Acknowledgment of Rights...........................54 ARTICLE XV. SUBORDINATION OF DEBENTURES.......................................54 Section 15.1 Agreement to Subordinate...........................54 Section 15.2 Default on Senior Indebtedness.....................55 Section 15.3 Liquidation, Dissolution, Bankruptcy...............55 Section 15.4 Subrogation........................................56 Section 15.5 Trustee to Effectuate Subordination................57 Section 15.6 Notice by the Company..............................57 Section 15.7 Rights of the Trustee; Holders of Senior Indebtedness.....................................58 Section 15.8 Subordination May Not Be Impaired..................58 3 INDENTURE THIS INDENTURE, dated as of February 18, 2004, between QCR Holdings, Inc., a Delaware corporation (the "Company"), and U.S. Bank National Association, a national banking association organized under the laws of the United States of America, as debenture trustee (the "Trustee"). W I T N E S S E T H: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Deferrable Interest Debentures due 2034 (the "Debentures") under this Indenture to provide, among other things, for the execution and authentication, delivery and administration thereof, and the Company has duly authorized the execution of this Indenture; and WHEREAS, all acts and things necessary to make this Indenture a valid agreement according to its terms, have been done and performed; NOW, THEREFORE, This Indenture Witnesseth: In consideration of the premises, and the purchase of the Debentures by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debentures as follows: ARTICLE I. Definitions Section 1.1 Definitions. The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted in the United States at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Additional Interest" means interest, if any, that shall accrue on any interest on the Debentures the payment of which has not been made on the applicable Interest Payment Date and which shall accrue at the Interest Rate, compounded quarterly (to the extent permitted by law). "Additional Junior Indebtedness" means, without duplication and other than the Debentures, any indebtedness, liabilities or obligations of the Company, or any Affiliate of the Company, under debt securities (or guarantees in respect of debt securities) initially issued to any trust, or a trustee of a trust, partnership or other entity affiliated with the Company that is, directly or indirectly, a finance subsidiary (as such term is defined in Rule 3a-5 under the Investment Company Act of 1940) or other financing vehicle of the Company or any Affiliate of the Company in connection with the issuance by that entity of preferred securities or other securities that are eligible to qualify for Tier 1 capital treatment (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company (or, if the Company is not a bank holding company, such guidelines applied to the Company as if the Company were subject to such guidelines); provided, however, that the inability of the Company to treat all or any portion of the Additional Junior Indebtedness as Tier 1 capital shall not disqualify it as Additional Junior Indebtedness if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve now or may hereafter accord Tier 1 capital treatment (including the Debentures) in excess of the amount which may qualify for treatment as Tier 1 capital under applicable capital adequacy guidelines. "Additional Sums" has the meaning set forth in Section 3.6. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder. "Applicable Depository Procedures" means, with respect to any transfer or transaction involving a Global Debenture or beneficial interest therein, the rules and procedures of the Depositary for such Debenture, in each case to the extent applicable to such transaction and as in effect from time to time. "Authenticating Agent" means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.12. 4 "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors or the executive committee or any other duly authorized designated officers of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in the city in which the Company's principal place of business is located, New York City or Hartford, Connecticut are permitted or required by any applicable law to close. "Capital Securities" means undivided beneficial interests in the assets of QCR Holdings Statutory Trust III which rank pari passu with Common Securities issued by the Trust; provided, however, that upon the occurrence of an Event of Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Capital Securities Guarantee" means the guarantee agreement that the Company enters into with U.S. Bank National Association, as guarantee trustee, or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust. "Capital Treatment Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of any amendment to, or change (including any announced prospective change) in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that the Company will not, within 90 days of the date of such opinion be entitled to treat an amount equal to the aggregate liquidation amount of the Debentures as "Tier 1 Capital" (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company (or if the Company is not a bank holding company, such guidelines applied to the Company as if the Company were subject to such guidelines); provided, however, that the inability of the Company to treat all or any portion of the liquidation amount of the Debentures as Tier 1 Capital shall not constitute the basis for a Capital Treatment Event, if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve or OTS, as applicable, may now or hereafter accord Tier 1 Capital treatment in excess of the amount which may now or hereafter qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines; provided further, however, that the distribution of Debentures in connection with the liquidation of the Trust shall not in and of itself constitute a Capital Treatment Event unless such liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Certificate" means a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company. "Common Securities" means undivided beneficial interests in the assets of the Trust which rank pari passu with Capital Securities issued by the Trust; provided, however, that upon the occurrence of an Event of Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Company" means QCR Holdings, Inc., a Delaware corporation, and, subject to the provisions of Article XI, shall include its successors and assigns. "Company Order" means a written order signed in the name of the Company by its Chairman of the Board of Directors, Vice Chairman, Chief Executive Officer, President, Chief Financial Officer, one of its Managing Directors or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents, and delivered to the Trustee. 5 "Coupon Rate" has the meaning set forth in Section 2.8. "Debenture" or "Debentures" has the meaning stated in the first recital of this Indenture. "Debenture Register" has the meaning specified in Section 2.5. "Declaration" means the Amended and Restated Declaration of Trust of the Trust, as amended or supplemented from time to time. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Interest" has the meaning set forth in Section 2.8. "Depositary" means an organization registered as a clearing agency under the Exchange Act that is designated as Depositary by the Company or any successor thereto. DTC will be the initial Depositary. "Distribution Period" has the meaning set forth in Section 2.8. "Determination Date" has the meaning set forth in Section 2.10. "Depository Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Depositary effects book-entry transfers and pledges of securities deposited with the Depositary. "DTC" means The Depository Trust Company, a New York corporation. --- "Event of Default" means any event specified in Section 5.1, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Extension Period" has the meaning set forth in Section 2.11. "Federal Reserve" means the Board of Governors of the Federal Reserve System and any successor federal agency that is primarily responsible for regulating the activities of bank holding companies. "Global Debenture" means a security that evidences all or part of the Debentures, the ownership and transfers of which shall be made through book entries by a Depositary. "Indenture" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both. "Institutional Trustee" has the meaning set forth in the Declaration. "Interest Payment Date" means each March 31, June 30, September 30 and December 31 during the term of this Indenture and on the Maturity Date. "Interest Rate" means for the period beginning on (and including) the date of original issuance and ending on (but excluding) March 31, 2004 the rate per annum of 3.97% and for each Distribution Period thereafter, the Coupon Rate. "Investment Company Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Debentures. "Liquidation Amount" means the stated amount of $1,000.00 per Trust Security. "Maturity Date" means February 18, 2034. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the Vice Chairman, the Chief Executive Officer, the President, the Chief Financial Officer, any Managing Director or any Vice President, and by the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section. 6 "Opinion of Counsel" means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section. "OTS" means the Office of Thrift Supervision and any successor federal agency that is primarily responsible for regulating the activities of savings and loan holding companies. "Outstanding" means, when used with reference to Debentures, subject to the provisions of Section 7.4, as of any particular time, all Debentures authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except: (a) Debentures theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Debentures, or portions thereof, for the payment or redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, however, that, if such Debentures, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Section 10.3 or provision satisfactory to the Trustee shall have been made for giving such notice; (c) Debentures paid pursuant to Section 2.6 or in lieu of or in substitution for which other Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Company and the Trustee is presented that any such Debentures are held by bona fide holders in due course; and (d) Debentures held in accordance with Section 7.4 hereof. "Person" means an individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture. "Principal Office of the Trustee," or other similar term, means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at the time of the execution of this Indenture shall be 225 Asylum Street, Goodwin Square, Hartford, Connecticut 06103. "Redemption Date" means the Interest Payment Date fixed for the redemption of Debentures. "Redemption Price" means 100% of the principal amount of the Debentures being redeemed, plus accrued and unpaid interest on such Debentures to the Redemption Date. "Responsible Officer" means, with respect to the Trustee, any officer within the Principal Office of the Trustee, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Securities Act" means the Securities Act of 1933, as amended from time to time or any successor legislation. "Securityholder," "holder of Debentures," or other similar terms, means any Person in whose name at the time a particular Debenture is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. 7 "Senior Indebtedness" means, with respect to the Company, whether incurred on or prior to the date of this Indenture or thereafter incurred, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement; (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker's acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company). Notwithstanding the foregoing, "Senior Indebtedness" shall not include (1) any Additional Junior Indebtedness, (2) Debentures issued pursuant to this Indenture and guarantees in respect of such Debentures, (3) trade accounts payable of the Company arising in the ordinary course of business (such trade accounts payable being pari passu in right of payment to the Debentures), or (4) obligations with respect to which (a) in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are pari passu, junior or otherwise not superior in right of payment to the Debentures and (b) the Company, prior to the issuance thereof, has notified (and, if then required under the applicable guidelines of the regulating entity, has received approval from) the Federal Reserve (if the Company is a bank holding company) or the OTS (if the Company is a savings and loan holding company). Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness. "Special Event" means any of a Capital Treatment Event, an Investment Company Event or a Tax Event. "Subsidiary" means with respect to any Person, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture, limited liability company or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Tax Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, field service advice, regulatory procedure, notice or announcement, including any notice or announcement of intent to adopt such procedures or regulations (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) interest payable by the Company on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. Provided, however, if the Company may eliminate the results described in (i) through (iii) of such Administrative Action or judicial decision interpreting or applying such laws or regulations by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure which has no adverse effect on the Company, the Trustee, the Trust or the Holders of the Capital Securities issued by the Trust, such Administrative Action or judicial decision shall not be deemed a Tax Event. 8 "3-Month LIBOR" has the meaning set forth in Section 2.10. "Telerate Page 3750" has the meaning set forth in Section 2.10. "Trust" shall mean QCR Holdings Statutory Trust III, a Connecticut statutory trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debentures under this Indenture, of which the Company is the sponsor. "Trust Agreement" means the Amended and Restated Declaration of Trust, dated February 18, 2004, by and among U.S. Bank National Association, as Institutional Trustee, QCR Holdings, Inc., as Sponsor, and the Administrators named therein, and any amendments or supplements thereto. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Trust Securities" means Common Securities and Capital Securities of the Trust. "Trustee" means U.S. Bank National Association, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. ARTICLE II. Debentures Section 2.1 Authentication and Dating. Upon the execution and delivery of this Indenture, or from time to time thereafter, Debentures in an aggregate principal amount not in excess of $8,248,000 may be executed and delivered by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debentures to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Vice Chairman, the Chief Executive Officer, the President, the Chief Financial Officer, one of its Managing Directors or one of its Vice Presidents without any further action by the Company hereunder. In authenticating such Debentures, and accepting the additional responsibilities under this Indenture in relation to such Debentures, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon: (a) a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company, as the case may be, and (b) an Opinion of Counsel prepared in accordance with Section 14.6 which shall also state: (1) that such Debentures, when authenticated and delivered by the Trustee and issued by the Company in each case in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, subject to or limited by applicable bankruptcy, insolvency, reorganization, conservatorship, receivership, moratorium and other statutory or decisional laws relating to or affecting creditors' rights or the reorganization of financial institutions (including, without limitation, preference and fraudulent conveyance or transfer laws), heretofore or hereafter enacted or in effect, affecting the rights of creditors generally; and (2) that all laws and requirements in respect of the execution and delivery by the Company of the Debentures have been complied with and that authentication and delivery of the Debentures by the Trustee will not violate the terms of this Indenture. The Trustee shall have the right to decline to authenticate and deliver any Debentures under this Section if the Trustee, being advised in writing by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing holders. The definitive Debentures shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debentures, as evidenced by their execution of such Debentures. Section 2.2 Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication on all Debentures shall be in substantially the following form: 9 This is one of the Debentures referred to in the within-mentioned Indenture. U.S. Bank National Association, as Trustee By ---------------- Authorized Signer Section 2.3 Form and Denomination of Debentures. The Debentures shall be substantially in the form of Exhibit A attached hereto. The Debentures shall be in registered, certificated form without coupons and in minimum denominations of $500,000.00 and any multiple of $1,000.00 in excess thereof. Any attempted transfer of the Debentures in a block having an aggregate principal amount of less than $500,000.00 shall be deemed to be void and of no legal effect whatsoever. Any such purported transferee shall be deemed not to be a holder of such Debentures for any purpose, including, but not limited to the receipt of payments on such Debentures, and such purported transferee shall be deemed to have no interest whatsoever in such Debentures. The Debentures shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Section 2.4 Execution of Debentures. The Debentures shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Vice Chairman, Chief Executive Officer, President, Chief Financial Officer, one of its Managing Directors or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents. Only such Debentures as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized signer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debenture executed by the Company shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Debentures shall cease to be such officer before the Debentures so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debentures nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debentures had not ceased to be such officer of the Company; and any Debenture may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debenture, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. Every Debenture shall be dated the date of its authentication. Section 2.5 Exchange and Registration of Transfer of Debentures. The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.2, a register (the "Debenture Register") for the Debentures issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debentures as in this Article II provided. The Debenture Register shall be in written form or in any other form capable of being converted into written form within a reasonable time. Debentures to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.2, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debenture or Debentures which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount. Registration or registration of transfer of any Debenture by the Trustee or by any agent of the Company appointed pursuant to Section 3.2, and delivery of such Debenture, shall be deemed to complete the registration or registration of transfer of such Debenture. 10 All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of any Debenture for a period of 15 days next preceding the date of selection of Debentures for redemption. Notwithstanding anything herein to the contrary, Debentures may not be transferred except in compliance with the restricted securities legend set forth below, unless otherwise determined by the Company, upon the advice of counsel experienced in securities law, in accordance with applicable law: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $500,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $500,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. 11 THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. Section 2.6 Mutilated, Destroyed, Lost or Stolen Debentures. In case any Debenture shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debenture bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in substitution for the Debenture so destroyed, lost or stolen. In every case the applicant for a substituted Debenture shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debenture and of the ownership thereof. The Trustee may authenticate any such substituted Debenture and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debenture which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debenture) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Debenture and of the ownership thereof. Every substituted Debenture issued pursuant to the provisions of this Section 2.6 by virtue of the fact that any such Debenture is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. All Debentures shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. Section 2.7 Temporary Debentures. Pending the preparation of definitive Debentures, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debentures that are typed, printed or lithographed. Temporary Debentures shall be issuable in any authorized denomination, and substantially in the form of the definitive Debentures in lieu of which they are issued but with such omissions, insertions and variations as may be appropriate for temporary Debentures, all as may be determined by the Company. Every such temporary Debenture shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debentures. Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debentures and thereupon any or all temporary Debentures may be surrendered in exchange therefor, at the principal corporate trust office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.2, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debentures a like aggregate principal amount of such definitive Debentures. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debentures shall in all respects be entitled to the same benefits under this Indenture as definitive Debentures authenticated and delivered hereunder. Section 2.8 Payment of Interest and Additional Interest. Interest at the Interest Rate and any Additional Interest on any Debenture that is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Debentures shall be paid to the Person in whose name said Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment except that interest and any Additional Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. In the event that any Debenture or portion thereof is called for redemption and the Redemption Date is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Debenture will be paid upon presentation and surrender of such Debenture. 12 Each Debenture shall bear interest for the period beginning on (and including) the date of original issuance and ending on (but excluding) March 31, 2004 at a rate per annum of 3.97%, and shall bear interest for each successive period beginning on (and including) March 31, 2004, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each, a "Distribution Period") at a rate per annum equal to the 3-Month LIBOR, determined as described in Section 2.10, plus 2.85% (the "Coupon Rate"), applied to the principal amount thereof, until the principal thereof becomes due and payable, and on any overdue principal and to the extent that payment of such interest is enforceable under applicable law (without duplication) on any overdue installment of interest at the Interest Rate compounded quarterly. Interest shall be payable (subject to any relevant Extension Period) quarterly in arrears on each Interest Payment Date with the first installment of interest to be paid on March 31, 2004. In the event that the 3-Month LIBOR is indeterminable by the methods described in Section 2.10, the Coupon Rate shall equal the 3-Month LIBOR in effect on the most recent Determination Date (whether or not 3-Month LIBOR for such period was in fact determined on such Determination Date) plus 2.85%. Any interest on any Debenture, including Additional Interest, that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing at least 25 days prior to the date of the proposed payment of the amount of Defaulted Interest proposed to be paid on each such Debenture and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payments. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at its address as it appears in the Debenture Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable. The Company may make payment of any Defaulted Interest on any Debentures in any other lawful manner after notice given by the Company to the Trustee of the proposed payment method, provided, however, the Trustee in its sole discretion deems such payment method to be practical. Any interest scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debentures. The term "regular record date" as used in this Section shall mean the close of business on the 15th day next preceding the applicable Interest Payment Date. Subject to the foregoing provisions of this Section, each Debenture delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debenture. Section 2.9 Cancellation of Debentures Paid, etc. All Debentures surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debentures shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debentures canceled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy all canceled Debentures unless the Company otherwise directs the Trustee in writing. If the Company shall acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are surrendered to the Trustee for cancellation. 13 Section 2.10 Computation of Interest Rate. The amount of interest payable for the Distribution Period commencing on March 31, 2004 and each succeeding Distribution Period will be calculated by applying the Interest Rate to the principal amount outstanding at the commencement of the Distribution Period and multiplying each such amount by the actual number of days in the Distribution Period concerned divided by 360. In the event that any date on which interest is payable on the Debentures is not a Business Day, then payment of interest payable on such date shall be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on the date such payment was originally payable. All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% or .09876545 being rounded to 9.87655% or .0987655) and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent, with one-half cent being rounded upward. (a) "3-Month LIBOR" means the London interbank offered rate for three-month, U.S. dollar deposits determined by the Trustee in the following order of priority: (1) the rate (expressed as a percentage per annum) for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the particular Determination Date (as defined below). "Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollars deposits; (2) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. (London time) on the Determination Date, 3-Month LIBOR will be the arithmetic mean of the rates (expressed as percentages per annum) for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that appear on Reuters Monitor Money Rates Page LIBO ("Reuters Page LIBO") as of 11:00 a.m. (London time) on such Determination Date; (3) if such rate does not appear on Reuters Page LIBO as of 11:00 a.m. (London time) on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (4) if fewer than two such quotations are provided as requested in clause (3) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars of an amount equal or comparable to the aggregate liquidation amount of the Debentures as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations. If the rate for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that initially appears on Telerate Page 3750 or Reuters Page LIBO, as the case may be, as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate page 3750 or Reuters Page LIBO, as the case may be, by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. (5) The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the particular Distribution Period for which a Coupon Rate is being determined. 14 (b) The Trustee shall notify the Company, the Institutional Trustee and any securities exchange or interdealer quotation system on which the Capital Securities are listed, of the Coupon Rate and the Determination Date for each Distribution Period, in each case as soon as practicable after the determination thereof but in no event later than the thirtieth (30th) Business Day of the relevant Distribution Period. Failure to notify the Company, the Institutional Trustee or any securities exchange or interdealer quotation system, or any defect in said notice, shall not affect the obligation of the Company to make payment on the Debentures at the applicable Coupon Rate. Any error in the calculation of the Coupon Rate by the Institutional Trustee may be corrected at any time by notice delivered as above provided. Upon the request of a holder of a Debenture, the Trustee shall provide the Coupon Rate then in effect and, if determined, the Coupon Rate for the next Distribution Period. (c) Subject to the corrective rights set forth above, all certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions relating, to the payment and calculation of interest on the Debentures and distributions on the Capital Securities by the Trustee or the Institutional Trustee will (in the absence of willful default, bad faith or manifest error) be final, conclusive and binding on the Trust, the Company and all of the holders of the Debentures and the Capital Securities, and no liability shall (in the absence of willful default, bad faith or manifest error) attach to the Trustee or the Institutional Trustee in connection with the exercise or non-exercise by either of them or their respective powers, duties and discretion. Section 2.11 Extension of Interest Payment Period. So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest (including Additional Interest) shall be due and payable. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date; provided, further, however, that during any such Extension Period, the Company shall not and shall not permit any Affiliate to (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's or such Affiliate's capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (ii) make any payment of principal or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (i) or (ii) above, (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (f) payments under the Capital Securities Guarantee). Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest to the extent permitted by applicable law. The Company must give the Trustee notice of its election to begin or extend such Extension Period at least 5 Business Days prior to the regular record date (as such term is used in Section 2.8) immediately preceding the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period. 15 Section 2.12 CUSIP Numbers. The Company in issuing the Debentures may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to Securityholders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debentures or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debentures, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers. Section 2.13 Global Debentures. (a) Upon the election of the holder of Outstanding Debentures, which election need not be in writing, the Debentures owned by such holder shall be issued in the form of one or more Global Debentures registered in the name of the Depositary or its nominee. Each Global Debenture issued under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global Debenture or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Debenture shall constitute a single Debenture for all purposes of this Indenture. (b) Notwithstanding any other provision in this Indenture, no Global Debenture may be exchanged in whole or in part for Debentures registered, and no transfer of a Global Debenture in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Debenture or a nominee thereof unless (i) such Depositary advises the Trustee and the Company in writing that such Depositary is no longer willing or able to properly discharge its responsibilities as Depositary with respect to such Global Debenture, and no qualified successor is appointed by the Company within ninety (90) days of receipt by the Company of such notice, (ii) such Depositary ceases to be a clearing agency registered under the Exchange Act and no successor is appointed by the Company within ninety (90) days after obtaining knowledge of such event, (iii) the Company executes and delivers to the Trustee a Company Order stating that the Company elects to terminate the book-entry system through the Depositary or (iv) an Event of Default shall have occurred and be continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Trustee shall notify the Depositary and instruct the Depositary to notify all owners of beneficial interests in such Global Debenture of the occurrence of such event and of the availability of Debentures to such owners of beneficial interests requesting the same. Upon the issuance of such Debentures and the registration in the Debenture Register of such Debentures in the names of the Holders of the beneficial interests therein, the Trustee shall recognize such holders of beneficial interests as Holders. (c) If any Global Debenture is to be exchanged for other Debentures or canceled in part, or if another Debenture is to be exchanged in whole or in part for a beneficial interest in any Global Debenture, then either (i) such Global Debenture shall be so surrendered for exchange or cancellation as provided in this Article II or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Debenture to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Debenture registrar, whereupon the Trustee, in accordance with the Applicable Depository Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Debenture by the Depositary, accompanied by registration instructions, the Company shall execute and the Trustee shall authenticate and deliver any Debentures issuable in exchange for such Global Debenture (or any portion thereof) in accordance with the instructions of the Depositary. The Trustee shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions. (d) Every Debenture authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Debenture or any portion thereof shall be authenticated and delivered in the form of, and shall be, a Global Debenture, unless such Debenture is registered in the name of a Person other than the Depositary for such Global Debenture or a nominee thereof. (e) Debentures distributed to holders of Book-Entry Capital Securities (as defined in the Trust Agreement) upon the dissolution of the Trust shall be distributed in the form of one or more Global Debentures registered in the name of a Depositary or its nominee, and deposited with the Debentures registrar, as custodian for such Depositary, or with such Depositary, for credit by the Depositary to the respective accounts of the beneficial owners of the Debentures represented thereby (or such other accounts as they may direct). Debentures distributed to holders of Capital Securities other than Book-Entry Capital Securities upon the dissolution of the Trust shall not be issued in the form of a Global Debenture or any other form intended to facilitate book-entry trading in beneficial interests in such Debentures. 16 (f) The Depositary or its nominee, as the registered owner of a Global Debenture, shall be the Holder of such Global Debenture for all purposes under this Indenture and the Debentures, and owners of beneficial interests in a Global Debenture shall hold such interests pursuant to the Applicable Depository Procedures. Accordingly, any such owner's beneficial interest in a Global Debenture shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Depositary Participants. The Debentures registrar and the Trustee shall be entitled to deal with the Depositary for all purposes of this Indenture relating to a Global Debenture (including the payment of principal and interest thereon and the giving of instructions or directions by owners of beneficial interests therein and the giving of notices) as the sole Holder of the Debenture and shall have no obligations to the owners of beneficial interests therein. Neither the Trustee nor the Debentures registrar shall have any liability in respect of any transfers effected by the Depositary. (g) The rights of owners of beneficial interests in a Global Debenture shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such owners and the Depositary and/or its Depositary Participants. (h) No holder of any beneficial interest in any Global Debenture held on its behalf by a Depositary shall have any rights under this Indenture with respect to such Global Debenture, and such Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the owner of such Global Debenture for all purposes whatsoever. None of the Company, the Trustee nor any agent of the Company or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Debenture or maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominee) as holder of any Debenture. ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY Section 3.1 Payment of Principal, Premium and Interest; Agreed Treatment of the Debentures. (a) The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and Interest and any Additional Interest on the Debentures at the place, at the respective times and in the manner provided in this Indenture and the Debentures. Each installment of interest on the Debentures may be paid (i) by mailing checks for such interest payable to the order of the holder of Debentures entitled thereto as they appear on the registry books of the Company if a request for a wire transfer has not been received by the Company or (ii) by wire transfer to any account with a banking institution located in the United States designated in writing by such Person to the paying agent no later than the related record date. Notwithstanding the foregoing, so long as the Institutional Trustee, not in its individual capacity but solely as Institutional Trustee for QCR Holdings Statutory Trust III, is the holder of the Debentures, the payment of the principal and Interest on the Debentures shall be made by wire transfer of immediately available funds to the Institutional Trustee, to be received not later than 1:00 p.m., New York City time, on the Interest Payment Date of such payment at the Principal Office of the Trustee for distribution to the holders of the Capital Securities. Notwithstanding any other provision of this Indenture to the contrary, the Institutional Trustee shall not be required to make, or cause to be made, distributions to the holders of the Capital Securities, as aforesaid prior to the first Business Day on which it is practicable for the Institutional Trustee to do so in view of the time of day when the funds to be so transferred were received by it if such funds were received after 1:00 p.m., New York City time. (b) The Company will treat the Debentures as indebtedness, and the amounts payable in respect of the principal amount of such Debentures as interest, for all United States federal income tax purposes. All payments in respect of such Debentures will be made free and clear of United States withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W8 BEN (or any substitute or successor form) establishing its non-United States status for United States federal income tax purposes. (c) As of the date of this Indenture, the Company has no present intention to exercise its right under Section 2.11 to defer payments of interest on the Debentures by commencing an Extension Period. 17 (d) As of the date of this Indenture, the Company believes that the likelihood that it would exercise its right under Section 2.11 to defer payments of interest on the Debentures by commencing an Extension Period at any time during which the Debentures are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase or make a liquidation payment with respect to, any of its outstanding equity and on the Company's ability to make any payments of principal of or interest on, or repurchase or redeem, any of its debt securities that rank pari passu in all respects with (or junior in interest to) the Debentures. Section 3.2 Offices for Notices and Payments, etc. So long as any of the Debentures remain outstanding, the Company will maintain in Hartford, Connecticut, an office or agency where the Debentures may be presented for payment, an office or agency where the Debentures may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Debentures or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.5, such office or agency for all of the above purposes shall be the office or agency of the Trustee. In case the Company shall fail to maintain any such office or agency in Hartford, Connecticut, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Hartford, Connecticut, where the Debentures may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and, the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Hartford, Connecticut, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. Section 3.3 Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.9, a Trustee, so that there shall at all times be a Trustee hereunder. Section 3.4 Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.4: (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest, if any, on the Debentures (whether such sums have been paid to it by the Company or by any other obligor on the Debentures) in trust for the benefit of the holders of the Debentures; (2) that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debentures) to make any payment of the principal of and premium, if any, or interest, if any, on the Debentures when the same shall be due and payable; and (3) that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest, if any, on the Debentures, set aside, segregate and hold in trust for the benefit of the holders of the Debentures a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debentures) to make any payment of the principal of and premium, if any, or interest, if any, on the Debentures when the same shall become due and payable. 18 Whenever the Company shall have one or more paying agents for the Debentures, it will, on or prior to each due date of the principal of and premium, if any, or interest, if any, on the Debentures, deposit with a paying agent a sum sufficient to pay the principal, premium or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act. (c) Anything in this Section 3.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Debentures, or for any other reason pay, or direct any paying agent to pay to the Trustee all sums held in trust by the Company or any such paying agent, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.4 is subject to Sections 12.3 and 12.4. Section 3.5 Certificate to Trustee. The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year, so long as Debentures are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default during such fiscal year by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature and status thereof. The Trustee shall provide a copy of such Certificate to any collateral manager for a securitized pool that owns any of the Capital Securities upon request by or on behalf of such manager. Section 3.6 Additional Sums. If and for so long as the Trust is the holder of all Debentures and the Trust is required to pay any additional taxes, duties, assessments or other governmental charges as a result of a Tax Event, the Company will pay such additional amounts ("Additional Sums") on the Debentures as shall be required so that the net amounts received and retained by the Trust after paying taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust would have received if no such taxes, duties, assessments or other governmental charges had been imposed. Whenever in this Indenture or the Debentures there is a reference in any context to the payment of principal of or interest on the Debentures, such mention shall be deemed to include mention of payments of the Additional Sums provided for in this paragraph to the extent that, in such context, Additional Sums are, were or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Sums in those provisions hereof where such express mention is not made; provided, however, that the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Sums that may be due and payable. Section 3.7 Compliance with Consolidation Provisions. The Company will not, while any of the Debentures remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article XI hereof are complied with. 19 Section 3.8 Limitation on Dividends. If Debentures are initially issued to the Trust or a trustee of such trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such period, or any extension thereof, shall be continuing, then the Company shall not, and shall not allow any Affiliate of the Company to, (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or its Affiliates' capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, if any, (2) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (3) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee). Section 3.9 Covenants as to the Trust. For so long as the Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company's ownership of such Common Securities. The Company, as owner of the Common Securities, shall, except in connection with a distribution of Debentures to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, take all steps necessary for the Company to cause the Trust (a) to remain a statutory trust, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes, and (c) to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debentures. Section 3.10 Additional Junior Indebtedness. The Company shall not, and it shall not cause or permit any Affiliate of the Company to, incur, issue or be obligated on any Additional Junior Indebtedness, either directly or indirectly, by way of guarantee, suretyship or otherwise, other than: (i) Additional Junior Indebtedness that, by its terms, is expressly stated to be either junior and subordinate or pari passu in all respects to the Debentures, and (ii) Additional Junior Indebtedness of which the Company has notified (and, if then required under the applicable guidelines of the regulating entity, has received approval from) the Federal Reserve, if the Company is a bank holding company, or the OTS, if the Company is a savings and loan holding company. ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE Section 4.1 Securityholders' Lists. The Company covenants and agrees that it will furnish or caused to be furnished to the Trustee: (a) on each regular record date for the Debentures, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of the Debentures as of such record date; and 20 (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; except that no such lists need be furnished under this Section 4.1 so long as the Trustee is in possession thereof by reason of its acting as Debenture registrar. Section 4.2 Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debentures (1) contained in the most recent list furnished to it as provided in Section 4.1 or (2) received by it in the capacity of Debentures registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished. (b) In case three or more holders of Debentures (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Debenture for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debentures with respect to their rights under this Indenture or under such Debentures and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within 5 Business Days after the receipt of such application, at its election, either: (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, or (2) inform such applicants as to the approximate number of holders of Debentures whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Debentures, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Debentures, by receiving and holding the same, agrees with Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debentures in accordance with the provisions of subsection (b) of this Section 4.2, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). 21 ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT Section 5.1 Events of Default. "Event of Default" wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the Company defaults in the payment of any interest upon any Debenture when it becomes due and payable, and fails to cure such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms of this Indenture shall not constitute a default in the payment of interest for this purpose; or (b) the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debentures as and when the same shall become due and payable either at maturity, upon redemption, by declaration of acceleration or otherwise; or (c) the Company defaults in the performance of, or breaches, any of its covenants or agreements in this Indenture or in the terms of the Debentures established as contemplated in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the Outstanding Debentures, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) a court of competent jurisdiction shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (f) the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (i) the distribution of the Debentures to holders of such Trust Securities in liquidation of their interests in the Trust, (ii) the redemption of all of the outstanding Trust Securities or (iii) certain mergers, consolidations or amalgamations, each as permitted by the Declaration. If an Event of Default occurs and is continuing with respect to the Debentures, then, and in each and every such case, unless the principal of the Debentures shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then Outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debentures and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. 22 The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debentures and the principal of and premium, if any, on the Debentures which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and Additional Interest) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.6, and if any and all Events of Default under this Indenture, other than the non-payment of the principal of or premium, if any, on Debentures which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of the Debentures then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debentures shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debentures shall continue as though no such proceeding had been taken. Section 5.2 Payment of Debentures on Default, Suit Therefor. The Company covenants that upon the occurrence of an Event of Default pursuant to Section 5.1(a) or Section 5.1(b) then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debentures the whole amount that then shall have become due and payable on all Debentures for principal and premium, if any, or interest, or both, as the case may be, with Additional Interest accrued on the Debentures (to the extent that payment of such interest is enforceable under applicable law and, if the Debentures are held by the Trust or a trustee of such Trust, without duplication of any other amounts paid by the Trust or a trustee in respect thereof); and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.6. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debentures and collect in the manner provided by law out of the property of the Company or any other obligor on such Debentures wherever situated the monies adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debentures under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debentures, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.2, shall be entitled and empowered, by intervention in such proceedings or otherwise, (i) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Debentures and, in case of any judicial proceedings, (ii) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.6), and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debentures, or to the creditors or property of the Company or such other obligor, and unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debentures in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, (iii) to collect and receive any monies or other property payable or deliverable on any such claims, and (iv) to distribute the same after the deduction of its charges and expenses. 23 Any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.6. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Debentures, may be enforced by the Trustee without the possession of any of the Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debentures. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the holders of the Debentures, and it shall not be necessary to make any holders of the Debentures parties to any such proceedings. Section 5.3 Application of Monies Collected by Trustee. Any monies collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Debentures in respect of which monies have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.6; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Debentures for principal (and premium, if any), and interest on the Debentures, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debentures for principal (and premium, if any) and interest, respectively; and Fourth: The balance, if any, to the Company. Section 5.4 Proceedings by Securityholders. No holder of any Debenture shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debentures and unless the holders of not less than 25% in aggregate principal amount of the Debentures then Outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding. 24 Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debenture to receive payment of the principal of, premium, if any, and interest, on such Debenture when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder and by accepting a Debenture hereunder it is expressly understood, intended and covenanted by the taker and holder of every Debenture with every other such taker and holder and the Trustee, that no one or more holders of Debentures shall have any right in any manner whatsoever by virtue or by availing itself of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debentures. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Section 5.5 Proceedings by Trustee. In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Section 5.6 Remedies Cumulative and Continuing; Delay or Omission Not a Waiver. Except as otherwise provided in Section 2.6, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debentures, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Debentures, and no delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.4, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. No delay or omission of the Trustee or any Securityholder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to any Securityholder may be exercised from time to time, and as often as may be deemed expedient, by the Trustee (in accordance with its duties under Section 6.1 hereof) or by such holder, as the case may be. Section 5.7 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. The holders of a majority in aggregate principal amount of the Debentures affected (voting as one class) at the time Outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debentures; provided, however, that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability. 25 The holders of a majority in aggregate principal amount of the Debentures at the time outstanding may on behalf of the holders of all of the Debentures waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debentures, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9; provided, however, that if the Debentures are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver, provided, further, that if the consent of the holder of each Outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section, said default or Event of Default shall for all purposes of the Debentures and this Indenture be deemed to have been cured and to be not continuing. Section 5.8 Notice of Defaults. The Trustee shall, within 90 days after the actual knowledge by a Responsible Officer of the Trustee of the occurrence of a Default with respect to the Debentures, mail to all Securityholders, as the names and addresses of such holders appear upon the Debenture Register, notice of all Defaults with respect to the Debentures known to the Trustee, unless such Defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.8 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.1, not including periods of grace, if any, provided for therein); provided, however, that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Debentures, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders. Section 5.9 Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Debenture by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, however, that the provisions of this Section 5.9 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Debentures Outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of, or premium, if any, or interest on any Debenture against the Company on or after the same shall have become due and payable. ARTICLE VI. CONCERNING THE TRUSTEE Section 6.1 Duties and Responsibilities of Trustee. With respect to the holders of Debentures issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debentures and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debentures, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default with respect to the Debentures has occurred (which has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. 26 No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default with respect to Debentures and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee with respect to Debentures shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Debentures as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.7, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is ground for believing that the repayment of such funds or liability is not assured to it under the terms of this Indenture or indemnity satisfactory to the Trustee against such risk is not reasonably assured to it. The Trustee shall provide the Company with written notice of the Interest Rate for each Distribution Period no later than the thirtieth (30th) Business Day of the relevant Distribution Period. Section 6.2 Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.1: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed), and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; 27 (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debentures (that has not been cured or waived) to exercise with respect to Debentures such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in aggregate principal amount of the outstanding Debentures affected thereby; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care; and (h) with the exceptions of defaults under Sections 5.1(a) or 5.1(b), the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debentures unless a written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debentures or by any holder of the Debentures. Section 6.3 No Responsibility for Recitals, etc. The recitals contained herein and in the Debentures (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debentures. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debentures or the proceeds of any Debentures authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. Section 6.4 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debentures. The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Debenture registrar, in its individual or any other capacity, may become the owner or pledgee of Debentures with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Debenture registrar. Section 6.5 Monies to be Held in Trust. Subject to the provisions of Section 12.4, all monies received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such monies shall be paid from time to time upon the written order of the Company, signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, a Managing Director, a Vice President, the Treasurer or an Assistant Treasurer of the Company. 28 Section 6.6 Compensation and Expenses of Trustee. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or willful misconduct. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee) incurred without negligence or willful misconduct on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability. The obligations of the Company under this Section 6.6 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Sections 5.1(d), 5.1(e) or 5.1(f), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture. Notwithstanding anything in this Indenture or any Debenture to the contrary, the Trustee shall have no obligation whatsoever to advance funds to pay any principal of or interest on or other amounts with respect to the Debentures or otherwise advance funds to or on behalf of the Company. Section 6.7 Officers' Certificate as Evidence. Except as otherwise provided in Sections 6.1 and 6.2, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or willful misconduct on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. Section 6.8 Eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person authorized under such laws to exercise corporate trust powers, having (or whose obligations under this Indenture are guaranteed by an affiliate having) a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000.00) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.8 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. 29 In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.8, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.9. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner described by this Indenture. Section 6.9 Resignation or Removal of Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company's expense, to the holders of the Debentures at their addresses as they shall appear on the Debenture Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor Trustee or Trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee. If no successor Trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, or any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, subject to the provisions of Section 5.9, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee. (b) In case at any time any of the following shall occur -- (1) the Trustee shall fail to comply with the provisions of Section 6.8 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.8 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, -- then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.9, any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint successor Trustee. (c) Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debentures at the time Outstanding may at any time remove the Trustee and nominate a successor Trustee, which shall be deemed appointed as successor Trustee unless within ten (10) Business Days after such nomination the Company objects thereto, in which case, or in the case of a failure by such holders to nominate a successor Trustee, the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.9 provided, may petition any court of competent jurisdiction for an appointment of a successor. (d) Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor Trustee as provided in Section 6.10. 30 Section 6.10 Acceptance by Successor Trustee. Any successor Trustee appointed as provided in Section 6.9 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.6, execute and deliver an instrument transferring to such successor Trustee all the rights and powers of the Trustee so ceasing to act and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee thereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. If a successor Trustee is appointed, the Company, the retiring Trustee and the successor Trustee shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debentures as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. No successor Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Trustee shall be eligible under the provisions of Section 6.8. In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder. Upon acceptance of appointment by a successor Trustee as provided in this Section 6.10, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debentures at their addresses as they shall appear on the Debenture Register. If the Company fails to mail such notice within 10 Business Days after the acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Company. Section 6.11 Succession by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided such corporation shall be otherwise eligible and qualified under this Article. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debentures shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debentures so authenticated; and in case at that time any of the Debentures shall not have been authenticated, any successor to the Trustee may authenticate such Debentures either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debentures or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debentures in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. 31 Section 6.12 Authenticating Agents. There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debentures issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debentures; provided, however, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debentures. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000.00 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.12 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder if such successor corporation is otherwise eligible under this Section 6.12 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debentures by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.12, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.12, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debentures as the names and addresses of such holders appear on the Debenture Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII. CONCERNING THE SECURITYHOLDERS Section 7.1 Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debentures voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders or (d) by any other method the Trustee deems satisfactory. 32 If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such Debentures for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debentures have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debentures shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six (6) months after the record date. Section 7.2 Proof of Execution by Securityholders. Subject to the provisions of Section 6.1, 6.2 and 8.5, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debentures shall be proved by the Debenture Register or by a certificate of the Debenture registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.6. Section 7.3 Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Debenture. Section 7.4 Debentures Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Debentures have concurred in any direction, consent or waiver under this Indenture, Debentures which are owned by the Company or any other obligor on the Debentures or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debentures shall be disregarded and deemed not to be Outstanding for the purpose of any such determination; provided, however, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debentures which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as Outstanding for the purposes of this Section 7.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debentures and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Section 7.5 Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.1) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.1) of a Debenture (or any Debenture issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debentures the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.2, revoke such action so far as concerns such Debenture (or so far as concerns the principal amount represented by any exchanged or substituted Debenture). Except as aforesaid any such action taken by the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture, and of any Debenture issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debenture or any Debenture issued in exchange or substitution therefor. 33 ARTICLE VIII. SECURITYHOLDERS' MEETINGS Section 8.1 Purposes of Meetings. A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Trustee and nominate a successor Trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.2; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Debentures under any other provision of this Indenture or under applicable law. Section 8.2 Call of Meetings by Trustee. The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.1, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debentures affected at their addresses as they shall appear on the Debentures Register and, if the Company is not a holder of Debentures, to the Company. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. Section 8.3 Call of Meetings by Company or Securityholders. In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debentures, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 8.1, by mailing notice thereof as provided in Section 8.2. Section 8.4 Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a Person shall (a) be a holder of one or more Debentures with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debentures. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. Section 8.5 Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debentures and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.3, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 7.4, at any meeting each holder of Debentures with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000.00 principal amount of Debentures held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debenture challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debentures held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.2 or 8.3 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. 34 Section 8.6 Voting. The vote upon any resolution submitted to any meeting of holders of Debentures with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debentures held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.2. The record shall show the serial numbers of the Debentures voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 8.7 Quorum; Actions. The Persons entitled to vote a majority in principal amount of the Debentures then outstanding shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in principal amount of the Debentures then outstanding, the Persons holding or representing such specified percentage in principal amount of the Debentures then outstanding will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.2, except that such notice need be given only once not less than 5 days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Debentures then outstanding which shall constitute a quorum. Except as limited by the provisos in the first paragraph of Section 9.2, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of a majority in principal amount of the Debentures then outstanding; provided, however, that, except as limited by the provisos in the first paragraph of Section 9.2, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be given by the holders of not less than a specified percentage in principal amount of the Debentures then outstanding may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of a not less than such specified percentage in principal amount of the Debentures then outstanding. Any resolution passed or decision taken at any meeting of holders of Debentures duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting. 35 ARTICLE IX. SUPPLEMENTAL INDENTURES Section 9.1 Supplemental Indentures without Consent of Securityholders. The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another Person to the Company, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Company, pursuant to Article XI hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of Debentures as the Board of Directors shall consider to be for the protection of the holders of such Debentures, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not materially adversely affect the interests of the holders of the Debentures; (d) to add to, delete from, or revise the terms of Debentures, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debentures, including to provide for transfer procedures and restrictions substantially similar to those applicable to the Capital Securities as required by Section 2.5 (for purposes of assuring that no registration of Debentures is required under the Securities Act); provided however, that any such action shall not adversely affect the interests of the holders of the Debentures then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debentures substantially similar to those that were applicable to Capital Securities shall not be deemed to materially adversely affect the holders of the Debentures); (e) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debentures and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; (f) to make any change (other than as elsewhere provided in this paragraph) that does not adversely affect the rights of any Securityholder in any material respect; or (g) to provide for the issuance of and establish the form and terms and conditions of the Debentures, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or the Debentures, or to add to the rights of the holders of Debentures. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 9.2. 36 Section 9.2 Supplemental Indentures with Consent of Securityholders. With the consent (evidenced as provided in Section 7.1) of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture; provided further, however, that if the Debentures are held by a trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities shall have consented to such supplemental indenture; provided further, however, that if the consent of the Securityholder of each outstanding Debenture is required, such supplemental indenture shall not be effective until each holder of the Trust Securities shall have consented to such supplemental indenture. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Debenture Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Section 9.3 Effect of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 9.4 Notation on Debentures. Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debentures so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debentures then Outstanding. Section 9.5 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, shall, in addition to the documents required by Section 14.6, receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee shall receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof. 37 ARTICLE X. REDEMPTION OF SECURITIES Section 10.1 Optional Redemption. The Company shall have the right (subject to the receipt by the Company of prior approval (i) if the Company is a bank holding company, from the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve or (ii) if the Company is a savings and loan holding company, from the OTS if then required under applicable capital guidelines or policies of the OTS), to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of $1,000.00, on any Interest Payment Date on or after February 18, 2009, at the Redemption Price. Section 10.2 Special Event Redemption. If a Special Event shall occur and be continuing, the Company shall have the right (subject to the receipt by the Company of prior approval (i) if the Company is a bank holding company, from the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve or (ii) if the Company is a savings and loan holding company, from the OTS if then required under applicable capital guidelines or policies of the OTS) to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event at the Redemption Price. Section 10.3 Notice of Redemption; Selection of Debentures. In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debentures, it shall cause to be mailed a notice of such redemption at least 30 and not more than 60 days prior to the Redemption Date to the holders of Debentures so to be redeemed as a whole or in part at their last addresses as the same appear on the Debenture Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debenture designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debenture. Each such notice of redemption shall specify the CUSIP number, if any, of the Debentures to be redeemed, the Redemption Date, the Redemption Price at which Debentures are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debentures, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In the event that any date on which the Redemption Price is payable is not a Business Day, then payment of the Redemption Price payable on such date shall be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on the date such payment was originally payable. If less than all the Debentures are to be redeemed, the notice of redemption shall specify the number of the Debentures to be redeemed. In case the Debentures are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion thereof will be issued. Prior to 10:00 a.m. New York City time on the Redemption Date, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Redemption Date all the Debentures so called for redemption at the appropriate Redemption Price, together with accrued interest to the Redemption Date. If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the Redemption Date, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed. 38 Section 10.4 Payment of Debentures Called for Redemption. If notice of redemption has been given as provided in Section 10.3, the Debentures or portions of Debentures with respect to which such notice has been given shall become due and payable on the Redemption Date and at the place or places stated in such notice at the applicable Redemption Price, together with interest accrued to the Redemption Date, and on and after said date (unless the Company shall default in the payment of such Debentures at the Redemption Price, together with interest accrued to said date) interest on the Debentures or portions of Debentures so called for redemption shall cease to accrue. On presentation and surrender of such Debentures at a place of payment specified in said notice, such Debentures or the specified portions thereof shall be paid and redeemed by the Company at the applicable Redemption Price, together with interest accrued thereon to the Redemption Date. Upon presentation of any Debenture redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debenture or Debentures of authorized denominations, in principal amount equal to the unredeemed portion of the Debenture so presented. ARTICLE XI. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE Section 11.1 Company May Consolidate, etc., on Certain Terms. Nothing contained in this Indenture or in the Debentures shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property or capital stock of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Debentures in accordance with their terms, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company, shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have merged, or by the entity which shall have acquired such property. Section 11.2 Successor Entity to be Substituted. In case of any such consolidation, merger, sale, conveyance, transfer or other disposition by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium if any, and interest on all of the Debentures and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debentures. Such successor entity thereupon may cause to be signed, and may issue in its own name, any or all of the Debentures issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debentures which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debentures which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debentures so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debentures theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debentures had been issued at the date of the execution hereof. Section 11.3 Opinion of Counsel to be Given to Trustee. The Trustee, subject to the provisions of Sections 6.1 and 6.2, shall receive, in addition to the Opinion of Counsel required by Section 9.5, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI. 39 ARTICLE XII. SATISFACTION AND DISCHARGE OF INDENTURE Section 12.1 Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Debentures theretofore authenticated (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) and not theretofore canceled, or (b) all the Debentures not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within 1 year or are to be called for redemption within one (1) year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debentures (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any monies for the payment of principal of, and premium, if any, or interest on the Debentures (1) theretofore repaid to the Company in accordance with the provisions of Section 12.4, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.5, 2.6, 2.8, 3.1, 3.2, 3.4, 6.6, 6.8, 6.9 and 12.4 hereof shall survive until such Debentures shall mature and be paid. Thereafter, Sections 6.6 and 12.4 shall and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. The Company agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debentures. Section 12.2 Deposited Monies to be Held in Trust by Trustee. Subject to the provisions of Section 12.4, all monies deposited with the Trustee pursuant to Section 12.1 shall be held in trust in a non-interest bearing account and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debentures for the payment of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest. Section 12.3 Paying Agent to Repay Monies Held. Upon the satisfaction and discharge of this Indenture all monies then held by any paying agent of the Debentures (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. Section 12.4 Return of Unclaimed Monies. Any monies deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Debentures and not applied but remaining unclaimed by the holders of Debentures for two (2) years after the date upon which the principal of, and premium, if any, or interest on such Debentures, as the case may be, shall have become due and payable, shall, subject to applicable escheatment laws, be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Debentures shall thereafter look only to the Company for any payment which such holder may be entitled to collect, and all liability of the Trustee or such paying agent with respect to such monies shall thereupon cease. 40 ARTICLE XIII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 13.1 Indenture and Debentures Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debentures. ARTICLE XIV. MISCELLANEOUS PROVISIONS Section 14.1 Successors. All the covenants, stipulations, promises and agreements of the Company in this Indenture shall bind its successors and assigns whether so expressed or not. Section 14.2 Official Acts by Successor Entity. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company. Section 14.3 Surrender of Company Powers. The Company by instrument in writing executed by authority of at least 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company, and as to any permitted successor. Section 14.4 Addresses for Notices, etc. Any notice, consent, direction, request, authorization, waiver or demand which by any provision of this Indenture is required or permitted to be given, made, furnished or served by the Trustee or by the Securityholders on or to the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company, with the Trustee for the purpose) to the Company at 3551 Seventh Street, Suite 204, Moline, Illinois 61265, Attention: Todd A. Gipple. Any notice, consent, direction, request, authorization, waiver or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, 225 Asylum Street, Goodwin Square, Hartford, Connecticut, 06103 Attention: Vice President, Corporate Trust Services, with a copy to U.S. Bank National Association, P.O. Box 778, Boston, Massachusetts 02102-0778, Attention: Earl W. Dennison, Corporate Trust Services. Any notice, consent, direction, request, authorization, waiver or demand on or to any Securityholder shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the address set forth in the Debenture Register. Section 14.5 Governing Law. This Indenture and each Debenture shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed in accordance with the law of said State, without regard to conflict of laws principles thereof. 41 Section 14.6 Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not in the opinion of such person, such condition or covenant has been complied with. Section 14.7 Non-Business Days. In any case where the date of payment of interest on or principal of the Debentures will be a day that is not a Business Day, the payment of such interest on or principal of the Debentures need not be made on such date but may be made on the next succeeding Business Day with the same force and effect as if made on the original date of payment, and no interest shall accrue for the period from and after such date. Section 14.8 Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 14.9 Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. Section 14.10 Separability. In case any one or more of the provisions contained in this Indenture or in the Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debentures, but this Indenture and such Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. Section 14.11 Assignment. The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties hereto. Section 14.12 Acknowledgment of Rights. The Company agrees that, with respect to any Debentures held by the Trust or the Institutional Trustee of the Trust, if the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debentures held as the assets of such Trust after the holders of a majority in Liquidation Amount of the Capital Securities of such Trust have so directed such Institutional Trustee, a holder of record of such Capital Securities may, to the fullest extent permitted by law, institute legal proceedings directly against the Company to enforce such Institutional Trustee's rights under this Indenture without first instituting any legal proceedings against such trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the Debentures on the date such interest (or premium, if any) or principal is otherwise payable (or in the case of redemption, on the redemption date), the Company agrees that a holder of record of Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of, or premium, if any, or interest on the Debentures having an aggregate principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such holder on or after the respective due date specified in the Debentures. 42 ARTICLE XV. SUBORDINATION OF DEBENTURES Section 15.1 Agreement to Subordinate. The Company covenants and agrees, and each holder of Debentures by such Securityholder's acceptance thereof likewise covenants and agrees, that all Debentures shall be issued subject to the provisions of this Article XV; and each holder of a Debenture whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, and premium, if any, and interest on all Debentures shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XV shall prevent the occurrence of any Default or Event of Default hereunder. Section 15.2 Default on Senior Indebtedness. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption) of, or premium, if any, or interest on the Debentures. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.2, such payment shall, subject to Section 15.7, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness. Section 15.3 Liquidation, Dissolution, Bankruptcy. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company, on account of the principal (and premium, if any) or interest on the Debentures. Upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued. as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. 43 For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debentures to the payment of all Senior Indebtedness, that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XI of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XI of this Indenture. Nothing in Section 15.2 or in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6 of this Indenture. Section 15.4 Subrogation. Subject to the payment in full of all Senior Indebtedness, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Debentures shall be paid in full. For the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debentures be deemed to be a payment or distribution by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand. Nothing contained in this Article XV or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debentures the principal of (and premium, if any) and interest on the Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debentures and creditors of the Company, other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order, or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. Section 15.5 Trustee to Effectuate Subordination. Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. 44 Section 15.6 Notice by the Company. The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least two (2) Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of, or premium, if any, or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two (2) Business Days prior to such date. The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 15.7 Rights of the Trustee; Holders of Senior Indebtedness. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6. Section 15.8 Subordination May Not Be Impaired. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. 45 Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debentures to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, and any other Person. Signatures appear on the following page 46 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. QCR HOLDINGS, INC. By: Name: Douglas M. Hultquist Title: President and Chief Executive Officer U.S. BANK NATIONAL ASSOCIATION, as Trustee By: Name: Earl W. Dennison, Jr. Title: Vice President 47 A - 7 EXHIBIT A FORM OF JUNIOR SUBORDINATED DEBENTURE THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE- CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $500,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $500,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. 48 Floating Rate Junior Subordinated Deferrable Interest Debenture of QCR Holdings, Inc. February 18, 2004 QCR Holdings, Inc., a Delaware corporation (the "Company" which term includes any successor Person under the Indenture hereinafter referred to), for value received promises to pay to U.S. Bank National Association, not in its individual capacity but solely as Institutional Trustee for QCR Holdings Statutory Trust III (the "Holder") or registered assigns, the principal sum of Eight Million Two Hundred Forty-Eight Thousand Dollars ($8,248,000) on February 18, 2034, and to pay interest on said principal sum from the original date of issuance, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30 and December 31 of each year commencing March 31, 2004, at an annual rate equal to 3.97% beginning on (and including) the date of original issuance and ending on (but excluding) March 31, 2004 and at an annual rate for each successive period beginning on (and including) March 31, 2004, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 2.85% (the "Coupon Rate"), applied to the principal amount hereof, until the principal hereof is paid or duly provided for or made available for payment, and on any overdue principal and (without duplication) on any overdue installment of interest at the same rate per annum, compounded quarterly, from the dates such amounts are due until they are paid or made available for payment. The amount of interest payable for any period will be computed on the basis of the actual number of days in the Distribution Period concerned divided by 360. In the event that any date on which interest is payable on this Debenture is not a Business Day, then a payment of the interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on the date the payment was originally payable. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, which shall be fifteen days prior to the day on which the relevant Interest Payment Date occurs. Any such interest installment not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such regular record date and may be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date. "3-Month LIBOR" as used herein, means the London interbank offered rate for three-month U.S. dollar deposits determined by the Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the particular Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollars deposits); (ii) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. (London time) on the Determination Date, 3-Month LIBOR will be the arithmetic mean of the rates (expressed as percentages per annum) for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that appear on Reuters Monitor Money Rates Page LIBOR ("Reuters Page LIBO") as of 11:00 a.m. (London time) on such Determination Date; (iii) if such rate does not appear on Reuters Page LIBO as of 11:00 a.m. (London time) on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date, and if at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars of an amount equal or comparable to the aggregate liquidation amount of the Debentures as of 11:00 a.m. (London time) on such Determination Date, and if at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations. If the rate for U.S. dollar deposits of an amount equal or comparable to the aggregate liquidation amount of the Debentures having a three-month maturity that initially appears on Telerate Page 3750 or Reuters Page LIBO, as the case may be, as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 or Reuters Page LIBO, as the case may be, by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. 49 In the event that the 3-Month LIBOR is indeterminable by the methods described above, the Coupon Rate shall equal the 3-Month LIBOR in effect on the most recent Determination Date (whether or not 3-Month LIBOR for such period was in fact determined on such Determination Date) plus 2.85%. The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% or .09876545 being rounded to 9.87655% or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). The principal of and interest on this Debenture shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made by check mailed to the registered holder at such address as shall appear in the Debenture Register if a request for a wire transfer by such holder has not been received by the Company or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Trustee. So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest (including Additional Interest) shall be due and payable. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date; provided, further, however, that during any such Extension Period, the Company shall not and shall not permit any Affiliate to (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's or such Affiliate's capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (i) and (ii) above, (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (f) payments under the Capital Securities Guarantee). Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. The Company must give the Trustee notice of its election to begin or extend such Extension Period at least five (5) Business Days prior to the regular record date (as such term is used in Section 2.8 of the Indenture) immediately preceding the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period. 50 Subject to the Company having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, the Company may redeem this Debenture prior to the Maturity Date in the manner and at the times set forth in the Indenture. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Debenture shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed with the law of said State, without regard to conflict of laws principles thereof. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. Capitalized terms used and not defined in this Debenture shall have the meanings assigned in the Indenture duly executed and dated as of the date of original issuance of this Debenture between the Trustee and the Company. The Indenture contains a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures and of the terms upon which the Debentures are, and are to be, authenticated and delivered. (continued) 51 IN WITNESS WHEREOF, the Company has duly executed this certificate. QCR HOLDINGS, INC. By: Name: Douglas M. Hultquist Title: President and Chief Executive Officer CERTIFICATE OF AUTHENTICATION This is one of the Debentures referred to in the within-mentioned Indenture. U.S. Bank National Association, as Trustee By: Authorized Officer 52 EX-12 13 qcrexhbt121.txt Exhibit 12.1 QCR Holdings, Inc. Calculation of earnings to fixed charges Dec-03 Dec-02 Jun-02 Jun-01 Jun-00 Jun-99 Jun-98 Jun-97 Jun-96 -------------------------------------------------------------------------------- Earnings before income taxes ..................... 8,156 4,879 4,277 3,556 4,426 4,079 4,071 1,384 683 Add: preferred dividends on a pretax basis ....... -- -- -- -- -- -- -- -- -- Add: fixed charges ............................... 12,414 6,713 13,389 16,979 13,552 11,269 8,437 4,997 3,495 -------------------------------------------------------------------------------- Earnings including interest expense on deposits (1) ................................... 20,570 11,592 17,666 20,535 17,978 15,348 12,508 6,381 4,178 Less: interest expense on deposits ............... 7,005 4,151 8,895 13,022 10,125 9,010 6,971 4,358 3,350 -------------------------------------------------------------------------------- Earnings excluding interest expense on deposits (2) ................................... 13,565 7,441 8,772 7,512 7,853 6,338 5,537 2,023 828 Fixed charges: Interest expense on deposits .................. 7,005 4,151 8,895 13,022 10,125 9,010 6,971 4,358 3,350 Interest expense on borrowings ................ 4,945 2,332 3,976 3,590 3,163 2,017 1,371 635 137 Portion of rents representative of interest factor ...................................... 464 230 519 367 264 242 95 4 8 ------------------------------------------------------------------------------- Fixed charges including interest expense on deposits (3) ................................... 12,414 6,713 13,389 16,979 13,552 11,269 8,437 4,997 3,495 Less interest expense on deposits ................ 7,005 4,151 8,895 13,022 10,125 9,010 6,971 4,358 3,350 Fixed charges excluding interest expense on deposits (4) ................................... 5,409 2,562 4,494 3,957 3,427 2,259 1,466 639 145 =============================================================================== Rents ........................................... 837 431 796 615 451 430 176 10 20 ------------------------------------------------------------------------------- Portion of rents representative of interest factor ......................................... 464 230 519 367 264 242 95 4 8 ------------------------------------------------------------------------------- Ratio of earnings to fixed charges and preferred stock dividends: Excluding interest expense on deposits ((2)/(4)) 2.51 2.90 1.95 1.90 2.29 2.81 3.78 3.17 5.71 Including interest expense on deposits ((1)/(3)) 1.66 1.73 1.32 1.21 1.33 1.36 1.48 1.28 1.20 1
EX-21 14 qcrexhbt211.txt Exhibit 21.1 - Subsidiaries of the Registrant Subsidiaries State of Incorporation/Formation - -------------------------------------------------------------------------------- Quad City Bank and Trust Company Iowa Cedar Rapids Bank and Trust Company Iowa Quad City Bancard, Inc. Delaware Quad City Holdings Capital Trust I Delaware QCR Holdings Statutory Trust II Connecticut QCR Holdings Statutory Trust III Connecticut 1 EX-23 15 qcrexhbt231.txt Exhibit 23.1 McGladrey & Pullen Certified Public Accountants Independent Auditor's Consent We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the QCR Holdings, Inc. 401(k)/Profit Sharing Plan (File No. 33-77420) and Stock Option Plan (File No. 33-78024) of our reported dated January 23, 2004 relating to the December 31, 2003 financial statements of QCR Holdings, Inc. and to the reference to our Firm under the caption "Experts" contained therein. /s/ McGladrey & Pullen, LLP - --------------------------- Davenport, Iowa March 19, 2004 McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation of separate and independent legal entities. 1 EX-31 16 qcrexhbt311.txt Exhibit 31.1 I, Douglas M. Hultquist, certify that: 1. I have reviewed this annual report on Form 10-K of QCR Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 19, 2004 /s/ Douglas M. Hultquist ------------------------ Douglas M. Hultquist Chief Executive Officer 1 EX-31 17 qcrexhbt312.txt Exhibit 31.2 I, Todd A. Gipple, certify that: 1. I have reviewed this annual report on Form 10-K of QCR Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 19, 2004 /s/ Todd A. Gipple ----------------------- Todd A. Gipple Chief Financial Officer 1 EX-32 18 qcrexhbt321.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of QCR Holdings, Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Douglas M. Hultquist, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Douglas M. Hultquist - ------------------------ Douglas M. Hultquist Chief Executive Officer March 19, 2004 1 EX-32 19 qcrexhbt322.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of QCR Holdings, Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Todd A. Gipple, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Todd A. Gipple - ----------------------- Todd A. Gipple Chief Financial Officer March 19, 2004 1 -----END PRIVACY-ENHANCED MESSAGE-----