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