Note 2 - Community National Bancorporation and Community National Bank

12 Months Ended

Dec. 31, 2013

Note 2 - Community National Bancorporation and Community National Bank [Line Items]

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

Note 22.     Acquisition of 20% Noncontrolling Interest in m2 Lease Funds

On August 27, 2012, the Company’s largest subsidiary bank, QCBT, entered into an amendment to the operating agreement of m2 and purchased the remaining 20% noncontrolling interest in m2 for $4,501,442. The purchase price and related acquisition costs exceeded the book value by $2,133,417. This excess is reflected as a reduction in additional paid in capital. The acquisition is structured in two payments with the initial payment of $1,653,755 made on September 11, 2012 and the final payment of $3,307,509 due in September 2015. QCBT calculated the present value of this future payment using a discount rate of 5% and recorded a resulting liability of $2,847,687. QCBT is accreting the discount of $459,822 using the effective yield method over the three year period to the final payment date. Accretion totaled $148,137 and $47,758 for the years ended December 31, 2013 and 2012, respectively. The liability related to the final payment due totals $3,043,582 and $2,895,445 at December 31, 2013 and 2012, respectively.

In conjunction with the purchase agreement, the Company also entered into an agreement with the Chief Executive Officer and former 20% owner of m2, whereby he will be provided additional consideration equal to 20% of the earnings of m2 for the period from September 2012 through the earlier of August 2015 or his separation from service. The payment under this arrangement will also be due in September 2015. Because the payment is contingent upon future service, QCBT is accruing the liability and related compensation expense over the service period. Expense totaled $725,483 and $195,715 for the years ended December 31, 2013 and 2012, respectively. The liability related to this future payment totaled $921,198 and $195,715 at December 31, 2013 and 2012, respectively.

Community National Bancorporation and Community National Bank [Member]

Note 2 - Community National Bancorporation and Community National Bank [Line Items]

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

Note 2.     Community National Bancorporation and Community National Bank

On May 13, 2013, the Company acquired 100% of Community National’s outstanding common stock for aggregate consideration totaling $19,441,834, which consisted of 834,715 shares of the Company’s common stock valued at $13,180,150 and cash of $6,261,684. Community National was the bank holding company providing bank and bank related services through its wholly-owned bank subsidiary, CNB. CNB was a commercial bank headquartered in Waterloo, Iowa serving Waterloo and Cedar Falls, Iowa. As a de novo bank, CNB commenced its operations in 1997. Previously, CNB also served Mason City, Iowa and Austin, Minnesota. On October 4, 2013, the Company sold certain assets and liabilities of the two Mason City branches of CNB. And, on October 11, 2013, the Company sold certain assets and liabilities of the two Austin branches of CNB. The Company operated CNB as a separate banking charter from the date of acquisition until October 26, 2013, when CNB’s charter was merged with and into CRBT. CNB’s merged branch offices now operate as a division of CRBT under the name “Community Bank & Trust.”

The Company accounted for the business combination under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”). The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects. The excess of fair value of net assets over the carrying value is recorded as bargain purchase gain which is included in noninterest income on the statement of income. The market value adjustments are accreted or amortized on a level yield basis over the expected term. Additionally, the Company recorded a core deposit intangible totaling $3,440,076 which was the portion of the acquisition purchase price which represented the value assigned to the existing deposit base at acquisition. The core deposit intangible has a finite life and is amortized by the straight-line method over the estimated useful life of the deposits (10 years). Following is a rollforward of the core deposit intangible for the year ended December 31, 2013:

	2013
Balance, beginning	$	-
Core deposit intangible from Community National Acquistion		3,440,076
Amortization expense		(178,881	)
Core deposit intangible sold in branch sales		(1,390,762	)
Balance, ending	$	1,870,433

The Company expects annual amortization expense of $199,512 for each of the five succeeding years and $872,873 combined in years thereafter.

The following table presents the gross carrying amount, accumulated amortization, and net carrying amount of the core deposit intangible as of December 31, 2013.

	2013
Gross carrying amount	$	1,995,127
Accumulated amortization		(124,694	)
Net carrying amount	$	1,870,433

The Company’s acquired loans were recorded at fair value at the acquisition date and no separate valuation allowance was established. The initial fair value was determined with the assistance of a valuation specialist that discounted expected cash flows at appropriate rates. The discount rates were based on market rates for new originations of comparable loans and did not include a factor for credit losses as that was included in the estimated cash flows. ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. If both conditions exist, the Company determines whether to account for each loan individually or whether such loans will be assembled into pools based on common risk characteristics such as credit score, loan type, and origination date. Based on this evaluation, the Company determined that the loans acquired from the Community National acquisition subject to ASC Topic 310-30 would be accounted for individually. At the acquisition date, the historical cost and fair value of these loans totaled $3,033,022 and $2,207,891, respectively.

The Company considered expected prepayments and estimated the total expected cash flows, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the loan is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the expected life of the loan. The excess of the contractual cash flows over expected cash flows is referred to as nonaccretable difference and is not accreted into income. Over the life of the loan, the Company continues to estimate expected cash flows. Subsequent decreases in expected cash flows are recognized as impairments in the current period through a provision for loan losses. Subsequent increases in cash flows to be collected are first used to reverse any existing valuation allowance and any remaining increase is recognized prospectively through an adjustment of the loan’s yield over its remaining life. At the acquisition date, accretable yield totaled $4,128,315 and nonaccretable yield totaled $397,894. At December 31, 2013, accretable yield totaled $2,068,332 and nonaccretable yield totaled $233,933. The decline in accretable yield was primarily the result of accelerated accretion of the accretable yield for the acquired performing loans sold in the branch sales as well as early payoffs of acquired performing loans.

The Company assumed junior subordinated debentures with principal outstanding of $6,702,000 and fair value of $4,125,175 after a discount of $2,576,825. The initial fair value was determined with the assistance of a valuation specialist that discounted expected cash flows at appropriate rates. The discount is accreted as interest expense on a level yield basis over the expected remaining term of the junior subordinated debentures.

Results of the operations of the acquired business are included in the income statement from the effective date of the acquisition.

The fair values of the assets acquired and liabilities assumed, including the consideration paid and resulting bargain purchase gain, is as follows:

	As of May 13, 2013
ASSETS
Cash and due from banks	$	9,286,757
Federal funds sold		12,335,000
Interest-bearing deposits at financial institutions		2,024,539
Securities available for sale		45,853,826
Loans/leases receivable, net		195,658,486
Premises and equipment		8,132,021
Core deposit intangible		3,440,076
Bank-owned life insurance		4,595,529
Restricted investment securities		1,259,375
Other real estate owned		550,326
Other assets		5,178,583
Total assets acquired	$	288,314,518
LIABILITIES
Deposits	$	255,045,071
Other borrowings		3,950,000
Junior subordinated debentures		4,125,175
Other liabilities		3,911,053
Total liabilties assumed	$	267,031,299
Net assets acquired	$	21,283,219
CONSIDERATION PAID:
Cash	$	6,261,684
Issuance of 834,715 shares of common stock		13,180,150
Total consideration paid	$	19,441,834
Bargain purchase gain	$	1,841,385

In order to fund the cash portion of the consideration and pay off the $3,950,000 of Community National borrowings at acquisition, the Company borrowed $4,400,000 on its 364-day revolving credit note. The outstanding balance on the 364-day revolving credit note totaled $10,000,000 until maturity at June 26, 2013. Upon maturity, the credit facility was restructured whereby the $10,000,000 of outstanding debt was restructured into a secured 3-year term note with principal due quarterly and interest due monthly where the interest is calculated at the effective LIBOR rate plus 3.00% per annum (3.17% at December 31, 2013). Additionally, as part of the restructuring, the Company maintained a secured 364-day revolving credit note with availability of $10,000,000 where the interest is calculated at the effective LIBOR rate plus 2.50% per annum. At December 31, 2013, the Company had not borrowed on this revolving credit note and had the full amount available.

The current note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various asset quality and operating ratios. 

The Company recorded a bargain purchase gain on the acquisition totaling $1,841,385 as the market value of the net assets acquired from Community National exceeded the total consideration paid. The consideration paid approximated a slight premium to the book value of Community National’s net assets at acquisition. The net impact of the market value adjustments resulted in a net increase to Community National’s net assets. The more significant market value adjustments were the core deposit intangible ($3,440,076) and the discount on the trust preferred securities ($2,576,825), as previously discussed.

The Company incurred costs related to the acquisition of Community National totaling $2,353,162. These costs consisted of professional fees (legal, investment banking, and accounting) for the acquisition of Community National and the subsequent branch sales, as well as data conversion costs (including both the de-conversion of the sold branches and the conversion of the remaining branches), and compensation costs for severed and retained employees.

Unaudited pro forma combined operating results for the years ended December 31, 2013 and 2012, giving effect to the Community National acquisition as if it had occurred as of January 1, 2012, are as follows:

	Years ended December 31,
	2013		2012
Interest income	$	83,008,255	$	87,514,410
Noninterest income	$	22,042,194	$	19,792,383
Net income	$	11,320,890	$	14,077,018
Net income attributable to QCR Holdings, Inc. common stockholders	$	8,152,588	$	10,092,460
Earnings per common share attributable to QCR Holdings, Inc. common stockholders
Basic	$	1.47	$	1.82
Diluted	$	1.44	$	1.79

The pro forma results exclude the impact of the bargain purchase gain of $1,841,385 and the impact of the gains on sales of certain CNB branches of $2,334,216. Additionally, the pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on January 1, 2012 or of future results of operations of the consolidated entities.

On October 4, 2013, the Company finalized the sale of certain assets and liabilities of the two Mason City, Iowa branches of CNB. The detail of the assets and liabilities sold, and resulting gain on sale, is as follows:

	As of October 4, 2013
ASSETS
Cash	$	29,905,991
Loans receivable		22,709,735
Premises and equipment		776,782
Core deposit intangible		910,415
Other assets		68,456
Total assets sold	$	54,371,379
LIABILITIES
Deposits	$	55,191,930
Other liabilities		53,421
Total liabilties sold	$	55,245,351
Gain on sale, pre-tax	$	873,972

On October 11, 2013, the Company finalized the sale of certain assets and liabilities of the two Austin, Minnesota branches of CNB. The detail of the assets and liabilities sold, and resulting gain on sale, is as follows:

	As of October 11, 2013
ASSETS
Cash	$	519,627
Loans receivable		31,749,135
Premises and equipment		1,597,040
Core deposit intangible		480,347
Other assets		70,443
Total assets sold	$	34,416,592
LIABILITIES
Deposits	$	35,830,168
Other liabilities		46,668
Total liabilties sold	$	35,876,836
Gain on sale, pre-tax	$	1,460,244