10-K 1 qcrh20131231_10k.htm FORM 10-K qcrh20131231_10k.htm

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-K

  

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013.

 

Commission file number: 0-22208

 

QCR HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 Delaware  

 

42-1397595 

(State of incorporation) 

 

(I.R.S. Employer Identification No.) 

                                                                                                                                          

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices)

 

(309) 743-7761

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

Common stock, $1.00 Par Value The NASDAQ Global Market

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

Preferred Share Purchase Rights

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.          

 

Yes [   ]

No [ X ] 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.                                                  

 

Yes [   ]

No [ X ]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days.

 

Yes [ X ]  

No [   ] 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      

 

Yes [ X ]   

No [   ] 

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

 

 
 

 

  

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ]  

Accelerated filer [   ]

Non-accelerated filer [   ]

Smaller reporting company [ X ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                                              

 

Yes [   ]    

No [ X ]  

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The NASDAQ Global Market on June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $74,572,956.

 

As of February 28, 2014, the Registrant had outstanding 7,898,059 shares of common stock, $1.00 par value per share.

 

Documents incorporated by reference:

Part III of Form 10-K - Proxy statement for annual meeting of stockholders to be held in May 2014.

 

 
2

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

INDEX

 

                                                                 

     

Page

Number(s)

Part I

     
 

Item 1.

Business

4-13

 

Item 1A.

Risk Factors

13-23

 

Item 1B.

Unresolved Staff Comments

23

 

Item 2.

Properties

23

 

Item 3.

Legal Proceedings

23

 

Item 4.

Mine Safety Disclosures

24

       

Part II

     
 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24-25

 

Item 6.

Selected Financial Data

26

 

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

27-58

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

58-59

 

Item 8.

Financial Statements

60-132

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

133

 

Item 9A.

Controls and Procedures

133-136

 

Item 9B.

Other Information

136

       

Part III

     
 

Item 10.

Directors, Executive Officers and Corporate Governance

136

 

Item 11.

Executive Compensation

136

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

136

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

137

 

Item 14.

Principal Accountant Fees and Services

137

       

Part IV

     
 

Item 15.

Exhibits

137-140

       

Signatures

 

141-142

 

 
3

 

 

Part I

 

Item 1.     Business

 

General. QCR Holdings, Inc. (the “Company”) is a multi-bank holding company headquartered in Moline, Illinois, that was formed in February 1993 under the laws of the state of Delaware. The Company serves the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls and Rockford communities through the following three wholly-owned banking subsidiaries, which provide full-service commercial and consumer banking and trust and asset management services:

 

 

Quad City Bank and Trust Company (“QCBT”), which is based in Bettendorf, Iowa, and commenced operations in 1994;

 

Cedar Rapids Bank and Trust Company (“CRBT”), which is based in Cedar Rapids, Iowa, and commenced operations in 2001; and

 

Rockford Bank and Trust Company (“RB&T”), which is based in Rockford, Illinois, and commenced operations in 2005.

 

On May 13, 2013, the Company acquired Community National Bancorporation (“Community National”) and its banking subsidiary Community National Bank (“CNB”). Community National and CNB commenced operations in 1997 and historically provided full-service commercial and consumer banking, and trust and asset management services, to Cedar Falls, Mason City, and Waterloo, Iowa and Austin, Minnesota. At acquisition, CNB had a total of eight branch facilities with four in the Waterloo/Cedar Falls area where CNB was headquartered, two in Mason City, and two in Austin. On October 4, 2013, the Company finalized the sale of the two branches in Mason City. On October 11, 2013, the Company finalized the sale of the two branches in Austin. On October 26, 2013, CNB merged with and into CRBT. CNB’s merged branch offices operate as a division of CRBT under the name “Community Bank & Trust.” In December 2013, one of the branch facilities in Cedar Falls was closed due to lack of sufficient customer activity. See Note 2 to the consolidated financial statements for further discussion of the acquisition and sales of certain branches.

 

The Company also engages in direct financing lease contracts through m2 Lease Funds, LLC (“m2”), a wholly-owned subsidiary of QCBT based in Brookfield, Wisconsin. QCBT previously owned 80% of m2. In August 2012, QCBT entered into an amendment to the operating agreement of m2 and purchased the remaining 20% noncontrolling interest. See Note 22 to the consolidated financial statements for further discussion of the acquisition.

 

Velie Plantation Holding Company (“VPHC”), previously owned 91% by the Company, was engaged in holding the real estate property known as the Velie Plantation in Moline, Illinois, which is the location for the Company’s headquarters. In October 2012, the Company acquired the remaining 9% noncontrolling interest, and effective December 31, 2012, VPHC was dissolved and liquidated.

 

Quad City Bancard, Inc. (“Bancard”), previously a wholly-owned subsidiary of the Company, conducted the Company’s credit card issuing and merchant credit cards acquiring operations. During 2008, Bancard sold its merchant credit card acquiring business. The resulting gain on sale, net of taxes and related expenses, was approximately $3.0 million. The comparative financial results associated with the merchant credit card acquiring business have been reflected as discontinued operations throughout the annual report. Effective December 31, 2009, Bancard was dissolved and liquidated. The credit card issuing operation was merged in as a department of QCBT. In January 2013, QCBT sold its credit card portfolio (approximately $10.2 million in credit card loan receivables) and the related credit card issuing operations to a third party. In connection with the transaction, the Company recorded a pre-tax gain, net of transaction-related costs, of $593 thousand. See Note 23 to the consolidated financial statements for further discussion of these sales.  

 

 
4

 

 

Subsidiary Banks. QCBT was capitalized on October 13, 1993, and commenced operations on January 7, 1994. QCBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law. QCBT provides full service commercial and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. QCBT, on a consolidated basis with m2, had total segment assets of $1.25 billion and $1.18 billion as of December 31, 2013 and 2012, respectively.

 

CRBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law. The Company commenced operations in Cedar Rapids in June 2001, operating a branch of QCBT. The Cedar Rapids branch operation then began functioning under the CRBT charter in September 2001. As previously discussed, the merged branches of CNB operate as a division of CRBT under the name “Community Bank & Trust.” CRBT provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids and Waterloo/Cedar Falls, Iowa and adjacent communities through its five facilities. The headquarters for CRBT is located in downtown Cedar Rapids with one other branch located in northern Cedar Rapids and two branches located in Waterloo and one branch located in Cedar Falls. CRBT had total segment assets of $804.2 million and $625.7 million as of December 31, 2013 and 2012, respectively.

 

RB&T is an Illinois-chartered commercial bank that is a member of the Federal Reserve System with depository accounts insured by the FDIC to the maximum amount permitted by law. The Company commenced operations in Rockford, Illinois in September 2004, operating a branch of QCBT, and that operation began functioning under the RB&T charter in January 2005. RB&T provides full-service commercial and consumer banking and trust and asset management services to Rockford and adjacent communities through its headquarters located on Guilford Road at Alpine Road in Rockford and its branch facility located in downtown Rockford. RB&T had total segment assets of $339.4 million and $313.8 million as of December 31, 2013 and 2012, respectively.

 

See Note 21 to the consolidated financial statements for additional business segment information.

 

Other Operating Subsidiaries. m2, which is based in Brookfield, Wisconsin, is engaged in the business of leasing machinery and equipment to commercial and industrial businesses under direct financing lease contracts. On August 26, 2005, QCBT acquired 80% of the membership units of m2. John Engelbrecht, the Chief Executive Officer of m2, retained 20% of the membership units. On August 31, 2012, QCBT acquired the 20% noncontrolling interest previously owned by John Engelbrecht.

 

VPHC was engaged in holding the real estate property known as the Velie Plantation Mansion in Moline, Illinois. Beginning in 1998, the Company held a 20% equity investment in VPHC. The Company acquired additional membership units in 2006 (37%), in 2009 (16%), and in 2010 (18%), bringing its total equity investment to 91%. During the fourth quarter of 2012, the Company acquired the remaining 9% noncontrolling interest and, effective as of December 31, 2012, VPHC was dissolved and liquidated.  

 

 
5

 

 

Trust Preferred Subsidiaries. As part of the acquisition of Community National during 2013, the Company acquired two new non-consolidated subsidiaries formed for the issuance of trust preferred securities. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 2013 and 2012:

 

Name

Date Issued

 

Amount Issued

 

Interest Rate

 

Interest

Rate as of

12/31/13

   

Interest

Rate as of

12/31/12

 

QCR Holdings Statutory Trust II

February 2004

  $ 12,372,000  

2.85% over 3-month LIBOR

    3.10 %     3.21 %

QCR Holdings Statutory Trust III

February 2004

    8,248,000  

2.85% over 3-month LIBOR

    3.10 %     3.21 %

QCR Holdings Statutory Trust IV

May 2005

    5,155,000  

1.80% over 3-month LIBOR

    2.04 %     2.14 %

QCR Holdings Statutory Trust V

February 2006

    10,310,000  

1.55% over 3-month LIBOR

    1.79 %     1.89 %
Community National Statutory Trust II September 2004     3,093,000   2.17% over 3-month LIBOR     2.42 %     N/A  
Community National Statutory Trust III March 2007     3,609,000   1.75% over 3-month LIBOR     1.99 %     N/A  
        42,787,000   Weighted Average Rate     2.51 %     2.68 %

 

Securities issued by all of the trusts listed above mature thirty years from the date of issuance, but are all currently callable at par at anytime.

 

Other Ownership Interests. The Company invests limited amounts of its capital in stocks of financial institutions and mutual funds. In addition to its wholly-owned subsidiaries, the Company owns a 20% equity position in Nobel Real Estate Investors, LLC. In June 2005, CRBT entered into a joint venture as a 50% owner of Cedar Rapids Mortgage Company, LLC which provided residential real estate mortgage lending services. During the first quarter of 2013, CRBT and the partner mutually terminated the joint venture. CRBT continues to provide residential real estate mortgage lending services through its consumer banking division.

 

The Company previously owned a 2.25% equity investment in Trisource Solutions, LLC (“Trisource”). On July 2, 2010, the Company exercised a put option and sold its equity investment back to the majority owner of Trisource for $750 thousand received in monthly installments of $10 thousand through July 2012, and a final balloon payment of $584 thousand received in August 2012. The gain (materially all of the sales proceeds) was recognized on a cash basis.

 

Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks 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/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities, as described more fully in this Form 10-K. Its operating results also can be affected by trust fees, investment advisory and management fees, deposit service charge fees, gains on the sale of residential real estate and government guaranteed loans, earnings from bank-owned life insurance (“BOLI”) and other income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.

 

The Company and its subsidiaries collectively employed 400 and 356 full-time equivalents (“FTEs”) at December 31, 2013 and 2012, respectively. The majority of the increase in FTEs during 2013 was the result of the acquisition of Community National.

 

The Board of Governors of the Federal Reserve System (the “Federal Reserve”) is the primary federal regulator of the Company and its subsidiaries. In addition, QCBT and CRBT are regulated by the Iowa Superintendent of Banking (“Iowa Superintendent”) and RB&T is regulated by the State of Illinois Department of Financial and Professional Regulation (“DFPR”). The FDIC, as administrator of the Deposit Insurance Fund, also has regulatory authority over the subsidiary banks.

 

 
6

 

 

Lending/Leasing. The Company and its subsidiaries provide a broad range of commercial and retail lending and investment services to corporations, partnerships, individuals, and government agencies. The subsidiary banks actively market their services to qualified lending and deposit clients. Officers actively solicit the business of new clients entering their market areas as well as long-standing members of the local business community. The Company has an established lending/leasing policy which includes a number of underwriting factors to be considered in making a loan/lease, including, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit history of the borrower.

 

In accordance with Iowa regulation, the legal lending limit to one borrower for QCBT and CRBT, calculated as 15% of aggregate capital, was $15.0 million and $9.0 million, respectively, as of December 31, 2013. In accordance with Illinois regulation, the legal lending limit to one borrower for RB&T, calculated as 25% of aggregate capital, totaled $9.9 million as of December 31, 2013.

 

The Company recognizes the need to prevent excessive concentrations of credit exposure to any one borrower or group of related borrowers. As such, the Company has established an in-house lending limit, which is lower than each subsidiary bank’s legal lending limit, in an effort to manage individual borrower exposure levels.

 

The in-house lending limit is the maximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. Under the in-house limit, total credit exposure to a single borrowing entity or group of related entities will not exceed the following, subject to certain exceptions:

 

Quad City Bank & Trust:  

$ 10.0 million 

Cedar Rapids Bank & Trust: 

$ 7.5 million  

Rockford Bank & Trust: 

$ 3.7 million  

                

On a consolidated basis, the in-house lending limit is $15.0 million, which is the maximum amount of credit that all affiliated banks, when combined, will extend to a single borrowing entity or group of related entities, subject to certain exceptions.

 

In addition, m2’s in-house lending limit is $1.0 million to a single leasing entity or group of related entities.

 

As part of the loan monitoring activity at the three subsidiary banks, credit administration personnel interact closely with senior bank management. For example, the internal loan committee of each subsidiary bank meets weekly. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks. To complement the in-house loan review, an independent third-party performs external loan reviews. Management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of those situations.

 

The Company recognizes that a diversified loan/lease portfolio contributes to reducing risk in the overall loan/lease portfolio. The specific loan/lease portfolio mix is subject to change based on loan/lease demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan/lease portfolio to ensure appropriate diversification and concentration risk is maintained.  

 

 
7

 

 

Specifically, each subsidiary bank’s total loans as a percentage of average assets may not exceed 85%. In addition, following are established policy limits and the actual allocations for the three subsidiary banks as of December 31, 2013 for the loan portfolio on a per loan type basis, reflected as a percentage of the subsidiary bank’s average gross loans: 

 

           

As of December 31, 2013

 

Type of Loan *

 

Maximum

Percentage per

Loan Policy **

   

QCBT

   

CRBT

   

RB&T

 
                                 

One-to-four family residential

    30 %     15 %     13 %     21 %

Multi-family

    15 %     3 %     7 %     3 %

Farmland

    5 %     0 %     2 %     0 %

Non-farm, nonresidential

    50 %     25 %     41 %     45 %

Construction and land development

    20 %     6 %     5 %     5 %

Commercial and industrial

    60 %     21 %     26 %     24 %

Loans to individuals

    10 %     1 %     2 %     1 %

Lease financing

    20 %     20 %     0 %     0 %

All other loans

    15 %     9 %     4 %     1 %
              100 %     100 %     100 %
                                 

Bank stock loans ***

    15 %     7 %     2 %     0 %

 

* The loan types above are as defined and reported in the subsidiary banks’ quarterly Reports of Condition and Income (also known as Call Reports).

** The maximum percentages listed are the same for all subsidiary banks except for CRBT, where the maximum percentage for one-to-four family residential is 25%, the maximum percentage for construction and land development is 15%, and the maximum percentage for lease financing receivables is 5%. Additionally, both CRBT and RB&T have maximum percentages for all other loans and bank stock loans of 10%.

*** Bank stock loans are not a separate reportable line item on the Call Reports. The loans are reported within “all other loans” above.

 

The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 2013 and 2012. Residential real estate loans held for sale are included in residential real estate loans below.  

 

   

Quad City

   

m2

   

Cedar Rapids

   

Rockford

   

Intercompany

   

Consolidated

 
   

Bank & Trust

   

Lease Funds

   

Bank & Trust

   

Bank & Trust

   

Elimination

   

Total

 
       $    

%

      $    

%

      $    

%

      $    

%

      $       $    

%

 

As of December 31, 2013:

 

(dollars in thousands)

 
                                                                                         

Commercial and industrial loans

  $ 209,150       38 %   $ -       0 %   $ 161,032       31 %   $ 61,506       24 %   $ -     $ 431,688       30 %

Commercial real estate loans

    239,965       44 %     -       0 %     290,625       55 %     142,819       57 %     (1,656 )     671,753       46 %

Direct financing leases

    -       0 %     128,902       96 %     -       0 %     -       0 %     -       128,902       9 %

Residential real estate loans

    65,678       12 %     -       0 %     45,457       9 %     36,221       14 %     -       147,356       10 %

Installment and other consumer loans

    36,791       7 %     -       0 %     28,427       5 %     10,816       4 %     -       76,034       5 %

Deferred loan/lease origination costs, net of fees

    45       0 %     4,814       4 %     (537 )     0 %     225       0 %     -       4,547       0 %
    $ 551,629       100 %   $ 133,716       100 %   $ 525,004       100 %   $ 251,587       100 %   $ (1,656 )   $ 1,460,280       100 %

As of December 31, 2012:

                                                                                       
                                                                                         

Commercial and industrial loans

  $ 203,542       36 %   $ -       0 %   $ 130,261       35 %   $ 60,441       26 %   $ -     $ 394,244       31 %

Commercial real estate loans

    258,133       45 %     -       0 %     201,659       54 %     136,025       58 %     (1,838 )     593,979       46 %

Direct financing leases

    -       0 %     103,686       96 %     -       0 %     -       0 %     -       103,686       8 %

Residential real estate loans

    60,666       11 %     -       0 %     27,863       7 %     27,053       11 %     -       115,582       9 %

Installment and other consumer loans

    47,621       8 %     -       0 %     17,425       4 %     11,675       5 %     -       76,721       6 %

Deferred loan/lease origination costs, net of fees

    (77 )     0 %     3,907       4 %     (738 )     0 %     84       0 %     -       3,176       0 %
    $ 569,885       100 %   $ 107,593       100 %   $ 376,470       100 %   $ 235,278       100 %   $ (1,838 )   $ 1,287,388       100 %

 

Proper pricing of loans is necessary to provide adequate return to the Company’s stockholders. Loan pricing, as established by the subsidiary banks’ internal loan committees, shall include consideration for the cost of funds, loan maturity and risk, origination and maintenance costs, appropriate stockholder return, competitive factors, and the economic environment. The portfolio contains a mix of loans with fixed and floating interest rates. Management attempts to maximize the use of interest rate floors on its variable rate loan portfolio. Refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk for more discussion on the Company’s management of interest rate risk.

 

 
8

 

 

Commercial and Industrial Lending

 

As noted above, the subsidiary banks are active commercial and industrial lenders. The current areas of emphasis include loans to small and mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Since 2010, the subsidiary banks have been active in participating in lending programs offered by the Small Business Administration (“SBA”) and the United States Department of Agriculture (“USDA”). Under these programs, the government entities will generally provide a guarantee of repayment ranging from 50% to 85% of the principal amount of the qualifying loan.

 

Loan approval is generally based on the following factors:

 

 

Ability and stability of current management of the borrower;

 

Stable earnings with positive financial trends;

 

Sufficient cash flow to support debt repayment;

 

Earnings projections based on reasonable assumptions;

 

Financial strength of the industry and business; and

 

Value and marketability of collateral.

 

For commercial and industrial loans, the Company assigns internal risk ratings which are largely dependent upon the aforementioned approval factors. The risk rating is reviewed annually or on an as needed basis depending on the specific circumstances of the loan. See Note 1 to the consolidated financial statements for additional information, including the internal risk rating scale.

 

As part of the underwriting process, management reviews current borrower financial statements. When appropriate, certain commercial and industrial loans may contain covenants requiring maintenance of financial performance ratios such as, but not limited to:

 

 

Minimum debt service coverage ratio;

 

Minimum current ratio;

 

Maximum debt to tangible net worth ratio; and/or

 

Minimum tangible net worth.

 

Establishment of these financial performance ratios depends on a number of factors, including risk rating and the specific industry.

 

Collateral for these loans generally includes accounts receivable, inventory, equipment, and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. Approved non-real estate collateral types and corresponding maximum advance percentages for each are listed below.

 

Approved Collateral Type  

 

Maximum Advance %   

     

Financial Instruments 

 

 

U.S. Government Securities    

 

90% of market value 

Securities of Federal Agencies

 

90% of market value 

Municipal Bonds rated by Moody’s As “A” or better 

 

80% of market value 

Listed Stocks 

 

75% of market value 

Mutual Funds 

 

75% of market value 

Cash Value Life Insurance 

 

95%, less policy loans 

Savings/Time Deposits (Bank) 

 

100% of current value 

 

 

 

General Business    
Accounts Receivable   80% of eligible account
 Inventory   50% of value
Fixed Assets (Existing)    50% of net book value, or
    75% of orderly liquidation appraised value
Fixed Assets (New)  

80% of cost

Leasehold Improvements   0%

 

 
9

 

 

Generally, if the above collateral is part of a cross-collateralization with other approved assets, then the maximum advance percentage may be higher.

 

The lending policy specifies maximum term limits for commercial and industrial loans. For term loans, the maximum term is generally 7 years. Generally, term loans range from 3 to 5 years. For lines of credit, the maximum term is typically 365 days.

 

In addition, the subsidiary banks often take personal guarantees or cosignors to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.

 

Commercial Real Estate Lending

 

The subsidiary banks also make commercial real estate loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those standards and processes specific to real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The lending policy specifies maximum loan-to-value limits based on the category of commercial real estate (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits as, or in some situations, more conservative than, those established by regulatory authorities. Following is a listing of these limits as well as some of the other guidelines included in the lending policy for the major categories of commercial real estate loans:

 

Commercial Real Estate Loan Types

 

Maximum Advance Rate **

 

Maximum

Term

Commercial Real Estate Loans on Improved Property *

 

80%

 

7 years

Raw Land

 

Lesser of 90% of project cost, or 65% of

"as is" appraised value

 

12 months

Land Development

 

Lesser of 90% of project cost, or 75% of

appraised value

 

24 months

Commerical Construction Loans

 

Lesser of 90% of project cost, or 80% of

appraised value

 

365 days

 

* Generally, the debt service coverage ratio must be a minimum of 1.25x for non-owner occupied loans and 1.15x for owner-occupied loans. For loans greater than $500 thousand, the subsidiary banks sensitivity test this ratio for deteriorated economic conditions, major changes in interest rates, and/or significant increases in vacancy rates.

** These maximum rates are consistent with, or in some situations, more conservative than, those established by regulatory authorities.

 

The lending policy also includes guidelines for real estate appraisals and evaluations, including minimum appraisal and evaluation standards based on certain transactions. In addition, the subsidiary banks often take personal guarantees to help assure repayment.

 

In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Owner-occupied loans are generally considered to have less risk. As of December 31, 2013 and 2012, approximately 39% and 35%, respectively, of the commercial real estate loan portfolio was owner-occupied.

 

 
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The Company’s lending policy limits non-owner occupied commercial real estate lending to 300% of total risk-based capital, and limits construction, land development, and other land loans to 100% of total risk-based capital. Exceeding these limits warrants the use of heightened risk management practices in accordance with regulatory guidelines. As of December 31, 2013, all three subsidiary banks were in compliance with these limits.

 

Following is a listing of the significant industries within the Company’s commercial real estate loan portfolio as of December 31, 2013 and 2012:

 

   

2013

   

2012

 
   

Amount

   

%

   

Amount

   

%

 
   

(dollars in thousands)

 

Lessors of Nonresidential Buildings

  $ 229,284       34 %   $ 178,060       30 %

Lessors of Residential Buildings

    64,659       10 %     61,460       10 %

Land Subdivision

    29,117       4 %     28,854       5 %

Hotels

    20,975       3 %     26,710       4 %

Nursing Care Facilities

    19,212       3 %     9,050       2 %

New Car Dealers

    16,597       2 %     27,079       5 %

Lessors of Other Real Estate Property

    15,509       2 %     12,765       2 %

Other *

    276,400       42 %     250,001       42 %

Total Commercial Real Estate Loans

  $ 671,753       100 %   $ 593,979       100 %

 

* “Other” consists of all other industries. None of these had concentrations greater than $15.0 million, or 2% of total commercial real estate loans.

 

Direct Financing Leasing

 

m2 leases machinery and equipment to commercial and industrial customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.

 

The following private and public sector business assets are generally acceptable to consider for lease funding:

 

 

Computer systems;

 

Photocopy systems;

 

Fire trucks;

 

Specialized road maintenance equipment;

 

Medical equipment;

 

Commercial business furnishings;

 

Vehicles classified as heavy equipment;

 

Aircraft;

 

Equipment classified as plant or office equipment; and

 

Marine boat lifts.

 

m2 will generally refrain from funding leases of the following type:

 

 

Leases collateralized by non-marketable items;

 

Leases collateralized by consumer items, such as vehicles, household goods, recreational vehicles, boats, etc.;

 

Leases collateralized by used equipment, unless its remaining useful life can be readily determined; and

 

Leases with a repayment schedule exceeding 7 years.

 

 
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Residential Real Estate Lending

 

Generally, the subsidiary banks’ residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that adjust in one to five years, and then retain these loans in their portfolios. During 2011 and 2012, the subsidiary banks originated and held a limited amount of 15-year fixed rate residential real estate loans that met certain credit guidelines. Servicing rights are not presently retained on the loans sold in the secondary market. The lending policy establishes minimum appraisal and other credit guidelines.

 

As mentioned above, the subsidiary banks sell the majority of their residential real estate loans in the secondary market. The following table presents the originations and sales of residential real estate loans for the Company.

   

For the year ended December 31,

 
   

2013

   

2012

   

2011

 
   

(dollars in thousands)

 

Originations of residential real estate loans

  $ 62,691     $ 151,676     $ 117,914  

Sales of residential real estate loans

  $ 56,103     $ 104,740     $ 83,926  

Percentage of sales to originations

    89 %     69 %     71 %

 

 

Installment and Other Consumer Lending

 

The consumer lending department of each subsidiary bank provides many types of consumer loans, including home improvement, home equity, motor vehicle, signature loans and small personal credit lines. The lending policy addresses specific credit guidelines by consumer loan type. In particular, for home equity loans and home equity lines of credit, the minimum credit bureau score is 680. For both home equity loans and lines of credit, the maximum advance rate is 90% of value with a minimum credit bureau score of 720, and the maximum advance rate is 80% of value with a credit bureau score of 680 to 719. The maximum term on home equity loans is 10 years and maximum amortization is 15 years. The maximum term on home equity lines of credit is 5 years.

 

*****

 

In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the lending policy described above. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are generally noted as such and specifically identified in loan/lease approval documents.

 

 

Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, and Rockford markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also insurance companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services. The Company competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.

 

Appendices. The commercial banking business is a highly regulated business. See Appendix A for a summary of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks.

 

See Appendix B for tables and schedules that show selected comparative statistical information relating to the business of the Company required to be presented pursuant to federal securities laws. Consistent with the information presented in the Form 10-K, results are presented for the fiscal years ended December 31, 2013, 2012, and 2011.

 

 
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Internet Site, Securities Filings and Governance Documents. The Company maintains Internet sites for itself and each of its three banking subsidiaries. The Company makes available free of charge through these sites its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Also available are many of its corporate governance documents, including the Code of Conduct and Ethics Policy. The sites are www.qcrh.com, www.qcbt.com, www.crbt.com, and www.rkfdbank.com.

 

 

Item 1A. Risk Factors  

 

In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:

 

Difficult market conditions have affected the financial industry and may adversely affect us in the future.

 

Dramatic declines in the U.S. housing market over the past few years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial banks and investment banks.  These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital from private and government entities, to merge with larger and stronger financial institutions and, in some cases, to fail. While these challenges are generally less severe than in recent years, their impact continues to be felt.

 

Reflecting concern about the stability of the financial markets in general and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including other financial institutions.  This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, erosion of consumer confidence, increased market volatility and widespread reduction of business activity in general.  The resulting economic pressure on consumers and erosion of confidence in the financial markets has already adversely affected our industry and may adversely affect our business, financial condition and results of operations.  Although we believe that these difficult conditions in the financial markets have recently improved, a worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and other financial institutions.  In particular, we may face the following risks in connection with these events:

 

 

Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage and underwrite the loans become less predictive of future behaviors.

 

 

The models used to estimate losses inherent in the credit exposure require difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of the borrowers to repay their loans, which may no longer be capable of accurate estimation and which may, in turn, impact the reliability of the models.

 

 

Our ability to borrow from other financial institutions or to engage in sales of mortgage loans to third parties on favorable terms, or at all, could be adversely affected by further disruptions in the capital markets or other events, including deteriorating investor expectations.

 

 

Competitive dynamics in the industry could change as a result of consolidation of financial services companies in connection with current market conditions.

 

 

We expect to face increased regulation of our industry.  Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

 

 
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We expect to face increased capital requirements, both at the Company level and at each of the subsidiary banks.  In this regard, the Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires the federal banking agencies to establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies. Furthermore, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, in September 2010 announced an agreement to a strengthened set of capital requirements for internationally active banking organizations, known as Basel III. In July 2013, the U.S. banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act. The increased capital requirements may limit our ability to pursue business opportunities and adversely affect our results of operations and growth prospects.

  

 

We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the Deposit Insurance Fund, or DIF, and reduced the ratio of reserves to insured deposits. Furthermore, the Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will necessitate increased assessments on depository institutions.  Although the precise impact on us will not be clear until implementing rules are issued, any future increases in assessments applicable to us will decrease our earnings and could have a material adverse effect on the value of, or market for, our common stock.

 

If current levels of market disruption and volatility continue or worsen to recessionary conditions, and/or if negative developments in the domestic and international credit markets continue, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

 

The acquisition of Community National, and potential future acquisitions, could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

 

On May 13, 2013, we acquired Community National and CNB. As part of our business strategy, we may consider acquisitions of other banks or financial institutions or branches, assets or deposits of such organizations. There is no assurance, however, that we will determine to pursue any of these opportunities or that if we determine to pursue them that we will be successful.  Acquisitions involve numerous risks, any of which could harm our business, including:

 

 

difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target company and realizing the anticipated synergies of the combined businesses;

 

 

difficulties in supporting and transitioning customers of the target company;

 

 

diversion of financial and management resources from existing operations;

 

 

the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

 

 

risks of entering new markets or areas in which we have limited or no experience or are outside our core competencies;

 

 

potential loss of key employees, customers and strategic alliances from either our current business or the business of the target company;

 

 

assumption of unanticipated problems or latent liabilities; and

 

 

inability to generate sufficient revenue to offset acquisition costs.

 

Future acquisitions may involve the issuance of our equity securities as payment or in connection with financing the business or assets acquired, and as a result, could dilute the ownership interests of existing stockholders. In addition, consummating these transactions could result in the incurrence of additional debt and related interest expense, as well as unforeseen liabilities, all of which could have a material adverse effect on our business, results of operations and financial condition. The failure to successfully evaluate and execute acquisitions or otherwise adequately address the risks associated with acquisitions could have a material adverse effect on our business, results of operations and financial condition. 

 

 
14

 

 

We must effectively manage our credit risk.

 

There are risks inherent in making any loan, including risks inherent in dealing with specific borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.

 

The majority of our subsidiary banks’ loan portfolios are invested in commercial and industrial and commercial real estate loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area’s largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to commercial and commercial real estate loans, our subsidiary banks are also active in residential mortgage and consumer lending. Should the economic climate fail to meaningfully improve or if it worsens, our borrowers may experience financial difficulties, and the level of nonperforming loans, charge-offs and delinquencies could rise, which could negatively impact our business through increased provision for loan/lease losses (“provision”), reduced interest income on loans/leases, and increased expenses incurred to carry and resolve problem loans/leases.

 

Commercial and industrial loans make up a large portion of our loan/lease portfolio.

 

Commercial and industrial loans were $431.7 million, or approximately 30% of our total loan/lease portfolio, as of December 31, 2013. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal guarantee on commercial loans. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing these loans may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. In addition, if the U.S. economy experiences a prolonged recovery period, it could harm or continue to harm the businesses of our commercial and industrial customers and reduce the value of the collateral securing these loans.

 

Our loan/lease portfolio has a significant concentration of commercial real estate loans, which involve risks specific to real estate values.

 

Commercial real estate lending comprises a significant portion of our lending business. Specifically, commercial real estate loans were $671.8 million, or approximately 46% of our total loan/lease portfolio, as of December 31, 2013. Of this amount, $261.2 million, or approximately 39%, was owner-occupied. The market value of real estate securing our commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located Adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

 

 
15

 

 

The problems that have occurred in the residential real estate and mortgage markets throughout much of the U.S. in prior years also affected the commercial real estate market. In our market areas, we generally experienced a downturn in credit performance by our commercial real estate loan customers in prior years relative to historical norms, and despite recent improvements in certain aspects of the economy, a level of uncertainty continues to exist in the economy and credit markets, there can be no guarantee that we will not experience further deterioration in the performance of commercial real estate and other real estate loans in the future. In such case, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision and adversely affect our operating results, financial condition and/or capital.

 

Our allowance for loan/lease losses may prove to be insufficient to absorb losses in our loan/lease portfolio.

 

We establish our allowance for loan/lease losses (“allowance”) in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2013, our allowance as a percentage of total gross loans/leases was 1.47%, and as a percentage of total nonperforming loans/leases was approximately 104.70%. In addition, we had net charge-offs as a percentage of gross average loans/leases of 0.31% for the year ended December 31, 2013. Because of the concentration of commercial and industrial and commercial real estate loans in our loan portfolio, which tend to be larger in amount than residential real estate and installment loans, the movement of a small number of loans to nonperforming status can have a significant impact on this ratio. Although management believes that the allowance as of December 31, 2013 was adequate to absorb losses on any existing loans/leases that may become uncollectible, in light of the current economic environment, which remains challenging, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance will prove sufficient to cover actual loan/lease losses in the future, particularly if economic conditions are more difficult than what management currently expects. Additional provisions and loan/lease losses in excess of our allowance may adversely affect our business, financial condition and results of operations.

 

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

 

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, as well as that of our customers engaging in internet banking activities, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. Any interruption in, or breach of security of, our computer systems and network infrastructure, or that of our internet banking customers, could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

 

 
16

 

 

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

 

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

 

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

 

We may be materially and adversely affected by the highly regulated environment in which we operate.

 

The Company and its bank subsidiaries are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

 

As a bank holding company, we are subject to regulation and supervision primarily by the Federal Reserve. QCBT and CRBT, as Iowa-chartered state member banks, are subject to regulation and supervision primarily by both the Iowa Superintendent and the Federal Reserve. RB&T, as an Illinois-chartered state member bank, is subject to regulation and supervision primarily by both the DFPR and the Federal Reserve. We and our banks undergo periodic examinations by these regulators, who have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies.

 

The primary federal and state banking laws and regulations that affect us are described in Appendix A to this report. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. For example, on July 21, 2010, the Dodd-Frank Act was signed into law, which significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act, together with the regulations to be developed thereunder, includes provisions affecting large and small financial institutions alike, including several provisions that affect how community banks, thrifts and small bank and thrift holding companies are and will be regulated. In addition, in recent years the Federal Reserve has adopted numerous new regulations addressing banks’ overdraft and mortgage lending practices. Further, the Consumer Financial Protection Bureau was recently established, with broad powers to supervise and enforce consumer protection laws, and additional consumer protection legislation and regulatory activity is anticipated in the near future.

 

In September 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III, which constitutes a strengthened set of capital requirements for banking organizations in the U.S. and around the world. In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million).  The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer.  The Basel III Rules also expand the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital.  A number of instruments that now qualify as Tier 1 Capital will not qualify, or their qualifications will change.  The Basel III Rules also permit smaller banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital.  The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1 Capital ratio.  In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more.  Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015.  

 

 
17

 

 

U.S. financial institutions are also subject to numerous monitoring, recordkeeping, and reporting requirements designed to detect and prevent illegal activities such as money laundering and terrorist financing. These requirements are imposed primarily through the Bank Secrecy Act, (“BSA”) which was most recently amended by the USA Patriot Act. We have instituted policies and procedures to protect us and our employees, to the extent reasonably possible, from being used to facilitate money laundering, terrorist financing and other financial crimes. There can be no guarantee, however, that these policies and procedures are effective.

 

Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on us. Although we have policies and procedures designed to mitigate the risk of any such violations, there can be no assurance that such violations will not occur.

 

In addition to the foregoing laws and regulations, the policies of the Federal Reserve also have a significant impact on us. Among other things, the Federal Reserve’s monetary policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits, and can also affect the value of financial instruments we hold and the ability of borrowers to repay their loans, which could have a material adverse effect on us.

 

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

 

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve.  An important function of the Federal Reserve is to regulate the money supply and credit conditions.  Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits.  These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits.  Their use also affects interest rates charged on loans or paid on deposits.

 

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.  The effects of such policies upon our business, financial condition and results of operations cannot be predicted, especially in light of the recent change in Federal Reserve leadership.

 

Interest rates and other conditions impact our results of operations.

 

Our profitability is in large part a function of the spread between the interest rates earned on investments and loans/leases and the interest rates paid on deposits and other interest bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan/lease terms, the mix of adjustable and fixed rate loans/leases in our portfolio, the length of time deposits and borrowings, and the rate sensitivity of our deposit customers could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures about Market Risk” included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations. 

 

 
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We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

 

The Company and each of its banking subsidiaries are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations and with the implementation of the Basel III Rules, we understand that the capital requirements imposed by the regulators will increase in the future. We intend to grow our business organically and to explore opportunities to grow our business by taking advantage of attractive acquisition opportunities, and such growth plans may require us to raise additional capital to ensure that we have adequate levels of capital to support such growth on top of our current operations. Our ability to raise additional capital, when and if needed or desired, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market conditions, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. Our failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and preferred stock and to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition.

 

Failure to pay interest on our debt or dividends on our preferred stock may adversely impact our ability to pay common stock dividends.

 

As of December 31, 2013, we had $40.3 million of junior subordinated debentures held by six business trusts that we control. Interest payments on the debentures, which totaled $1.1 million for 2013, must be paid before we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. As of December 31, 2013, we had 29,867 shares of senior non-cumulative perpetual preferred stock issued and outstanding, which we issued to the U.S. Department of the Treasury (the “Treasury”) as part of the Small Business Lending Fund Program (“SBLF”). The terms of the senior preferred stock impose limits on our ability to pay dividends on and repurchase shares of our common stock and other securities. In general, we may declare and pay dividends on our common stock or any other stock junior to the senior preferred stock, or repurchase shares of any such stock, only if after payment of such dividends or repurchase of such shares, our Tier 1 Capital would be at least 90% of our consolidated Tier 1 Capital on the date of issuance of the senior preferred stock. If we fail to declare and pay dividends on the senior preferred stock in a given quarter, then during such quarter and for the next three quarters following such missed dividend payment we may not pay dividends on or repurchase any common stock or any other securities that are junior to (or in parity with) the senior preferred stock, except that dividends may be paid on parity stock to the extent necessary to avoid any material breach of a covenant by which our company is bound. Although we expect to be able to pay all required dividends on the senior preferred stock (and to continue to pay dividends on common stock at current levels), there is no guarantee that we will be able to do so. Deferral, of either interest payments on the debentures or preferred dividends on the preferred shares, could cause a subsequent decline in the market price of our common stock because we would not be able to pay dividends on our common stock.

 

As a bank holding company, our sources of funds are limited.

 

We are a bank holding company, and our operations are primarily conducted by our subsidiary banks, which are subject to significant federal and state regulation. When available, cash to pay dividends to our stockholders is derived primarily from dividends received from our subsidiary banks. Our ability to receive dividends or loans from our subsidiary banks is restricted. Dividend payments by our subsidiaries to us in the future will require generation of future earnings by them and could require regulatory approval if any proposed dividends are in excess of prescribed guidelines. Further, as a structural matter, our right to participate in the assets of our subsidiary banks in the event of a liquidation or reorganization of any of the banks would be subject to the claims of the creditors of such bank, including depositors, which would take priority except to the extent we may be a creditor with a recognized claim. As of December 31, 2013, our subsidiary banks had deposits and other liabilities in the aggregate of approximately $2.19 billion.

 

 
19

 

 

Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.

 

The market value of investments in our securities portfolio has become increasingly volatile in recent years, and as of December 31, 2013, we had gross unrealized losses of $31.9 million, or 4.4% of amortized cost, in our investment portfolio (modestly offset by gross unrealized gains of $2.9 million). The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we formally evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if our investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on our results of operations in the periods in which the write-offs occur. Based on management’s evaluation, it was determined that the gross unrealized losses at December 31, 2013 are temporary and primarily a function of an increase in certain market interest rates.

 

Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.

 

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of securities and/or loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, deposits, investment maturities and calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from the Federal Reserve Bank of Chicago (the “Federal Reserve Bank”) or other correspondent banks, Federal Home Loan Bank (“FHLB”) advances, wholesale and customer repurchase agreements, brokered time deposits, and the ability to borrow at the Federal Reserve Bank’s Discount Window. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

 

During the recent recession and early stages of recovery, the financial services industry and the credit markets generally were materially and adversely affected by significant declines in asset values and by a lack of liquidity.  The liquidity issues were particularly acute for regional and community banks, as many of the larger financial institutions significantly curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks.  In addition, many of the larger correspondent lenders reduced or even eliminated federal funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans/leases, invest in securities, meet our expenses, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.

 

Our business is concentrated in and dependent upon the continued growth and welfare of the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, and Rockford markets.

 

We operate primarily in the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, and Rockford markets, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a particularly strong presence in Bettendorf, Cedar Falls, Cedar Rapids, Davenport, and Waterloo, Iowa and Moline and Rockford, Illinois and their surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce demand for our products and services, affect the ability of our customers to repay their loans to us, increase the levels of our nonperforming and problem loans, and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.  

 

 
20

 

 

We face intense competition in all phases of our business from other banks and financial institutions.

 

The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services.

 

Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and offer a broader range of financial services than we can offer.

 

The soundness of other financial institutions could negatively affect us. 

 

Our ability to engage in routine funding and other transactions could be negatively affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of the difficulties or failures of other banks, which would increase the capital we need to support our growth.

 

Our community banking strategy relies heavily on our subsidiaries’ independent management teams, and the unexpected loss of key managers may adversely affect our operations.

 

We rely heavily on the success of our bank subsidiaries’ independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain the executive officers and current management teams of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we manage our existing portfolio and grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.

 

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.

 

The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

 

 
21

 

 

Our reputation could be damaged by negative publicity.

 

Reputational risk, or the risk to our business, financial condition or results of operations from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from actions taken by regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships.

 

The repeal of federal prohibitions on payment of interest on business demand deposits could increase our interest expense.

 

All federal prohibitions on the ability of financial institutions to pay interest on business demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, some financial institutions have commenced offering interest on these demand deposits to compete for customers. If competitive pressures require us to pay interest on these demand deposits to attract and retain business customers, our interest expense would increase and our net interest margin would decrease. This could have a material adverse effect on our business, financial condition and results of operations. Further, the effect of the repeal of the prohibition could be more significant in a higher interest rate environment as business customers would have a greater incentive to seek interest on demand deposits.

 

The preparation of our consolidated financial statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.

 

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and general reporting practices within the financial services industry, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies, such as those pertaining to our allowance, require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions, which may have a material adverse effect on our financial condition or results of operations in subsequent periods.

 

From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial condition and results of operations.

 

Changes in these standards are continuously occurring, and given the current economic environment, more drastic changes may occur. The implementation of such changes could have a material adverse effect on our financial condition and results of operations.

 

Secondary mortgage and government guaranteed loan market conditions could have a material impact on our financial condition and results of operations.

 

Currently, we sell a majority of the residential real estate and government guaranteed loans we originate. The profitability of these operations depends in large part upon our ability to make loans and to sell them in the secondary market at a gain. Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market.

 

In addition to being affected by interest rates, the secondary markets are also subject to investor demand for residential mortgages and government guaranteed loans and investor yield requirements for those loans. These conditions may fluctuate or even worsen in the future. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse effect on our financial condition and results of operations.  

 

 
22

 

 

Customers may decide not to use banks to complete their financial transactions, which could result in a loss of income to us.

 

Technology and other changes are allowing customers to complete financial transactions using nonbanks that historically have involved banks at one or both ends of the transaction. For example, customers can now pay bills and transfer funds directly without going through a bank. The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income as well as the loss of customer deposits.

 

Item 1B. Unresolved Staff Comments

 

There are no unresolved staff comments.

 

Item 2.     Properties

 

The following table is a listing of the Company’s operating facilities for its subsidiary banks:

 

Facility Address

 

Facility

Square

Footage

Facility Owned or

Leased

       

Quad City Bank & Trust

     

2118 Middle Road in Bettendorf, IA

 

6,700

Owned

4500 Brady Street in Davenport, IA

 

36,000

Owned

3551 7th Street in Moline, IL

 

30,000

Owned

5405 Utica Ridge Road in Davenport, IA

 

7,400

Leased

1700 Division Street in Davenport, IA

 

12,000

Owned

       

Cedar Rapids Bank & Trust

     

500 1st Avenue NE, Suite 100 in Cedar Rapids, IA

 

36,000

Owned

5400 Council Street in Cedar Rapids, IA

 

5,900

Owned

422 Commercial Street in Waterloo, IA *

 

25,000

Owned

11 Tower Park Drive in Waterloo, IA *

 

6,000

Owned

312 1st Street in Cedar Falls, IA *

 

3,000

Owned

       

Rockford Bank & Trust

     

127 North Wyman Street in Rockford, IL **

 

7,800

Leased

4571 Guilford Road in Rockford, IL

 

20,000

Owned

308 West State Street in Rockford, IL**      1,100 Leased

 

* Branches of Community Bank & Trust.

** RB&T is in the process of transitioning its second branch facility from North Wyman Street to West State Street during the first quarter of 2014. Total operating facilities for RB&T will remain at two.

 

The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured, and are adequately equipped for carrying on the business of the Company.

 

No individual real estate property or mortgage amounts to 10% or more of consolidated assets.

 

Item 3.     Legal Proceedings

 

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

 

 
23

 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Part II

 

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information. The common stock, par value $1.00 per share, of the Company is listed on The NASDAQ Global Market under the symbol “QCRH”. The stock began trading on NASDAQ on October 6, 1993. The Company transferred its listing from the NASDAQ Capital Market to the NASDAQ Global Market on March 1, 2010. As of December 31, 2013, there were 7,884,462 shares of common stock outstanding held by approximately 2,700 holders of record. The following table sets forth the high and low sales prices of the common stock, as reported by NASDAQ for the periods indicated.

 

   

2013 Sales Price

   

2012 Sales Price

   

2011 Sales Price

 
   

High

   

Low

   

High

   

Low

   

High

   

Low

 

First quarter

  $ 16.960     $ 13.050     $ 12.450     $ 8.500     $ 8.670     $ 7.220  

Second quarter

    16.500       13.180       14.500       10.700       9.470       7.290  

Third quarter

    16.510       14.960       14.980       12.620       9.928       8.701  

Fourth quarter

    18.200       15.650       15.500       11.400       9.234       8.420  

 

Dividends on Common Stock. On May 1, 2013, the Company declared a cash dividend of $0.04 per share, or $229 thousand, which was paid on July 8, 2013, to stockholders of record as of June 21, 2013. On November 7, 2013, the Company declared a cash dividend of $0.04 per share, or $230 thousand, which was paid on January 7, 2014, to stockholders of record as of December 20, 2013. In the future, it is the Company’s intention to continue to consider the payment of dividends on a semi-annual basis. The Company anticipates an ongoing need to retain much of its operating income to help provide the capital to redeem the Series F Noncumulative Perpetual Preferred Stock (the “Series F Preferred Stock),” in the short-term and for continued growth in the long-term, but believes that operating results have reached a level that can sustain dividends to stockholders as well. See Note 11 to the consolidated financial statements for a detailed discussion of preferred stock.

 

The Company is heavily dependent on dividend payments from its subsidiary banks to make dividend payments on the Company’s preferred and common stock. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Iowa and Illinois law provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits.

 

The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. 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.

 

The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debentures in six private placements (including two that were assumed in the acquisition of Community National). Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. Additionally, the Company has issued shares of non-cumulative perpetual preferred stock and under the terms of this preferred stock, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. See Note 11 to the consolidated financial statements for additional detail on the preferred stock. None of these circumstances existed through the date of filing of this Form 10-K filed with the Securities and Exchange Commission.

 

 
24

 

  

Purchase of Equity Securities by the Company. There were no purchases of common stock by the Company for the years ended December 31, 2013, 2012, and 2011.

 

Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2008 and ending December 31, 2013, a comparison of cumulative total returns for the Company, the NASDAQ Composite Index, and the SNL Bank NASDAQ Index prepared by SNL Securities, Charlottesville, Virginia. The graph was prepared at the Company’s request by SNL Securities. The information assumes that $100 was invested at the closing price on December 31, 2008 in the common stock of the Company and in each index, and that all dividends were reinvested.

 

 


 
25

 

 

Item 6.     Selected Financial Data

 

The following “Selected Financial Data” of the Company is derived in part from, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto. See Item 8 Financial Statements. Results for past periods are not necessarily indicative of results to be expected for any future period.

 

   

Years Ended December 31,

 
   

2013

   

2012

   

2011

   

2010

   

2009

 

 

 

(dollars in thousands, except per share data)

 
STATEMENT OF INCOME DATA      

Interest income

  $ 81,872     $ 77,376     $ 77,723     $ 80,097     $ 85,611  

Interest expense

    17,767       19,727       23,578       30,233       34,949  

Net interest income

    64,105       57,649       54,145       49,864       50,662  

Provision for loan/lease losses

    5,930       4,371       6,616       7,464       16,976  

Non-interest income

    25,814       16,621       17,462       15,406       15,547  

Non-interest expense

    64,433       52,259       50,993       48,549       46,937  

Income tax expense

    4,618       4,534       3,868       2,449       247  

Net income

    14,938       13,106       10,130       6,808       2,049  

Less: net income attributable to noncontrolling interests

    -       488       438       221       277  

Net income attributable to QCR Holdings, Inc.

    14,938       12,618       9,692       6,587       1,772  

Less: preferred stock dividends and discount accretion

    3,168       3,496       5,284       4,128       3,844  

Net income (loss) attributable to QCR Holdings, Inc. common stockholders

    11,770       9,122       4,408       2,459       (2,072 )
                                         

PER COMMON SHARE DATA

                                       

Net income (loss) - Basic (1)

  $ 2.13     $ 1.88     $ 0.93     $ 0.54     $ (0.46 )

Net income (loss) - Diluted (1)

    2.08       1.85       0.92       0.53       (0.46 )

Cash dividends declared

    0.08       0.08       0.08       0.08       0.08  

Dividend payout ratio

    3.76

%

    4.26

%

    8.60

%

    14.81

%

    (17.39

)%

                                         

BALANCE SHEET DATA

                                       

Total assets

  $ 2,394,953     $ 2,093,730     $ 1,966,610     $ 1,836,635     $ 1,779,646  

Securities

    697,210       602,239       565,229       424,847       370,520  

Total loans/leases

    1,460,280       1,287,388       1,200,745       1,172,539       1,244,320  

Allowance for estimated losses on loans/leases

    21,448       19,925       18,789       20,365       22,505  

Deposits

    1,646,991       1,374,114       1,205,458       1,114,816       1,089,323  

Borrowings

    563,381       547,758       590,603       566,060       542,895  

Stockholders' equity:

                                       

Preferred

    29,799       53,163       63,386       62,214       58,578  

Common

    117,778       87,271       81,047       70,357       67,017  
                                         

KEY RATIOS

                                       

Return on average assets (2)

    0.64

%

    0.62

%

    0.51

%

    0.36

%

    0.10

%

Return on average common stockholders' equity (3)

    11.48       10.84       5.82       3.58       (2.97 )

Return on average total stockholder's equity (2)

    10.24       8.90       7.09       5.03       1.43  

Net interest margin, tax equivalent yield (4)

    3.03       3.10       3.08       2.92       3.14  

Efficiency ratio (5)

    71.66       70.36       71.21       74.38       70.89  

Loans to deposits

    88.66       93.69       99.61       105.18       114.23  

Nonperforming assets to total assets

    1.28       1.41       2.06       2.73       2.27  

Allowance for estimated losses on loans/leases to total loans/leases

    1.47       1.55       1.56       1.74       1.81  

Allowance for estimated losses on loans/leases to nonperforming loans/leases

    104.70       78.47       58.70       49.49       74.94  

Net charge-offs to average loans/leases

    0.31       0.27       0.70       0.79       1.00  

Average total stockholders' equity to average total assets

    6.26       7.00       7.17       7.13       7.18  

 

(1) Income (loss) amounts are attributable to QCR Holdings, Inc.

(2) Numerator is net income attributable to QCR Holdings, Inc.

(3) Numerator is net income (loss) available to QCR Holdings, Inc. common stockholders

(4) Interest earned and yields on nontaxable investments and nontaxable loans are determined on a tax equivalent basis using a 34% tax rate

(5) Non-interest expenses divided by the sum of net interest income before provision for loan/lease losses and non-interest income

 

 
26

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion provides additional information regarding our operations for the years ending December 31, 2013, 2012, and 2011, and our financial condition at December 31, 2013 and 2012. This discussion should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.

 

OVERVIEW

 

The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty years, the Company has grown to include two additional banking subsidiaries (including the 2013 acquisition of CNB which was merged into one of the Company’s legacy banking subsidiaries) and a number of nonbanking subsidiaries. As of December 31, 2013, the Company had $2.39 billion in consolidated assets, including $1.46 billion in total loans/leases and $1.65 billion in deposits.

 

The Company recognized net income and net income attributable to QCR Holdings, Inc. of $14.9 million for the year ended December 31, 2013. After preferred stock dividends of $3.2 million, the Company reported net income available to common stockholders of $11.8 million, or diluted earnings per common share (“EPS”) of $2.08. For the same period in 2012, the Company recognized net income of $13.1 million, and net income attributable to QCR Holdings, Inc. of $12.6 million, which excludes the net income attributable to noncontrolling interests of $488 thousand. After preferred stock dividends of $3.5 million, the Company reported net income available to common stockholders of $9.1 million, or EPS of $1.85. By comparison, for 2011, the Company recognized net income of $10.1 million, and net income attributable to QCR Holdings, Inc. of $9.7 million, which excludes the net income attributable to noncontrolling interests of $438 thousand. After preferred stock dividends and discount accretion of $5.3 million, the Company reported net income available to common stockholders of $4.4 million, or EPS of $0.92. The $5.3 million of preferred stock dividends and discount accretion included $1.2 million of accelerated discount accretion on the repurchased Treasury Capital Purchase Program (“CPP”) preferred shares. Excluding the impact of the accelerated accretion, the Company’s EPS for 2011 would have been $1.18.

 

Following is a table that represents the various net income measurements for the years ended December 31, 2013, 2012, and 2011.

 

   

Year Ended December 31,

 
   

2013

   

2012

   

2011

 
                         

Net income

  $ 14,938,245     $ 13,106,240     $ 10,129,869  

Less: Net income attributable to noncontrolling interests

    -       488,473       438,221  

Net income attributable to QCR Holdings, Inc.

  $ 14,938,245     $ 12,617,767     $ 9,691,648  
                         

Less: Preferred stock dividends and discount accretion

    3,168,302       3,496,085       5,283,885

*

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 11,769,943     $ 9,121,682     $ 4,407,763  
                         

Diluted earnings per common share

  $ 2.08     $ 1.85     $ 0.92  
                         

Weighted average common and common equivalent shares outstanding

    5,646,926       4,919,559       4,789,026  

 

*Includes $1.2 million of accelerated accretion of discount on the CPP preferred shares repurchased during the third quarter of 2011. See Note 11 to the consolidated financial statements for detailed discussion of preferred stock.

 

 
27

 

 

Following is a table that represents the major income and expense categories.

 

   

Year Ended December 31,

 
   

2013

   

2012

   

2011

 
                         

Net interest income

  $ 64,105,437     $ 57,649,260     $ 54,144,856  

Provision for loan/lease losses

    (5,930,420 )     (4,370,767 )     (6,616,014 )

Noninterest income

    25,813,828       16,621,295       17,461,878  

Noninterest expense

    (64,432,658 )     (52,258,947 )     (50,992,652 )

Federal and state income tax

    (4,617,942 )     (4,534,601 )     (3,868,199 )

Net income

  $ 14,938,245     $ 13,106,240     $ 10,129,869  

 

With the acquisition of Community National and CNB on May 13, 2013, the Company’s 2013 results were significantly impacted. In comparison to 2012, following are some noteworthy changes:

 

 

Net interest income grew $6.5 million, or 11%, propelled by the addition of CNB for more than half of the year as well as some modest organic growth in earning assets.

 

Excluding the acquisition-related gains (bargain purchase gain of $1.8 million upon acquisition and gains on CNB branch sales of $2.3 million), noninterest income increased $5.0 million, or 30%, led by wealth management fees, deposit service fees, and gains on sales of government guaranteed portions of loans.

 

Excluding acquisition and data conversion costs totaling $2.4 million, noninterest expense increased $9.8 million, or 19%, with most of this increase attributable to the addition of CNB’s cost structure for more than half of the year.

 

NET INTEREST INCOME AND MARGIN

 

Net interest income, on a tax equivalent basis, grew $7.2 million, or 12%, in 2013 compared to 2012. The increase in net interest income was primarily driven by the addition of CNB for more than half of the year. Secondarily, the Company’s legacy charters experienced modest organic growth in earning assets during 2013. A comparison of yields, spreads and margins from 2013 to 2012 shows the following (on a tax equivalent basis):

 

 

The average yield on interest-earning assets decreased 34 basis points from 4.18% to 3.84%.

 

The average cost of interest-bearing liabilities decreased 28 basis points from 1.37% to 1.09%.

 

The net interest spread declined 6 basis points from 2.81% to 2.75%.

 

The net interest margin declined 11 basis points from 3.14% to 3.03%.

 

Net interest income, on a tax equivalent basis, grew $4.9 million, or 9% in 2012 compared to 2011. Interest income (on a tax equivalent basis) grew slightly as growth in earning assets coupled with diversification of the securities portfolio outpaced the impact of declining yields. In addition, interest expense continued its significant decline as the Company continued its shift in mix of funding from wholesale (FHLB advances, wholesale structured repurchase agreements (“structured repos”), and brokered time deposits) to core deposits. For 2012, average earning assets increased by $122.2 million, or 7%, while average interest-bearing liabilities grew modestly by $15.7 million, or 1%, when compared with average balances for 2011. Primarily funding the growth in average earning assets, noninterest-bearing deposits grew $95.9 million, or 30%. A comparison of yields, spreads and margins from 2012 to 2011 shows the following (on a tax equivalent basis):

 

 

The average yield on interest-earning assets decreased 23 basis points from 4.41% to 4.18%.

 

The average cost of interest-bearing liabilities decreased 28 basis points from 1.65% to 1.37%.

 

The net interest spread improved 5 basis points from 2.76% to 2.81%.

 

The net interest margin improved 6 basis points from 3.08% to 3.14%.

 

 
28

 

 

The Company’s management closely monitors and manages net interest margin. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and leasing company is the improvement of their net interest margins. Management continually addresses this issue with pricing and other balance sheet management strategies including, but not limited to, the use of alternative funding sources. Over the past three years, the Company’s management has emphasized improving its funding mix by reducing its reliance on wholesale funding, which tends to be at a higher cost than deposits. In addition, with deposit growth outpacing loan growth, the Company’s management has focused on growing and diversifying its securities portfolio.

 

The following strategies were executed by the Company to reduce reliance on wholesale funding or reducing the cost of portions of the Company’s wholesale funding.

 

QCBT executed a balance sheet restructuring during the first quarter of 2011. Specifically, the bank utilized excess liquidity and prepaid $15.0 million of FHLB advances with a weighted average interest rate of 4.87% and a weighted average maturity of May 2012. The fees for prepayment totaled $832 thousand. The Company sold $37.4 million of government sponsored agency securities and recognized pre-tax gains of $880 thousand which more than offset the prepayment fees. The proceeds from the sales of the government sponsored agency securities were reinvested into government guaranteed residential mortgage-backed securities with reduced risk-weighting for regulatory capital purposes and yields that were comparable to the sold securities. The resulting impacts were significant and included:

 

 

Significantly reduced interest expense and improved net interest margin

 

Stronger regulatory capital

 

Reduced reliance on wholesale funding

 

Separately, during the first quarter of 2011, QCBT modified $20.4 million of fixed rate FHLB advances with a weighted average interest rate of 4.33% and a weighted average maturity of October 2013 into new fixed rate advances with a weighted average interest rate of 3.35% and a weighted average maturity of February 2014. Additionally, during the fourth quarter of 2011, RB&T modified $13.0 million of fixed rate FHLB advances with a weighted average interest rate of 3.37% and a weighted average maturity of March 2013 into new fixed rate FHLB advances with a weighted average interest rate of 2.29% and a weighted average maturity of February 2016.

 

During the second quarter of 2012, the Company’s subsidiary banks modified $25.0 million of fixed rate structured repos with a weighted average interest rate of 3.77% and a weighted average maturity of December 2015 into new fixed rate structured repos with a weighted average interest rate of 3.21% and a weighted average maturity of April 2019.

 

During the first quarter of 2013, QCBT modified $50.0 million of structured repos with a weighted average interest rate of 3.21% and a weighted average maturity of February 2016 into new fixed rate structured repos with a weighted average interest rate of 2.65% and a weighted average maturity of May 2020. During the second quarter of 2013, CRBT modified $20.0 million of fixed rate FHLB advances with a weighted average rate of 4.82% and a weighted average maturity of October 2016 into new fixed rate FHLB advances with a weighted average interest rate of 4.12% and a weighted average maturity of June 2019.

 

These modifications serve to reduce interest expense and improve net interest margin, and minimize the exposure to rising rates through the duration extension of fixed rate liabilities.  

 

 
29

 

 

The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories are presented in the following table: 

 

   

Years Ended December 31,

 
   

2013

   

2012

   

2011

 
   

Average

Balance

   

Interest

Earned

or Paid

   

Average

Yield or

Cost

   

Average

Balance

   

Interest

Earned

or Paid

   

Average

Yield or

Cost

   

Average

Balance

   

Interest

Earned

or Paid

   

Average

Yield or

Cost

 
   

(dollars in thousands)

 

ASSETS

                                                                       

Interest earning assets:

                                                                       

Federal funds sold

  $ 14,577     $ 19       0.13

%

  $ 3,003     $ 6       0.20

%

  $ 49,510     $ 92       0.19  

Interest-bearing deposits at financial institutions

    43,909       275       0.63       54,834       378       0.69       29,691       405       1.36  

Investment securities (1)

    700,344       16,140       2.30       603,568       14,268       2.36       501,470       12,344       2.46  

Restricted investment securities

    16,083       559       3.48       15,172       507       3.34       15,573       558       3.58  

Gross loans/leases receivable (1) (2) (3) (4)

    1,425,364       67,484       4.73       1,219,623       64,100       5.26       1,177,705       64,808       5.50  

Total interest earning assets

  $ 2,200,277       84,477       3.84     $ 1,896,200       79,259       4.18     $ 1,773,949       78,207       4.41  
                                                                         

Noninterest-earning assets: