KBRA Affirms Ratings for QCR Holdings, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Moline, Illinois based QCR Holdings, Inc. (NASDAQ: QCRH) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+ and the short-term deposit and debt ratings of K2 for its subsidiary banks: Quad City Bank and Trust Company, Cedar Rapids Bank and Trust Company, Community State Bank, and Guaranty Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Consolidated operating performance continues to exhibit solid multi-year results, anchored by strong noninterest income levels, largely connected to capital markets revenue, in addition to solid NIM and good expense management. Net earnings across individual subsidiary banks can vary, largely because of different business activities that can affect the level of noninterest income and due to varying funding costs, which impact the NIM.

Capital markets revenue consists almost entirely of fees generated by LIHTC borrower interest rate swap activity. These customers desire long-term fixed rate financing due to the underlying structure of the LIHTC financing market; to provide this service, the bank(s) enter offsetting pay-fixed, receive-floating interest rate swaps, generating a fee for the arrangement. While this activity has led to steady fee income in the past several years, LIHTC loans currently comprise a substantial percentage of total loans, potentially limiting the earnings contribution in future periods; management has begun to securitize these loans, which reduces absolute exposure and supports liquidity; however, since the retained interests are currently held, there is a limit to this activity.

The stable consolidated Tax Equivalent Net Interest Margin is tied to solid yields on the loan and investment portfolios, which effectively offset the relatively high cost of funds, enabling the NIM to slightly outperform rated peer comparisons.

Consolidated regulatory capital has improved, beginning in 2023, due to balance sheet management and retained earnings, although levels continue to trail rated peers by a noticeable margin, especially on a CET1 and Tier 1 leverage basis, primary because the BHC operates with relatively high double leverage. Capital protection at the subsidiary banks is generally commensurate with rated peers.

Balance sheet liquidity is somewhat limited, in context of the consolidated funding profile, which, in aggregate, encompasses meaningful amounts of higher cost and potentially volatile wholesale borrowings and uninsured deposits, as well as large insured deposit relationships held in cash sweep accounts. Cash and short-term investments, plus the AFS investment book, total a relatively low 9% of deposits. About 50% of the AFS portfolio and nearly 100% HTM book are invested in municipal instruments, the marketability of which could be uneven. Contingent sources of funding, including in the form of Fed and FHLB available borrowing capacity, are considered average.

Rating Sensitivities

Positive rating movement at the subsidiary banks is not anticipated in the intermediate term, as the ratings are well positioned based on the current asset compositions, funding profiles, and earnings mixes. Rating pressure would most likely emanate from a material deterioration in loan or investment credit quality, such that earnings performance became highly variable or trended below rated peer comparisons. Double leverage at the parent company remains elevated, and its ratings could be subject to re-evaluation from a further increase in leverage, especially if KBRA believes its ability to support the subsidiary banks (if needed) becomes questionable.

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