KBRA Assigns Ratings to Notes Issued by QCR Holdings, Inc.

KBRA assigns a rating of BBB- with a Stable Outlook to the subordinated notes issued by QCR Holdings, Inc. (NASDAQ: QCRH) (“the company”). The notes consist of two subordinated debt offerings: Subordinated Notes, Due September 15, 2035 ($50 million) and Subordinated Notes, Due September 15, 2037 ($20 million). The $50 million note is callable on the fifth anniversary date of issuance and the $20 million note is callable on the seventh anniversary. The proceeds will be used to retire existing debt totaling $70 million.

QCR Holdings, Inc. is a $9.2 billion-asset multi-bank holding company headquartered in Moline, IL, with a 36-branch network across six Midwestern regions, including the Quad Cities, Cedar Rapids, Central-Iowa, and in southwest Missouri (Springfield and Joplin). The four subsidiary banks maintain leading deposit market shares in their respective operating areas and offer an array of products and services, including trust and investment management ($6.7 billion AUM), with specialized activities in correspondent banking and low-income housing tax credit (LIHTC) financing.

Key Credit Considerations

The ratings are underpinned by robust consolidated earnings results over the past several years, buoyed by strong noninterest income levels, largely connected to capital markets revenue, and supported by solid NIM performance and good expense management.

Capital markets revenue consists predominantly 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 banks enter into 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 held, there is a limit to this activity from a balance sheet exposure perspective. Additionally, management has several other strategic initiatives that can create additional ongoing capacity within its LIHTC business.

Consolidated regulatory capital ratios remain on an improving trend due primarily to balance sheet management and retained earnings, although levels continue to trail rated peers by a noticeable margin, especially the CET1 ratio. Capital protection at the subsidiary banks is generally commensurate with rated peers. Dividends at the company constitute a small percentage of quarterly net income, and the company has not repurchased common shares in the past year or so.

Loan quality problems remain isolated, consistent with broader community banking trends.

Balance sheet liquidity is somewhat limited in the context of the consolidated funding profile, which, in aggregate, encompasses meaningful amounts of non-core funding, as defined by the bank regulators, in addition to uninsured deposits. Cash and short-term investments, plus the AFS investment book, total a relatively low 7% of total deposits at 2Q25. Contingent sources of funding, including in the form of Fed and FHLB available borrowing capacity, are considered average.

Rating Sensitivities

Positive rating momentum is not anticipated in the intermediate term; 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 believed its ability to support subsidiary banks (if needed) were to become questionable. KBRA notes that this debt transaction will not impact parent company leverage because net debt will be unchanged.

To access ratings and relevant documents, click here.

Methodologies