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

The ratings reflect solid long-term credit performance, underpinned by a long-tenured management team, disciplined underwriting standards, well-defined policy limits, and a benign credit environment, resulting in a history of minimal losses. Limited exposures to office (<3% of loans) or to large urban centers, and stable and relatively diverse economies within its core markets, further support a stable credit profile. Earnings performance continues to outperform the rated peer average (core ROA of ~1.55% in 4Q23 and ~1.40% in YE23), driven by an above average NIM, robust interest rate swap transaction fees, and lower tax expenses. Positive trending and meaningful contributions from wealth management fees as well as durable card fees also reinforce the company’s solid revenue diversity. NIM in recent years has been partly buoyed by a more highly leveraged balance sheet, with a loan-to-deposit ratio tracking above both the rated peer average as well as pre-COVID levels, and comparatively elevated CRE growth, notably multifamily C&D. While earning asset yield expansion has served to partly counterbalance a surge in deposit costs, which have exhibited moderately greater price sensitivities relative to many peers, a higher for longer rate environment and late credit cycle uncertainties remain headwinds to earnings. Capital protection as measured by the CET1 ratio (9.6% at 4Q23), while 30 bps higher than the year ago period, remains well below the average of similarly rated peers. KBRA views it necessary for the CET1 ratio to align reasonably closer to the peer average in consideration of the higher investor CRE loan mix with moderate C&D exposures and RWA density, and comparatively elevated double leverage. Therefore, the ratings consider expectations that the CET1 ratio will continue to trend higher in the foreseeable future. With that said, appetite for near-term share buybacks appear modest, and management expects future securitizations of multifamily loans, with the company completing its first securitizations in 4Q23, to provide incremental capital relief.

Rating Sensitivities

A rating upgrade is not expected over the medium term. However, managing the CET1 ratio and funding measures at levels more commensurate with higher rated peers while generating above peer earnings could facilitate positive rating momentum over time. Conversely, material deterioration in credit and funding metrics, significant contraction in earnings, or aggressive capital management resulting in the CET1 ratio falling short of KBRA's expectations while sustaining comparatively higher double leverage could result in rating pressure.

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