Executive Summary / Key Takeaways

• QCR Holdings ($QCRH) is a high-performing Midwest regional bank leveraging a relationship-based, multi-charter model and a specialized Low-Income Housing Tax Credit (LIHTC) lending niche to drive differentiated growth and profitability.
• The Company demonstrated strong operational execution in Q1 2025 with robust core deposit growth (20% annualized), contributing to enhanced liquidity and reduced reliance on wholesale funding.
• Despite macroeconomic uncertainty impacting capital markets revenue in Q1 2025, the LIHTC pipeline remains strong, and management expects normalization, reaffirming guidance of $50M-$60M in revenue over the next four quarters, supported by strategic securitizations.
• Asset quality remains excellent, with criticized loan balances decreasing to a five-year low, and capital ratios (TCE/TA 9.70%, CET1 10.26%) continue to strengthen, providing a solid foundation for organic growth and resilience.
• QCRH is strategically managing its approach towards the $10 billion asset threshold, utilizing securitizations to moderate balance sheet growth and planning for gradual increases in operational expenses.

The Foundation: Relationship Banking and a Strategic Niche

QCR Holdings operates as a multi-bank holding company deeply embedded in the Midwest, serving its communities through four distinct bank charters: Quad City Bank & Trust Company (QCBT), Cedar Rapids Bank & Trust Company (CRBT), Community State Bank (CSB), and Guaranty Bank (GB). This structure allows QCRH to maintain a client-first, relationship-based community banking model tailored to local market dynamics while benefiting from centralized operational efficiencies. The Company's overarching strategy is centered on fostering employee well-being and community impact, all aimed at delivering top-tier financial performance for shareholders.

In a competitive landscape populated by larger regional banks like Wintrust Financial (WTFC), Heartland Financial (HTLF), MidWestOne Financial (MOFG), and Old National Bancorp (ONB), as well as increasingly prevalent fintech alternatives, QCRH differentiates itself through its high-touch service model and, crucially, a specialized lending niche: the Low-Income Housing Tax Credit (LIHTC) program. This program, which supports the development of affordable housing, has become a cornerstone of QCRH's strategy, not only contributing to loan growth but also serving as a significant driver of non-interest income through its associated capital markets activities.

The Company's operational technology supports this multi-charter model, enabling centralized back-office functions and providing platforms for specialized services like correspondent banking. While QCRH does not highlight a unique, proprietary core banking technology in the same vein as some fintech disruptors, its focus on investing in technology, automation, and digital transformation initiatives aims to drive operational efficiency and enhance service delivery within its relationship-focused framework. These investments include upgrades to platforms like the safekeeping system for correspondent banking and broader digital transformation efforts, intended to support scalability and improve the overall client experience. The strategic intent is to leverage technology to become more efficient and competitive, particularly as the Company grows.

The LIHTC Engine and Capital Markets Momentum

The LIHTC lending program is central to QCRH's differentiated strategy. It provides a consistent source of high-quality loan originations and fuels a significant portion of the Company's non-interest income through its capital markets business. This revenue is primarily generated through back-to-back interest rate swaps executed on LIHTC permanent loans, where QCRH facilitates a fixed rate for the borrower while receiving a variable rate and an upfront nonrefundable fee from an upstream counterparty. The LIHTC industry itself is described as strong and growing, driven by the persistent need for affordable housing, and the credit quality of these loans is considered exceptional, with a long track record of solid performance across multiple credit cycles.

QCRH strategically utilizes securitizations of these stabilized LIHTC loans. This is not merely a transaction but a key balance sheet management tool. Securitizations serve multiple purposes: they sustain the capital markets revenue stream, enhance liquidity, reduce reliance on higher-cost wholesale funding, strengthen the tangible common equity (TCE) ratio, increase the net interest margin (NIM), and, importantly, help moderate on-balance sheet growth as the Company approaches the $10 billion asset threshold. Management expects improved economics on future securitizations due to refined execution and plans for larger deals, such as a single $350 million securitization targeted for late 2025, which may include selling the B piece to further boost regulatory capital (estimated to free up approximately 40 basis points of CET1 for a deal of that size).

While macroeconomic and governmental uncertainty did impact capital markets revenue in the first quarter of 2025, causing project delays and resulting in revenue of $6.5 million compared to $21 million in Q4 2024 and $16 million in Q3 2024, management remains confident in the long-term demand for affordable housing and the strength of their pipeline. They expect activity to normalize in the second quarter and reaffirmed guidance for capital markets revenue from swap fees to be in the range of $50 million to $60 million over the next four quarters.

Building Strength: Balance Sheet and Profitability

QCRH's financial performance in the first quarter of 2025 demonstrated key strengths. Net interest income was $60 million, a slight decrease from Q4 2024 but a notable 10% increase compared to Q1 2024, driven by higher average earning assets. The adjusted NIM on a tax-equivalent yield basis expanded by one basis point sequentially to 3.41%, overcoming four basis points of dilution from expired interest rate caps. This core margin expansion was fueled by a significant decrease in deposit and funding costs, as the Company's liability-sensitive balance sheet benefited from expected rate movements and strong deposit betas. Management expects this trend to continue, guiding for adjusted NIM TEY to be static to up four basis points in Q2 2025, assuming no further Fed rate cuts. They anticipate a 2-3 basis point NIM expansion for every 25 basis point Fed rate cut.

Loan growth in Q1 2025 was a modest 2.3% annualized, influenced by the macroeconomic uncertainty and elevated traditional loan payoffs. Management has suspended full-year loan growth guidance due to this uncertainty, providing a Q2 2025 annualized growth target of 4%-6%. Despite this near-term moderation, the long-term target remains 9% annual loan growth, funded primarily by core deposits.

Core deposit growth was a standout in Q1 2025, reaching a robust 20% annualized. This success, driven by expanding market share and the correspondent banking business, significantly enhanced liquidity and allowed the Company to reduce wholesale funding by $196 million ($140M FHLB advances, $56M brokered deposits). Total deposits increased $276.2 million year-over-year to $7.34 billion. Correspondent banking remains a core strategy, serving 189 banks and providing over $1 billion in deposits and a steady source of fee income. Management is highly focused on continuing core deposit growth to reduce reliance on higher-cost funding and lower the loan-to-deposit ratio (LDR), targeting the low 90s over the next couple of years (LDR was 93% at Q4 2024).

Noninterest income, while impacted by the capital markets slowdown in Q1 2025 ($16.9 million vs. $30.6 million in Q4 2024), saw strength in other areas. Wealth management revenue was $5 million, representing a 14% annualized increase from Q4 2024, driven by growth in assets under management ($24.6 million increase QoQ, $514 million YoY) from new client relationships and market performance. The Company's strategic expansion of wealth management into Southwest Missouri and Central Iowa in 2024 is expected to fuel continued growth in this consistent revenue stream.

Noninterest expense demonstrated disciplined management, decreasing $7 million sequentially to $46.5 million in Q1 2025, primarily due to lower variable compensation tied to capital markets revenue and loan growth. This highlights the flexibility in QCRH's cost structure. Q2 2025 expense guidance is set at $50 million-$53 million. The effective tax rate in Q1 2025 was exceptionally low at 1%, benefiting from equity compensation, new state tax credit investments, and the revenue mix, but is expected to normalize to 6%-8% in Q2 2025.

Asset Quality and Risk Management

Asset quality remains a key strength for QCRH, consistently described as excellent and better than historical averages. Despite a normalizing credit environment, leading indicators are positive. Total criticized loan balances decreased by 28 basis points in Q1 2025 to 2.06% of total loans, marking the lowest level in five years. Non-performing assets (NPAs) increased slightly to 0.53% of total assets in Q1 2025, up from 0.50% in Q4 2024, but remain well below historical levels. This increase was attributed to three specific client relationships, offset by the payoff of a large NPA from the prior quarter. Approximately half of the current NPAs are concentrated in five relationships. Management emphasizes that this movement reflects a return to normal credit dynamics rather than broad-based financial stress.

The provision for credit losses in Q1 2025 was $4.2 million, a decrease from Q4 2024 but an increase from Q1 2024, primarily driven by overall loan growth and increased net charge-offs. The allowance for credit losses (ACL) stood at 1.32% of total loans held for investment, stable compared to Q4 2024. Management maintains a disciplined approach to reserves, factoring in historical losses, economic forecasts, and portfolio risk.

Key risks include macroeconomic and governmental uncertainty, which can impact loan growth and capital markets activity. The Company has proactively assessed potential tariff exposure, identifying minimal high-risk exposure ($6M across two clients) and noting that most manufacturing clients have already diversified supply chains away from China. Interest rate risk is managed through a liability-sensitive balance sheet and derivative strategies, including swaptions designed to protect regulatory capital against significant declines in long-term rates. Concentration risk, particularly in CRE and Correspondent Banking, is actively monitored.

Capital Strength and Strategic Growth Trajectory

QCRH continues to build capital and strengthen its capital ratios. The tangible common equity to tangible assets (TCE/TA) ratio improved by 15 basis points sequentially to 9.70% at March 31, 2025, driven by strong earnings. The Common Equity Tier 1 (CET1) ratio increased by 23 basis points to 10.26%, and the Total Risk-Based Capital ratio rose by six basis points to 14.16%. These improvements reflect solid earnings and disciplined growth in risk-weighted assets. Management is committed to maintaining strong regulatory capital, targeting a CET1 ratio above 10% and a TCE ratio in the top quartile of its peers.

The Company's strong earnings power and modest dividend enable it to generate capital at a pace faster than many peers. Capital allocation priorities are focused on funding organic growth, evaluating potential retirement or refinancing of upcoming sub-debt tranches (September 2025), and maintaining flexibility. While a share repurchase program is authorized, management is taking a deliberate, wait-and-see approach to buybacks given the current macroeconomic uncertainty. M&A is explicitly not a priority, as the Company focuses on executing its core strategy and leveraging its strong organic growth momentum.

As QCRH approaches the $10 billion asset threshold, expected in approximately two years, it is strategically preparing for the associated regulatory requirements and costs. Management anticipates a gradual increase in expenses, estimated at $5 million-$6 million annually over roughly three years, rather than a sudden "cliff." The securitization strategy is a key tool in managing the pace of on-balance sheet growth to ensure a smooth transition.

Competitive Positioning and Outlook

QCRH's competitive positioning is rooted in its ability to combine the personalized service of community banking with specialized expertise and operational discipline. Its LIHTC niche provides a differentiated revenue stream and a high-quality asset class that many regional peers cannot replicate. The Company's success in driving robust core deposit growth sets it apart, enhancing liquidity and funding capabilities compared to competitors more reliant on wholesale funding. QCRH also demonstrates strong performance in asset quality and expense management, contributing to its ability to generate capital faster than peers and achieve top-tier profitability metrics like ROAA and ROE.

While QCRH may not possess the scale or digital infrastructure of larger national banks like ONB or the pure technological focus of fintech firms, it is investing in technology and automation to enhance its operational efficiency and service delivery within its relationship model. Its competitive moat lies in the strength of its client relationships, its specialized market knowledge, and its proven execution capabilities in key areas like LIHTC lending and deposit gathering.

Looking ahead, QCRH is positioned for continued growth and margin expansion, supported by its liability-sensitive balance sheet and strategic initiatives. The normalization of capital markets activity and the strong LIHTC pipeline are expected to drive fee income. The focus on core deposit growth will continue to strengthen the funding profile. While macroeconomic uncertainty and potential tariff impacts require careful monitoring, management's proactive approach and the Company's strong asset quality and capital levels provide resilience. The strategic use of securitizations and disciplined expense management are expected to support continued tangible book value growth and navigate the transition to a larger institution.

Conclusion

QCR Holdings presents a compelling investment narrative centered on its success as a high-performing regional bank leveraging a unique strategic blend of relationship banking and specialized niche expertise. The Company's strength is evident in its robust core deposit growth, disciplined expense management, consistently excellent asset quality, and proactive capital generation. The LIHTC lending program, while subject to near-term macroeconomic fluctuations, remains a powerful engine for both loan growth and high-margin fee income, strategically managed through securitizations to enhance balance sheet flexibility and capital efficiency.

Despite facing uncertainties in the broader economic environment and competitive pressures from both regional peers and digital disruptors, QCRH's focused strategy and operational execution position it for continued outperformance. The ongoing efforts to strengthen the balance sheet, optimize funding costs, and invest in supporting technology underscore a commitment to sustainable growth and shareholder value creation. As the Company approaches the $10 billion asset threshold, its deliberate preparation and proven ability to execute on strategic initiatives suggest it is well-equipped to manage this transition while maintaining its trajectory of strong financial results.