| DERIVATIVES AND HEDGING ACTIVITIES |
NOTE 5 – DERIVATIVES AND HEDGING ACTIVITIES Derivatives are summarized as follows as of June 30, 2025 and December 31, 2024: | | | | | | | | | June 30, 2025 | | December 31, 2024 | | | | (dollars in thousands) | Assets: | | | | | | | Hedged Derivatives | | | | | | | Cash Flow Hedges | | | | | | | Interest rate swaps | | $ | 852 | | $ | 1,905 | Interest rate collars | | | 14 | | | — | Unhedged Derivatives | | | | | | | Interest rate caps | | | — | | | 118 | Swaptions | | | 416 | | | 998 | Interest rate swaps | | | 183,700 | | | 183,760 | | | $ | 184,982 | | $ | 186,781 | | | | | | | | Liabilities: | | | | | | | Hedged Derivatives | | | | | | | Cash Flow Hedges | | | | | | | Interest rate swaps | | $ | (23,056) | | $ | (30,623) | Interest rate collars | | | (356) | | | (105) | Fair Value Hedges | | | | | | | Interest rate swaps | | | (2,393) | | | (335) | Unhedged Derivatives | | | | | | | Interest rate swaps | | | (183,700) | | | (183,760) | | | $ | (209,505) | | $ | (214,823) | | | | | | | |
The Company uses interest rate swap, cap, collar and swaption instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates. Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of AOCI. Changes in fair values of derivative financial instruments accounted for as fair value hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of interest income/expense. The Company has entered into interest rate swaps to hedge against the risk of rising rates on one of its variable rate subordinated notes and its variable rate trust preferred securities. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet | | Notional | | | | | | | | Fair Value as of | Hedged Item | | Effective Date | | Maturity Date | | Location | | Amount | | Receive Rate | | Pay Rate | | June 30, 2025 | | December 31, 2024 | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | QCR Holdings Statutory Trust V | | 7/7/2018 | | 7/7/2028 | | Derivatives - Assets | | $ | 10,000 | | 6.61 | % | | 4.54 | % | | $ | 185 | | $ | 427 | Community National Statutory Trust III | | 9/15/2018 | | 9/15/2028 | | Derivatives - Assets | | | 3,500 | | 6.33 | % | | 4.75 | % | | | 86 | | | 197 | Guaranty Bankshares Statutory Trust I | | 9/15/2018 | | 9/15/2028 | | Derivatives - Assets | | | 4,500 | | 6.33 | % | | 4.75 | % | | | 67 | | | 153 | Community National Statutory Trust II | | 9/20/2018 | | 9/20/2028 | | Derivatives - Assets | | | 3,000 | | 6.76 | % | | 5.17 | % | | | 58 | | | 132 | QCR Holdings Statutory Trust II | | 9/30/2018 | | 9/30/2028 | | Derivatives - Assets | | | 10,000 | | 7.41 | % | | 5.85 | % | | | 193 | | | 443 | QCR Holdings Statutory Trust III | | 9/30/2018 | | 9/30/2028 | | Derivatives - Assets | | | 8,000 | | 7.41 | % | | 5.85 | % | | | 154 | | | 353 | Guaranty Statutory Trust II | | 5/23/2019 | | 2/23/2026 | | Derivatives - Assets | | | 10,310 | | 6.04 | % | | 4.09 | % | | | 109 | | | 200 | QCR Holdings Subordinated Note | | 3/1/2024 | | 2/15/2028 | | Derivatives - Liabilities | | | 65,000 | | 4.36 | % | | 4.02 | % | | | (1,063) | | | (50) | | | | | | | | | $ | 114,310 | | | | | | | | $ | (211) | | $ | 1,855 |
The Company uses interest rate collars in an effort to manage future interest rate exposure on variable rate loans. The collar hedging strategy stabilizes interest rate fluctuations by setting both a floor and a cap. The collar is designated as a cash flow hedge in accordance with ASC 815. The details of the interest rate collar is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value as of | Hedged Item | | Effective Date | | Maturity Date | | Location | | Notional Amount | | Cap Strike Rate | | | Floor Strike Rate | | June 30, 2025 | | December 31, 2024 | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | Loans | | 10/1/2022 | | 10/1/2026 | | Derivatives - Assets (Liabilities) | | $ | 50,000 | | 4.40 | % | | 2.44 | % | | $ | 14 | | $ | (105) | | | | | | | | | | | | | | | | | | | | | | |
For derivative instruments that are designated as unhedged, the change in fair value of the derivative instrument is recognized into current earnings. The details of the unhedged interest rate caps are as follows: | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet | | | | | | | | Fair Value as of | | | Effective Date | | Maturity Date | | Location | | Notional Amount | | Strike Rate | | | June 30, 2025 | | | December 31, 2024 | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | 3/1/2020 | | 3/3/2025 | | Derivatives - Assets | | $ | 25,000 | | 1.90 | % | | $ | - | | | $ | 118 | | | | | | | | | | | | | | | | | | | | | | |
During the third quarter of 2024, the Company executed a derivative strategy more commonly known as a swaption. The swaptions are designed to hedge the Company’s regulatory capital ratios against the adverse effects of a significant decline in long-term interest rates. The swaptions are designated as unhedged in accordance with ASC 815, therefore the change in fair value of the derivative instrument is recognized into current earnings. An initial premium of $4.5 million was paid upfront for the swaptions. The details of the swaptions are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value as of | Effective Date | | Maturity Date | | Location | | Notional Amount | | Strike Rate | | June 30, 2025 | | December 31, 2024 | (dollars in thousands) | | | | | | | | | | | | | | | | | | 7/30/2024 | | 7/30/2025 | | Derivatives - Assets | | $ | 77,600 | | 2.13 | % | | $ | - | | $ | 37 | 7/30/2024 | | 7/30/2025 | | Derivatives - Assets | | | 33,100 | | 2.62 | % | | | 43 | | | 54 | 7/30/2024 | | 7/30/2025 | | Derivatives - Assets | | | 28,254 | | 2.12 | % | | | 26 | | | 48 | 7/30/2024 | | 7/30/2025 | | Derivatives - Assets | | | 66,247 | | 2.63 | % | | | - | | | 33 | 7/30/2024 | | 1/29/2026 | | Derivatives - Assets | | | 20,750 | | 2.63 | % | | | 89 | | | 102 | 7/30/2024 | | 1/29/2026 | | Derivatives - Assets | | | 41,700 | | 2.13 | % | | | 61 | | | 77 | 7/30/2024 | | 1/30/2026 | | Derivatives - Assets | | | 36,546 | | 2.14 | % | | | 23 | | | 70 | 7/30/2024 | | 1/30/2026 | | Derivatives - Assets | | | 18,453 | | 2.64 | % | | | 39 | | | 93 | 7/30/2024 | | 7/30/2026 | | Derivatives - Assets | | | 16,100 | | 2.64 | % | | | - | | | 140 | 7/30/2024 | | 7/30/2026 | | Derivatives - Assets | | | 29,800 | | 2.14 | % | | | - | | | 116 | 7/30/2024 | | 7/30/2026 | | Derivatives - Assets | | | 25,971 | | 2.14 | % | | | 54 | | | 103 | 7/30/2024 | | 7/30/2026 | | Derivatives - Assets | | | 14,280 | | 2.64 | % | | | 81 | | | 125 | | | | | | | $ | 408,801 | | | | | $ | 416 | | $ | 998 | | | | | | | | | | | | | | | | | |
The Company has entered into interest rate swaps to hedge against the risk of declining interest rates on floating rate loans. The interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet | | | | | | | | | | | | | Fair Value as of | Hedged Item | | Effective Date | | Maturity Date | | Location | | Notional Amount | | | Receive Rate | | | Pay Rate | | June 30, 2025 | | December 31, 2024 | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | 7/1/2021 | | 7/1/2031 | | Derivatives - Liabilities | | $ | 35,000 | | | 1.40 | % | | | 4.43 | % | | $ | (4,098) | | $ | (5,445) | Loans | | 7/1/2021 | | 7/1/2031 | | Derivatives - Liabilities | | | 50,000 | | | 1.40 | % | | | 4.43 | % | | | (5,855) | | | (7,779) | Loans | | 7/1/2021 | | 7/1/2031 | | Derivatives - Liabilities | | | 40,000 | | | 1.40 | % | | | 4.43 | % | | | (4,693) | | | (6,233) | Loans | | 10/1/2022 | | 7/1/2031 | | Derivatives - Liabilities | | | 25,000 | | | 1.30 | % | | | 4.43 | % | | | (2,950) | | | (3,916) | Loans | | 4/1/2022 | | 4/1/2027 | | Derivatives - Liabilities | | | 15,000 | | | 1.91 | % | | | 4.43 | % | | | (440) | | | (720) | Loans | | 4/1/2022 | | 4/1/2027 | | Derivatives - Liabilities | | | 50,000 | | | 1.91 | % | | | 4.43 | % | | | (1,466) | | | (2,400) | Loans | | 4/1/2022 | | 4/1/2027 | | Derivatives - Liabilities | | | 35,000 | | | 1.91 | % | | | 4.43 | % | | | (1,026) | | | (1,680) | Loans | | 4/1/2022 | | 4/1/2027 | | Derivatives - Liabilities | | | 50,000 | | | 1.91 | % | | | 4.43 | % | | | (1,465) | | | (2,400) | | | | | | | | | $ | 300,000 | | | | | | | | | | $ | (21,993) | | $ | (30,573) | | | | | | | | | | | | | | | | | | | | | | | | |
The Company uses interest rate collars in an effort to manage future interest rate exposure on variable rate deposits. The collar hedging strategy stabilizes interest rate fluctuations by setting both a floor and a cap. The collars are designated as a cash flow hedge in accordance with ASC 815. The details of the interest rate collars are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet | | | | | | | | | Fair Value as of | | | Hedged Item | | Effective Date | | Maturity Date | | Location | | Notional Amount | | Cap Strike Rate | | Floor Strike Rate | | June 30, 2025 | | | December 31, 2024 | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits | | 5/1/2025 | | 11/1/2027 | | Derivatives - Liabilities | | $ | 50,000 | | 4.40 | % | | 2.24 | % | | $ | (77) | | | $ | N/A | | | Deposits | | 5/1/2025 | | 5/1/2028 | | Derivatives - Liabilities | | | 50,000 | | 4.40 | % | | 2.34 | % | | | (117) | | | | N/A | | | Deposits | | 5/1/2025 | | 11/1/2028 | | Derivatives - Liabilities | | | 50,000 | | 4.40 | % | | 2.43 | % | | | (162) | | | | N/A | | | | | | | | | | | $ | 150,000 | | | | | | | | $ | (356) | | | $ | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company has entered into interest rate swaps to hedge against the risk of rising rates on loans. The interest rate swaps are designated as fair value hedges in accordance with ASC 815. The details of the interest rate swaps are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet | | | | | | | | | | | | Fair Value as of | Hedged Item | | Effective Date | | Maturity Date | | Location | | Notional Amount | | Receive Rate | | | | Pay Rate | | | June 30, 2025 | | December 31, 2024 | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | Loans | | 7/12/2023 | | 8/1/2025 | | Derivatives - Liabilities | | $ | 15,000 | | 4.32 | % | | | 4.60 | % | | $ | (3) | | $ | (35) | Loans | | 7/12/2023 | | 2/1/2026 | | Derivatives - Liabilities | | | 25,000 | | 4.32 | % | | | 4.38 | % | | | (47) | | | (77) | Loans | | 7/12/2023 | | 2/1/2026 | | Derivatives - Liabilities | | | 15,000 | | 4.32 | % | | | 4.38 | % | | | (28) | | | (46) | Loans | | 7/12/2023 | | 2/1/2026 | | Derivatives - Liabilities | | | 20,000 | | 4.32 | % | | | 4.38 | % | | | (37) | | | (61) | Loans | | 7/12/2023 | | 8/1/2026 | | Derivatives - Liabilities | | | 30,000 | | 4.32 | % | | | 4.21 | % | | | (144) | | | (79) | Loans | | 7/12/2023 | | 8/1/2026 | | Derivatives - Liabilities | | | 15,000 | | 4.32 | % | | | 4.21 | % | | | (72) | | | (40) | Loans | | 7/12/2023 | | 8/1/2026 | | Derivatives - Liabilities | | | 20,000 | | 4.32 | % | | | 4.21 | % | | | (96) | | | (53) | Loans | | 7/12/2023 | | 2/1/2027 | | Derivatives - Liabilities | | | 32,500 | | 4.32 | % | | | 4.08 | % | | | (270) | | | (44) | Loans | | 7/12/2023 | | 2/1/2027 | | Derivatives - Liabilities | | | 15,000 | | 4.32 | % | | | 4.08 | % | | | (125) | | | (20) | Loans | | 7/12/2023 | | 2/1/2027 | | Derivatives - Liabilities | | | 20,000 | | 4.32 | % | | | 4.08 | % | | | (166) | | | (27) | Loans | | 7/12/2023 | | 8/1/2027 | | Derivatives - Liabilities | | | 32,500 | | 4.32 | % | | | 3.98 | % | | | (364) | | | 14 | Loans | | 7/12/2023 | | 8/1/2027 | | Derivatives - Liabilities | | | 15,000 | | 4.32 | % | | | 3.98 | % | | | (168) | | | 6 | Loans | | 7/12/2023 | | 8/1/2027 | | Derivatives - Liabilities | | | 25,000 | | 4.32 | % | | | 3.98 | % | | | (280) | | | 11 | Loans | | 7/12/2023 | | 2/1/2028 | | Derivatives - Liabilities | | | 30,000 | | 4.32 | % | | | 3.90 | % | | | (395) | | | 77 | Loans | | 7/12/2023 | | 2/1/2028 | | Derivatives - Liabilities | | | 15,000 | | 4.32 | % | | | 3.90 | % | | | (198) | | | 39 | | | | | | | | | $ | 325,000 | | | | | | | | | $ | (2,393) | | $ | (335) | | | | | | | | | | | | | | | | | | | | | | | |
The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with an upstream counterparty. Additionally, the Company receives an upfront, non-refundable fee from the upstream counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations. Interest rate swaps that were not designated as hedging instruments as of June 30, 2025 and December 31, 2024 are summarized as follows: | | | | | | | | | | | | | | | | | | As of June 30, 2025 | | As of December 31, 2024 | | | | Notional Amount | | Estimated Fair Value | | Notional Amount | | Estimated Fair Value | | | | | (dollars in thousands) | Non-Hedging Interest Rate Derivatives Assets: | | | | | | | | | | | | | | Interest rate swap contracts | | | $ | 4,339,462 | | $ | 183,700 | | $ | 4,148,306 | | $ | 183,760 | Non-Hedging Interest Rate Derivatives Liabilities: | | | | - | | | | | | | | | | Interest rate swap contracts | | | $ | 4,339,462 | | $ | 183,700 | | $ | 4,148,306 | | $ | 183,760 |
The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three and six months ended June 30, 2025 and 2024 are as follows: | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2025 | | Three Months Ended June 30, 2024 | | | Interest and | | Interest | | | Interest and | | Interest | | | | Dividend Income | | Expense | | | Dividend Income | | Expense | | | | | (dollars in thousands) | Income and expense line items presented in the consolidated statements of income | | $ | 120,247 | | $ | 58,165 | | | $ | 119,746 | | $ | 63,583 | | | | | | | | | | | | | | | | | The effects of cash flow hedging: | | | | | | | | | | | | | | | Gain (loss) on interest rate caps and collars on deposits | | | - | | | - | | | | - | | | (1,039) | | Gain (loss) on interest rate swaps on debt | | | - | | | (210) | | | | - | | | (337) | | Loss on interest rate swaps and collars on loans | | | (2,109) | | | - | | | | (2,987) | | | - | | | | | | | | | | | | | | | | | The effects of fair value hedging: | | | | | | | | | | | | | | | Gain on interest rate swaps on loans | | | 165 | | | - | | | | 985 | | | - | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Six Months Ended June 30, 2025 | | | Six Months Ended June 30, 2024 | | | | Interest and | | Interest | | | Interest and | | Interest | | | | Dividend Income | | Expense | | | Dividend Income | | Expense | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | Income and expense line items presented in the consolidated statements of income | | $ | 236,920 | | $ | 114,852 | | | $ | 234,795 | | $ | 123,933 | | | | | | | | | | | | | | | | | The effects of cash flow hedging: | | | | | | | | | | | | | | | Gain (loss) on interest rate caps and collars on deposits | | | - | | | (117) | | | | - | | | (2,155) | | Gain (loss) on interest rate swaps on debt | | | - | | | (419) | | | | - | | | (673) | | (Gain) loss on interest rate swaps and collars on loans | | | (4,192) | | | - | | | | (5,961) | | | - | | | | | | | | | | | | | | | | | The effects of fair value hedging: | | | | | | | | | | | | | | | Gain on interest rate swaps on loans | | | 335 | | | - | | | | 1,962 | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company’s hedged interest rate swaps and non-hedged interest rate swaps are collateralized with cash and investment securities with carrying values as follows, as of the dates presented: | | | | | | | | | June 30, 2025 | | December 31, 2024 | | | | (dollars in thousands) | | | | | | | | Cash | | $ | 41,911 | | $ | 39,431 | U.S. govt. sponsored agency securities | | | 6,469 | | | 6,222 | Municipal securities | | | 140,958 | | | 151,107 | Residential mortgage-backed and related securities | | | 25,272 | | | 18,132 | | | $ | 214,610 | | $ | 214,892 | | | | | | | |
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit ratings and financial information. Additionally, the Company manages financial institution counterparty credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its borrower/customer counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company underwrites the combination of the base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values. The majority of the Company’s swapped loan portfolio consists of loans on projects, with loan-to-values, including the potential swap exposure, below 65%. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
|