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Note 7 - Derivatives and Hedging Activities | 12 Months Ended
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Dec. 31, 2018
Notes to Financial Statements |
Derivatives and Hedging Activities | Note 7. Derivatives and Hedging Activities The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates. The Company entered into interest rate caps on June 5, 2014 to hedge against the risk of rising interest rates on short-term liabilities. The short-term liabilities consist of $30.0 million of 1-month FHLB advances, and the benchmark rate hedged is 1-month LIBOR. The interest rate caps are designated as a cash flow hedge in accordance with ASC 815. An initial premium of $2.1 million was paid upfront for the two caps. The details of the interest rate caps are as follows:
|  |  |  |  |  | Balance Sheet |  |  |  |  | 1-Month LIBOR |  |  | Fair Value as of |
Hedged Instrument |  | Effective Date |  | Maturity Date |  | Location |  |  | Notional Amount |  | Strike Rate |  |  | December 31, 2018 |  |  | December 31, 2017 |
1-month FHLB Advance |  | 6/3/2014 |  | 6/5/2019 |  | Other Assets |  | $ | 15,000,000 |  | 0.93 | % |  | $ | 116,775 |  |  | $ | 190,085 |
1-month FHLB Advance |  | 6/5/2014 |  | 6/5/2021 |  | Other Assets |  |  | 15,000,000 |  | 1.43 | % |  |  | 342,037 |  |  |  | 316,615 |
|  |  |  |  |  |  |  | $ | 30,000,000 |  |  |  |  | $ | 458,812 |  |  | $ | 506,700 |
On June 21, 2018, the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities. The floating rate trust preferred securities are tied to 3-month LIBOR, and the interest rate swaps utilize 3-month LIBOR, so the hedge is effective. The interest rate swaps are designated as a cash flow hedge in accordance with ASC 815. The details of the interest rate swaps are as follows:
|  |  |  |  |  | Balance Sheet |  |  |  |  |  |  |  |  |  |  |  | Fair Value as of |
Hedged Instrument |  | Effective Date |  | Maturity Date |  | Location |  |  | Notional Amount |  | Receive Rate |  |  | Pay Rate |  | December 31, 2018 |  |
QCR Holdings Statutory Trust II |  | 9/30/2018 |  | 9/30/2028 |  | Other Liabilities |  | $ | 10,000,000 |  | 5.65 | % |  |  | 5.85 | % |  | $ | (298,367) |  |
QCR Holdings Statutory Trust III |  | 9/30/2018 |  | 9/30/2028 |  | Other Liabilities |  |  | 8,000,000 |  | 5.65 | % |  |  | 5.85 | % |  |  | (238,693) |  |
QCR Holdings Statutory Trust V |  | 7/7/2018 |  | 7/7/2028 |  | Other Liabilities |  |  | 10,000,000 |  | 3.99 | % |  |  | 4.54 | % |  |  | (287,716) |  |
Community National Statutory Trust II |  | 9/20/2018 |  | 9/20/2028 |  | Other Liabilities |  |  | 3,000,000 |  | 4.96 | % |  |  | 5.17 | % |  |  | (89,008) |  |
Community National Statutory Trust III |  | 9/15//2018 |  | 9/15/2028 |  | Other Liabilities |  |  | 3,500,000 |  | 4.54 | % |  |  | 4.75 | % |  |  | (103,858) |  |
Guaranty Bankshares Statutory Trust I |  | 9/15/2018 |  | 9/15/2028 |  | Other Liabilities |  |  | 4,500,000 |  | 4.54 | % |  |  | 4.75 | % |  |  | (133,532) |  |
|  |  |  |  |  |  |  | $ | 39,000,000 |  | 4.94 | % |  |  | 5.24 | % |  | $ | (1,151,174) |  |
Changes in the fair values of derivative financial instruments accounted for as cash flow hedges to the extent they are effective hedges, are recorded as a component of accumulated other comprehensive income. The following is a summary of how AOCI was impacted during the reporting periods:
|  | Year Ended
|  | December 31, 2018 |  | December 31, 2017
Unrealized loss at beginning of period, net of tax |  | $ | (805,027) |  | $ | (932,156)
Amount reclassified from accumulated other comprehensive income to noninterest expense related to hedge ineffectiveness |  |  | 27,407 |  |  | 79,757
Amount reclassified from accumulated other comprehensive income to interest expense related to caplet amortization |  |  | 575,247 |  |  | 405,134
Amount of loss recognized in other comprehensive income, net of tax |  |  | (1,073,815) |  |  | (357,762)
Unrealized loss at end of period, net of tax |  | $ | (1,276,188) |  | $ | (805,027)
Changes in the fair value related to the ineffective portion of cash flow hedges, are reported in noninterest income during the period of the change. As shown in the table above, $27 thousand and $80 thousand of expense from the change in fair value for the years ending December 31, 2018 and 2017, respectively, was due to ineffectiveness. 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 offsetting interest rate swap with a third part financial institution. 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.
|  |  |  | December 31, 2018 |  |  | December 31, 2017 |
|  |  |  |  |  |  | Estimated |  |  |  |  |  | Estimated |
|  |  |  | Notional Amount |  |  | Fair Value |  |  | Notional Amount |  |  | Fair Value |
Non-Hedging Interest Rate Derivatives Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  |  | $ | 445,021,807 |  | $ | 22,195,713 |  | $ | 230,434,728 |  | $ | 4,397,238 |
Non-Hedging Interest Rate Derivatives Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  |  | $ | 445,021,807 |  | $ | 22,195,713 |  | $ | 230,434,728 |  | $ | 4,397,238 |
Swap fee income totaled $10.8 million, $3.1 million and $1.7 million for the years ended December 31, 2018, 2017, and 2016, respectively.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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