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Note 7 - Derivatives and Hedging Activities | 12 Months Ended
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Dec. 31, 2019
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 in December 2019 to hedge against the risk of rising interest rates on liabilities. The liabilities consist of $375.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and Prime. The Company entered into interest rate caps in June 2014 to hedge against the risk of rising interest rates on short-term liabilities. The short-term liabilities consisted of $30.0 million of 1-month FHLB advances, and the benchmark rate hedged was 1-month LIBOR. In 2019, short-term liabilities of $15 million matured, and the remaining short-term liabilities as well as caps were sold as part of the RB&T asset sale in the fourth quarter of 2019. The interest rate caps are designated as cash flow hedges in accordance with ASC 815. An initial premium of $4.3 million was paid upfront for the caps executed in 2019. The details of the interest rate caps are as follows:
|  |  |  |  |  | Balance Sheet |  |  |  |  |  |  | Fair Value as of |  |
Hedged Item |  | Effective Date |  | Maturity Date |  | Location |  | Notional Amount |  | Strike Rate |  | December 31, 2019 |  |  | December 31, 2018 |  |
(dollars in thousands) |
Deposits |  | 1/1/2020 |  | 1/1/2023 |  | Other Assets |  | $ | 25,000 |  | 1.75 | % |  | $ | 112 |  |  | $ | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2023 |  | Other Assets |  |  | 50,000 |  | 1.57 |  |  |  | 218 |  |  |  | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2023 |  | Other Assets |  |  | 25,000 |  | 1.90 |  |  |  | 96 |  |  |  | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2023 |  | Other Assets |  |  | 25,000 |  | 1.80 |  |  |  | 109 |  |  |  | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2024 |  | Other Assets |  |  | 25,000 |  | 1.75 |  |  |  | 214 |  |  |  | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2024 |  | Other Assets |  |  | 50,000 |  | 1.57 |  |  |  | 401 |  |  |  | - |  |
Deposits |  | 2/1/2020 |  | 2/1/2024 |  | Other Assets |  |  | 25,000 |  | 1.90 |  |  |  | 202 |  |  |  | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2024 |  | Other Assets |  |  | 25,000 |  | 1.80 |  |  |  | 201 |  |  |  | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2025 |  | Other Assets |  |  | 25,000 |  | 1.75 |  |  |  | 337 |  |  |  | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2025 |  | Other Assets |  |  | 50,000 |  | 1.57 |  |  |  | 617 |  |  |  | - |  |
Deposits |  | 3/1/2020 |  | 3/1/2025 |  | Other Assets |  |  | 25,000 |  | 1.90 |  |  |  | 332 |  |  |  | - |  |
Deposits |  | 1/1/2020 |  | 1/1/2025 |  | Other Assets |  |  | 25,000 |  | 1.80 |  |  |  | 309 |  |  |  | - |  |
1-month FHLB Advance |  | 6/3/2014 |  | 6/5/2019 |  | Other Assets |  |  | 15,000 |  | N/A |  |  |  | - |  |  |  | 117 |  |
1-month FHLB Advance |  | 6/5/2014 |  | 6/5/2021 |  | Other Assets |  |  | 15,000 |  | N/A |  |  |  | - |  |  |  | 342 |  |
|  |  |  |  |  |  |  | $ | 405,000 |  |  |  |  | $ | 3,148 |  |  | $ | 459 |  |
Note 7. Derivatives and Hedging Activities (continued) In June 2018, the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities. The variable 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 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 |  | December 31, 2019 |  | December 31, 2018
(dollars in thousands)
QCR Holdings Statutory Trust II |  | 9/30/2018 |  | 9/30/2028 |  | Other Liabilities |  | $ | 10,000 |  | 4.79 | % |  |  | 5.85 | % |  | $ | (971) |  | $ | (298)
QCR Holdings Statutory Trust III |  | 9/30/2018 |  | 9/30/2028 |  | Other Liabilities |  |  | 8,000 |  | 4.79 | % |  |  | 5.85 | % |  |  | (777) |  |  | (239)
QCR Holdings Statutory Trust V |  | 7/7/2018 |  | 7/7/2028 |  | Other Liabilities |  |  | 10,000 |  | 3.54 | % |  |  | 4.54 | % |  |  | (944) |  |  | (288)
Community National Statutory Trust II |  | 9/20/2018 |  | 9/20/2028 |  | Other Liabilities |  |  | 3,000 |  | 4.08 | % |  |  | 5.17 | % |  |  | (291) |  |  | (89)
Community National Statutory Trust III |  | 9/15//2018 |  | 9/15/2028 |  | Other Liabilities |  |  | 3,500 |  | 3.64 | % |  |  | 4.75 | % |  |  | (339) |  |  | (104)
Guaranty Bankshares Statutory Trust I |  | 9/15/2018 |  | 9/15/2028 |  | Other Liabilities |  |  | 4,500 |  | 3.64 | % |  |  | 4.75 | % |  |  | (436) |  |  | (133)
|  |  |  |  |  |  |  | $ | 39,000 |  | 4.18 | % |  |  | 5.24 | % |  | $ | (3,758) |  | $ | (1,151)
Changes in the fair values of derivative financial instruments accounted for as cash flow hedges to the extent they are included in the assessment of effectiveness, are recorded as a component of AOCI. The following is a summary of how AOCI was impacted during the reporting periods:
|  | Year Ended
|  | December 31, 2019 |  | December 31, 2018
|  | (dollars in thousands)
Unrealized loss at beginning of period, net of tax |  | $ | (1,276) |  | $ | (805)
Amount reclassified from accumulated other comprehensive income to noninterest expense related to hedge ineffectiveness |  |  | — |  |  | 27
Amount reclassified from accumulated other comprehensive income to interest expense related to caplet amortization |  |  | 422 |  |  | 575
Amount of loss recognized in other comprehensive income, net of tax |  |  | (3,061) |  |  | (1,073)
Unrealized loss at end of period, net of tax |  | $ | (3,915) |  | $ | (1,276)
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 party financial institution. Additionally, the Company receives an upfront fee from the 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. 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 rating and financial information. The Company manages dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, central clearing mechanisms and counterparty limits. The agreements contain bilateral collateral arrangements 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 counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations. Interest rate swaps that are not designated as hedging instruments are summarized as follows:
|  |  |  | December 31, 2019 |  |  | December 31, 2018
|  |  | Notional Amount |  | Estimated Fair Value |  | Notional Amount |  | Estimated Fair Value
|  |  | (dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  |  | $ | 787,221 |  | $ | 84,679 |  | $ | 445,022 |  | $ | 22,196
Non-Hedging Interest Rate Derivatives Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  |  | $ | 787,221 |  | $ | 84,679 |  | $ | 445,022 |  | $ | 22,196
Note 7. Derivatives and Hedging Activities (continued) Swap fee income totaled $28.3 million, $10.8 million and $3.1 million for the years ended December 31, 2019, 2018, and 2017, respectively. The Company’s hedged interest rate swaps and non-hedged interest rate swaps are collateralized by investment securities with carrying values as follows:
|  | 2019 |  | 2018
|  | (dollars in thousands)
U.S govt. sponsored agency securities |  | $ | 3,541 |  | $ | —
Municipal securities |  |  | 22,924 |  |  | —
Residential mortgage-backed and related securities |  |  | 72,090 |  |  | —
|  | $ | 98,555 |  | $ | —
In addition to the pledged investment securities, the Company collateralized the interest rate swaps with cash totaling $10.0 million and $18.5 million as of December 31, 2019 and 2018, 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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