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NOTE 4 - DERIVATIVES AND HEDGING ACTIVITIES | 3 Months Ended
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Mar. 31, 2020
Notes to Financial Statements |
DERIVATIVES AND HEDGING ACTIVITIES | NOTE 4 – 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 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 |  | March 31, 2020 |  |  | December 31, 2019 |  |
(dollars in thousands) |
Deposits |  | 1/1/2020 |  | 1/1/2023 |  | Other Assets |  | $ | 25,000 |  | 1.75 | % |  | $ | 18 |  |  | $ | 112 |  |
Deposits |  | 1/1/2020 |  | 1/1/2023 |  | Other Assets |  |  | 50,000 |  | 1.57 |  |  |  | 35 |  |  |  | 218 |  |
Deposits |  | 1/1/2020 |  | 1/1/2023 |  | Other Assets |  |  | 25,000 |  | 1.90 |  |  |  | 16 |  |  |  | 96 |  |
Deposits |  | 1/1/2020 |  | 1/1/2023 |  | Other Assets |  |  | 25,000 |  | 1.80 |  |  |  | 17 |  |  |  | 109 |  |
Deposits |  | 1/1/2020 |  | 1/1/2024 |  | Other Assets |  |  | 25,000 |  | 1.75 |  |  |  | 47 |  |  |  | 214 |  |
Deposits |  | 1/1/2020 |  | 1/1/2024 |  | Other Assets |  |  | 50,000 |  | 1.57 |  |  |  | 85 |  |  |  | 401 |  |
Deposits |  | 2/1/2020 |  | 2/1/2024 |  | Other Assets |  |  | 25,000 |  | 1.90 |  |  |  | 44 |  |  |  | 202 |  |
Deposits |  | 1/1/2020 |  | 1/1/2024 |  | Other Assets |  |  | 25,000 |  | 1.80 |  |  |  | 42 |  |  |  | 201 |  |
Deposits |  | 1/1/2020 |  | 1/1/2025 |  | Other Assets |  |  | 25,000 |  | 1.75 |  |  |  | 94 |  |  |  | 337 |  |
Deposits |  | 1/1/2020 |  | 1/1/2025 |  | Other Assets |  |  | 50,000 |  | 1.57 |  |  |  | 171 |  |  |  | 617 |  |
Deposits |  | 3/1/2020 |  | 3/1/2025 |  | Other Assets |  |  | 25,000 |  | 1.90 |  |  |  | 94 |  |  |  | 332 |  |
Deposits |  | 1/1/2020 |  | 1/1/2025 |  | Other Assets |  |  | 25,000 |  | 1.80 |  |  |  | 86 |  |  |  | 309 |  |
|  |  |  |  |  |  |  | $ | 375,000 |  |  |  |  | $ | 749 |  |  | $ | 3,148 |  |
The Company has entered into interest rate swaps to hedge against the risk of rising rates on its rolling fixed rate short-term FHLB advances or brokered CDs 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 |  |  |  |  |  |  |  |  |  |  |  | Fair Value as of
Hedged Item |  | Effective Date |  | Maturity Date |  | Location |  | Notional Amount |  | Receive Rate |  |  | Pay Rate |  | March 31, 2020 |  | December 31, 2019
(dollars in thousands)
CRBT - FHLB Advances or Brokered CDs |  | 3/16/2020 |  | 3/16/2023 |  | Derivatives - Liabilities |  | $ | 30,000 |  | 0.89 | % |  |  | 1.12 | % |  | $ | (644) |  | $ | -
SFCB - FHLB Advances or Brokered CDs |  | 3/16/2020 |  | 3/16/2023 |  | Derivatives - Liabilities |  |  | 10,000 |  | 0.74 | % |  |  | 0.95 | % |  |  | (162) |  | $ | -
QCR Holdings Statutory Trust II |  | 9/30/2018 |  | 9/30/2028 |  | Derivatives - Liabilities |  |  | 10,000 |  | 4.30 | % |  |  | 5.85 | % |  |  | (1,992) |  | $ | (971)
QCR Holdings Statutory Trust III |  | 9/30/2018 |  | 9/30/2028 |  | Derivatives - Liabilities |  |  | 8,000 |  | 4.30 | % |  |  | 5.85 | % |  |  | (1,594) |  |  | (777)
QCR Holdings Statutory Trust V |  | 7/7/2018 |  | 7/7/2028 |  | Derivatives - Liabilities |  |  | 10,000 |  | 3.54 | % |  |  | 4.54 | % |  |  | (1,935) |  |  | (944)
Community National Statutory Trust II |  | 9/20/2018 |  | 9/20/2028 |  | Derivatives - Liabilities |  |  | 3,000 |  | 3.29 | % |  |  | 5.17 | % |  |  | (597) |  |  | (291)
Community National Statutory Trust III |  | 9/15//2018 |  | 9/15/2028 |  | Derivatives - Liabilities |  |  | 3,500 |  | 2.49 | % |  |  | 4.75 | % |  |  | (698) |  |  | (339)
Guaranty Bankshares Statutory Trust I |  | 9/15/2018 |  | 9/15/2028 |  | Derivatives - Liabilities |  |  | 4,500 |  | 2.49 | % |  |  | 4.75 | % |  |  | (898) |  |  | (436)
|  |  |  |  |  |  |  | $ | 79,000 |  | 3.66 | % |  |  | 5.24 | % |  | $ | (8,520) |  | $ | (3,758)
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. 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 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. Additionally, the Company enters into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The ISDA master 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 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:
|  |  |  | March 31, 2020 |  |  | December 31, 2019
|  |  | Notional Amount |  | Estimated Fair Value |  | Notional Amount |  | Estimated Fair Value
|  |  | (dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  |  | $ | 915,109 |  | $ | 195,224 |  | $ | 787,221 |  | $ | 84,679
Non-Hedging Interest Rate Derivatives Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  |  | $ | 915,109 |  | $ | 195,224 |  | $ | 787,221 |  | $ | 84,679
Swap fee income totaled $6.8 million and $3.2 million for the three months ended March 31, 2020 and 2019, respectively. Swap fee income totaled $28.3 million for the year ended December 31, 2019.

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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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