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Note 5 - DERIVATIVES AND HEDGING ACTIVITIES

3 Months Ended

Mar. 31, 2025

DERIVATIVES AND HEDGING ACTIVITIES

DERIVATIVES AND HEDGING ACTIVITIES

NOTE 5 – DERIVATIVES AND HEDGING ACTIVITIES

Derivatives are summarized as follows as of March 31, 2025 and December 31, 2024:


		March 31, 2025			December 31, 2024

		(dollars in thousands)
Assets:
Hedged Derivatives
Cash Flow Hedges
Interest rate swaps		$	1,271		$	1,905
Unhedged Derivatives
Interest rate caps			—			118
Swaptions			918			998
Interest rate swaps			178,808			183,760
		$	180,997		$	186,781

Liabilities:
Hedged Derivatives
Cash Flow Hedges
Interest rate swaps		$	(26,218)		$	(30,623)
Interest rate collars			(8)			(105)
Fair Value Hedges
Interest rate swaps			(1,891)			(335)
Unhedged Derivatives
Interest rate swaps			(178,808)			(183,760)
		$	(206,925)		$	(214,823)

The Company uses interest rate swap, cap and collar instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.

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			March 31, 2025			December 31, 2024
(dollars in thousands)

QCR Holdings Statutory Trust V		7/7/2018		7/7/2028		Derivatives - Assets		$	10,000		6.11	%			4.54	%		$	278		$	427
Community National Statutory Trust III		9/15/2018		9/15/2028		Derivatives - Assets			3,500		6.31	%			4.75	%			131			197
Guaranty Bankshares Statutory Trust I		9/15/2018		9/15/2028		Derivatives - Assets			4,500		6.31	%			4.75	%			102			153
Community National Statutory Trust II		9/20/2018		9/20/2028		Derivatives - Assets			3,000		6.74	%			5.17	%			87			132
QCR Holdings Statutory Trust II		9/30/2018		9/30/2028		Derivatives - Assets			10,000		7.44	%			5.85	%			293			443
QCR Holdings Statutory Trust III		9/30/2018		9/30/2028		Derivatives - Assets			8,000		7.44	%			5.85	%			234			353
Guaranty Statutory Trust II		5/23/2019		2/23/2026		Derivatives - Assets			10,310		6.04	%			4.09	%			146			200
QCR Holdings Subordinated Note		3/1/2024		2/15/2028		Derivatives - Liabilities			65,000		4.46	%			4.02	%			(706)			(50)
								$	114,310									$	565		$	1,855

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			March 31, 2025			December 31, 2024
(dollars in thousands)

Loans		7/1/2021		7/1/2031		Derivatives - Liabilities		$	35,000			1.40	%			4.45	%		$	(4,656)		$	(5,445)
Loans		7/1/2021		7/1/2031		Derivatives - Liabilities			50,000			1.40	%			4.45	%			(6,653)			(7,779)
Loans		7/1/2021		7/1/2031		Derivatives - Liabilities			40,000			1.40	%			4.45	%			(5,332)			(6,233)
Loans		10/1/2022		7/1/2031		Derivatives - Liabilities			25,000			1.30	%			4.45	%			(3,351)			(3,916)
Loans		4/1/2022		4/1/2027		Derivatives - Liabilities			15,000			1.91	%			4.45	%			(552)			(720)
Loans		4/1/2022		4/1/2027		Derivatives - Liabilities			50,000			1.91	%			4.45	%			(1,840)			(2,400)
Loans		4/1/2022		4/1/2027		Derivatives - Liabilities			35,000			1.91	%			4.45	%			(1,288)			(1,680)
Loans		4/1/2022		4/1/2027		Derivatives - Liabilities			50,000			1.91	%			4.45	%			(1,840)			(2,400)
								$	300,000										$	(25,512)		$	(30,573)

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			March 31, 2025			December 31, 2024
(dollars in thousands)

Loans		10/1/2022		10/1/2026		Derivatives - Liabilities		$	50,000		4.40	%		2.44	%		$	(8)		$	(105)

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			March 31, 2025			December 31, 2024
(dollars in thousands)

Loans		7/12/2023		8/1/2025		Derivatives - Assets		$	15,000		4.34	%			4.60	%		$	(18)		$	(35)
Loans		7/12/2023		2/1/2026		Derivatives - Assets			25,000		4.34	%			4.38	%			(82)			(77)
Loans		7/12/2023		2/1/2026		Derivatives - Assets			15,000		4.34	%			4.38	%			(49)			(46)
Loans		7/12/2023		2/1/2026		Derivatives - Assets			20,000		4.34	%			4.38	%			(65)			(61)
Loans		7/12/2023		8/1/2026		Derivatives - Assets			30,000		4.34	%			4.21	%			(159)			(79)
Loans		7/12/2023		8/1/2026		Derivatives - Assets			15,000		4.34	%			4.21	%			(79)			(40)
Loans		7/12/2023		8/1/2026		Derivatives - Assets			20,000		4.34	%			4.21	%			(106)			(53)
Loans		7/12/2023		2/1/2027		Derivatives - Assets			32,500		4.34	%			4.08	%			(219)			(44)
Loans		7/12/2023		2/1/2027		Derivatives - Assets			15,000		4.34	%			4.08	%			(101)			(20)
Loans		7/12/2023		2/1/2027		Derivatives - Assets			20,000		4.34	%			4.08	%			(135)			(27)
Loans		7/12/2023		8/1/2027		Derivatives - Assets			32,500		4.34	%			3.98	%			(241)			14
Loans		7/12/2023		8/1/2027		Derivatives - Assets			15,000		4.34	%			3.98	%			(111)			6
Loans		7/12/2023		8/1/2027		Derivatives - Assets			25,000		4.34	%			3.98	%			(186)			11
Loans		7/12/2023		2/1/2028		Derivatives - Assets			30,000		4.34	%			3.90	%			(227)			77
Loans		7/12/2023		2/1/2028		Derivatives - Assets			15,000		4.34	%			3.90	%			(113)			39
								$	325,000									$	(1,891)		$	(335)

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.

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

March 31, 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			March 31, 2025			December 31, 2024
(dollars in thousands)

7/30/2024		7/30/2025		Derivatives - Assets		$	77,600		2.13	%		$	15		$	37
7/30/2024		7/30/2025		Derivatives - Assets			33,100		2.62	%			100			54
7/30/2024		7/30/2025		Derivatives - Assets			28,254		2.12	%			75			48
7/30/2024		7/30/2025		Derivatives - Assets			66,247		2.63	%			29			33
7/30/2024		1/29/2026		Derivatives - Assets			20,750		2.63	%			145			102
7/30/2024		1/29/2026		Derivatives - Assets			41,700		2.13	%			118			77
7/30/2024		1/30/2026		Derivatives - Assets			36,546		2.14	%			68			70
7/30/2024		1/30/2026		Derivatives - Assets			18,453		2.64	%			92			93
7/30/2024		7/30/2026		Derivatives - Assets			16,100		2.64	%			26			140
7/30/2024		7/30/2026		Derivatives - Assets			29,800		2.14	%			14			116
7/30/2024		7/30/2026		Derivatives - Assets			25,971		2.14	%			105			103
7/30/2024		7/30/2026		Derivatives - Assets			14,280		2.64	%			131			125
						$	408,801					$	918		$	998

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 are not designated as hedging instruments are summarized as follows:


				March 31, 2025					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			$	4,241,443		$	178,808		$	4,148,306		$	183,760
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts			$	4,241,443		$	178,808		$	4,148,306		$	183,760

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three months ended March 31, 2025 and 2024 are as follows:


		Three Months Ended March 31, 2025							Three Months Ended March 31, 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		$	116,673		$	56,687			$	115,049		$	60,350

The effects of cash flow hedging:
Gain on interest rate caps on deposits			-			(117)				-			(1,116)
Gain on interest rate swaps on debt			-			(209)				-			(336)
Loss on interest rate swaps and collars on loans			(2,083)			-				(2,974)			-

The effects of fair value hedging:
Gain on interest rate swaps on loans			170			-				977			-

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:


		March 31, 2025			December 31, 2024

		(dollars in thousands)

Cash		$	53,401		$	39,431
U.S. govt. sponsored agency securities			6,408			6,222
Municipal securities			146,041			151,107
Residential mortgage-backed and related securities			17,322			18,132
		$	223,172		$	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.