NOTE 5 - DERIVATIVES AND HEDGING ACTIVITIES

3 Months Ended

Mar. 31, 2026

DERIVATIVES AND HEDGING ACTIVITIES

DERIVATIVES AND HEDGING ACTIVITIES

NOTE 5 – DERIVATIVES AND HEDGING ACTIVITIES

Effective January 1, 2026, the Company elected to apply the master netting provisions under ASC 210-20 and ASC 815.  See Note 1 to the Consolidated Financial Statements for additional information regarding this election.

Derivatives are summarized as follows as of March 31, 2026 and December 31, 2025:

	March 31, 2026						December 31, 2025
			Fair Value						Fair Value
		Notional or Contractual Amount		Derivative Assets		Derivative Liabilities		Notional or Contractual Amount		Derivative Assets		Derivative Liabilities
	(dollars in thousands)
Hedged derivatives
Cash flow hedges
Interest rate swaps	$	39,000	$	752	$	19,864	$	49,310	$	576	$	20,169
Interest rate collars		150,000		7		—		150,000		—		144
Fair value hedges
Interest rate swaps		250,000		—		940		310,000		—		2,186
	$	439,000		759		20,804	$	509,310	$	576	$	22,499
Unhedged derivatives
Swaptions	$	86,151	$	6	$	—	$	203,600	$	22	$	—
Interest rate swaps		6,169,719		213,015		213,015		5,954,979		191,828		191,828
	$	6,255,870	$	213,021	$	213,015	$	6,158,579	$	191,850	$	191,828
Total derivatives, gross			$	213,780	$	233,819			$	192,426	$	214,327
Netting adjustments				(3,944)		(3,944)				(4,017)		(4,017)
Cash collateral				—		(80,039)				—		(73,259)
Total derivatives, net			$	209,836	$	149,836			$	188,409	$	137,051

The Company uses interest rate swap, 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		March 31, 2026		December 31, 2025
(dollars in thousands)
QCR Holdings Statutory Trust V	7/7/2018	7/7/2028	Derivatives - Assets	$	10,000	5.48	%	4.54	%	$	185	$	140
Community National Statutory Trust III	9/15/2018	9/15/2028	Derivatives - Assets		3,500	5.69	%	4.75	%		87		64
Guaranty Bankshares Statutory Trust I	9/15/2018	9/15/2028	Derivatives - Assets		4,500	5.69	%	4.75	%		68		50
Community National Statutory Trust II	9/20/2018	9/20/2028	Derivatives - Assets		3,000	6.12	%	5.17	%		59		43
QCR Holdings Statutory Trust II	9/30/2018	9/30/2028	Derivatives - Assets		10,000	6.81	%	5.85	%		196		144
QCR Holdings Statutory Trust III	9/30/2018	9/30/2028	Derivatives - Assets		8,000	6.81	%	5.85	%		157		115
Guaranty Statutory Trust II	5/23/2019	2/23/2026*	Derivatives - Assets		10,310	N/A	%	N/A	%		N/A		20
QCR Holdings Subordinated Note	3/1/2024	2/15/2028	Derivatives - Liabilities		65,000	4.02	%	4.02	%		(516)		(1,020)
				$	114,310					$	236	$	(444)
* Matured in first quarter of 2026.

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, 2026		December 31, 2025
(dollars in thousands)
Loans	10/1/2022	10/1/2026	Derivatives - Assets (Liabilities)	$	50,000	4.40	%	2.44	%	$	(1)	$	(1)

The Company has 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, 2026		December 31, 2025
(dollars in thousands)
7/30/2024	1/29/2026*	Derivatives - Assets	$	20,750	2.63	%	$	N/A	$	-
7/30/2024	1/29/2026*	Derivatives - Assets		41,700	2.13	%		N/A		-
7/30/2024	1/30/2026*	Derivatives - Assets		36,546	2.14	%		N/A		-
7/30/2024	1/30/2026*	Derivatives - Assets		18,453	2.64	%		N/A		-
7/30/2024	7/30/2026	Derivatives - Assets		16,100	2.64	%		2		8
7/30/2024	7/30/2026	Derivatives - Assets		29,800	2.14	%		1		4
7/30/2024	7/30/2026	Derivatives - Assets		25,971	2.14	%		1		3
7/30/2024	7/30/2026	Derivatives - Assets		14,280	2.64	%		2		7
			$	203,600			$	6	$	22
* Matured in first quarter of 2026.

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, 2026		December 31, 2025
(dollars in thousands)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities	$	35,000	1.40	%	3.77	%	$	(3,864)	$	(3,798)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		50,000	1.40	%	3.77	%		(5,520)		(5,425)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		40,000	1.40	%	3.77	%		(4,424)		(4,348)
Loans	10/1/2022	7/1/2031	Derivatives - Liabilities		25,000	1.30	%	3.77	%		(2,780)		(2,734)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		15,000	1.91	%	3.77	%		(276)		(285)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	3.77	%		(920)		(948)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		35,000	1.91	%	3.77	%		(644)		(664)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	3.77	%		(920)		(947)
				$	300,000					$	(19,348)	$	(19,149)

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		March 31, 2026		December 31, 2025
(dollars in thousands)
Deposits	5/1/2025	11/1/2027	Derivatives - Liabilities	$	50,000	4.40	%	2.24	%	$	10	$	(18)
Deposits	5/1/2025	5/1/2028	Derivatives - Liabilities		50,000	4.40	%	2.34	%		4		(53)
Deposits	5/1/2025	11/1/2028	Derivatives - Liabilities		50,000	4.40	%	2.43	%		(6)		(72)
				$	150,000					$	8	$	(143)

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, 2026		December 31, 2025
(dollars in thousands)
Loans	7/12/2023	2/1/2026*	Derivatives - Liabilities	$	25,000	4.21	%	4.38	%	$	N/A	$	(15)
Loans	7/12/2023	2/1/2026*	Derivatives - Liabilities		15,000	4.21	%	4.38	%		N/A		(9)
Loans	7/12/2023	2/1/2026*	Derivatives - Liabilities		20,000	4.21	%	4.38	%		N/A		(12)
Loans	7/12/2023	8/1/2026	Derivatives - Liabilities		30,000	4.21	%	4.21	%		(55)		(119)
Loans	7/12/2023	8/1/2026	Derivatives - Liabilities		15,000	4.21	%	4.21	%		(28)		(59)
Loans	7/12/2023	8/1/2026	Derivatives - Liabilities		20,000	4.21	%	4.21	%		(37)		(79)
Loans	7/12/2023	2/1/2027	Derivatives - Liabilities		32,500	4.21	%	4.08	%		(115)		(251)
Loans	7/12/2023	2/1/2027	Derivatives - Liabilities		15,000	4.21	%	4.08	%		(53)		(116)
Loans	7/12/2023	2/1/2027	Derivatives - Liabilities		20,000	4.21	%	4.08	%		(71)		(154)
Loans	7/12/2023	8/1/2027	Derivatives - Liabilities		32,500	4.21	%	3.98	%		(148)		(352)
Loans	7/12/2023	8/1/2027	Derivatives - Liabilities		15,000	4.21	%	3.98	%		(68)		(162)
Loans	7/12/2023	8/1/2027	Derivatives - Liabilities		25,000	4.21	%	3.98	%		(113)		(271)
Loans	7/12/2023	2/1/2028	Derivatives - Liabilities		30,000	4.21	%	3.90	%		(169)		(391)
Loans	7/12/2023	2/1/2028	Derivatives - Liabilities		15,000	4.21	%	3.90	%		(83)		(196)
				$	310,000					$	(940)	$	(2,186)
* Matured in first quarter of 2026.

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 March 31, 2026 and December 31, 2025 are summarized as follows:

		As of March 31, 2026			As of December 31, 2025
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	6,169,719	$	213,015	$	5,954,979	$	191,828
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	6,169,719	$	213,015	$	5,954,979	$	191,828

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three months ended March 31, 2026 and 2025 are as follows:

	Three Months Ended March 31, 2026				Three Months Ended March 31, 2025
	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	$	120,091	$	52,653	$	116,673	$	56,687
The effects of cash flow hedging:
Loss on interest rate caps and collars on deposits		-		-		-		(117)
Loss on interest rate swaps on debt		-		(113)		-		(209)
Loss on interest rate swaps and collars on loans		(1,732)		-		(2,083)		-
The effects of fair value hedging:
Gain (loss) on interest rate swaps on loans		(127)		-		170		-

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, 2026		December 31, 2025
	(dollars in thousands)
Cash	$	84,081	$	81,131
U.S. govt. sponsored agency securities		11,210		11,268
Municipal securities		138,695		142,065
Residential mortgage-backed and related securities		36,316		36,565
	$	270,302	$	271,029

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.