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Note 9 - Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

9. DERIVATIVES AND HEDGING ACTIVITIES

We are exposed to certain risks arising from both business operations and economic conditions. We principally manage the exposure to a wide variety of operational risks through core business activities. Economic risks, including interest rate, liquidity and credit risk, are primarily administered via the amount, sources and duration of assets and liabilities. Derivative financial instruments may also be used to assist in managing economic risks.

Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with correspondent banks to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent banks are recognized directly to earnings. Fees paid to us by the correspondent banks are recognized as noninterest income on our Consolidated Statements of Income on the settlement date.

The fair values of derivative instruments as of September 30, 2022 are reflected on a gross basis in the following table.

		Notional Amount			Balance Sheet Location		Fair Value

Derivative Assets
Interest rate swaps		$	359,936,000		Other Assets		$	28,445,000

Derivative Liabilities
Interest rate swaps			359,936,000		Other Liabilities			28,544,000

The effect of interest rate swaps that are not designated as hedging instruments resulted in income of $0.2 million during the first nine months of 2022 that was recorded in other noninterest expense on our Consolidated Statements of Income. The value of interest rate swaps in a liability position, which includes accrued interest, was $28.5 million as of September 30, 2022. We have master netting arrangements with our correspondent banks. Cash collateral totaling $28.0 million was provided to us by the counterparty correspondent banks as of September 30, 2022. Cash collateral amounts, which are based on daily fair value calculations, are adjusted daily if fair value changes exceed an aggregate of $250,000.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $360 million as of September 30, 2022. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instruments.

The fair values of derivative instruments as of December 31, 2021 are reflected on a gross basis in the following table.

		Notional Amount			Balance Sheet Location		Fair Value

Derivative Assets
Interest rate swaps		$	279,419,000		Other Assets		$	4,609,000

Derivative Liabilities
Interest rate swaps			279,419,000		Other Liabilities			4,857,000

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $0.2 million during the year-ended December 31, 2021 recognized in other noninterest expense on our Consolidated Statements of Income. The fair value of interest rate swaps in a liability position, which includes accrued interest, was $4.9 million as of December 31, 2021. We have master netting arrangements with our correspondent banks. Cash collateral totaling $3.6 million was provided to the counterparty correspondent banks as of December 31, 2021. Cash collateral amounts, which are based on daily fair value calculations, are adjusted daily if fair value changes exceed an aggregate of $250,000.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $279 million as of December 31, 2021. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instruments.