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Note 11 - Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 11. Derivative Instruments and Hedging Activities

Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. The Company’s interest rate swaps qualify and are designated as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of September 30, 2020. The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

	*September 30, 2020*						*December 31, 2019*
	*Notional or*		*Fair Value*				*Notional or*		*Fair Value*
	*Contractual*		*Derivative*		*Derivative*		*Contractual*		*Derivative*		*Derivativ*
(Amounts in thousands)	*Amount*		*Assets*		*Liabilities*		*Amount*		*Assets*		*Liabilities*
Derivatives designated as hedges
Interest rate swaps	$	16,889	$	-	$	1,261	$	17,432	$	-	$	510
Total derivatives	$	16,889	$	-	$	1,261	$	17,432	$	-	$	510

The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
(Amounts in thousands)	*2020*		*2019*		*2020*		*2019*		*Income Statement Location*
Derivatives designated as hedges
Interest rate swaps	$	80	$	1	$	172	$	1	Interest and fees on loans
Total derivative expense	$	80	$	1	$	172	$	1