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Note 18 - Derivatives

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 18 – DERIVATIVES

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain borrowings, brokered deposits, investment securities, forward sales contracts, and commitments to extend credit associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.

Mortgage Banking Derivatives Not Designated as Hedges

The Company regularly enters into commitments to originate and sell loans held for sale. The Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one-to four-family loans that are intended to be sold and for closed one-to-four-family mortgage loans held for sale for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one-to-four-family mortgage loans or into contracts to sell forward To-Be-Announced (“TBA”) mortgage-backed securities. These commitments and contracts are considered derivatives but have not been designated as hedging instruments for reporting purposes under U.S. GAAP. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in noninterest income or noninterest expense. The Bank recognizes all derivative instruments as either “Other assets” or “Other liabilities” on the Consolidated Balance Sheets and measures those instruments at fair value.

Customer Swaps Not Designated as Hedges

The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of clients desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. To economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into derivative contracts with third parties to offset the customer contracts such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts reduce over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to clients.

Cash Flow Hedges

The Company has entered into interest rate swaps to reduce the exposure to variability in interest-related cash outflows attributable to changes in forecasted SOFR based brokered deposits. These derivative instruments are designated as cash flow hedges. The hedged item is the SOFR portion of the series of future adjustable-rate borrowings and deposits over the term of the interest rate swap. Accordingly, changes to the amount of interest payment cash flows for the hedged transactions attributable to a change in credit risk are excluded from management’s assessment of hedge effectiveness. The Bank tests for hedging effectiveness on a quarterly basis. The accumulated other comprehensive income is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Bank has not recorded any hedge ineffectiveness since inception.

The Bank expects that approximately $3.6 million will be reclassified from accumulated other comprehensive loss as a decrease to interest expense over the next twelve months related to these cash flow hedges.

Fair Value Hedges

The Company is exposed to changes in the fair value of certain of its pools of prepayable fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, the SOFR. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

The following amounts were recorded on the balance sheet related to cumulative-basis adjustment for fair value hedges for the dates indicated:

						Cumulative Amount of Fair Value
Line item on the Consolidated Balance Sheets						Hedging Adjustment Included in
in which the hedged item is included:		Carrying Amount of the				the Carrying Amount of the
December 31, 2023		Hedged Assets				Hedged Assets
Investment securities⁽¹⁾		$	56,785			$	3,215
Total		$	56,785			$	3,215

December 31, 2022
Investment securities⁽¹⁾		$	55,893			$	4,107
Total		$	55,893			$	4,107

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1)

These amounts include the amortized cost basis of closed portfolios used in designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At December 31, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $236.7 million; the cumulative basis adjustments associated with these hedging relationships was $3.2 million; and the amounts of the designated hedged items was $60.0 million.

The following tables summarize the Company’s derivative instruments at the dates indicated. The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as “Other assets” and “Other liabilities”, respectively, on the Consolidated Balance Sheets, as follows:

		December 31, 2023
						Fair Value
Cash flow hedges:		Notional				Asset				Liability
Interest rate swaps - brokered deposits		$	250,000			$	3,233			$	375
Fair value hedges:
Interest rate swaps - securities		$	60,000			$	3,198			$	—
Non-hedging derivatives:
Fallout adjusted interest rate lock commitments with customers			22,334				329				—
Mandatory and best effort forward commitments with investors			10,070				—				188
Forward TBA mortgage-backed securities			33,000				—				284
Interest rate swaps - customer swap positions			801								63
Interest rate swaps - dealer offsets to customer swap positions			801				64				—

		December 31, 2022
						Fair Value
Cash flow hedges:		Notional				Asset				Liability
Interest rate swaps - brokered deposits		$	90,000			$	5,780			$	—
Fair value hedges:
Interest rate swaps - securities		$	60,000			$	4,090			$	—
Non-hedging derivatives:
Fallout adjusted interest rate lock commitments with customers			8,837				107				—
Mandatory and best effort forward commitments with investors			4,558				—				38
Forward TBA mortgage-backed securities			27,000				164				—

The following table summarizes the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Income for the years indicated:

		Year Ended December 31,
		2023								2022								2021
		Interest				Interest				Interest				Interest				Interest				Interest
		Expense				Income				Expense				Income				Expense				Income
		Deposits				Securities				Deposits				Securities				Deposits				Securities
Total amounts presented on the Consolidated Statements of Income		$	36,751			$	12,247			$	9,420			$	7,046			$	6,929			$	5,637
Net gains (losses) on fair value hedging relationships:
Interest rate swaps - securities
Recognized on hedged items			—				892				—				(4,107	)			—				—
Recognized on derivatives designated as hedging instruments			—				(892	)			—				4,103				—				—
Net interest income (expense) recognized on cash flows of derivatives designated as hedging instruments			—				1,509				—				—				—				—
Net income (expense) recognized on fair value hedges		$	—			$	1,509			$	—			$	(4	)		$	—			$	—
Net gain (loss) on cash flow hedging relationships:
Interest rate swaps - brokered deposits and borrowings
Realized gains (losses) (pre-tax) reclassified from AOCI into net income		$	5,465			$	—			$	970			$	—			$	(538	)		$	—
Net income (expense) recognized on cash flow hedges		$	5,465			$	—			$	970			$	—			$	(538	)		$	—

Changes in the fair value of the non-hedging derivatives recognized in “Noninterest income” on the Consolidated Statements of Income and included in gain on sale of loans resulted in net gains of $75,000, net losses of $2.6 million, and net gains of $5.1 million for the years ended December 31, 2023, 2022, and 2021, respectively.

The following table presents a summary of amounts outstanding in derivative financial instruments, including those entered into in connection with the same counterparty under master netting agreements, as of the years indicated. While these agreements are typically over-collateralized, GAAP requires disclosures in this table to limit the amount of such collateral to the amount of the related asset or liability for each counterparty.

						Gross Amounts				Net Amounts of				Gross Amounts Not Offset
		Gross Amounts				Offset on the				Assets on the				on the Consolidated Balance Sheets
Offsetting of derivative assets		of Recognized				Consolidated				Consolidated				Financial				Cash Collateral
At December 31, 2023		Assets				Balance Sheets				Balance Sheets				Instruments				Received				Net Amount
Interest rate swaps		$	6,648			$	153			$	6,495			$	—			$	—			$	6,495

At December 31, 2022
Interest rate swaps		$	9,870			$	—			$	9,870			$	—			$	—			$	9,870

						Gross Amounts				Net Amounts of				Gross Amounts Not Offset
		Gross Amounts				Offset on the				Liabilities on the				on the Consolidated Balance Sheets
Offsetting of derivative liabilities		of Recognized				Consolidated				Consolidated				Financial				Cash Collateral
At December 31, 2023		Liabilities				Balance Sheets				Balance Sheets				Instruments				Posted				Net Amount
Interest rate swaps		$	(722	)		$	(347	)		$	(375	)		$	—			$	270			$	(105	)

At December 31, 2022
Interest rate swaps		$	—			$	—			$	—			$	—			$	—			$	—

Credit Risk-related Contingent Features

The Company has derivative contracts with its derivative counterparties that contain provisions to post collateral to the counterparties when these contracts are in a net liability position. At December 31, 2023, the Company had collateral posted of $569,000 due to these provisions. Receivables related to cash collateral that has been paid to counterparties is included in "Cash and cash equivalents" on the Consolidated Balance Sheets. In certain cases, the Company will have posted excess collateral, compared to total exposure due to initial margin requirements or day-to-day rate volatility.