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Note 5 - Derivatives | 6 Months Ended
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Jun. 30, 2024
Notes to Financial Statements |
Derivative Instruments and Hedging Activities Disclosure [Text Block] | NOTE 5 – 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 Secured Overnight Financing Rate (“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 Company 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 Company has not recorded any hedge ineffectiveness since inception. The Company expects that approximately $3.9 million will be reclassified from accumulated other comprehensive loss as a decrease to interest expense over the next 12 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 in the statement of financial |  |  |  |  |  | Hedging Adjustment Included in |
position in which the hedged Item is |  | Carrying Amount of the |  |  | the Carrying Amount of the |
included |  | Hedged Assets |  |  | Hedged Assets |
June 30, 2024 |  |  |  |  |  |  |  |
Investment securities (1) |  | $ | 55,397 |  |  | $ | 4,603 |
Total |  | $ | 55,397 |  |  | $ | 4,603 |
December 31, 2023 |  |  |  |  |  |  |  |
Investment securities (1) |  | $ | 56,785 |  |  | $ | 3,215 |
Total |  | $ | 56,785 |  |  | $ | 3,215 |
(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 June 30, 2024, the amortized cost basis of the closed portfolios used in these hedging relationships was $223.1 million; the cumulative basis adjustments associated with these hedging relationships was $4.6 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 recognizes derivative assets and liabilities in “Other assets” and “Other liabilities,” respectively, on the Consolidated Balance Sheets, as follows:
|  | June 30, 2024 |
|  |  |  |  |  | Fair Value |
Cash flow hedges: |  | Notional |  |  | Asset |  |  | Liability |
Interest rate swaps - brokered deposits and borrowings |  | $ | 235,000 |  |  | $ | 5,072 |  |  | $ | — |
Fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - securities |  |  | 60,000 |  |  |  | 4,582 |  |  |  | — |
Non-hedging derivatives: |  |  |  |  |  |  |  |  |  |  |  |
Fallout adjusted interest rate lock commitments with customers |  |  | 43,041 |  |  |  | 378 |  |  |  | — |
Mandatory and best effort forward commitments with investors |  |  | 34,337 |  |  |  | — |  |  |  | 316 |
Forward TBA mortgage-backed securities |  |  | 58,000 |  |  |  | 122 |  |  |  | — |
Interest rate swaps - customer swap positions |  |  | 801 |  |  |  | — |  |  |  | 71 |
Interest rate swaps - dealer offsets to customer swap positions |  |  | 801 |  |  |  | 71 |  |  |  | — |
|  | 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 |  |  |  | — |
The following table summarizes the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Income for the three and six months ended June 30, 2024 and 2023:
|  | Three Months Ended June 30, |
|  | 2024 |  |  | 2023 |
|  | Interest |  |  |  |  |  | Interest |  |  |  |
|  | Expense |  |  | Interest |  |  | Expense |  |  | Interest |
|  | Deposits and Borrowings |  |  | Income Securities |  |  | Deposits and Borrowings |  |  | Income Securities |
Total amounts presented on the Consolidated Statements of Income |  | $ | 15,053 |  |  | $ | 3,534 |  |  | $ | 8,829 |  |  | $ | 2,651 |
Net gains (losses) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recognized on hedged items |  | $ | — |  |  | $ | (163 | ) |  | $ | — |  |  | $ | 1,559 |
Recognized on derivatives designated as hedging instruments |  |  | — |  |  |  | 163 |  |  |  | — |  |  |  | (1,559 | )
Net interest income recognized on cash flows of derivatives designated as hedging instruments |  |  | — |  |  |  | 421 |  |  |  | — |  |  |  | 363 |
Net income recognized on fair value hedges |  | $ | — |  |  | $ | 421 |  |  | $ | — |  |  | $ | 363 |
Net gain on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - brokered deposits and borrowings |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Realized gains (pre-tax) reclassified from AOCI into net income |  | $ | 1,148 |  |  | $ | — |  |  | $ | 1,271 |  |  | $ | — |
Net income recognized on cash flow hedges |  | $ | 1,148 |  |  | $ | — |  |  | $ | 1,271 |  |  | $ | — |
|  | Six Months Ended June 30, |
|  | 2024 |  |  | 2023 |
|  | Interest |  |  |  |  |  | Interest |  |  |  |
|  | Expense |  |  | Interest |  |  | Expense |  |  | Interest |
|  | Deposits and Borrowings |  |  | Income Securities |  |  | Deposits and Borrowings |  |  | Income Securities |
Total amounts presented on the Consolidated Statements of Income |  | $ | 29,102 |  |  | $ | 7,417 |  |  | $ | 16,294 |  |  | $ | 5,271 |
Net gains (losses) on fair value hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recognized on hedged items |  | $ | — |  |  | $ | (1,388 | ) |  | $ | — |  |  | $ | (60 | )
Recognized on derivatives designated as hedging instruments |  |  | — |  |  |  | 1,388 |  |  |  | — |  |  |  | 60 |
Net interest income recognized on cash flows of derivatives designated as hedging instruments |  |  | — |  |  |  | 839 |  |  |  | — |  |  |  | 656 |
Net income recognized on fair value hedges |  | $ | — |  |  | $ | 839 |  |  | $ | — |  |  | $ | 656 |
Net gain on cash flow hedging relationships: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - brokered deposits and borrowings |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Realized gains (pre-tax) reclassified from AOCI into net income |  | $ | 2,870 |  |  | $ | — |  |  | $ | 2,178 |  |  | $ | — |
Net income recognized on cash flow hedges |  | $ | 2,870 |  |  | $ | — |  |  | $ | 2,178 |  |  | $ | — |
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 $19,000 and net losses of $51,000 for the three months ended June 30, 2024 and 2023, and net gains of $201,000 and $373,000 for the six months ended June 30, 2024 and 2023, respectively. The following tables present a summary of amounts outstanding in derivative financial instruments, including those entered into in connection with the same counterparty under master netting agreements at the dates 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 Assets |  |  | Gross Amounts Not Offset |
|  | Gross Amounts |  |  | Offset in the |  |  | Presented in the |  |  | in the Statement of Financial Position |
|  | of Recognized |  |  | Statement of |  |  | Statement of |  |  | Financial |  |  | Cash Collateral |  |  |  |  |
Offsetting of derivative assets |  | Assets |  |  | Financial Position |  |  | Financial Position |  |  | Instruments |  |  | Received |  |  | Net Amount |
At June 30, 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 9,811 |  |  | $ | 86 |  |  | $ | 9,725 |  |  | $ | — |  |  | $ | 1,120 |  |  | $ | 8,605 |
At December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 6,648 |  |  | $ | 153 |  |  | $ | 6,495 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,495 |
|  |  |  |  | Gross Amounts |  |  | Net Amounts of |  |  | Gross Amounts Not Offset |
|  | Gross Amounts |  |  | Offset in the |  |  | Liabilities |  |  | in the Statement of Financial Position |
|  | of Recognized |  |  | Statement of |  |  | Presented in the Statement |  |  | Financial |  |  | Cash Collateral |  |  |  |
Offsetting of derivative liabilities |  | Liabilities |  |  | Financial Position |  |  | of Financial Position |  |  | Instruments |  |  | Posted |  |  | Net Amount |
At June 30, 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
At December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | (722) |  |  | $ | (347) |  |  | $ | (375) |  |  | $ | — |  |  | $ | 270 |  |  | $ | (105) |
Credit Risk–Related Contingent Features The Company has derivative contracts with its derivative counterparties that contain a provision to post collateral to the counterparties when these contracts are in a net liability position. At June 30, 2024, the Company had no collateral posted due to this provision. 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.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
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