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Note 11 - Derivative Financial Instruments

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

11. Derivative Financial Instruments

Fair Value Hedges

The Company uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. The Company uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income.

During the third quarter of 2023, the Company executed an interest rate swap designated as a fair value hedge with an original notional amount of $25.0 million to convert certain long-term fixed rate 1-4 family loans to floating rates to hedge interest rate risk exposure using the portfolio layer method.

The portfolio layer method allows the Company to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors that would affect the timing and amount of cash flow. The fair value portfolio level basis adjustment on the hedged loans has not been attributed to the individual loans on the consolidated balance sheet.

The Company was required to pledge $0.7 million and $1.0 million of securities as collateral for these fair value hedges at September 30, 2023, and December 31, 2022, respectively.

The table below identifies the notional amount, fair value and balance sheet category of the Company's interest rate swaps at September 30, 2023, and December 31, 2022 (in thousands):

		Notional Amount				Fair Value				Balance Sheet Category
September 30, 2023
Interest rate swaps		$	34,028			$	1,366			Other assets
December 31, 2022
Interest rate swaps		$	9,314			$	1,096			Other assets

The table below identifies the carrying amount of the hedged assets and cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets that are designated as a fair value hedge accounting relationship at September 30, 2023, and December 31, 2022 (in thousands):

										Cumulative Amount of Fair Value
		Location in the consolidated				Carrying Amount of				Hedging Adjustment Included in
		balance sheet				the Hedged Assets				Carrying Amount of Hedged Assets
September 30, 2023
Interest rate swaps			Loans receivable, net			$	58,985		$	(1,366
December 31, 2022
Interest rate swaps			Loans receivable, net			$	8,494		$	(1,096

Back-to-Back Loan Swaps

The Company has interest rate swap loan relationships with customers to assist them in managing their interest rate risk. Upon entering into these loan swaps, the Company enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. The Company posted collateral of $415 thousand at September 30, 2023 and was not required to post collateral at December 31, 2022, related to these back-to-back swaps. The Company's counterparties were not required to pledge collateral at September 30, 2023 and December 31, 2022. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three and nine months ended September 30, 2023, and September 30, 2022, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of the derivative instruments designated as loan swaps at September 30, 2023, and December 31, 2022 (in thousands):

											Weighted Average				Weighted Average
		Notional Amount				Fair Value			Balance Sheet Category		Receive Rate				Pay Rate
September 30, 2023
Customer interest rate swaps		$	11,373			$	199		Other assets			7.33	%			5.62	%
Customer interest rate swaps			11,373				(199	)	Other liabilities			5.62	%			7.33	%
December 31, 2022
Customer interest rate swaps		$	-			$	-		Other assets			0.00	%			0.00	%
Customer interest rate swaps			-				-		Other liabilities			0.00	%			0.00	%

X

- 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

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- References

No definition available.

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