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Note 11 - Derivative Financial Instruments

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 11. Derivative Financial Instruments

In the normal course of business, the Company may use derivative financial instruments to manage its interest rate risk. These instruments carry varying degrees of credit, interest rate and market or liquidity risks. Derivative instruments are recognized as either assets or liabilities in the accompanying consolidated financial statements and are measured at fair value. The Company’s objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amount to be exchanged between the counterparties. The Company is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Company minimizes this risk by entering into derivative contracts with large, stable financial institutions. The Company has not experienced any losses from nonperformance by counterparties. The Company monitors counterparty risk in accordance with the provisions of ASC 815.

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. The Company uses the dollar-offset method for assessing effectiveness using the cumulative approach. The dollar-offset method compares the fair value of the hedging derivative with the fair value of the hedged exposure. The cumulative approach involves comparing the cumulative changes in the hedging derivative’s fair value to the cumulative changes in the hedged exposure’s fair value.

During 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 $1.6 million and $1.0 million of securities as collateral for these fair value hedges as of December 31, 2023 and 2022, respectively.

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

		Notional Amount				Fair Value				Balance Sheet Category
December 31, 2023
Interest rate swaps		$	8,930			$	891			Other assets
Interest rate swaps			25,000				(411	)		Other liabilities
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 as of December 31, 2023 and 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
December 31, 2023
Interest rate swaps		Loans receivable, net			$	58,588			$	(481	)
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 $429 thousand as of December 31, 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 as of December 31, 2023 and 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 years ended December 31, 2023 and 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 as of December 31, 2023 and 2022 (in thousands):

												Weighted Average				Weighted Average
		Notional Amount				Fair Value				Balance Sheet Category		Receive Rate				Pay Rate
December 31, 2023
Customer interest rate swaps		$	11,353			$	334			Other assets			7.36	%			5.62	%
Customer interest rate swaps			11,353				(334	)		Other liabilities			5.62	%			7.36	%
December 31, 2022
Customer interest rate swaps		$	-			$	-			Other assets			0.00	%			0.00	%
Customer interest rate swaps			-				-			Other liabilities			0.00	%			0.00	%