XML 25 R15.htm IDEA: XBRL DOCUMENT

Note 8 - Derivatives

6 Months Ended

Jun. 30, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 8. Derivatives

Derivatives Not Designated in Hedge Relationships

Patriot is a party to four interest rate swaps derivatives that are not designated as hedging instruments. Under a program, Patriot will execute interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Patriot executes with a third party, such that Patriot minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties.

Patriot entered two initial interest rate swaps under the program in November 2018, and another two swaps were entered into in May 2019. As of June 30, 2021 and December 31, 2020, Patriot had cash pledged for collateral on its interest rate swaps of $1.4 million and $1.4 million, respectively. This collateral is included in other assets on the consolidated balance sheets. The company did not recognize any net gain or loss in other noninterest income on the consolidated statements of operations during the three and six months ended June 30, 2021 and 2020.

Derivatives Designated in Hedge Relationships

Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. In April 2021, Patriot entered into an interest rate swap, which is designated as a cash flow hedge that effective converts variable-rate receivable into fixed-rate receivable. The Company’s objectives in using the cash flow hedge are to add stability to interest receivable and to manage its exposure to contractually specified interest rate movements. Under the term of the swap contract, the Company hedged the cashflows associated with a pool of 1-month LIBOR floating rate loans by converting a $50 million portion of that pool of loans into fixed rates with the swap. The Bank receives fixed and pays floating rate based on 1 month LIBOR for a 7-year rolling period beginning April 29, 2021. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk.

Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. As of June 30, 2021, a fair value adjustment of $168,000 was recorded in accumulated other comprehensive income. During the three and six month ended June 30, 2021, the Company recognized $85,000 of accumulated other comprehensive income that was reclassified into interest income, which is included in interest and fees on loans on the consolidated statements of operations. The Company expects to reclassify $508,000 to interest income during the next 12 months.

The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes.

Collateral Arrangements

For both types of derivative arrangements, swaps with a third party bank are subject to collateral pledging agreement where collateral is pledged by both parties on the net position of all swaps subject to certain thresholds. As of June 30, 2021, Patriot has $1.4 million in collateral pledged on swap agreements. The interest rate swap agreements do not contain any credit risk related contingent features.

Further discussion of the accounting policy of derivatives is set forth in Note 1, and information about the valuation methods used to measure the fair value of derivatives is provided in Note 13 to the consolidated financial statements.

The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):

(In thousands)		Notional Amount				Maturity (Years)				Fixed Rate			Variable Rate		Fair Value
June 30, 2021
Classified in Other Assets:
Customer interest rate swap		$	4,894				7.8				5.25	%	1 Mo. LIBOR + 1.96%		$	763
Customer interest rate swap			1,414				8.0				4.38	%	1 Mo. LIBOR + 2.00%			130

Classified in Other Liabilities:
3rd party interest rate swap		$	4,894				7.8				5.25	%	1 Mo. LIBOR + 1.96%		$	(763	)
3rd party interest rate swap			1,414				8.0				4.38	%	1 Mo. LIBOR + 2.00%			(130	)

Classified in Other Assets:
Interest rate swap cash flow hedge		$	50,000				6.8				1.10	%	1 Mo. LIBOR		$	168

December 31, 2020
Classified in Other Assets:
Customer interest rate swap		$	4,911				8.3				5.25	%	1 Mo. LIBOR + 1.96%		$	997
Customer interest rate swap			1,431				8.5				4.38	%	1 Mo. LIBOR + 2.00%			190

Classified in Other Liabilities:
3rd party interest rate swap		$	4,911				8.3				5.25	%	1 Mo. LIBOR + 1.96%		$	(997	)
3rd party interest rate swap			1,431				8.5				4.38	%	1 Mo. LIBOR + 2.00%			(190	)

Changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows for the three and six months ended June 30, 2021:

		Three Months Ended				Six Months Ended
(In thousands)		June 30, 2021				June 30, 2021
Interest rate swap designated as cash flow hedge:
Unrealized gain recognized in accumulated other comprehensive income before reclassifications		$	253			$	253
Amounts reclassified from accumulated other comprehensive income			(85	)			(85	)
Income tax expense on items recognized in accumulated other comprehensive income			(44	)			(44	)

Other comprehensive income		$	124			$	124

The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, lower long-term interest rates will result in a positive impact to comprehensive income whereas higher long-term interest rates will result in a negative impact to comprehensive income.