Note 9 - Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

9.  DERIVATIVES AND HEDGING ACTIVITIES

We are exposed to certain risks arising from both business operations and economic conditions. We principally manage the exposure to a wide variety of operational risks through core business activities. Economic risks, including interest rate, liquidity and credit risk, are primarily administered via the amount, sources and duration of assets and liabilities. Derivative financial instruments may also be used to assist in managing economic risks.

Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings.

The estimated fair values of derivative instruments as of September 30, 2021 are reflected in the following table.

	Notional Amount		Balance Sheet Location	Fair Value
Derivative Assets
Interest rate swaps	$	214,368,000	Other Assets	$	5,031,000
Derivative Liabilities
Interest rate swaps		214,368,000	Other Liabilities		5,250,000

The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of $0.2 million during the first nine months of 2021.

The estimated fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $5.3 million as of September 30, 2021. Cash collateral totaling $4.6 million was provided to the counterparty correspondent bank as of September 30, 2021.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $214 million as of September 30, 2021. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instrument that has been hedged.

The estimated fair values of derivative instruments as of December 31, 2020 are reflected in the following table.

	Notional Amount		Balance Sheet Location	Fair Value
Derivative Assets
Interest rate swaps	$	33,731,000	Other Assets	$	1,003,000
Derivative Liabilities
Interest rate swaps		33,731,000	Other Liabilities		1,027,000

The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of less than $0.1 million during the year-ended December 31, 2020.

The estimated fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $1.0 million as of December 31, 2020. Cash collateral totaling $1.1 million was provided to the counterparty correspondent bank as of December 31, 2020.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $33.7 million as of December 31, 2020. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instrument that has been hedged.