Note

12:

Derivative Financial Instruments

The Company records all derivative financial instruments at fair value in the financial statements. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.

When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as

) a hedge of fair value of a recognized asset or liability (fair value hedge) or

) a hedge of a forecasted transaction, such as, the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective.

June 2017,

the Company entered into a forward start interest rate swap agreement totaling

$50

million notional amount to hedge against interest rate risk on FHLB advances. The swap rate paid is

2.12%

and is hedged against

three

-month floating LIBOR with a termination date of

February 2025.

As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. At

June 30, 2019,

the Company reported a

$752,679

unrealized loss, net of a

$257,629

tax effect, in other comprehensive income related to this cash flow hedge.

March 2019,

the Company entered into a forward start interest rate swap agreement totaling

$10.3

million notional amount to hedge against interest rate risk on variable rate subordinated debentures. The swap rate paid is

4.09%

and is hedged against

three

-month floating LIBOR plus

145

basis points with a termination date of

February 2026.

June 30, 2019,

the Company reported a

$417,943

unrealized loss, net of a

$143,054

tax effect, in other comprehensive income related to this cash flow hedge.

The Company documents, both at inception and periodically over the life of the hedges, its analysis of actual and expected hedge effectiveness.

As of

June 30, 2019,

based on current fair values, the Company pledged cash collateral of

$1.6

million to its counterparty for the swaps. As of

December 31, 2018,

based on current fair values, the counterparty had pledged cash collateral of

$1.5

million to the Company.

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments on the consolidated balance sheets at

June 30, 2019

and

December 31, 2018:

				June 30, 2019				December 31, 2018

				Fair Value				Fair Value
	Balance Sheet	Notional		Derivative		Derivative		Derivative		Derivative
Derivatives designated as hedging instruments:	Classification	Amount		Assets		Liablities		Assets		Liablities

Interest rate swap - FHLB Advances	Other liabilites	$	50,000,000	$	-	$	1,010,308	$	1,271,538	$	-
Interest rate swap - Subordinated Debentures	Other liabilites	$	10,310,000	$	-	$	560,997	$	-	$	-

The following table presents amounts included in the consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:

		Six Months Ended						Three Months Ended
	Income Statement	June, 30						June, 30
Derivatives designated as hedging instruments:	Classification	2019			2018			2019			2018

Interest rate swap - FHLB Advances	Interest Expense	$	(129,093	)	$	(7,838	)	$	(59,205	)	$	(1,990	)
Interest rate swap - Subordinated Debentures	Interest Expense	$	1,301		$	-		$	1,301		$	-