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Note 12 - Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Text Block]

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 1) a hedge of fair value of a recognized asset or liability (fair value hedge) or 2) 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.

In 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, 2020, the Company reported a $3,199,386 unrealized loss, net of a $1,095,092 tax effect, in other comprehensive income related to this cash flow hedge.

In 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. 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, 2020, the Company reported a $998,121 unrealized loss, net of a $341,639 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, 2020, based on current fair values, the Company pledged cash collateral of $5.6 million to its counterparty for the swaps, included on the balance sheet in interest-bearing demand deposits in other financial institutions. As of December 31, 2019, based on then current fair values, the Company had pledged cash collateral of $1.9 million to the counterparty.

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments on the consolidated balance sheets at June 30, 2020 and December 31, 2019:

Derivatives designated as hedging instruments:
									June 30, 2020	Estimated Fair Value at:
Forward Start Inception Date	Termination Date	Derivative Type	Notional Amount		Rate Paid			Rate Hedged	Balance Sheet Classfication	June 30, 2020			December 31, 2019

2/28/2018	2/28/2025	Interest rate swap - FHLB Advances	$	50,000,000		2.12	%	3 month LIBOR Floating	Other liabilites	$	(4,294,478	)	$	(1,067,935	)

5/23/2019	2/23/2026	Interest rate swap - Subordinated Debentures	$	10,310,000		4.09	%	3 month LIBOR Floating +145 bps	Other liabilites	$	(1,339,760	)	$	(560,388	)

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

Derivative	Income Statement	Three months ended June 30,					Six months ended June 30,
Type	Classfication	2020		2019			2020		2019

Interest rate swap - FHLB Advances	Interest expense	$	122,537	$	(59,205	)	$	162,378	$	(129,093	)

Interest rate swap - Subordinated Debentures	Interest expense	$	38,590	$	1,301		$	60,031	$	1,301