Note 21 - Derivative Financial Instruments

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 21: 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 is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. During the third quarter of 2021, the Company executed a de-leveraging transaction whereby utilizing the proceeds from the sale of $43 million in investment securities and $7 million of excess cash to terminate this interest rate swap and payoff $50 million in higher-cost FHLB advances. The $2.7 million of gains recognized on the investment sales were used to offset the prepayment loss on the interest rate swap of $2.6 million. The prepayment loss on the interest rate swap of $2.6 million was reclassified from other comprehensive income and reported as loss on interest rate swap on the Company’s statement of income.

In March 2019, the Company entered into an interest rate swap agreement totaling $10.3 million notional amount to hedge against interest rate risk on variable rate subordinated debentures. 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 December 31, 2021, the Company reported a $443,495 unrealized loss, net of a $140,051 tax effect, in accumulated other comprehensive income related to this cash flow hedge.

For each instrument, the Company documents at inception and periodically over the life of the hedge, its analysis of actual and expected hedge effectiveness. To the extent that the hedge of future cash flows is deemed ineffective, changes in the fair value of the derivative are recognized in earnings as a component of other noninterest expense. For the years ended December 31, 2021 and 2020, there was no ineffectiveness attributable to either cash flow hedge.

As of December 31, 2021, based on current fair values, the Company pledged cash collateral of $580,000 to its counterparty for the swap. As of December 31, 2020, based on current fair values, the Company pledged cash collateral of $5.1 million to its counterparty for the swaps.

A summary of the Company’s derivative financial instruments at December 31, 2021 and 2020 is shown in the following table:

									December 31, 2021	Estimated Fair Value at:
Forward Start	Termination	Derivative	Notional		Rate			Rate	Balance Sheet	December 31,
Inception Date	Date	Type	Amount		Paid			Hedged	Classfication	2021			2020
2/28/2018	9/21/2021	Interest rate swap - FHLB Advances	$	50,000,000		2.12	%	3 month LIBOR Floating	Other liabilites	$	0		$	(3,760,287	)
5/23/2019	2/23/2026	Interest rate swap - Subordinated Debentures	$	10,310,000		4.09	%	3 month LIBOR Floating +145 bps	Other liabilites	$	(583,546	)	$	(1,180,909	)

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

Derivative	Income Statement	Years ended December 31,
Type	Classfication	2021		2020
Interest rate swap - FHLB Advances	Interest expense	$	650,316	$	630,870
Interest rate swap - Subordinated Debentures	Interest expense	$	259,031	$	184,537