Note 8 - Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

( 8 ) Derivative Financial Instruments

The Company has entered into interest rate swaps in order to provide commercial real estate loan clients the ability to swap from variable to fixed interest rates.  Under these agreements, the Company enters into a variable rate loan with a client at a specified index (Wall Street Journal Prime Lending Rate) in addition to a borrower swap agreement.  This swap agreement effectively converts the client's variable rate loan into a fixed rate.  The Company then enters into a matching swap agreement with a

third

-party dealer counterparty in order to offset its exposure on the borrower swap. These interest rate swaps are considered derivative financial instruments.  These derivative instruments involve both credit and market risk.  The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based.  Notional amounts do

not

represent direct credit exposures.  Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any, over the life of the contract.  Such differences, which represent the fair value of the derivative instruments, are included in “other assets” and “other liabilities” on the Company's condensed consolidated balance sheets, and the net change in each of these financial statement line items in the accompanying condensed consolidated statements of cash flows.  The derivative transactions are considered instruments with

no

hedging designation, otherwise known as stand-alone derivatives.   

	At September 30,
	2020			2019
dollars in thousands
Notional amount - interest rate swaps:
Stand-alone derivatives	$	21,200		$	-
Weighted-average pay rate - interest rate swaps		3.68	%		-
Weighted-average receive rate - interest rate swaps		3.00	%		-
Weighted-average maturity (in years) - interest rate swaps		14.8			-
Net realized fair value adjustments:
Stand-alone derivatives - interest rate swaps (other assets)	$	189			-
Stand-alone derivatives - interest rate swaps (other liabilities)	$	(189	)		-

The Company is party to a collateral support agreement with its dealer counterparty.  Such agreement requires that the Company or the dealer counterparty to maintain collateral based on the fair values of derivative instruments.  In the event of default by a counterparty the non-defaulting counterparty would be entitled to the collateral.  At

September 30, 2020,

the Company maintained a

$300,000

cash deposit as collateral for its derivative instruments, which is included in “interest-bearing deposits” on the Company's condensed consolidated balance sheets.  The Company does

not

require borrower counterparties to post cash collateral based on the fair values of borrower interest rate swaps.  In the event of default of a borrower counterparty wherein the fair value of the derivative instrument is owed to the Company, the fair value is collected through a real property foreclosure or liquidation.