Note 7 - Derivatives

6 Months Ended

Jun. 30, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

7 – DERIVATIVES

As part of its asset liability management activities, the Corporation may utilize interest rate swaps to help manage its interest rate risk position. The notional amount of an interest rate swap does not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amount and the other terms of the interest rate swap agreements.

Fair Value Hedge. On March 16, 2023, the Bank entered into a three year interest rate swap with a notional amount totaling $300 million which was designated as a fair value hedge of certain fixed rate residential mortgages. The Bank pays a fixed rate of 3.82% and receives a floating rate based on the secured overnight financing rate (“SOFR”) for the life of the agreement without an exchange of the underlying notional amount. The hedge was determined to be effective during the six months ended  June 30, 2023 and the Corporation expects the hedge to remain effective during the remaining term of the swap. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in interest income.

The following table summarizes information about the interest rate swap designated as a fair value hedge.

	June 30, 2023
Notional amount (in millions)	$300
Fixed pay rate	3.82%
Overnight SOFR receive rate	5.07%
Maturity (in years)	2.71

The carrying value of the closed portfolio of fixed rate residential mortgage loans at June 30, 2023 totaled $478.5 million. The amount identified as the last-of-layer in the open hedge relationship was $300.0 million, which is the amount of loans in the closed portfolio anticipated to be outstanding for the designated hedge period. The basis adjustment associated with the hedge was a $4.4 million contra asset as of June 30, 2023, which would be allocated across the entire remaining closed pool upon termination or maturity of the hedged relationship. 

During the first six months of 2023, the Bank recorded a $912,000 credit from the swap transaction as a component of interest income in the consolidated statements of income.

Cash Flow Hedge. The Bank entered into a five year interest rate swap with a notional amount totaling $50 million in January 2019, which was designated as a cash flow hedge of certain Federal Home Loan Bank (“FHLB”) advances and included in short-term borrowings on the consolidated balance sheets. In April 2022, the swap was terminated and the FHLB advance was paid off. Termination fees were immaterial.

Interest expense recorded on the swap transaction, which totaled $426,000 for the six months ended June 30, 2022, was recorded as a component of interest expense in the consolidated statements of income. Amounts reported in accumulated OCI related to swaps were reclassified to interest expense as interest payments were made on the Bank’s variable-rate liabilities. During the six months ended June 30, 2022, the Corporation had $426,000 of reclassifications to interest expense.

The following table presents the amounts recorded in the consolidated statements of income and the consolidated statements of comprehensive income relating to the interest rate swap for the six months ended June 30, 2022.

	Six Months Ended		Three Months Ended
(in thousands)	June 30, 2022		June 30, 2022
Interest rate contract:
Amount of gain recognized in OCI (effective portion)	$	1,324	$	76
Amount of loss reclassified from OCI to interest expense		426		127
Amount of loss recognized in other noninterest income (ineffective portion)		—		—