Note 18 - Derivative Financial Instruments

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

(18) Derivative Financial Instruments

Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements for the first six months of 2019 were offsetting and therefore had no effect on Bancorp’s earnings or cash flows.

Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments, and the value of the derivative 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. Bancorp is exposed to credit-related losses in the event of nonperformance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, limits, collateral, and monitoring procedures, and does not expect any counterparties to fail their obligations.

At June 30, 2019 and December 31, 2018, Bancorp had outstanding undesignated interest rate swap contracts as follows:

(Dollars in thousands)	Receiving				Paying
	June 30,		December 31,		June 30,		December 31,
	2019		2018		2019		2018
Notional amount	$	60,607	$	55,505	$	60,607	$	55,505
Weighted average maturity (years)		7.4		8.0		7.4		8.0
Fair value	$	1,813	$	519	$	1,835	$	543

In 2015, Bancorp entered into an interest rate swap to hedge cash flows of a $20 million rolling fixed-rate three-month FHLB borrowing. The swap began December 9, 2015 and matures December 6, 2020. In 2016, Bancorp entered into an interest rate swap to hedge cash flows of a $10 million rolling fixed-rate three-month FHLB borrowing. The swap began December 6, 2016 and ends December 6, 2021. For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities. Interest rate swaps involve exchange of Bancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated, and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings.

The following table details Bancorp’s derivative position designated as a cash flow hedge, and the fair values as of June 30, 2019 and December 31, 2018.

(Dollars in thousands)
							Fair value
Notional		Maturity	Receive (variable)	Pay fixed			assets (liabilities)
amount		date	index	swap rate			June 30, 2019			December 31, 2018
$	10,000	12/6/2021	US 3 Month LIBOR		1.89	%	$	(37	)	$	193
	20,000	12/6/2020	US 3 Month LIBOR		1.79	%		23			323
$	30,000				1.82	%	$	(14	)	$	516