Note 4 - Derivatives

6 Months Ended

Jun. 30, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 4. Derivatives

Derivatives Designated as Fair Value Hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate loans. The hedging strategy on loans converts the fixed interest rates to variable interest rates tied to the applicable reference rate. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the maturity dates of the hedged loans.

During the second quarter of 2020, the Company entered into one swap transaction with a notional amount of $30,000,000 pursuant to which the Company pays the counter-party a fixed interest rate and receives a floating rate, which to date has equaled 1 month LIBOR. Beginning September 1, 2023, the Company expects to begin receiving a daily compounded SOFR rate plus a spread adjustment in lieu of 1 month LIBOR as part of the LIBOR transition event. The derivative transaction is designated as a fair value hedge.

A summary of the Company's fair value hedge relationships as of  June 30, 2023 and  December 31, 2022 are as follows (in thousands):

June 30, 2023
	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)		Weighted Average Pay Rate			Receive Rate	Notional Amount		Estimated Fair Value
Interest rate swap agreements - loans	Other assets		6.93		0.65	%	1 month LIBOR	$	30,000		4,458

December 31, 2022
	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)		Weighted Average Pay Rate			Receive Rate	Notional Amount		Estimated Fair Value
Interest rate swap agreements - loans	Other assets		7.42		0.65	%	1 month LIBOR	$	30,000		4,520

The effects of fair value hedge relationships reported in interest income on loans on the consolidated statements of income for the six months ended June 30, 2023 and 2022 were as follows (in thousands):

	Six Months Ended June 30,
Gain (loss) on fair value hedging relationship	2023			2022
Interest rate swap agreements - loans:
Hedged items	$	172			(2,368	)
Derivative designated as hedging instruments		(62	)		2,394

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at  June 30, 2023 and  December 31, 2022 (in thousands):

	Carrying Amount of the Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
Line item on the balance sheet	June 30, 2023		December 31, 2022		June 30, 2023			December 31, 2022
Loans	$	25,624		25,452		(4,376	)		(4,548	)

Mortgage Banking Derivatives

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors under the Bank's mandatory delivery program are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in an effort to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. At June 30, 2023 and December 31, 2022, the Company had approximately $7,252,000 and $6,923,000, respectively, of interest rate lock commitments and approximately $7,000,000 and $6,250,000, respectively, of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $157,000 and $123,000 at June 30, 2023 and December 31, 2022, respectively, and a derivative asset of $28,000 and $62,000 at June 30, 2023 and December 31, 2022, respectively. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sale of loans.

The net gains (losses) relating to free-standing derivative instruments used for risk management is summarized below (in thousands):

	In Thousands
	June 30, 2023			June 30, 2022
Interest rate contracts for customers	$	34			(467	)
Forward contracts related to mortgage loans held for sale and interest rate contracts		(34	)		(28	)

The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as of June 30, 2023 and December 31, 2022 (in thousands):

	In Thousands
	June 30, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets (liabilities):
Interest rate contracts for customers	$	7,252		157		6,923		123
Forward contracts related to mortgage loans held-for-sale		7,000		28		6,250		62