Federal Home Loan Bank, Short- and Long-term Borrowings

12 Months Ended

Dec. 31, 2022

Federal Home Loan Bank, Short- and Long-term Borrowings

Federal Home Loan Bank, Short- and Long-term Borrowings

Note 6. Federal Home Loan Bank, Short- and Long-term Borrowings

The Bank owned 2,212 shares of common stock of the FHLB at December 31, 2022. The Bank is required to maintain an investment of 0.05% of total assets with a dollar cap of $31.7 million, adjusted annually, plus 3.75% of total advances, adjusted for advances and repayments. The credit available under this facility is determined at 25% of the Bank’s total assets, or approximately $103.9 million at December 31, 2022. Short-and long-term advances totaled $0 under this credit arrangement at December 31, 2022 and short- and long-term advances were both $10.0 million, respectively, at December 31, 2021. This credit facility is secured by a floating lien on the Bank’s residential mortgage loan portfolio. Average short-term borrowings approximated $10.4 million and $19.8 million for 2022 and 2021,

respectively and the weighted average interest rate was 2.30% and 2.34%, respectively. Average long-term borrowings approximated $6.2 million and $2.1 million for 2022 and 2021, respectively.

At December 31, 2022 the Bank had available unsecured federal funds lines of credit from two financial institutions for $9.0 million and $8.0 million.

Derivatives

During the fourth quarter of 2017, the Company entered into interest rate swaps to manage interest rate risk. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. These instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted issuances of short-term FHLB advances. The change in the fair value of this hedging instrument is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.

For derivative financial instruments accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which the effectiveness of the hedge will be assessed. We formally assess both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in cash flows of the related underlying exposures. Any ineffective portion of the changes in cash flow of the instruments is recognized immediately into earnings.

ASC 815-10, Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the consolidated balance sheets. In accordance with ASC 815, we designated our interest rate swaps as cash flow hedges of certain active and forecasted variable rate FHLB advances. Changes in the fair value of the hedging instrument, except any ineffective portion, were recorded in accumulated other comprehensive income (loss) until earnings were impacted by the hedged instrument. No components of our hedging instruments were excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.

Classification of the gain or loss in the consolidated statements of income upon release from accumulated other comprehensive income (loss) is the same as that of the underlying exposure. We discontinue the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. When we discontinue hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value that were recorded in accumulated other comprehensive income (loss) are recognized immediately in earnings.

As of December 31, 2022, the Company had $0 outstanding interest rate swaps designated as a cash flow hedges. As of December 31, 2021, the Company had three outstanding interest rate swaps designated as a cash flow hedges with an aggregate notional value of $20.0 million. The agreements had five year terms and stipulates that the counterparty will pay the Company interest at three-month LIBOR and the Company paid fixed rates of interest at 2.105%, 2.235% and 2.246% on the $10.0 million, $5.0 million and $5.0 million notional amounts, respectively. These interest rate swaps of $10.0 million, $5.0 million and $5.0 million mature on October 2022, July 2023, and August 2023, respectively, and hedge three-month FHLB advances that will be renewed every year at the SOFR interest rate at that time. The $10.0 million contract is an interest rate swap that became effective in November 2017 was paid in full as of October 31, 2022, and the two $5.0 million contracts were interest rate swaps that became effective in July 2018 and August 2018. These were terminated early on October 31, 2022, with a gain of $206,000 recognized in noninterest income.

The cash flow hedges were determined to be fully effective during all periods presented. As such, no ineffectiveness has been included in net income.

The following table reflects information about swaps designated as cash flow hedges as of December 31, 2022 and 2021:

							At December 31,
							2022				2021
									Unrealized				Unrealized
	Notional		Pay		Receive		Assets/		Loss		Assets/		Loss
(dollars in thousands)	Amount		Rate		Rate	Term	Liabilities		AOCI		Liabilities		AOCI
Interest rate swap on FHLB advance	$	10,000	2.105	%	3M LIBOR	11/2017 - 10/2022	$	—	$	—	$	(174)	$	(126)
Interest rate swap on FHLB advance		5,000	2.235	%	3M LIBOR	7/2018 - 7/2023		—		—		(136)		(99)
Interest rate swap on FHLB advance		5,000	2.246	%	3M LIBOR	8/2018 - 8/2023		—		—		(132)		(96)
Total	$	20,000					$	—	$	—	$	(442)	$	(321)

The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income during the year ended December 31, 2022 and December 31, 2021:

		Years Ended December 31,
(dollars in thousands)	Bank Position	2022		2021
Interest rate swap on FHLB advance	Pay fixed/receive variable	$	(65)	$	(194)
Interest rate swap on FHLB advance	Pay fixed/receive variable		(38)		(105)
Interest rate swap on FHLB advance	Pay fixed/receive variable		(47)		(105)
Total		$	(150)	$	(404)

The Bank is required to pledge securities as collateral for all swaps with dealer counterparties.  The fair value of cash or investment securities pledged as collateral by the Bank totaled $0 and $1,175,000 at December 31, 2022 and 2021.