Note 12 - Derivative Financial Instruments

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 12 – Derivative Financial Instruments

The Bancorp uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Bancorp has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Bancorp to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Bancorp enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Bancorp agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bancorp agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bancorp’s results of operations.

The Bancorp enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., interest rate lock commitment). The interest rate lock commitments are considered derivatives and are recorded on the accompanying consolidated balance sheets at fair value in accordance with FASB ASC 815, Derivatives and Hedging.

The following table shows the amounts of non-hedging derivative financial instruments:

September 30, 2022
	Notational or contractual amount		Asset derivatives			Liability derivatives
(Dollars in thousands)			Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value
Interest rate swap contracts	$	90,181	Other assets	$	9,819	Other liabilties		$	9,819
Interest rate lock commitments		2,097	Other assets		31		N/A		-
Total	$	92,278		$	9,850			$	9,819

December 31, 2021
	Notational or contractual amount		Asset derivatives			Liability derivatives
(Dollars in thousands)			Statement of Financial Condition classification	Fair value		Statement of Financial Condition classification		Fair value
Interest rate swap contracts	$	94,154	Other assets	$	2,686	Other liabilties		$	2,686
Interest rate lock commitments		7,837	Other assets		141		N/A		-
Total	$	101,991		$	2,827			$	2,686

The following table shows the amounts included in the Statements of Income for non-hedging derivative financial instruments:

		Nine Months Ended
		September 30,
(Dollars in thousands)	Statement of Income Classification	2022			2021
Interest rate swap contracts	Fees and service charges	$	3		$	379
Interest rate lock commitments	Gain on sale of loans held-for-sale, net		(110	)		(152	)
Total		$	(107	)	$	227

		Three Months Ended
		September 30,
(Dollars in thousands)	Statement of Income Classification	2022			2021
Interest rate swap contracts	Fees and service charges	$	3		$	161
Interest rate lock commitments	Gain on sale of loans held-for-sale, net		(42	)		(24	)
Total		$	(39	)	$	137

The following table shows the offsetting of financial assets and derivative assets:

							Gross Amounts not Offset in the
							Statement of Financial Condition
	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Assets Presented				Cash Collateral Received
(Dollars in thousands)	Recognized Assets		Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments				Net Amount
September 30, 2022
Interest rate swap contracts	$	9,819	$	-	$	9,819	$	-	$	-	$	9,819
Interest rate lock commitments		31		-		31		-		-		31
Total	$	9,850	$	-	$	9,850	$	-	$	-	$	9,850

							Gross Amounts not Offset in the
							Statement of Financial Condition
	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities Presented				Cash Collateral Received
(Dollars in thousands)	Recognized Liabilities		Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments				Net Amount
December 31, 2021
Interest rate swap contracts	$	2,686	$	-	$	2,686	$	-	$	-	$	2,686
Interest rate lock commitments		141		-		141		-		-		141
Total	$	2,827	$	-	$	2,827	$	-	$	-	$	2,827

The following table shows the offsetting of financial liabilities and derivative liabilities:

							Gross Amounts not Offset in the
							Statement of Financial Condition
	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities Presented				Cash Collateral Pledged
(Dollars in thousands)	Recognized Liabilities		Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments				Net Amount
September 30, 2022
Interest rate swap contracts	$	9,819	$	-	$	9,819	$	-	$	3,930	$	5,889
Total	$	9,819	$	-	$	9,819	$	-	$	3,930	$	5,889

							Gross Amounts not Offset in the
							Statement of Financial Condition
	Gross Amounts of		Gross Amounts Offset in the		Net Amounts of Liabilities Presented				Cash Collateral Pledged
(Dollars in thousands)	Recognized Liabilities		Statement of Financial Condition		in the Statement of Financial Condition		Financial Instruments				Net Amount
December 31, 2021
Interest rate swap contracts	$	2,686	$	-	$	2,686	$	-	$	3,930	$	(1,244	)
Total	$	2,686	$	-	$	2,686	$	-	$	3,930	$	(1,244	)