Note 15 - Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2024

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 15 - Derivatives and Hedging Activities

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, the Secured Overnight Financing Rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreement without the exchange of the underlying notional amount. The fair value hedges are recorded as components of other assets and other liabilities in the Company’s consolidated balance sheets. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk, are recognized in interest income in the Company’s consolidated statements of income.

The following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges for the periods shown.

		Carrying Amount of the Hedged Assets		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
	(In thousands)
Line item in the Consolidated Balance Sheets where the hedged item is included:
September 30, 2024
Investment securities (1)	$	51,433	$	1,433
Loans receivable (2)		101,579		1,579
Total	$	153,012	$	3,012
December 31, 2023
Investment securities	$	51,054	$	1,054
Total	$	51,054	$	1,054

(1) These amounts include the amortized cost basis of a closed portfolio of AFS securities used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At  September 30, 2024 and December 31, 2023, the amortized cost basis of the closed portfolio used in this hedging relationship was $56.8 million and $57.4 million, respectively; the cumulative basis adjustments associated with this hedging relationship was $1.4 million and $1.1 million, respectively; and the amount of the designated hedged items was $50.0 million for both periods.

(2) These amounts include the amortized cost basis of a closed portfolio of loans receivable used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At September 30, 2024, the amortized cost basis of the closed portfolio used in this hedging relationship was $283.2 million, the cumulative basis adjustments associated with this hedging relationship was $1.6 million, and the amount of the designated hedged items was $100.0 million. No prior year end information is provided as this hedging relationship was initiated in 2024.

The following table summarizes the Company’s derivative instruments at the date indicated. The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as “Other assets” and “Other liabilities,” respectively, on the Consolidated Balance Sheets, as follows:

			Fair Value
	Notional Amount		Other Assets		Other Liabilities
		(In thousands)
September 30, 2024
Fair value hedges:
Interest rate swaps - securities	$	50,000	$	—	$	1,310
Interest rate swaps - loans		100,000		—		1,439
December 31, 2023
Fair value hedges:
Interest rate swaps - securities	$	50,000	$	—	$	1,002

The following table summarizes the effect of fair value accounting on the Consolidated Statements of Income for the periods shown:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2024			2023		2024			2023
	(In thousands)
Total amounts recognized in interest on investment securities	$	3,786		$	3,368	$	11,367		$	9,886
Total amounts recognized in interest and fees on loans receivable (1)		23,536			—		70,036			—
Net gains (losses) on fair value hedging relationships
Interest rate swaps - securities
Recognized on hedged items	$	1,338		$	—	$	1,433		$	392
Recognized on derivatives designated as hedging instruments		(1,102	)		—		(1,350	)		(254	)
Interest rate swaps - loans
Recognized on hedged items (1)		562			—		1,579			—
Recognized on derivatives designated as hedging instruments (1)		(300	)		—		(1,544	)		—
Net income recognized on fair value	$	498		$	—	$	118		$	138
(1) Fair value hedge on loans initiated in 2024. Amounts presented for 2023 are limited to the fair value hedge on securities.

Credit Risk-related Contingent Features

The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted.

The Company has interest rate swap agreements with its derivative counterparties that contain provisions where if the Company either defaults or fails to maintain its status as a well or adequately capitalized institution, then the Company could be required to terminate the contract or post additional collateral. At September 30, 2024, the Company had derivatives in a net liability position related to these agreements. The Company has minimum collateral posting thresholds with its derivative counterparties and has posted cash of $3.5 million at September 30, 2024, to secure the related interest rate swap agreements as needed. In certain cases, the Company will have posted excess collateral compared to total exposure due to initial margin requirements or day-to-day rate volatility.

As of September 30, 2024, the Company was in compliance with all credit risk-related contingent features. Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial.