Note 12 - Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

12. DERIVATIVES AND HEDGING ACTIVITIES

QNB's risk management objective with respect to derivative financial instruments is to hedge the risk of changes in the fair value of certain fixed-rate investment securities, included in a closed portfolio, for changes in the Secured Overnight Financing Rate ("SOFR"). The effective portions of changes in the fair value of each derivative financial instrument is reported in accumulated other comprehensive (loss) income, net of tax, and are reclassified to interest income as interest payments are made or received on the hedged portfolios. QNB assesses the effectiveness of each hedging relationship using a regression analysis of prior periodic changes in fair value of both the hedge and the hedged item. In the assessment of hedge effectiveness, QNB will consider the likelihood of the counterparty's

compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk). If the likelihood that the counterparty will not default ceases to be probable, the hedge may no longer be highly effective and hedge ineffectiveness due to counterparty payment risk will be assessed.

The following tables present the notional amounts of derivatives designated as fair value hedging instruments at June 30, 2024, and December 31, 2023. QNB pledges cash or securities to cover the negative fair value of derivatives instruments. Cash collateral associated with the derivative instruments are not added to or netted against the fair value amounts.

	Interest Rate Swaps-Fair Value Hedges
	At June 30, 2024						At December 31, 2023
Balance Sheet Classification	Notional Amount		Amortized Cost of Hedged Portfolio		Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Asset		Notional Amount		Amortized Cost of Hedged Portfolio		Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Asset
Investment Securities Available-for-sale:
State and municipal securities	$	75,000	$	97,044	$	1,761	$	75,000	$	97,373	$	(445	)
U.S. Government agencies and GSE mortgage backed securities		225,000		326,879		4,254		225,000		343,453		(1,304	)
Total	$	300,000	$	423,923	$	6,015	$	300,000	$	440,826	$	(1,749	)

The following table presents amounts included in the Consolidated Statements on Income for derivatives designated as fair value hedging instruments for the three and six months ended June 30, 2024 and 2023.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
Income Sheet Classification	2024			2023			2024			2023
Interest and dividends on available-for-sale and equity securities:
State and municipal securities
Recognized on fair value hedge	$	1,000		$	190		$	2,010		$	190
Recognized on hedge portfolio		(661	)		(134	)		(1,329	)		(134	)
Recognized on remeasurement of fair value hedge		8			(14	)		(10	)		(14	)
U.S. Government agencies and GSE mortgage backed securities
Recognized on fair value hedge		2,999			569			5,995			569
Recognized on hedge portfolio		(2,039	)		(407	)		(4,076	)		(407	)
Recognized on remeasurement of fair value hedge		44			(24	)		(12	)		(24	)
Total	$	1,351		$	180		$	2,578		$	180

The following table presents amounts included in accumulated other comprehensive gain (loss) income for derivatives designated as fair value hedging instruments at June 30, 2024 and December 31, 2023.

	Interest Rate Swaps-Fair Value Hedges
Balance Sheet Classification	At June 30, 2024		At December 31, 2023
Net unrealized holding gains (losses) on fair value hedge, net of tax	$	4,752	$	(1,382	)
Total	$	4,752	$	(1,382	)