Note 12 - Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 12. Derivative Instruments and Hedging Activities

Generally, derivative instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that fluctuations in external factors such as interest rates, market-driven loan rates, prices, or other economic factors will adversely affect economic value or net interest income.

The Company uses interest rate swap contracts to modify its exposure to interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. These instruments are used to convert these fixed rate loans to an effective floating rate. If the LIBOR rate falls below the loan’s stated fixed rate for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated rate for a given period, the Company will receive payments based on the notional amount times the difference between LIBOR and the stated fixed rate. Certain of the Company’s interest rate swaps qualify as fair value hedging instruments; therefore, fair value changes in the derivative and hedged item attributable to the hedged risk are recognized in earnings in the same period. The fair value hedges were effective as of December 31, 2020. The remaining interest rate swaps do not qualify as fair value hedges and the fair value changes in the derivative are recognized in earnings each period.  The following table presents the notional, or contractual, amounts and fair values of derivative instruments as of the dates indicated:

	December 31,
	2020						2019
(Amounts in thousands)	Notional or Contractual Amount		Derivative Assets		Derivative Liabilities		Notional or Contractual Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedges
Interest rate swaps	$	4,772	$	—	$	465	$	5,136	$	—	$	217
Derivatives not designated as hedges
Interest rate swaps		11,928		-		666		12,296		-		293
Total derivatives	$	16,700	$	—	$	1,131	$	17,432	$	—	$	510

The following table presents the effect of derivative and hedging activity, if applicable, on the consolidated statements of income for the periods indicated:

	Year Ended December 31,
(Amounts in thousands)	2020		2019		2018		Income Statement Location
Derivatives designated as hedges
Interest rate swaps	$	85	$	12	$	40	Interest and fees on loans
Derivatives not designated as hedges
Interest rate swaps		235		-		-	Interest and fees on loans
Total derivative expense	$	320	$	12	$	40