v3.25.1
Note 7 - Derivatives
 3 Months Ended
Mar. 31, 2025
Notes to Financial Statements  
Derivative Instruments and Hedging Activities Disclosure [Text Block]

7 – DERIVATIVES

 

As part of its asset liability management activities, the Corporation may utilize interest rate swaps to help manage its interest rate risk position. The notional amount of an interest rate swap does not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amount and the other terms of the interest rate swap agreements.

 

Fair Value Hedge. On March 16, 2023, the Bank entered into a three year interest rate swap with a notional amount totaling $300 million which was designated as a fair value hedge of certain fixed rate residential mortgages. The Bank pays a fixed rate of 3.82% and receives a floating rate based on the secured overnight financing rate (“SOFR”) for the life of the agreement without an exchange of the underlying notional amount. The hedge was determined to be effective during the quarter ended  March 31, 2025 and the Corporation expects the hedge to remain effective during the remaining term of the swap. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in interest income.

 

The following table summarizes information about the interest rate swap designated as a fair value hedge.

 

  

March 31,

 
  2025 

Notional amount

 

$300 million

 

Fixed pay rate

 

3.82%

 

Overnight SOFR receive rate

 

4.41%

 

Maturity

 0.96 years 

 

The following table presents the amount recorded on the balance sheet related to cumulative basis adjustments for the fair value hedge as of the periods indicated.

 

    
  March 31,  December 31, 

(in thousands)

 

2025

  

2024

 

Loans - Residential Mortgages:

        

Carrying amount of the hedged asset (1)

 $436,422  $440,755 

Fair value hedging adjustment included in the carrying amount of the hedged asset

  58   (525)

 

(1)

This amount represents the amortized cost basis of the closed loan portfolio used to designate the hedging relationship in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedge period. At March 31, 2025, the amortized cost basis of the closed portfolio used in this hedging relationship was $436.4 million. The cumulative basis adjustment associated with this hedging relationship was $58,000 and the amount of the designated hedged item was $299,000.

 

During the first quarter of 2025, the Bank recorded a $356,000 credit from the swap transaction as a component of interest income in the consolidated statements of income.

 

Derivatives Not Designated as Hedges. The Bank enters into interest rate swap agreements (“back-to-back swap”) that are not designated as hedging instruments. A back-to-back swap allows a borrower to effectively convert a variable rate loan to a fixed rate. The Bank originates a variable rate loan with a borrower and simultaneously enters into offsetting back-to-back swaps with the borrower and an unaffiliated dealer counterparty to minimize interest rate risk. In connection with each swap transaction, the Bank agrees to pay interest to the borrower on a notional amount at a variable interest rate and receives interest from the borrower on a similar notional amount at a fixed interest rate. Concurrently, the Bank agrees to pay the dealer counterparty the same fixed interest rate on the same notional amount and receives the same variable interest rate on the same notional amount. Because the Bank acts as an intermediary for its borrower, changes in the fair value of the underlying derivative contracts offset each other and do not impact the Bank’s results of operations.

 

  March 31, 2025 
      

Notional

  

Fair Value

  

Fair Value

 

(in thousands)

 

Positions

  

Amount

  

Asset

  

Liabilities

 

Derivatives not designated as hedging instruments included in other assets / other liabilities:

                

Interest rate swap with borrower

  3  $36,373  $574  $— 

Interest rate swap with offsetting counterparty

  3  $36,373  $—  $574 
    
  

December 31, 2024

 

Derivatives not designated as hedging instruments included in other assets / other liabilities:

                

Interest rate swap with borrower

  3  $36,523  $395  $— 

Interest rate swap with offsetting counterparty

  3  $36,523  $—  $395 

 

The Bank did not record any back-to-back swap fee income during the first quarter of 2025.