Note 11 - Derivative and Hedging Activities |
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| Derivative Instruments and Hedging Activities Disclosure [Text Block] |
NOTE 11 - DERIVATIVE AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage its interest rate risk resulting from the differences in the amount, timing, and duration of known or expected cash payments. The Company has entered into interest rate swaps to add stability to interest expense and manage exposure to interest rate movements as part of an overall risk management strategy.
An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The Company has entered into interest rate swaps in which it pays fixed and receives floating interest in order to manage its interest rate risk exposure to the variability in interest cash flows on certain floating-rate FHLB Advances and brokered certificates of deposit. The interest rate swaps effectively convert the floating rate payments made on the FHLB Advances and brokered certificates of deposit to a fixed rate and consequently reduce the Company’s exposure to variability in short-term interest rates.
Derivative instruments are carried at fair value in the Company’s Consolidated Financial Statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not the instrument qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.
The Company’s interest rate swaps have been designated as and are accounted for as cash flow hedges. The changes in fair value are included in other comprehensive income and reclassified into net income in the same period or periods during which the hedged forecasted transaction affects net income.
Cash flow hedges are initially assessed for effectiveness using regression analysis. Changes in the fair value of derivatives that are designated as and that qualify as cash flow hedges are recorded in OCI and are subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Quarterly, a quantitative analysis is performed to monitor the ongoing effectiveness of the hedging instrument. All derivative positions were initially, and continue to be, highly effective at June 30, 2025.
The following table reflects the Company's derivative position at the date indicated below for the interest rate swaps:
The table below presents the fair value of the Company's derivative financial instruments, as well as their classification on the Consolidated Balance Sheets as of the dates indicated:
For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of the gains or losses is reported as a component of other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company expects approximately $30,000 to be reclassified as a decrease to interest expense from OCI related to the Company’s cash flow hedges in the twelve months following June 30, 2025. This reclassification is due to anticipated payments that will be received on the swaps based upon the forward curve at June 30, 2025.
The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is 5.0 years.
The pre-tax effects of cash flow hedges on accumulated other comprehensive income and current earnings for the period indicated are as follows:
By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty not secured by variation margin plus any initial margin collateral posted. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with those counterparties is remote. As of June 30, 2025, the Company has pledged cash collateral to a derivative counterparty totaling $3.5 million. The Company may need to post additional collateral or may receive additional collateral in the future in proportion to potential changes in the overall unrealized gain or loss position.
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