Note 5 - Derivatives |
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| Derivative Instruments and Hedging Activities Disclosure [Text Block] |
Note 5. Derivatives
As part of our overall asset liability management strategy, the Company utilizes interest rate swaps to help manage its interest rate risk position. The notional amount of an interest rate swap does not represent amounts exchanged by the parties. The exchange of cash flow is determined by reference to the notional amount and the other terms of the interest rate swap agreements. Derivative instruments are recognized on the balance sheet at their fair value. The Company’s cash flow hedges are reported on a gross basis as they are not subject to master netting arrangements. Conversely, interest rate caps are reported on a net basis in the balance sheet, as these instruments are subject to enforceable master netting agreements that allow for the offsetting of assets and liabilities with the same counterparty.
Derivatives Designated as Hedges
Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner:
1) Cash flow hedges: changes in fair value are recognized as a component in OCI 2) Fair value hedges: changes in fair value are recognized concurrently in earnings
As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings. The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item. As of March 31, 2026, the Bank was not utilizing fair value hedges.
Cash Flow Hedges
The Company has entered into twelve pay fixed-rate interest rate swaps, with a total notional amount of $675 million. These are designated as cash flow hedges of outstanding FHLB advances. We are required to pay fixed rates of interest ranging from 0.63% to 3.72% and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”). The swaps carry expiration dates ranging from August 2026 to November 2028. The swaps are determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss) ("OCI"). The amount included in accumulated other comprehensive income (loss) ("AOCI") would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.
The Company previously entered into forward starting interest rate cap spread transactions, one with a total notional amount of $150 million, which became effective on October 1, 2022 and which matures in October of 2027 and one interest rate cap spread transaction, with a total notional amount of $75 million, which became effective in November 2022 and which matures in November of 2027. These are designated as cash flow hedges of brokered certificates of deposit, and the interest rate cap spread is indexed to a benchmark of fed funds with payment required on a monthly basis. The structure of these instruments is such that the Company entered into a total of $225 million in notional amount of sold interest rate cap agreements, in which we are required to pay the counterparty an incremental amount if the index rate exceeds a set cap rate. Simultaneously, the Company purchased a total of $225 million notional amount of interest rate cap agreements in which we receive an incremental amount if the index rate is above a set cap rate. No payments are required if the index rate is at, or below, the cap rate on the sold or purchased interest rate cap agreements.
Interest income recorded on these swap and interest rate cap transactions totaled approximately $2.6 million and $4.1 million during the three months ended March 31, 2026 and March 31, 2025, respectively, and is recorded as a component of either interest expense on FHLB advances or on brokered certificates of deposit.
The following table presents the gross gains (losses) recorded in OCI and the Consolidated Statements of Income relating to the cash flow hedge derivative instruments for the periods indicated:
The following table reflects the cash flow hedges included in the consolidated statements of condition as of March 31, 2026 and December 31, 2025:
Derivatives Not Designated as Hedges
As part of the merger with FLIC, the Bank acquired interest rate swap agreements (each, a “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.
The following table reflects the back-to-back swaps that are not designated as hedging instruments as of March 31, 2026:
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