v3.26.1
Derivative and Hedging Activities
 3 Months Ended
Mar. 31, 2026
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative and Hedging Activities

NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES

 

ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.

ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.

Interest rate swaps

 

ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount.

Active Interest Rate Swaps

 

In the third quarter of 2025, ChoiceOne entered into $30.4 million in amortizing pay fix swaps to hedge interest rate risk on approximately $40.6 million of newly purchased agency mortgage backed securities. The swap is designated as a fair value hedge and will amortize with the expected cash flow of the bonds and hold a coupon of 3.52% and a contractual term ending in 2040. A fair value basis adjustment associated with available-for-sale agency mortgage backed securities initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the agency mortgage backed securities related to the hedged risk (the benchmark interest rate component) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid monthly, with the first starting in October 2025, and will be included in interest income. Settlements on this swap increased interest income by $6,000 during the three months ended March 31, 2026 and zero during the three months ended March 31, 2025.

 

Terminated Interest Rate Swaps

 

In 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $200.0 million that was designated as a cash flow hedge. On February 6, 2025, ChoiceOne sold $50 million of the Pay Fixed Swap Agreement. This transaction resulted in a gain of approximately $3.6 million, which will be recognized through interest expense over the 7 years remaining on the life of the swap. On February 26, 2026, ChoiceOne sold the remaining $150 million of the Pay Fixed Swap Agreement, which resulted in a gain of approximately $4.6 million, which will be recognized through interest expense over the 6 years remaining on the life of the swap. Interest expense was reduced by net settlements and accretion from the gain on the sales of the Pay Fixed Swap Agreement which totaled $411,000 and $750,000 for the three months ended March 31, 2026 and March 31, 2025, respectively.

 

In 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $201.0 million that were designated as fair value hedges. In January 2026, ChoiceOne sold these swaps, realizing a gain of $2.5 million, that will be applied to the basis of the hedged bonds. Settlements on these four pay-fixed/receive-floating interest rate swaps amounted to $37,000 and $550,000 for the three months ended March 31, 2026 and March 31, 2025, respectively, with no future settlements.

 

The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition:

 

 

March 31, 2026

 

 

December 31, 2025

 

(Dollars in thousands)

Balance Sheet Location

Fair Value

 

 

Balance Sheet Location

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Interest rate contracts

Other Assets

$

409

 

 

Other Assets

$

8,446

 

Interest rate contracts

Other Liabilities

$

-

 

 

Other Liabilities

$

-

 

 

 

The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented:

 

Location and Amount of Gain or (Loss)

 

 

Recognized in Income on Fair Value and Cash Flow Hedging Relationships

 

 

Three months ended March 31, 2026

 

 

Three months ended March 31, 2025

 

(Dollars in thousands)

Interest Income

 

Interest Expense

 

 

Interest Income

 

Interest Expense

 

Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded

$

43

 

$

411

 

 

$

550

 

$

750

 

 

 

 

 

 

 

 

 

 

Gain or (loss) on fair value hedging relationships:

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Hedged items

$

(128

)

$

-

 

 

$

4,578

 

$

-

 

Derivatives designated as hedging instruments

$

128

 

$

-

 

 

$

(4,534

)

$

-

 

Amount excluded from effectiveness testing recognized in earnings based on amortization approach

$

-

 

$

-

 

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

Gain or (loss) on cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income

$

-

 

$

191

 

 

$

-

 

$

-

 

Amount excluded from effectiveness testing recognized in earnings based on amortization approach

$

-

 

$

-

 

 

$

73

 

$

-

 

 

 

The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented:

 

 

 

 

March 31, 2026

 

 

 

 

Cumulative amount of Fair

 

(Dollars in thousands)

 

 

Value Hedging Adjustment

 

Line Item in the Statement of

 

 

included in the carrying

 

Financial Position in which the

Amortized cost of the

 

amount of the Hedged

 

Hedged Item is included

Hedged Assets/(Liabilities)

 

Assets/(Liabilities)

 

 

 

 

 

 

Securities available for sale

$

38,886

 

$

(415

)

 

Back to Back Loan Swaps

 

Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. ChoiceOne executes interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. This is known as a back to back loan swap agreement. The net result is the desired floating rate loan and a minimization of the risk exposure of the interest rate swap transactions. Under this arrangement the Bank has freestanding interest rate swaps, each of which is carried at fair value. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings.

 

The table below presents the notional and fair value of these derivative instruments as of March 31, 2026 and December 31, 2025:

 

 

March 31, 2026

 

(Dollars in thousands)

Notional Amount

 

Balance Sheet Location

Fair Value

 

Derivative assets

 

 

 

 

 

Interest rate swaps

$

93,704

 

 Other Assets

$

1,119

 

Derivative liabilities

 

 

 

 

 

Interest rate swaps

$

93,704

 

 Other Liabilities

$

1,127

 

 

 

 

 

 

 

 

December 31, 2025

 

(Dollars in thousands)

Notional Amount

 

Balance Sheet Location

Fair Value

 

Derivative assets

 

 

 

 

 

Interest rate swaps

$

101,508

 

 Other Assets

$

1,815

 

Derivative liabilities

 

 

 

 

 

Interest rate swaps

$

101,508

 

 Other Liabilities

$

1,826

 

 

The fair value of interest rate swaps in a net liability position, which includes accrued interest was $1.1 million and $1.8 million as of March 31, 2026 and December 31, 2025, respectively. ChoiceOne has a master netting agreement with the correspondent bank and has the right to offset; however, ChoiceOne has elected to present the assets and liabilities gross. ChoiceOne is required to pledge collateral to the correspondent bank equal to or in excess of the net liability position. ChoiceOne's derivative liability with the correspondent banks was $930,000 and $1.7 million at March 31, 2026 and December 31, 2025, respectively. Cash pledged as collateral to the correspondent bank was $530,000 and $2.5 million at March 31, 2026 and December 31, 2025, respectively.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $93.7 million as of March 31, 2026 and $101.5 million at December 31, 2025. Associated credit exposure is generally mitigated by securing the interest rate swaps with the underlying collateral of the loan instrument that has been hedged.