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Note 15 - Financial Derivatives
 6 Months Ended
Jun. 30, 2026
Notes to Financial Statements  
Derivative Instruments and Hedging Activities Disclosure [Text Block]

15. Financial Derivatives

 

The Company uses derivative instruments to manage exposure to interest rate and foreign currency risk and to assist customers with their risk‑management objectives. Certain derivatives are designated as hedging instruments in qualifying fair value hedge relationships. Other derivatives are economic hedges that do not qualify for, or the Company has elected not to apply, hedge accounting, including derivatives entered into to accommodate customer needs. Derivative instruments are recognized on the Consolidated Balance Sheets at fair value, and the accounting for changes in fair value depends on whether the derivative is designated as a hedging instrument.

 

Customer Accommodation Derivatives (Economic Hedges)

The Company enters into interest rate and foreign exchange derivative contracts with customers to assist them in managing market risks. For each customer derivative, the Company enters into an offsetting derivative with a third‑party financial institution, including centrally cleared counterparties (“CCPs”), resulting in minimal net market risk to the Company. These derivatives are not designated as accounting hedges and are recorded at fair value, with changes in fair value recognized in earnings.

 

Certain derivatives cleared through CCPs are subject to daily variation margin. When variation margin is legally characterized as settlement under the CCP’s rulebook, the daily cash exchanges are accounted for as settlements of the derivative’s fair value rather than collateral.

 

As of June 30, 2026, and December 31, 2025, the Company had outstanding customer and offsetting dealer interest rate derivative contracts with a notional amount of $1.16 billion and $1.02 billion, respectively, fair values of $17.6 million and $24.0 million, respectively. As of June 30, 2026, and  December 31, 2025, no customer swap transactions were cleared through a CCP.  

 

The Company also enters into foreign exchange forward contracts with customers to mitigate the risk of fluctuations in foreign currency exchange rates associated with foreign currency deposits or customer‑initiated foreign exchange transactions. These contracts are not designated as hedging instruments and are recorded at fair value, with changes in fair value recognized in non‑interest income. Period‑end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities.

 

The notional amount and fair value of the Company’s derivative financial instruments not designated as hedging instruments as of June 30, 2026, and December 31, 2025, not including interest rate swaps cleared through the CCP, were as follows:

 

Derivative financial instruments not designated as hedging instruments:

 

June 30, 2026

  

December 31, 2025

 
  

($ In thousands)

 

Notional amounts:

        

Forward, and swap contracts with positive fair value

 $1,353,114  $1,194,638 

Forward, and swap contracts with negative fair value

 $1,171,943  $1,056,592 

Fair value:

        

Forward, and swap contracts with positive fair value

 $18,020  $24,199 

Forward, and swap contracts with negative fair value

 $(17,751) $(24,061)

 

Fair Value Hedges of Individual Loans

As of June 30, 2026, the Bank’s outstanding fair value interest rate swap contracts matched to individual fixed-rate commercial real estate loans with a notional amount of $46.7 million and a fair value of $1.7 million. These swaps are designated as fair value hedges of changes in the fair value of the underlying loans attributable to interest rate movements. The swaps amortize in line with the contractual amortization of the hedged loans and permit prepayments with the same prepayment penalty terms as the related loans. Hedge ineffectiveness for these relationships was not significant for the periods presented.

 

Last‑of‑Layer (Portfolio Layer) Fair Value Hedges

The Company has designated $577.0 million of notional amount as a last-of layer fair value hedge of closed pools of fixed-rate loans with an aggregate notational value of $857.1 million as of June 30, 2026. The loans included in the closed portfolio are expected to retain sufficient principal such that the hedged layer is not affected by prepayments, defaults, or other factors under the last‑of‑layer method.

 

The Company uses pay‑fixed, receive 1‑Month Term SOFR interest rate swaps to hedge the designated last‑of‑layer portion of the loan pools. As of June 30, 2026, the hedged last‑of‑layer tranche had a fair value gain basis adjustment of $1.1 million. These swaps convert the hedged layer into a floating‑rate exposure. The Company’s objective in these hedging relationships is to reduce exposure to changes in fair value attributable to interest rate movements.

 

The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of June 30, 2026, and December 31, 2025, were as follows:

 

  

June 30, 2026

  

December 31, 2025

 
  ($ In thousands) 

Fair value swap hedges:

   

Notional

 $623,678  $625,222 

Weighted average fixed rate-pay

  3.81%  4.06%

Weighted average variable rate spread

  0.18%  0.19%

Weighted average variable rate-receive

  4.17%  4.41%
         

Net gain/(loss)(1)

 $1,678  $(2,417)

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30, 2026

  

June 30, 2025

  

June 30, 2026

  

June 30, 2025

 

Periodic net settlement of swaps (2)

 $(565) $834  $(1,099) $2,334 
                 

(1) the amount is included in other non-interest income.

 

(2) the amount of periodic net settlement of interest rate swaps was included in interest income.

 

 

Included in the total notional amount of $623.7 million of the fair value interest rate contracts entered into with financial counterparties as of June 30, 2026, was $570.4 million of interest rate swaps cleared through the CCP. Applying variation margin payments as settlement to CCP cleared derivative transactions resulted in a reduction in derivative asset fair values of $475.0 thousand as of June 30, 2026.

 

As of June 30, 2026, and December 31, 2025, the Company had $17.9 million and $12.1 million, respectively, as cash margin that serves as collateral on deposits in a cash margin account for interest rate swaps. Of the balances held in the cash margin account $2.1 million and $4.3 million are restricted as of  June 30, 2026, and December 31, 2025, respectively. 

 

Counterparty Credit Risk

Derivative contracts expose the Company to the risk that counterparties may be unable to meet their contractual obligations. The Company manages this risk by transacting with institutional counterparties that have strong credit profiles and by requiring approval from the Bank’s Board of Directors. Credit exposure is limited to the net favorable fair value and any accrued interest receivable on derivative positions. A significant portion of the Company’s interest rate swaps are centrally cleared through a derivative clearing organization, which reduces counterparty credit risk.