Derivative Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Corporation manages its exposure to certain interest rate risks through the use of derivatives, however, none are entered into for speculative purposes. During the first quarter of March 31, 2023, Mid Penn entered into outstanding derivative contracts designated as hedges. As of and December 31, 2022, Mid Penn did not designate any derivative financial instruments as formal hedging relationships. Mid Penn’s free-standing derivative financial instruments are required to be carried at their fair value on the Consolidated Balance Sheets.

Mortgage Banking Derivative Financial Instruments

In connection with its mortgage banking activities, Mid Penn enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, Mid Penn enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured.

Loan-level Interest Rate Swaps

Mid Penn enters into loan-level interest rate swaps with certain qualifying, creditworthy commercial loan customers to meet their interest rate risk management needs. Mid Penn simultaneously enters into parallel interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of the offsetting customer and dealer counterparty swap agreements is that the customer pays a fixed rate of interest and Mid Penn receives a floating rate. Mid Penn’s loan-level interest rate swaps are considered derivatives, but are not accounted for using hedge accounting.

Cash Flow Hedges of Interest Rate Risk

The Corporation’s objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Corporation primarily uses interest rate swaps as part of its interest rate risk management strategy. During the first quarter of 2023, the Corporation entered into interest rate swaps designated as cash flow hedges to hedge the cash flows associated with existing brokered CDs.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Corporation’s variable-rate liabilities. During the next twelve months, the Corporation estimates that an additional $919 thousand will be reclassified as a decrease to interest expense.

The following table presents a summary of the notional amounts and fair values of derivative financial instruments:


	March 31, 2023				December 31, 2022
(In thousands)	Notional Amount		Asset (Liability) Fair Value		Notional Amount		Asset (Liability) Fair Value
Interest Rate Lock Commitments
Positive Fair Values	$	4,830	$	40	$	274	$	3
Negative Fair Values	1,962		(6)		5,252		(40)
Forward Commitments
Positive Fair Values	1,474		22		4,750		43
Negative Fair Values	312		—		—		—
Interest Rate Swaps with Customers
Positive Fair Values	24,463		655		16,650		164
Negative Fair Values	104,827		(9,607)		107,145		(11,533)
Interest Rate Swaps with Counterparties
Positive Fair Values	104,827		9,607		107,145		11,533
Negative Fair Values	24,463		(655)		16,650		(164)
Interest Rate Swaps used in Cash Flow Hedges
Positive Fair Values	75,000		172		—		—
Negative Fair Values	25,000		(253)		—		—

The following table presents derivative financial instruments and the amount of the net fair value gains (losses) recognized within other noninterest income on the Consolidated Statement of Income:


	Three months ended
(In thousands)		March 31, 2023		March 31, 2022
Interest Rate Lock Commitments		$	71	$	(187)
Forward Commitments		(51)		753
Total		$	20	$	566

The following table presents the effect of fair value and cash flow hedge accounting on AOCI:


(In thousands)	Amount of Loss Recognized in OCI on Derivative		Amount of Loss Recognized in OCI Included Component		Amount of Loss Recognized in OCI Excluded Component		Location of Loss recognized from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income		Amount of Gain (Loss) Reclassified from AOCI into Expense Included Component		Amount of Gain (Loss) Reclassified from AOCI into Expense Excluded Component
Derivatives in Cash Flow Hedging Relationships:
Balance at March 31, 2023
Interest Rate Swaps	$	(163)	$	(163)	$	—	Interest Expense	$	81	$	81	$	—

The gross amounts of commercial loan swap derivatives, the amounts offset and the carrying values in the Consolidated Balance Sheets, and the collateral pledged to support such agreements are presented below:


(In thousands)	March 31, 2023		December 31, 2022
Interest Rate Swap Contracts - Commercial Loans:
Gross amounts recognized (1)	$	10,262	$	11,697
Gross amounts offset (2)	10,262		11,697
Net Amounts Presented in the Consolidated Balance Sheets	—		—
Gross amounts not offset:
Financial instruments	—		—
Cash collateral (3)	1,600		1,600
Net Amounts	$	1,600	$	1,600

(1) Included in other assets on the Consolidated Balance Sheet.

(2) Included in other liabilities on the Consolidated Balance Sheet.

(3) Included in cash and due from banks on the Consolidated Balance Sheet.