Derivative Financial Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Mid Penn manages its exposure to certain interest rate risks through the use of derivatives; however, none are entered into for speculative purposes. During the first nine months of 2023, Mid Penn entered into outstanding derivative contracts designated as hedges. As of 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.

Information related to mortgage banking hedging activity is set forth in the following table:

	September 30, 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	$	2,233	$	15	$	274	$	3
Negative Fair Values	4,043		(24)		5,252		(40)
Forward Commitments
Positive Fair Values	4,011		18		4,750		43
Negative Fair Values	3,146		(44)		—		—

For the three months ended September 30, 2023 and 2022, Mid Penn recorded net gains from mortgage banking hedging activity of $67 thousand and $217 thousand, respectively. For the nine months ended September 30, 2023 and 2022, Mid Penn recorded net gains from mortgage banking hedging activity of $215 thousand and $1.3 million, respectively.

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.

Information related to loan level swaps is set forth in the following table:

	September 30, 2023			December 31, 2022
	(Dollars in thousands)
Interest rate swaps on loans with customers
Notional amount	$	150,769		$	123,795
Weighted average remaining term (years)	6.84			7.85
Receive fixed rate (weighted average)	4.17		%	3.59		%
Pay variable rate (weighted average	7.36		%	6.09		%
Estimated fair value	$	14,070		$	11,697
	September 30, 2023			December 31, 2022
	(Dollars in thousands)
Interest rate swaps on loans with correspondents
Notional amount	$	150,769		$	123,795
Weighted average remaining term (years)	6.84			7.85
Receive variable rate (weighted average)	7.36		%	6.09		%
Pay fixed rate (weighted average	4.17		%	3.59		%
Estimated fair value	$	14,070		$	11,697

Cash Flow Hedges of Interest Rate Risk

Mid Penn’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, Mid Penn primarily uses interest rate swaps as part of its interest rate risk management strategy. During the first nine months of 2023, Mid Penn entered into interest rate swaps designated as cash flow hedges to hedge the cash flows associated with existing brokered CDs.

Information related to cash flow hedges is set forth in the following table:

	September 30, 2023
	(Dollars in thousands)
Cash flow hedges
Notional amount	$	190,000
Weighted average remaining term (years)	2.47
Pay fixed rate (weighted average)	3.74		%
Receive variable rate (weighted average	4.78		%
Estimated fair value	$	4,914

There were no cash flow hedges at December 31, 2022.

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 Mid Penn’s variable-rate liabilities. During the next twelve months, Mid Penn estimates that an additional $2.9 million will be reclassified as a decrease to interest expense.