DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2024

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

11. DERIVATIVE FINANCIAL INSTRUMENTS

The Corporation is a party to derivative financial instruments. These financial instruments consist of interest rate swap agreements and risk participation agreements (RPAs) which contain master netting and collateral provisions designed to protect the party at risk.

Interest rate swaps with commercial loan banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party, such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures. These derivatives are not designated as hedges and are not speculative. Rather, these derivatives result from a service provided to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

The aggregate notional amount of interest rate swaps was $147,650,000 at June 30, 2024 and $150,028,000 at December 31, 2023. There were no interest rate swaps originated in the six-month periods ended June 30, 2024, and 2023. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at June 30, 2024. The net impact on the consolidated statements of income from interest rate swaps was an increase in interest income on loans of $493,000 in the second quarter 2024 and $991,000 in the six-month period ended June 30, 2024 as compared to $439,000 in the second quarter 2023 and $784,000 in the six-months ended June 30, 2023.

The Corporation has entered into an RPA with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed.  This type of derivative is referred to as an “RPA In.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation purchased an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA Out.”  The net impact on the consolidated statements of income from RPAs was an increase in other noninterest income of $1,000 in the second quarter 2024 and $2,000 in the six-month period ended June 30, 2024 as compared to $2,000 in the second quarter 2023 and $18,000 in the six months ended June 30, 2023.

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at June 30, 2024 and December 31, 2023:

(In Thousands)	At June 30, 2024								At December 31, 2023
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
	Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair
	Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)
Interest rate swap agreements	$	73,825	$	3,202	$	73,825	$	3,202	$	75,014	$	2,783	$	75,014	$	2,783
RPA Out		7,020		4		0		0		7,082		11		0		0
RPA In		0		0		10,000		4		0		0		10,000		13

(1) Included in other assets in the consolidated balance sheets.

(2) Included in accrued interest and other liabilities in the consolidated balance sheets.

The Corporation’s agreements with its derivative counterparties provide that if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. Further, if the Corporation were to fail to maintain its status as a well or adequately capitalized institution, then the counterparties could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. There was interest-bearing cash pledged as collateral against the Corporation’s liability related to the interest rate swaps of $1,140,000 at June 30, 2024 and $1,360,000 at December 31, 2023.