Company: FRME
Filing Date: 2025-02-24
Form Type: 10-K
Source: 0000712534-25-000058
Chunk: 22

Company: FIRST MERCHANTS CORP
Filing Date: 2025-02-24
Form: 10-K
Item: Item 8
Chunk 22
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  This product allows customers to enter into an agreement with the Corporation to swap their variable rate loan to a fixed rate.  These derivative products are designed to reduce, eliminate or modify the risk of changes in the borrower’s interest rate or market price risk.  The extension of credit incurred through the execution of these derivative products is subject to the same approvals and rigorous underwriting standards as the related traditional credit product.  The Corporation limits its risk exposure to these products by entering into a mirror-image, offsetting swap agreement with a separate, well-capitalized and rated counterparty previously approved by the Credit and Asset Liability Committee.  By using these interest rate swap arrangements, the Corporation is also better insulated from the interest rate risk associated with underwriting fixed-rate loans.  These derivative contracts are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting.  The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the customer and the offsetting swap agreements are recorded (and essentially offset) in noninterest income.  The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820, Fair Value Measurements and Disclosures), resulting in some volatility in earnings each period.  

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PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATANOTES TO CONSOLIDATED FINANCIAL STATEMENTS(table dollar amounts in thousands, except share data)

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.  It is the Corporation’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans.  These mortgage banking derivatives are not designated in hedge relationships.  Fair values were estimated based on changes in mortgage interest rates from the date of the commitments.  Changes in the fair value of these mortgage banking derivatives are included in net gains and fees on sales of loans.  In the normal course of business, the Corporation may decide to settle a forward contract rather than fulfill the contract.  Cash received or paid in this settlement manner is included in “Net gains and fees on sales of loans” in the Consolidated Statements of Income and is considered a cost of executing a forward contract. Details of the Corporation