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DERIVATIVES (Restated)

6 Months Ended

Jun. 30, 2023

4. DERIVATIVES (Restated)

Consumer Program Derivative

The Company has a derivative instrument in connection with its agreement with a third-party that originates loans that are held on the Company’s balance sheet. The third-party provides credit support and reimbursement for lost interest under the agreement and the Company provides performance fees to the third-party on performing loans. Specifically, a portion of the originated loans are originated with a promotional period where interest accrues on the loans but is not owed to the Company unless and until the loan begins to amortize. If the borrower prepays the principal on the loan prior to the end of the promotional period the accrued interest is waived, but becomes due to the Company from the third-party under the agreement. This expected payment of waived interest to the Company along with performance fees due to the third-party comprise the value of the derivative.

The fair value of the derivative instrument was an asset of $10.6 million recorded in the consolidated balance sheets in “Consumer Program derivative asset” as of June 30, 2023 and a liability of $0.5 million recorded in the consolidated balance sheets in “Consumer Program derivative liability” as of December 31, 2022. The underlying expected cash flows were $13.0 million and $0.6 million as of June 30, 2023 and December 31 2022, respectively. The Company calculates the fair value of this derivative using a discounted cash flow model using inputs that are inherently judgmental and reflect management’s best estimates of the assumptions a market participant would use to calculate the fair value. The most significant inputs and assumptions in determining the value of the derivative are noted below ($ in thousands).


	June 30, 2023
					Weighted
	Low		High		Average
Remaining cumulative charge-offs	$	2,960	$	16,243	$	n/a
Remaining cumulative promotional prepayments	$	36,037	$	65,860	$	44,271
Average life (years)		n/a		n/a		1.3
Discount rate		5.07%		15.08%		15.08%

	June 30, 2022
					Weighted
	Low		High		Average
Remaining cumulative charge-offs	$	—	$	1,170	$	n/a
Remaining cumulative promotional prepayments	$	3,223	$	5,890	$	3,667
Average life (years)		n/a		n/a		2.4
Discount rate		2.87%		12.88%		6.00%

Consumer Program derivative income (loss) was $1.8 million and ($0.2) million, respectively, during the three months ending June 30, 2023 and 2022, and was $13.2 million and ($0.2) million, respectively, during the six months ended June 30, 2023 and 2022, and was recorded in noninterest income in the Consolidated Statements of Income and Comprehensive Income (Loss). The income (loss) included $0.6 million and ($0.3) million during the three months ended June 30, 2023 and 2022, respectively, and $11.1 million and ($0.3) million during the six months ended June 30, 2023 and 2022, respectively, related to derivative fair value adjustments. Income related to the credit support and reimbursement of lost interest due from the third-party under the agreement was $1.2 million and $0.1 million during the three months ended June 30, 2023 and 2022, respectively, and $2.1 million and $0.1 million during the six months ended June 30, 2023 and 2022, respectively.

Mortgage Banking Derivatives and Financial Instruments

The Company enters into IRLCs (“interest rate lock commitments”) to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time (generally between 30 and 90 days), with borrowers who have applied for a loan and have met certain credit and underwriting criteria. The IRLCs are adjusted for estimated costs to originate the loan as well as the probability that the mortgage loan will fund within the terms of the IRLC (the

pullthrough rate). Estimated costs to originate include loan officer commissions and overrides. The pullthrough rate is estimated on changes in market conditions, loan stage, and actual borrower behavior using a historical analysis of IRLC closing rates. The Company obtains an analysis from a third party on a monthly basis to support the reasonableness of the pullthrough estimate.

Best efforts and mandatory forward loan sale commitments are commitments to sell individual mortgage loans using both best efforts and mandatory delivery at a fixed price to an investor at a future date. Forward loan sale commitments that are mandatory delivery are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Forward loan sale commitments that are best efforts are not derivatives but can be and have been accounted for at fair value, determined in a similar manner to those that are mandatory delivery. Forward loan sale commitments are recorded on the balance sheet as derivative assets and derivative liabilities with changes in their fair values recorded in mortgage banking income in the statement of operations.

The key unobservable inputs used in determining the fair value of IRLCs as of June 30, 2023 and December 31, 2022 are as follows:


	June 30, 2023		December 31, 2022
Average pullthrough rates	90.22	%	80.78	%
Average costs to originate	1.31	%	4.77	%

The following summarizes derivative and non-derivative financial instruments as of June 30, 2023 and December 31, 2022:


	June 30, 2023
	Fair		Notional
Derivative financial instruments:	Value		Amount
Derivative assets ⁽¹⁾	$	1,122	$	46,035
Derivative liabilities	$	—	$	—
⁽¹⁾Pullthrough rate adjusted
	June 30, 2023
	Fair		Notional
Non-derivative financial instruments:	Value		Amount
Best efforts assets	$	205	$	10,999


	December 31, 2022
	Fair		Notional
Derivative financial instruments:	Value		Amount
Derivative assets ⁽¹⁾	$	921	$	25,368
Derivative liabilities	$	98	$	25,028
⁽¹⁾Pullthrough rate adjusted
	December 31, 2022
	Fair		Notional
Non-derivative financial instruments:	Value		Amount
Best efforts assets	$	17	$	2,658

The notional amounts of mortgage loans held for sale not committed to investors was $30.2 million and $20.0 million as of June 30, 2023 and December 31, 2022, respectively.

The Company has exposure to credit loss in the event of contractual non-performance by its trading counterparties in derivative instruments that the Company uses in its rate risk management activities. The Company manages this credit risk by selecting only counterparties that the Company believes to be financially strong, spreading the risk among multiple counterparties, by placing contractual limits on the amount of unsecured credit extended to any single counterparty and by entering into netting agreements with counterparties, as appropriate.