Note 5: Derivative Financial Instruments

The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities.

Forward Sales Commitments and Interest Rate Lock Commitments

The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into interest rate lock commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.

Each of these items are considered derivatives, but are not designated as accounting hedges, and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in other assets in the consolidated balance sheets while derivative instruments with a negative fair value are reported in other liabilities in the consolidated balance sheets.

The following table presents the notional amount and fair value of interest rate locks and forward contracts utilized by the Company at December 31, 2019 and December 31, 2018.


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		(Liability)
December 31, 2019		(In thousands)			(In thousands)
Interest rate lock commitments	$	17,826	Derivative assets/liabilities	$	186	$	—
Forward contracts		34,268	Derivative assets/liabilities		—		27
				$	186	$	27


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		(Liability)
December 31, 2018		(In thousands)			(In thousands)
Interest rate lock commitments	$	8,812	Derivative assets/liabilities	$	70	$	—
Forward contracts		19,640	Derivative assets/liabilities		—		9
				$	70	$	9

Fair values of derivative financial instruments were estimated using changes in mortgage interest rates from the date the Company entered into the interest rate lock commitment and the balance sheet date. The following tables summarizes the periodic changes in the fair value of the derivative financial instruments on the consolidated statements of income for the years ended December 31, 2019, 2018, and 2017.


	Year Ended
	December 31,
	2019		2018		2017
		(In thousands)
Interest rate lock commitments	$	116	$	70	$	—
Forward contracts (1)		(53)		(64)		—
Net gains (losses)		63	$	6	$	—

(1)

Amounts include pair-off settlements.

Derivatives on Behalf of Customers

The Company began offering derivative contracts to some customers in connection with their risk management needs during the year ended December 31, 2019. These derivatives include interest rate swaps. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred, typically resulting in no net earnings impact. The fair values of derivative assets and liabilities related to derivatives for customers with interest rate swaps were recorded in the condensed consolidated balance sheets as follows:


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability
		(In thousands)			(In thousands)
December 31, 2019	$	58,067	Other assets/liabilities	$	511	$	511
December 31, 2018		—	Other assets/liabilities	$	—	$	—

The gross gains and losses on these derivative assets and liabilities recorded in Other income in the condensed consolidated statements of income as follows:


	Year Ended
	December 31,
	2019		2018		2017
		(In thousands)
Gross swap gains	$	511	$	—	$	—
Gross swap losses		(511)		—		—
Net swap gains (losses)		—	$	—	$	—

The Company pledged $590,000 and $0 in collateral to secure its obligations under swap contracts at December 31, 2019 and December 31, 2018, respectively.