Derivative Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Financial Instruments

Derivative Financial Instruments

Note 7:    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, Interest Rate Lock Commitments, and Interest Rate Swaps

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.

Interest rate swaps are also used by the Company to reduce the risk that significant increases in interest rates may have on the value of certain fixed rate loans held for sale and the respective loan payments received from borrowers.  All changes in the fair market value of these interest rate swaps and associated loans held for sale have been included in gain on sale of loans.  Any difference between the fixed and floating interest rate components of these transactions have been included in interest income.

All 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 condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in other assets in the condensed

consolidated balance sheets while derivative instruments with a negative fair value are reported in other liabilities in the condensed consolidated balance sheets.

The following table presents the notional amount and fair value of interest rate locks, forward contracts, and interest rate swaps utilized by the Company at March 31, 2023 and December 31, 2022. This table excludes the fair market value adjustment on loans associated with these derivatives.

		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability
March 31, 2023		(In thousands)			(In thousands)
Interest rate lock commitments	$	32,018	Other assets/liabilities	$	218	$	4
Forward contracts	$	29,317	Other assets/liabilities		2		235
Interest rate swaps	$	57,566	Other assets/liabilities		1,694		—
				$	1,914	$	239

		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability
December 31, 2022		(In thousands)			(In thousands)
Interest rate lock commitments	$	8,759	Other assets/liabilities	$	28	$	23
Forward contracts	$	13,096	Other assets/liabilities		46		52
Interest rate swaps	$	57,574	Other assets/liabilities		3,030		—
				$	3,104	$	75

Fair values of these 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 table summarizes the periodic changes in the fair value of the derivative financial instruments on the condensed consolidated statements of income for the three months ended March 31, 2023 and 2022.

	Three Months Ended
	March 31,
	2023		2022
		(In thousands)
Derivative gain (loss) included in other income:
Interest rate lock commitments	$	209	$	(882)
Forward contracts (includes pair-off settlements)		(96)		3,150
Net derivative gains (loss)	$	113	$	2,268
Gain (loss) included in gain on sale of loans:
Interest rates swaps - change in fair value		(1,336)		—
Loans held for sale - change in fair value		1,560		—
Net gain (loss)	$	224	$	—

Derivatives on Behalf of Customers

The Company offers derivative contracts to some customers in connection with their risk management needs. These derivatives include back-to-back 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 back-to-back interest rate swaps were recorded in the consolidated balance sheets as follows:

		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability
		(In thousands)			(In thousands)
March 31, 2023	$	77,354	Other assets/liabilities	$	2,461	$	2,461
December 31, 2022	$	77,495	Other assets/liabilities	$	3,041	$	3,041

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

	Three Months Ended
	March 31,
	2023		2022
		(In thousands)
Gross swap gains	$	580	$	496
Gross swap losses		580		496
Net swap gains (losses)	$	—	$	—

The Company pledged $0 in collateral to secure its obligations under swap contracts at both March 31, 2023 and December 31, 2022.