On-Balance Sheet Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2016

Derivative Instruments And Hedging Activities Disclosure [Abstract]

On-Balance Sheet Derivative Instruments and Hedging Activities

11. ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING

ACTIVITIES

Derivative Loan Commitments

Mortgage loan interest rate lock commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding.  The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the secondary market.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to an increase in mortgage interest rates.  If interest rates increase, the value of these loan commitments decreases.  Conversely, if interest rates decrease, the value of these loan commitments increases.  The notional amount of derivative loan commitments was $32,904,000 and $5,292,000 at December 31, 2016 and 2015, respectively.  The fair value of such commitments at December 31, 2016 and 2015 was an asset of $617,000 and $93,000, respectively, and is included in other assets in the consolidated balance sheets. During the years ended December 31, 2016 and 2015, a gain/(loss) of ($81,000) and $24,000, respectively, related to interest rate lock commitments was recognized and is included in the net gain on sales of mortgage loans in the accompanying consolidated statements of operations.

Forward Loan Sale Commitments

The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date.  If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes.  Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).

The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.  The notional amount of undesignated forward loan sale commitments was $29,481,000 and $7,371,000 at December 31, 2016 and 2015, respectively and a liability of $47,000 at December 31,2016 included in other liabilities in the consolidated balance sheets. The fair value of such commitments was an asset of $65,000 and $14,000 at December 31, 2016 and 2015, respectively, included in other assets in the consolidated balance sheets. During the years ended December 31, 2016 and 2015, a gain of $103,000 and $16,000, respectively, related to forward loan sale commitments was recognized and is included in net gain on sales of mortgage loans in the accompanying consolidated statements of operations.