On-Balance Sheet Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2022

Derivative Instruments And Hedging Activities Disclosure [Abstract]

On-Balance Sheet Derivative Instruments and Hedging Activities

7. 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 either in the secondary market, to large aggregators of loans or to other financial institutions.

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 $42,678,000 and $85,887,000 at March 31, 2022 and December 31, 2021, respectively. The fair value of such commitments consisted of assets of $221,000 and $1,364,000 at March 31, 2022 and December 31, 2021, respectively, included in other assets on the consolidated balance sheets and liabilities of $199,000 and $0 at March 31, 2022 and December 31, 2021, respectively, included in other liabilities on the consolidated balance sheets.     

Forward Loan Sale Commitments

The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments and To Be Announced (“TBA”) securities to mitigate the risk of potential decreases in the value of loans that would result from the exercise of the derivative loan commitments as well as for loans held for sale.

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 and TBA securities will experience changes in fair value that serve to offset the change in fair value of loans held for sale and derivative loan commitments, the degree to which depends on the notional amount of such sale commitments.  The notional amount of forward loan sale commitments and TBA securities was $44,132,000 and $80,407,000 at March 31, 2022 and December 31, 2021, respectively. The fair value of such commitments consisted of liabilities of $13,000 and $84,000 at March 31, 2022 and December 31, 2021, respectively, included in other liabilities in the consolidated balance sheets and assets of $674,000 and $50,000 at March 31, 2022 and December 31, 2021, respectively, included in other assets in the consolidated balance sheets.