Commitments and Financial Instruments with Off-Balance-Sheet Risk

9 Months Ended

Sep. 30, 2016

Commitments and Financial Instruments with Off-Balance-Sheet Risk

Commitments and Financial Instruments with Off-Balance-Sheet Risk

NOTE 9: Commitments and Financial Instruments with Off-Balance-Sheet Risk

C&F Mortgage enters into IRLCs with customers and will sell the underlying loans to investors on either a best efforts or a mandatory delivery basis. C&F Mortgage mitigates interest rate risk on IRLCs and loans held for sale by (a) entering into forward loan sales contracts with investors for loans to be delivered on a best efforts basis or (b) entering into forward sales contracts of MBS for loans to be delivered on a mandatory basis. Both the IRLCs with customers and the forward sales contracts are considered derivative financial instruments. At September 30, 2016, the Corporation had best efforts forward sales contracts with a notional value of $156.87 million, and each loan held for sale by C&F Mortgage was subject to a forward sales agreement. The fair value of these derivative instruments at September 30, 2016 was $1.25 million, which was included in other assets.  The Corporation had no mandatory forward sales contracts at September 30, 2016.

C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party counterparties (i.e., investors). As is customary in the industry, the agreements with these counterparties require C&F Mortgage to extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the agreements, the counterparties are entitled to make loss claims and repurchase requests of C&F Mortgage for loans that contain covered deficiencies. C&F Mortgage has obtained early payment default recourse waivers for a significant portion of its business. Recourse periods for early payment default for the remaining counterparties vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. C&F Mortgage maintains an indemnification reserve for potential claims made under these recourse provisions.  During the third quarter of 2016, C&F Mortgage reached an agreement with one of its third-party counterparties that resolved all known and unknown indemnification obligations for loans sold to this counterparty prior to August 2016.  The following table presents the changes in the allowance for indemnification losses for the periods presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2016		2015		2016		2015
Allowance, beginning of period	$	2,503	$	2,227	$	2,363	$	2,089
Provision for indemnification losses		103		73		243		212
Payments		(350)		—		(350)		(1)
Allowance, end of period	$	2,256	$	2,300	$	2,256	$	2,300