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Derivative Financial Instruments
12 Months Ended
Dec. 31, 2021
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

16. DERIVATIVE FINANCIAL INSTRUMENTS

 

The following table provides the outstanding notional balances and fair values of outstanding derivative positions at December 31, 2021 and 2020.

 

 

 

December 31, 2021

 

 

December 31, 2020

 

 

 

Outstanding

Notional

Balance

 

 

Asset Derivative Fair Value

 

 

Liability Derivative

Fair Value

 

 

Outstanding

Notional

Balance

 

 

Asset Derivative Fair Value

 

 

Liability Derivative

Fair Value

 

 

 

(Dollars in thousands)

 

Interest rate lock commitments

 

$

8,411

 

 

$

237

 

 

$

 

 

$

 

 

$

 

 

$

 

Forward mortgage-backed securities trades

 

 

22,250

 

 

 

18

 

 

 

18

 

 

 

 

 

 

 

 

 

 

Commercial loan interest rate swaps and caps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan customer counterparty

 

 

198,683

 

 

 

4,124

 

 

 

 

 

 

224,684

 

 

 

11,912

 

 

 

 

Financial institution counterparty

 

 

198,683

 

 

 

 

 

 

4,124

 

 

 

224,684

 

 

 

 

 

 

11,912

 

 

These financial instruments are not designated as hedging instruments and are used for asset and liability management and commercial customers’ financing needs.  All derivatives are carried at fair value in either other assets or other liabilities.

Interest rate lock commitments (“IRLCs”) - In the normal course of business, the Company enters into interest rate lock commitments with consumers to originate mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.

Forward mortgage-backed securities trades - The Company manages the changes in fair value associated with changes in interest rates related to IRLCs by using forward sold commitments known as forward mortgage-backed securities trades.  These instruments are typically entered into at the time the interest rate lock commitment is made.

Interest rate swaps and caps - These derivative positions relate to transactions in which the Company enters into an interest rate swap or cap with a customer, while at the same time entering into an offsetting interest rate swap or cap with another financial institution.  An interest rate swap transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. In connection with each swap, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate.  At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.   In connection with each interest rate cap, the Company sells a cap to the customer and agree to pay interest if the underlying index exceeds the strike price defined in the cap agreement.  Simultaneously the Company purchases a cap with matching terms from another financial institution that agrees to pay the Company if the underlying index exceeds the strike price.

The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps outstanding at December 31, 2021 and 2020 are presented in the following table.

 

 

 

Weighted-Average Interest Rate

 

 

 

December 31, 2021

 

 

December 31, 2020

 

 

 

Received

 

 

Paid

 

 

Received

 

 

Paid

 

Loan customer counterparty

 

 

2.64

%

 

 

0.80

%

 

 

2.83

%

 

 

0.79

%

 

The Company’s credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $4.1 million and $11.9 million at December 31, 2021 and 2020, respectively.  This credit exposure is partly mitigated as transactions with customers are secured by the collateral, if any, securing the underlying transaction being hedged. The Company’s credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counter-parties was zero at December 31, 2021.  A credit support annex is in place and allows the Company to call collateral from upstream financial institution counter-parties.  Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.  The Company’s cash collateral pledged for interest rate swaps was $4.3 million and $13.8 million at December 31, 2021 and 2020, respectively.

The initial and subsequent changes in the fair value of IRLCs and the forward sales of mortgage-backed securities are recorded in net gain on sale of mortgage loans.  These gains and losses were not attributable to instrument-specific credit risk.   For interest rate swaps and caps, because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on its results of operations.  Income (loss) for the years ended December 31, 2021, 2020 and 2019 was as follows:

 

 

 

Year Ended December 31,

 

Derivatives not designated as hedging instruments

 

2021

 

 

2020

 

 

2019

 

Interest rate lock commitments

 

$

237

 

 

$

(305

)

 

$

(154

)

Forward mortgage-backed securities trades

 

 

181

 

 

 

(2,398

)

 

 

(1,210

)