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Derivative Financial Instruments

12 Months Ended

Dec. 31, 2023

Note 6: 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.

Internal Interest Rate Risk Management

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.

The Company entered into a contract containing put options and interest rate floors on securities it acquired from a warehouse customer. These provide protection and prevent losses in value of certain available for sale securities. All changes in the fair market value of these options and floors associated with these securities have been included in other noninterest 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 consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in other assets in the consolidated balance sheets while derivative instruments with a negative fair value are reported in other liabilities in the consolidated balance sheets.

The following table presents the notional amount and fair value of interest rate locks, forward contracts, interest rate swaps, put options and interest rate floors utilized by the Company at December 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

December 31, 2023		(In thousands)			(In thousands)
Interest rate lock commitments	$	16,526	Other assets/liabilities	$	140	$	4
Forward contracts		25,500	Other assets/liabilities		4		391
Interest rate swaps		57,540	Other assets/liabilities		2,610		—
Put options		748,374	Other assets		25,877		—
Interest rate floors		748,374	Other assets		6,576		—
				$	35,207	$	395


		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

The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the consolidated statements of income for the years ended December 31, 2023, 2022, and 2021.


	Year Ended
	December 31,
	2023		2022		2021
	(In thousands)
Derivative gain (loss) included in gain on sale of loans:
Interest rate lock commitments	$	130	$	(218)	$	(5,908)
Forward contracts (includes pair-off settlements)		201		5,277		5,956
Interest rate swaps		(420)		132		—
Net gain (loss)		(89)		5,191		48

Derivative gain (loss) included in other income:
Put options		5,629		—		—
Interest rate floors		6,575		—		—
Net gain (loss)	$	12,204	$	—	$	—

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)
December 31, 2023	$	607,169	Other assets/liabilities	$	12,426	$	12,426
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 consolidated statements of income as follows:


	Year Ended
	December 31,
	2023		2022		2021
	(In thousands)
Gross swap gains	$	9,385	$	1,910	$	2,039
Gross swap losses		9,385		1,910		2,039
Net swap gains (losses)	$	—	$	—	$	—

The Company pledged no collateral to secure its obligations under swap contracts at both December 31, 2023 and December 31, 2022.