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Mortgage Banking Derivatives | 9 Months Ended
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Sep. 30, 2020
Mortgage Banking Derivatives |
Mortgage Banking Derivatives | Mortgage Banking DerivativesAs part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded. Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations. The fair value of the mortgage banking derivatives is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change. During the second quarter of 2020, the Company suspended locking loans for sale on a mandatory basis as a result of elevated origination volumes and market dislocations associated with the current COVID-19 pandemic. In connection with this shift in pipeline strategy from mandatory to best efforts, beginning in the third quarter of 2020, the Company adjusted its accounting treatment of loans sold on a best efforts basis which accelerated revenue recognition associated with the pipeline to when the loans are committed, in accordance with GAAP. The change reflects the timely recognition of non-interest income associated with the gains and fees attributable to the best efforts sale and aligns the accounting treatment of best efforts with the accounting treatment of loans sold on a mandatory basis. Under the adjustment to the accounting for best efforts implemented in the third quarter of 2020, the Company recognized an additional $1.6 million in noninterest income associated with the residential mortgage operations. Had the company utilized the adjusted accounting method for best efforts in prior quarters, non-interest income would have been higher by an immaterial amount. At September 30, 2020, the Bank had mortgage banking derivative financial instruments totaling $6.0 million. At September 30, 2019 the Bank had mortgage banking derivative financial instruments of $134.3 million notional value. The fair value of these mortgage banking derivative instruments at December 31, 2019 was $280 thousand included in other assets and $66 thousand included in other liabilities. Included in other noninterest income for the three and nine months ended September 30, 2020 was a net loss of $145 thousand and a net loss of $309 thousand relating to mortgage banking derivative instruments as compared to a net gain of $30 thousand and a net gain of $249 thousand for the three and nine months ended September 30, 2019. The amount included in other noninterest income for the three and nine months ended September 30, 2020 pertaining to its mortgage banking hedging activities was a net realized gain of $34 thousand and a net gain of $27 thousand, respectively, as compared to a net gain of $277 thousand and a net gain of $228 thousand, respectively, for the three and nine months ended September 30, 2019. ​

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- Definition The entire disclosure for mortgage banking derivatives and fair value of assets and liabilities. + References No definition available. + Details
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