XML 25 R12.htm IDEA: XBRL DOCUMENT v3.21.2
Mortgage Banking Derivatives
 9 Months Ended
Sep. 30, 2021
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.
The Bank has mortgage banking derivative financial instruments that are included in other assets, and are related to its interest rate lock commitments. The notional value of the mortgage banking derivative financial instruments was $137.0 million at September 30, 2021 and $367.7 million at December 31, 2020. The fair value of these mortgage banking derivative instruments was $1.6 million at September 30, 2021 and at $5.2 million at December 31, 2020.
Included in gain on sale of loans for the three and nine months ended September 30, 2021 there was a $21 thousand net loss relating to mortgage banking derivative instruments as compared to a net loss of $145 thousand and $309 thousand for the three and nine months ended September 30, 2020, respectively.