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Financial Instruments with Off-Balance Sheet Risk, Commitments and Contingencies

12 Months Ended

Dec. 31, 2020

Financial Instruments with Off-Balance Sheet Risk, Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk, Commitments and Contingencies

(17)Financial Instruments with Off-Balance Sheet Risk, Commitments and Contingencies

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

A summary of the Corporation’s financial instrument commitments at December 31, 2020 and 2019 is as follows:


(dollars in thousands)	2020		2019
Commitments to grant loans and commitments under lines of credit	$	421,399	327,788
Letters of credit		8,928	9,750

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

Outstanding letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Corporation requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2020 and 2019 for guarantees under standby letters of credit issues is not material.

Not included in commitments to grant loans in the table above are mortgage loan commitments of $428.8 million and $72.9 million in 2020 and 2019, respectively, which included interest rate lock commitments. These rate lock commitments represent an agreement to extend credit to a mortgage loan applicant whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Corporation to lend funds to a potential borrower at the specified rate, regardless

of whether interest rates change between the commitment date and the loan funding date. The Corporation’s loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loans. As such, these commitments are subject to interest rate risk and related price risk during the period from interest rate lock commitment through the loan funding date or expiration date. To manage this risk, the Corporation either locks the rate with the investor purchasing the loan on a “best efforts” basis or economically hedges this risk for loans sold to investors on its mandatory sales channel using the forward sale of mortgage-backed securities, in addition to best-efforts forward sale commitments to substantially eliminate these risks. At December 31, 2020 and 2019, the Corporation had a notional amount of $230.1 million and $62.8 million, respectively, related to commitments on the mandatory channel. At December 31, 2020 and 2019, the Corporation had best efforts forward sale commitments to sell loans amounting to $198.7 million and $18.6 million, respectively. The Corporation is only obligated to settle the forward sale commitment if the loan closes in accordance with the terms of the interest rate lock commitment. The Corporation’s forward sale commitments generally expire within 90 days.

Loans sold under FHA or investor programs are subject to repurchase or indemnification if they fail to meet the origination criteria of those programs. In addition, loans sold to investors may be subject to repurchase or indemnification if the loan is two or three months delinquent during a set period that usually varies from the first six months to a year after the loan is sold. At December 31, 2020 there were no indemnification or repurchase requests pending. Although repurchases and losses have historically been infrequent, a repurchase reserve of $2.7 million was recorded in 2020 due to the significant increase in loan originations. $71 thousand was recorded as of December 31, 2019. There was one loan repurchased for the year ended December 31, 2020 with an unpaid principle balance of $153 thousand.