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Derivative Instruments | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments [Abstract] |
Derivative Instruments | NOTE 11 – DERIVATIVE INSTRUMENTS Interest-rate swaps: CFBank utilizes interest-rate swaps as part of its asset/liability management strategy to help manage its interest rate risk position, and does not use derivatives for trading purposes. The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements. CFBank was party to interest-rate swaps with a combined notional amount of $54,480 at September 30, 2021 and $46,474 at December 31, 2020. The objective of the interest-rate swaps is to protect the related fixed-rate commercial real estate loans from changes in fair value due to changes in interest rates. CFBank has a program whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap. The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges. Accordingly, both instruments are carried at fair value and changes in fair value are reported in current period earnings. CFBank currently does not have any derivatives designated as hedges. The counterparty to CFBank’s interest-rate swaps is exposed to credit risk whenever the interest-rate swaps are in a liability position. At September 30, 2021, CFBank had $2,724 in cash pledged as collateral for these derivatives. Should the liability increase beyond the collateral value, CFBank will be required to pledge additional collateral. Additionally, CFBank’s interest-rate swap instruments contain provisions that require CFBank to remain well capitalized under regulatory capital standards and to comply with certain other regulatory requirements. The interest-rate swaps may be called by the counterparty if CFBank fails to maintain well-capitalized status under regulatory capital standards or becomes subject to certain adverse regulatory events such as a regulatory cease and desist order. As of September 30, 2021, CFBank was well-capitalized under regulatory capital standards and was not subject to any adverse regulatory events specified in CFBank’s interest-rate swap instruments. Summary information about the derivative instruments is as follows:
| September 30, 2021 |  | December 31, 2020
| (unaudited) |  |  |
Notional amount | $ | 54,480 |  | $ | 46,474
Weighted average pay rate on interest-rate swaps |  | 4.15% |  |  | 4.19%
Weighted average receive rate on interest-rate swaps |  | 3.04% |  |  | 3.08%
Weighted average maturity (years) |  | 6.7 |  |  | 7.4
Fair value of derivative asset | $ | 726 |  | $ | 1,944
Fair value of yield derivative liability |  | (726) |  |  | (1,944)
T he fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other liabilities, respectively, in the consolidated balance sheet. Changes in the fair value of the yield maintenance provisions and interest-rate swaps are reported currently in earnings, as other noninterest income in the consolidated statements of income. There were no net gains or losses recognized in earnings related to yield maintenance provisions and interest-rate swaps for the nine months ended September 30, 2021 or 2020. Mortgage banking derivatives: Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market are considered derivatives. These mortgage banking derivatives are not designated in hedge relationships. The Company had approximately $61,404 and $1,048,613 of interest rate lock commitments related to residential mortgage loans at September 30, 2021 and December 31, 2020, respectively. The fair value of these mortgage banking derivatives was $519 and $18,100 at September 30, 2021 and December 31, 2020, respectively, which is included in other assets at September 30, 2021 and December 31, 2020 in the consolidated balance sheet. Fair values were estimated based on anticipated gains on the sale of the underlying loans. Changes in the fair values of these mortgage banking derivatives are included in net gains on sales of loans. Mortgage banking activities include two types of commitments: rate lock commitments and forward loan commitments. Rate lock commitments are loans in our pipeline that have an interest rate locked with the customer. The commitments are generally for periods of 30-60 days and are at market rates. In order to mitigate the effect of the interest rate risk inherent in providing rate lock commitments, we economically hedge our commitments by entering into either a forward loan sales contract under best efforts or a trade of “to be announced (TBA)” mortgage-backed securities (“notional securities”) for mandatory delivery. The Company had approximately $64,500 and $506,750 of TBA mortgage-backed securities at September 30, 2021 and December 31, 2020, respectively. The fair value of these TBA mortgage-backed securities was $379 at September 30, 2021 and is included in other assets in the consolidated balance sheet. The fair value of the TBA mortgage-backed securities at December 31, 2020 was ($2,690) and is included in other liabilities in the consolidated balance sheet. The changes in fair value related to movements in market rates of the rate lock commitments and the forward loan sales contracts and notional securities generally move in opposite directions, and the net impact of changes in these valuations on net income during the loan commitment period is generally inconsequential. The Company has not formally designated these derivatives as a qualifying hedge relationship and, accordingly, accounts for such forward contracts as freestanding derivatives with changes in fair value recorded to earnings each period. The following table reflects the amount and market value of mortgage banking derivatives included in the consolidated balance sheet as of the period end (in thousands):
| September 30, 2021 |  | December 31, 2020
| (unaudited) |  |  |  |  |  |
| Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Assets (Liabilities): |  |  |  |  |  |  |  |  |  |  |
Interest rate commitments | $ | 61,404 |  | $ | 519 |  | $ | 1,048,613 |  | $ | 18,100
TBA mortgage-back securities |  | 64,500 |  |  | 379 |  |  | 506,750 |  |  | (2,690)
As of September 30, 2021, CFBank has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $4,847. The following table represents the notional amount of loans sold during the three and nine months ended September 30, 2021 and 2020 (unaudited):
| Three Months ended |  | Nine Months ended
| September 30, |  | September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Notional amount of loans sold | $ | 498,968 |  | $ | 552,122 |  | $ | 2,228,104 |  | $ | 1,357,314
The following table represents the revenue recognized on mortgage activities for the three and nine months ended September 30, 2021 and 2020 (unaudited):
| Three Months ended |  | Nine Months ended
| September 30, |  | September 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Gain on loans sold |  | 6,415 |  |  | 19,984 |  |  | 20,621 |  |  | 37,466
Gain (loss) from change in fair value of loans held-for-sale |  | (1,916) |  |  | 4,669 |  |  | (7,841) |  |  | 9,124
Gain (loss) from change in fair value of derivatives |  | (4,767) |  |  | (1,586) |  |  | (7,432) |  |  | (1,103)
| $ | (268) |  | $ | 23,067 |  | $ | 5,348 |  | $ | 45,487

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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