Note 15 - Mortgage Banking Activities

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Regulatory Capital Requirements for Mortgage Companies Disclosure [Text Block]

(15) Mortgage Banking Activities

Mortgage banking activities primarily include residential mortgage originations and servicing.

As of March 31, 2022, mortgages originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale as of December 31, 2021 and prior were carried at the lower of cost or market value.

Activity for mortgage loans held for sale, at fair value, was as follows:

Note 15 - Mortgage Banking Activities - Activity in Mortgage Loans Held for Sale

	Three months ended
	March 31,
(in thousands)	2022
Balance, beginning of period:	$	8,614
Origination of mortgage loans held for sale		35,829
Loans held for sale acquired		3,559
Proceeds from the sale of mortgage loans held for sale		(38,771	)
Net gain on sale of mortgage loans held for sale		92
Balance, end of period		9,323

The following table represents the components of Mortgage banking income:

Note 15 - Mortgage Banking Activities - Mortgage Banking Income

	Three months ended
	March 31,
(in thousands)	2022			2021
Net gain realized on sale of mortgage loans held for sale	$	92		$	1,196
Net change in fair value recognized on loans held for sale		(27	)		-
Net change in fair value recognized on rate lock loan commitments		392			-
Net change in fair value recognized on forward contracts		179			-
Net gain recognized		636			1,196
Loan servicing income		702			255
Amortization of mortgage servicing rights		(481	)		(252	)
Change in mortgage servicing rights valuation allowance		-			-
Net servicing income recognized		221			3
Other mortgage banking income		146			245
Total Mortgage banking income	$	1,003		$	1,444

Activity for capitalized mortgage servicing rights was as follows:

Note 15 - Mortgage Banking Activities - Changes in the Net Carrying Amount of MSRs

	Three months ended
	March 31,
(in thousands)	2022			2021
Balance at beginning of period	$	4,528		$	2,710
MSRs acquired		12,676			—
Additions for mortgage loans sold		154			407
Amortization		(481	)		(252	)
Impairment		—			—
Balance at end of period	$	16,877		$	2,865

MSRs, a component of other assets, are initially recognized at fair value when mortgage loans are sold with servicing retained. The MSRs are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. MSRs are evaluated quarterly for impairment by comparing carrying value to fair value. Fair value is based on a valuation model that calculates the PV of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income.

The estimated fair value of MSRs at March 31, 2022 and December 31, 2021 were $26 million and $6 million, respectively. MSRs with an estimated fair value of $13 million were acquired in the CB acquisition. There was no valuation allowance recorded for MSRs as of March 31, 2022 and December 31, 2021, as fair value exceeded carrying value.

Total outstanding principal balances of loans serviced for others were $2.2 billion and $698 million at March 31, 2022 and December 31, 2021, respectively. Loans serviced for others acquired as part of the CB acquisition totaled $1.5 billion at the date of acquisition.

As of March 31, 2022 and December 31, 2021, no valuation allowance was recorded on capitalized mortgage servicing rights.

Mortgage banking derivatives used in the ordinary course of business consist primarily of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future loan commitments to deliver loans at a specified price and date are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amount required to be received or paid.

Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.

The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate lock loan commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.

The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives:

Note 15 - Mortgage Banking Activities - Notional Amounts and Fair Values

	March 31, 2022
(in thousands)	Notional Amount		Fair Value
Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value	$	9,202	$	9,323
Included in other assets:
Rate lock loan commitments	$	63,421	$	702
Mandatory forward contracts		12,564		94