Note 15 - Mortgage Banking Activities

6 Months Ended

Jun. 30, 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.

Effective 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:

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2022			2021			2022			2021
Balance, beginning of period:	$	9,323		$	6,579		$	8,614		$	22,547
Origination of mortgage loans held for sale		43,814			50,692			79,643			119,431
Loans held for sale acquired		-			3,071			3,559			3,071
Proceeds from the sale of mortgage loans held for sale		(43,504	)		(55,844	)		(82,275	)		(141,747	)
Net gain on sale of mortgage loans held for sale		412			922			504			2,118
Balance, end of period	$	10,045		$	5,420		$	10,045		$	5,420

The following table represents the components of Mortgage banking income:

	Three months ended						Six months ended
	June 30,						June 30,
(in thousands)	2022			2021			2022			2021
Net gain realized on sale of mortgage loans held for sale	$	412		$	922		$	504		$	2,118
Net change in fair value recognized on loans held for sale		70			-			43			-
Net change in fair value recognized on rate lock loan commitments		797			-			1,189			-
Net change in fair value recognized on forward contracts		(814	)		-			(635	)		-
Net gain recognized		465			922			1,101			2,118
Net loan servicing income		1,215			333			1,917			588
Amortization of mortgage servicing rights		(856	)		(174	)		(1,337	)		(426	)
Change in mortgage servicing rights valuation allowance		-			-			-			-
Net servicing income recognized		359			159			580			162
Other mortgage banking income		471			222			617			467
Total mortgage banking income	$	1,295		$	1,303		$	2,298		$	2,747

Activity for capitalized mortgage servicing rights was as follows:

	Three months ended						Six months ended
	June 30,						June 30,
(in thousands)	2022			2021			2022			2021
Balance at beginning of period	$	16,877		$	2,865		$	4,528		$	2,710
MSRs acquired		—			1,662			12,676			1,662
Additions for mortgage loans sold		483			304			637			711
Amortization		(856	)		(174	)		(1,337	)		(426	)
Impairment		—			—			—			—
Balance at end of period	$	16,504		$	4,657		$	16,504		$	4,657

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 June 30, 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 June 30, 2022 and December 31, 2021, as fair value exceeded carrying value.

Total outstanding principal balances of loans serviced for others were $2.16 billion and $698 million at June 30, 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.

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:

	June 30, 2022
(in thousands)	Notional Amount		Fair Value
Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value	$	9,989	$	10,045
Included in other assets:
Rate lock loan commitments	$	17,951	$	472
Mandatory forward contracts		18,459		44