Note 15 - Mortgage Banking Activities

6 Months Ended

Jun. 30, 2024

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. Mortgages originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors.

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

	Three months ended						Six months ended
	June 30,						June 30,
(in thousands)	2024			2023			2024			2023
Balance, beginning of period:	$	6,462		$	6,397		$	6,056		$	2,606
Origination of mortgage loans held for sale		29,196			30,709			51,464			55,391
Proceeds from the sale of mortgage loans held for sale		(29,903	)		(30,567	)		(52,106	)		(51,673	)
Net gain realized on sale of mortgage loans held for sale		683			530			1,024			745
Balance, end of period	$	6,438		$	7,069		$	6,438		$	7,069

The following table represents the components of Mortgage banking income:

	Three months ended						Six months ended
	June 30,						June 30,
(in thousands)	2024			2023			2024			2023
Net gain realized on sale of mortgage loans held for sale	$	683		$	530		$	1,024		$	745
Net change in fair value recognized on loans held for sale		(3	)		(34	)		31			17
Net change in fair value recognized on rate lock loan commitments		(108	)		(104	)		149			226
Net change in fair value recognized on forward contracts		82			173			108			127
Net gain recognized		654			565			1,312			1,115
Net loan servicing income		817			1,120			1,778			2,307
Amortization of mortgage servicing rights		(582	)		(762	)		(1,319	)		(1,523	)
Change in mortgage servicing rights valuation allowance		-			-			-			-
Net servicing income recognized		235			358			459			784
Other mortgage banking income		128			107			194			169
Total mortgage banking income	$	1,017		$	1,030		$	1,965		$	2,068

Activity for capitalized mortgage servicing rights was as follows:

	Three months ended						Six months ended
	June 30,						June 30,
(in thousands)	2024			2023			2024			2023
Balance, beginning of period	$	12,544		$	14,623		$	13,082		$	15,219
Additions for mortgage loans sold		235			255			434			420
Amortization		(582	)		(762	)		(1,319	)		(1,523	)
Impairment		—			—			—			—
Balance, end of period	$	12,197		$	14,116		$	12,197		$	14,116

The estimated fair value of MSRs at June 30, 2024 and December 31, 2023 was $25 million and $24 million, respectively. There was no valuation allowance recorded for MSRs as of June 30, 2024 and December 31, 2023, as fair value exceeded carrying value. The fair value of MSRs at June 30, 2024 was determined using discount rates ranging from 10.0% to 13.0%, prepayment speeds ranging from 6.1% to 11.1%, depending on the stratification of the specific right, and a weighted average default rate of 0.6%. The fair value of MSRs at December 31, 2023 was determined using discount rates ranging from 10.0% to 13.0%, prepayment speeds ranging from 6.0% to 11.1%, depending on the stratification of the specific right, and a weighted average default rate of 0.6%.

Total outstanding principal balances of loans serviced for others were $1.87 billion and $1.93 billion at June 30, 2024 and December 31, 2023, respectively.

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 and 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.

Bancorp 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 may 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, 2024				December 31, 2023
(in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value	$	6,317	$	6,438	$	5,965	$	6,056
Included in other assets:
Rate lock loan commitments	$	9,342	$	337	$	4,345	$	174
Mandatory forward contracts		12,250		27		-		-
Included in other liabilities
Mandatory forward contracts	$	-	$	-	$	6,750	$	(43	)