Note 15 - Mortgage Banking Activities

9 Months Ended

Sep. 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						Nine months ended
	September 30,						September 30,
(in thousands)	2024			2023			2024			2023
Balance, beginning of period:	$	6,438		$	7,069		$	6,056		$	2,606
Origination of mortgage loans held for sale		27,278			30,775			78,742			86,100
Proceeds from the sale of mortgage loans held for sale		(29,737	)		(31,814	)		(81,844	)		(83,422	)
Net gain realized on sale of mortgage loans held for sale		843			505			1,868			1,251
Balance, end of period	$	4,822		$	6,535		$	4,822		$	6,535

The following table represents the components of Mortgage banking income:

	Three months ended						Nine months ended
	September 30,						September 30,
(in thousands)	2024			2023			2024			2023
Net gain realized on sale of mortgage loans held for sale	$	843		$	505		$	1,868		$	1,251
Net change in fair value recognized on loans held for sale		30			(81	)		61			(65	)
Net change in fair value recognized on rate lock loan commitments		37			(186	)		185			40
Net change in fair value recognized on forward contracts		(218	)		214			(109	)		340
Net gain recognized		692			452			2,005			1,566
Net loan servicing income		827			1,031			2,605			3,338
Amortization of mortgage servicing rights		(536	)		(822	)		(1,856	)		(2,345	)
Change in mortgage servicing rights valuation allowance		-			-			-			-
Net servicing income recognized		291			209			749			993
Other mortgage banking income		129			153			323			323
Total mortgage banking income	$	1,112		$	814		$	3,077		$	2,882

Activity for capitalized mortgage servicing rights was as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
(in thousands)	2024			2023			2024			2023
Balance, beginning of period	$	12,197		$	14,116		$	13,082		$	15,219
Additions for mortgage loans sold		247			264			682			684
Amortization		(536	)		(822	)		(1,856	)		(2,345	)
Impairment		—			—			—			—
Balance, end of period	$	11,908		$	13,558		$	11,908		$	13,558

The estimated fair value of MSRs at September 30, 2024 and December 31, 2023 was $23 million and $24 million, respectively. There was no valuation allowance recorded for MSRs as of September 30, 2024 and December 31, 2023, as fair value exceeded carrying value. The fair value of MSRs at September 30, 2024 was determined using discount rates ranging from 10.0% to 13.0%, prepayment speeds ranging from 6.4% to 11.2%, depending on the characteristics of the specific rights (rate, maturity, etc.), 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 characteristics of the specific rights, and a weighted average default rate of 0.6%.

Total outstanding principal balances of loans serviced for others were $1.84 billion and $1.93 billion at September 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:

	September 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	$	4,671	$	4,822	$	5,965	$	6,056
Included in other assets:
Rate lock loan commitments	$	10,545	$	377	$	4,345	$	174
Mandatory forward contracts		13,500		7		-		-
Included in other liabilities
Mandatory forward contracts	$	-	$	-	$	6,750	$	(43	)