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Note 23 - Mortgage Banking Activities
 12 Months Ended
Dec. 31, 2024
Notes to Financial Statements  
Regulatory Capital Requirements for Mortgage Companies Disclosure [Text Block]

(23) Mortgage Banking Activities

 

Mortgage banking activities primarily include residential mortgage originations and servicing.

 

Effective March 31, 2022, Bancorp began carrying mortgages originated and intended for sale in the secondary market at fair value, as determined by outstanding commitments from investors.

 

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

 

Years ended December 31, (in thousands)

  

2024

    

2023

    

2022

  

Balance, beginning of period:

   $ 6,056     $ 2,606     $ 8,614  

Origination of mortgage loans held for sale

     114,773       105,912       129,193  

Loans held for sale acquired

     —       —       3,559  

Proceeds from the sale of mortgage loans held for sale

     (116,974 )     (104,152 )     (139,281 )

Net gain realized on sale of mortgage loans held for sale

     2,431       1,690       521  

Balance, end of period

   $ 6,286     $ 6,056     $ 2,606  

 

The following table represents the components of Mortgage banking income:

 

Years ended December 31, (in thousands)

  

2024

    

2023

    

2022

  
                         

Net gain realized on sale of mortgage loans held for sale

   $ 2,431     $ 1,690     $ 521  

Net change in fair value recognized on loans held for sale

     (4 )     33       -  

Net change in fair value recognized on rate lock loan commitments

     41       23       1,821  

Net change in fair value recognized on forward contracts

     219       150       (1,102 )

Net gain recognized

     2,687       1,896       1,240  
                         

Net loan servicing income

     3,455       4,387       4,200  

Amortization of mortgage servicing rights

     (2,726 )     (2,961 )     (3,072 )

Change in mortgage servicing rights valuation allowance

     -       -       -  

Net servicing income recognized

     729       1,426       1,128  
                         

Other mortgage banking income

     442       383       842  

Total mortgage banking income

   $ 3,858     $ 3,705     $ 3,210  

 

Activity for capitalized mortgage servicing rights was as follows:

 

Years ended December 31, (in thousands)

  

2024

    

2023

    

2022

  

Balance, beginning of period

   $ 13,082     $ 15,219     $ 4,528  

Added from acquisition

     —       —       12,676  

Additions for mortgage loans sold

     977       824       1,087  

Amortization

     (2,726 )     (2,961 )     (3,072 )

Impairment

     —       —       —  

Balance, end of period

   $ 11,333     $ 13,082     $ 15,219  

 

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, such as estimated prepayment speeds and discount rates.

 

 

The estimated fair value of MSRs at December 31, 2024 and December 31, 2023 were $25 million and $24 million, respectively. There was no valuation allowance recorded for MSRs as of December 31, 2024 and December 31, 2023, as fair value exceeded carrying value. The fair value of MSRs at December 31, 2024 was determined using discount rates ranging from 10.0% to 13.0%, prepayment speeds ranging from 5.3% to 10.5%, 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 $1.82 billion and $1.93 billion at December 31, 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 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 fluctuate. 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:

 

   

December 31, 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

   $ 6,199     $ 6,286     $ 5,965     $ 6,056  
                                 

Included in other assets:

                                

Rate lock loan commitments

   $ 7,138     $ 225     $ 4,345     $ 174  

Mandatory forward contracts

     9,000       56       -       -  
                                 

Included in other liabilities

                                

Mandatory forward contracts

   $ -     $ -     $ 6,750     $ (43 )