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Note 15 - Mortgage Banking Activities
 9 Months Ended
Sep. 30, 2025
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)

  

2025

    

2024

    

2025

    

2024

  

Balance, beginning of period:

   $ 5,014     $ 6,438     $ 6,286     $ 6,056  

Origination of mortgage loans held for sale

     37,086       27,278       105,149       78,742  

Proceeds from the sale of mortgage loans held for sale

     (37,052 )     (29,737 )     (107,764 )     (81,844 )

Net gain realized on sale of mortgage loans held for sale

     997       843       2,374       1,868  

Balance, end of period

   $ 6,045     $ 4,822     $ 6,045     $ 4,822  

 

The following table represents the components of Mortgage banking income:

 

   

Three months ended

    

Nine months ended

  
   

September 30,

    

September 30,

  

(in thousands)

  

2025

    

2024

    

2025

    

2024

  
                                 

Net gain realized on sale of mortgage loans held for sale

   $ 997     $ 843     $ 2,374     $ 1,868  

Net change in fair value recognized on loans held for sale

     26       30       2       61  

Net change in fair value recognized on rate lock loan commitments

     18       37       239       185  

Net change in fair value recognized on forward contracts

     (129 )     (218 )     (360 )     (109 )

Net gain recognized

     912       692       2,255       2,005  
                                 

Net loan servicing income

     807       827       2,411       2,605  

Amortization of mortgage servicing rights

     (581 )     (536 )     (1,714 )     (1,856 )

Change in mortgage servicing rights valuation allowance

     -       -       -       -  

Net servicing income recognized

     226       291       697       749  
                                 

Other mortgage banking income

     114       129       311       323  

Total mortgage banking income

   $ 1,252     $ 1,112     $ 3,263     $ 3,077  

 

Activity for capitalized mortgage servicing rights was as follows:

 

   

Three months ended

    

Nine months ended

  
   

September 30,

    

September 30,

  

(in thousands)

  

2025

    

2024

    

2025

    

2024

  

Balance, beginning of period

   $ 10,706     $ 12,197     $ 11,333     $ 13,082  

Additions for mortgage loans sold

     322       247       828       682  

Amortization

     (581 )     (536 )     (1,714 )     (1,856 )

Impairment

     —       —       —       —  

Balance, end of period

   $ 10,447     $ 11,908     $ 10,447     $ 11,908  

 

The estimated fair value of MSRs at September 30, 2025 and December 31, 2024 was $23 million and $25 million, respectively. There was no valuation allowance recorded for MSRs as of September 30, 2025 and December 31, 2024, as fair value exceeded carrying value. The fair value of MSRs at September 30, 2025 was determined using discount rates ranging from 9.5% to 12.5%, prepayment speeds ranging from 6.4% to 11.3%, depending on the characteristics of the specific rights (rate, maturity, etc.), and a weighted average default rate of 0.5%. 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, and a weighted average default rate of 0.6%.

 

Total outstanding principal balances of loans serviced for others were $1.75 billion and $1.82 billion at September 30, 2025 and December 31, 2024, 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, 2025

    

December 31, 2024

  

(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

   $ 5,798     $ 6,045     $ 6,199     $ 6,286  
                                 

Included in other assets:

                                

Rate lock loan commitments

   $ 12,838     $ 479     $ 7,138     $ 225  

Mandatory forward contracts

     15,500       13       9,000       56