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MORTGAGE BANKING ACTIVITIES

6 Months Ended

Jun. 30, 2023

12. MORTGAGE BANKING ACTIVITIES

Mortgage Banking activities primarily include residential mortgage originations and servicing.

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)	2023		2022		2023		2022

Balance, beginning of period	$	1,034	$	13,302	$	1,302	$	29,393
Origination of mortgage loans held for sale		13,948		61,489		29,890		162,150
Proceeds from the sale of mortgage loans held for sale		(11,483)		(67,759)		(28,113)		(186,971)
Net gain on sale of mortgage loans held for sale		539		1,459		959		3,919
Balance, end of period	$	4,038	$	8,491	$	4,038	$	8,491

The following table presents the components of Mortgage Banking income:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2023		2022		2023		2022

Net gain realized on sale of mortgage loans held for sale	$	357	$	2,674	$	605	$	5,407
Net change in fair value recognized on loans held for sale		47		109		39		(597)
Net change in fair value recognized on rate lock loan commitments		93		(222)		187		(1,184)
Net change in fair value recognized on forward contracts		42		(1,102)		128		293
Net gain recognized		539		1,459		959		3,919

Loan servicing income		852		884		1,722		1,749
Amortization of mortgage servicing rights		(484)		(580)		(974)		(1,248)
Change in mortgage servicing rights valuation allowance		—		—		—		—
Net servicing income recognized		368		304		748		501
Total Mortgage Banking income	$	907	$	1,763	$	1,707	$	4,420

Activity for capitalized mortgage servicing rights was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2023		2022		2023		2022

Balance, beginning of period	$	8,406	$	9,502	$	8,769	$	9,196
Additions		73		485		200		1,459
Amortized to expense		(484)		(580)		(974)		(1,248)
Change in valuation allowance		—		—		—		—
Balance, end of period	$	7,995	$	9,407	$	7,995	$	9,407

Activity in the valuation allowance for capitalized mortgage servicing rights follows:

Three Months Ended

Six Months Ended

June 30,

(in thousands)

2023

2022

2023

2022

Beginning valuation allowance

—

Charge during the period

—

Ending valuation allowance

—

Other information relating to mortgage servicing rights follows:


(dollars in thousands)	June 30, 2023			December 31, 2022

Fair value of mortgage servicing rights portfolio	$	16,955		$	17,145
Monthly weighted average prepayment rate of unpaid principal balance*		121	%		127	%
Discount rate		10.29	%		10.21	%
Weighted average foreclosure rate		0.07	%		0.10	%
Weighted average life in years		7.68			7.54

*	Rates are applied to individual tranches with similar characteristics.

Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future 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 amounts 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 and the Board of Directors. 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 or purchase TBA securities. 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 loan lock 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 as of the period ends presented:


	June 30, 2023				December 31, 2022
	Notional				Notional
(in thousands)	Amount		Fair Value		Amount		Fair Value

Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value	$	3,961	$	4,038	$	1,265	$	1,302

Included in other assets:
Rate lock loan commitments	$	12,896	$	189	$	4,118	$	2
Mandatory forward contracts		—		—		—		—

Included in other liabilities:
Mandatory forward contracts		10,057		61		4,009		67