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MORTGAGE BANKING ACTIVITIES

3 Months Ended

Mar. 31, 2024

11. 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
	March 31,
(in thousands)	2024		2023

Balance, beginning of period	$	3,227	$	1,302
Origination of mortgage loans held for sale		27,046		15,942
Transferred from held for investment to held for sale		69,464		—
Proceeds from the sale of mortgage loans held for sale		(18,773)		(16,630)
Net gain (loss) on mortgage loans held for sale		(80)		420
Balance, end of period	$	80,884	$	1,034

The following table presents the components of Mortgage banking income:


	Three Months Ended
	March 31,
(in thousands)	2024		2023

Net gain realized on sale of mortgage loans held for sale	$	565	$	248
Net loss realized on fair value adjustment for correspondent loans reclassified to held for sale		(997)		—
Net change in fair value recognized on loans held for sale		145		(8)
Net change in fair value recognized on rate lock loan commitments		223		94
Net change in fair value recognized on forward contracts		(16)		86
Net gain (loss) recognized		(80)		420

Loan servicing income		816		870
Amortization of mortgage servicing rights		(426)		(490)
Change in mortgage servicing rights valuation allowance		—		—
Net servicing income recognized		390		380
Total mortgage banking income	$	310	$	800

Activity for capitalized mortgage servicing rights was as follows:


	Three Months Ended
	March 31,
(in thousands)	2024		2023

Balance, beginning of period	$	7,411	$	8,769
Additions		118		127
Amortized to expense		(426)		(490)
Change in valuation allowance		—		—
Balance, end of period	$	7,103	$	8,406

There was no valuation allowance for capitalized mortgage servicing rights for the three months ended March 31, 2024 and 2023.

Other information relating to mortgage servicing rights follows:


(dollars in thousands)	March 31, 2024			December 31, 2023

Fair value of mortgage servicing rights portfolio	$	16,704		$	16,054
Monthly weighted average prepayment rate of unpaid principal balance*		124	%		128	%
Discount rate		10.09	%		10.26	%
Weighted average foreclosure rate		0.16	%		0.16	%
Weighted average life in years		7.58			7.52

*	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 or to purchase TBA securities 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:


	March 31, 2024				December 31, 2023
	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	$	80,681	$	80,884	$	3,168	$	3,227

Included in other assets:
Rate lock loan commitments	$	16,380	$	466	$	9,275	$	243

Included in other liabilities:
Mandatory forward contracts	$	22,317	$	77	$	9,092	$	61