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MORTGAGE BANKING ACTIVITIES

12 Months Ended

Dec. 31, 2024

15.MORTGAGE BANKING ACTIVITIES

Mortgage banking activities primarily include residential mortgage originations and servicing.

Activity for mortgage loans held for sale was as follows:




December 31, (in thousands)	2024		2023		2022

Balance, beginning of period	$	3,227	$	1,302	$	29,393
Origination of mortgage loans held for sale		186,959		77,800		205,365
Transferred from held for investment to held for sale		68,173		—		—
Proceeds from the sale of mortgage loans held for sale		(253,922)		(77,928)		(238,398)
Net gain (loss) on mortgage loans held for sale		3,875		2,053		4,942
Balance, end of period	$	8,312	$	3,227	$	1,302

Mortgage loans serviced for others are not reported as assets. The following table provides information for loans serviced by the Bank for the FHLMC, FNMA, and FHLB as of December 31, 2024 and 2023:


(in thousands)	2024		2023

FHLMC	$	830,835	$	899,444
FNMA		448,488		417,475
FHLB		44,299		—
Total	$	1,323,622	$	1,316,919

Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Custodial escrow account balances maintained in connection with serviced loans were approximately $8 million and $8 million as of December 31, 2024 and 2023.

Mortgage loans sold to the FHLB provide for the establishment of an LRA, which represents a recourse obligation of the FHLB for absorbing potential losses on loans sold to the FHLB and an asset to the Company. The funds withheld by the FHLB to settle these recourse obligations totaled $1,336,000 and $0 as of December 31, 2024 and 2023. In the event that the estimated losses are not realized within the portfolio, the LRA agreements provide for repayment of these funds to the Company. These receivables are recorded on the Company’s balance sheet at the present value of their expected future cash flows upon the establishment of the LRA, and adjusted on a quarterly basis based on changes in interest rates and the projected future cash flows. As of the December 31, 2024 and 2023, the LRA had a carrying value on the Company’s balance sheet of $572,000 and $0.

The following table presents the components of Mortgage Banking income:




(in thousands)	2024		2023		2022

Net gain realized on sale of mortgage loans held for sale	$	4,624	$	1,784	$	7,164
Fair value adjustment for correspondent loans reclassified to held for sale		(997)		—		—
Net change in fair value recognized on loans held for sale		136		22		(688)
Net change in fair value recognized on rate lock loan commitments		(20)		242		(1,402)
Net change in fair value recognized on forward contracts		132		5		(132)
Net gain (loss) recognized		3,875		2,053		4,942

Loan servicing income		3,290		3,370		3,518
Amortization of mortgage servicing rights		(1,727)		(1,881)		(2,264)
Change in mortgage servicing rights valuation allowance		—		—		—
Net servicing income recognized		1,563		1,489		1,254
Total mortgage banking income	$	5,438	$	3,542	$	6,196

Activity for capitalized mortgage servicing rights was as follows:




(in thousands)	2024		2023		2022

Balance, beginning of period	$	7,411	$	8,770	$	9,196
Additions		1,291		522		1,838
Amortized to expense		(1,727)		(1,881)		(2,264)
Change in valuation allowance		—		—		—
Balance, end of period	$	6,975	$	7,411	$	8,770

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




(in thousands)	2024		2023		2022

Beginning valuation allowance	$	—	$	—	$	—
Charge during the period		—		—		—
Ending valuation allowance	$	—	$	—	$	—

Other information relating to mortgage servicing rights follows:


December 31, (in thousands)	2024			2023

Fair value of mortgage servicing rights portfolio	$	17,159		$	16,054
Monthly weighted average prepayment rate of unpaid principal balance*		125	%		128	%
Discount rate		10.25	%		10.26	%
Weighted average foreclosure rate		0.06	%		0.16	%
Weighted average life in years		4.41			7.52

* Rates are applied to individual tranches with similar characteristics.

Estimated future amortization expense of the MSR portfolio (net of any applicable impairment charge) follows; however, actual amortization expense will be impacted by loan payoffs and changes in estimated lives that occur during each respective year:


Year	(in thousands)

2025	$	936
2026		932
2027		928
2028		912
2029		854
2030		717
Thereafter		1,696
Total	$	6,975

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:


	2024				2023
	Notional				Notional
December 31, (in thousands)	Amount		Fair Value		Amount		Fair Value

Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value	$	8,117	$	8,312	$	3,168	$	3,227

Included in other assets:
Rate lock loan commitments	$	12,592	$	223	$	9,275	$	243
Mandatory forward contracts		18,776		70		—		—

Included in other liabilities:
Mandatory forward contracts	$	—	$	—	$	9,092	$	61