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MORTGAGE BANKING ACTIVITIES

9 Months Ended

Sep. 30, 2025

10. MORTGAGE BANKING ACTIVITIES

Mortgage banking activities primarily include residential mortgage originations and servicing.

Activity for mortgage loans HFS, 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	$	8,850	$	9,703	$	8,312	$	3,227
Origination of mortgage loans held for sale		59,494		57,142		152,515		136,894
Transferred from held for investment to held for sale		—		—		—		68,173
Proceeds from the sale of mortgage loans held for sale		(54,716)		(59,732)		(150,093)		(202,198)
Net gain on mortgage loans held for sale		1,710		1,413		4,604		2,430
Balance, end of period	$	15,338	$	8,526	$	15,338	$	8,526

The following table presents 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	$	1,529	$	1,325	$	4,166	$	3,010
Fair value adjustment for correspondent loans reclassified to held for sale		—		—		—		(997)
Net change in fair value recognized on loans held for sale		376		70		357		177
Net change in fair value recognized on rate lock loan commitments		(226)		90		252		292
Net change in fair value recognized on forward contracts		31		(72)		(171)		(52)
Net gain recognized		1,710		1,413		4,604		2,430

Loan servicing income		833		1,071		2,483		2,825
Amortization of mortgage servicing rights		(479)		(422)		(1,306)		(1,271)
Net servicing income recognized		354		649		1,177		1,554
Total mortgage banking income	$	2,064	$	2,062	$	5,781	$	3,984

Activity for capitalized MSR’s was as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2025		2024		2025		2024

Balance, beginning of period	$	6,841	$	7,030	$	6,975	$	7,411
Additions		436		445		1,129		913
Amortized to expense		(479)		(422)		(1,306)		(1,271)
Balance, end of period	$	6,798	$	7,053	$	6,798	$	7,053

There was no valuation allowance for capitalized MSR’s for the three and nine months ended September 30, 2025 and 2024.

Other information relating to MSR’s follows:


(dollars in thousands)	September 30, 2025			December 31, 2024

Fair value of mortgage servicing rights portfolio	$	16,941		$	17,159
Monthly weighted average prepayment rate of unpaid principal balance*		134	%		125	%
Discount rate		9.84	%		10.25	%
Weighted average foreclosure rate		0.12	%		0.06	%
Weighted average life in years		7.28			7.51

*	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 HFS. 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 HFS and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans HFS 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 HFS and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate loan lock commitments and loans HFS 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 HFS and mortgage banking derivatives:


	September 30, 2025				December 31, 2024
	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	$	14,786	$	15,338	$	8,117	$	8,312

Included in other assets:
Rate lock loan commitments	$	27,438	$	475	$	12,592	$	223
Mandatory forward contracts		—		—		18,776		70

Included in other liabilities:
Mandatory forward contracts	$	37,066	$	101	$	—	$	—