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MORTGAGE BANKING ACTIVITIES
3 Months Ended
Mar. 31, 2021
MORTGAGE BANKING ACTIVITIES  
MORTGAGE BANKING ACTIVITIES

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)

2021

    

2020

Balance, beginning of period

$

46,867

$

19,224

Origination of mortgage loans held for sale

 

213,587

 

125,273

Proceeds from the sale of mortgage loans held for sale

 

(203,815)

 

(109,918)

Net gain on sale of mortgage loans held for sale

 

6,997

 

4,805

Balance, end of period

$

63,636

$

39,384

The following table presents the components of Mortgage Banking income:

    

    

Three Months Ended

March 31, 

(in thousands)

2021

    

2020

Net gain realized on sale of mortgage loans held for sale

$

8,045

$

3,078

Net change in fair value recognized on loans held for sale

 

(1,011)

 

642

Net change in fair value recognized on rate lock loan commitments

 

(2,637)

 

3,779

Net change in fair value recognized on forward contracts

 

2,600

 

(2,694)

Net gain recognized

 

6,997

 

4,805

Loan servicing income

 

793

 

675

Amortization of mortgage servicing rights

 

(997)

 

(585)

Change in mortgage servicing rights valuation allowance

 

400

 

(100)

Net servicing income recognized

 

196

 

(10)

Total Mortgage Banking income

$

7,193

$

4,795

Activity for capitalized mortgage servicing rights was as follows:

    

Three Months Ended

March 31, 

(in thousands)

    

2021

    

2020

Balance, beginning of period

$

7,095

$

5,888

Additions

 

1,213

 

791

Amortized to expense

 

(997)

 

(585)

Change in valuation allowance

 

400

 

(100)

Balance, end of period

$

7,711

$

5,994

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

    

Three Months Ended

March 31, 

(in thousands)

    

2021

    

2020

Beginning valuation allowance

$

500

$

Charge during the period

 

(400)

 

100

Ending valuation allowance

$

100

$

100

Other information relating to mortgage servicing rights follows:

(in thousands)

    

March 31, 2021

  

  

December 31, 2020

 

Fair value of mortgage servicing rights portfolio

$

10,379

$

8,318

Monthly weighted average prepayment rate of unpaid principal balance*

 

207

%

 

308

%

Discount rate

10.00

%

10.00

%

Weighted average foreclosure rate

0.39

%

0.44

%

Weighted average life in years

 

6.02

 

4.85

*

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. 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 as of the period ends presented:

March 31, 2021

    

December 31, 2020

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

$

62,561

$

63,636

$

44,781

$

46,867

Included in other assets:

Rate lock loan commitments

$

74,187

$

1,903

$

105,395

$

4,540

Mandatory forward contracts

134,953

1,624

Included in other liabilities:

Mandatory forward contracts

$

$

$

136,236

$

976