NOTE 4 – MORTGAGE BANKING ACTIVITIES

 

The Company’s mortgagebanking activities at its subsidiary Capital City Homes Loans (“CCHL”) includemandatory delivery loan

sales, forward sales contracts used to manage residentialloan pipeline price risk, utilization of warehouse lines to fund secondary

market residential loan closings, and residential mortgageservicing.For the six month period of 2020, information provided below

reflects CCHL activities for the period March 1, 2020to June 30, 2020 and CCB legacy residential real estate activities forthe period

January 1, 2020 to March 1, 2020.All quarterly information subsequent to the quarter ended March 31,2020 includes CCHL activity.

 

Residential Mortgage Loan Production

 

The Company originates, markets, and services conventionaland government-sponsored residential mortgageloans.Generally,

conforming fixed rate residential mortgage loans are heldfor sale in the secondary market and non-conforming andadjustable-rate

residential mortgage loans may be held for investment.The volume of residential mortgage loans originated forsale and secondary

market prices are the primary drivers of origination revenue.

 

Residential mortgage loan commitments are generally outstandingfor 30 to 90 days, which represents the typical period from

commitment to originate a residential mortgage loan towhen the closed loan is sold to an investor.Residential mortgage loan

commitments are subject to both credit and price risk.Credit risk is managed through underwriting policies andprocedures, including

collateral requirements, which are generally acceptedby the secondary loan markets.Price risk is primarily related to interest rate

fluctuations and is partially managed through forwardsales of residential mortgage-backed securities (primarily to-be announced

securities, or TBAs) or mandatory delivery commitmentswith investors.

 

The unpaid principal balance of residential mortgage loansheld for sale, notional amounts of derivative contractsrelated to residential

mortgage loan commitments and forward contract sales andtheir related fair values are set- forth below.

June 30, 2021

December 31, 2020

Unpaid Principal

Unpaid Principal

(Dollars in Thousands)

Balance/Notional

Fair Value

Balance/Notional

Fair Value

Residential Mortgage Loans Held for Sale

$

78,111

$

80,821

$

109,831

$

114,039

Residential Mortgage Loan Commitments ("IRLCs")

(1)

107,797

2,524

147,494

4,825

Forward Sales Contracts

(2)

99,000

(90)

158,500

(907)

$

83,255

$

117,957

(1)

Recorded in other assets at fair value

(2)

Recorded in other liabilities at fair value

The Company had

no

residential mortgage loans held for sale that were 90 days or moreoutstanding or on nonaccrual at June 30, 2021

and had $

0.6

million at December 31, 2020.

 

Mortgage banking revenue was as follows:

Residential Mortgage Servicing

 

 

The Company may retain the right to service residentialmortgage loans sold.The unpaid principal balance of loans serviced for

others is the primary driver of servicing revenue.

 

The following represents a summary of mortgageservicing rights.

Conforming conventional loans serviced by the Companyare sold to FNMA on a non-recourse basis, whereby foreclosurelosses are

generally the responsibility of FNMA and not the Company.The government loans serviced by the Company aresecured through

GNMA, whereby the Company is insured against loss bythe Federal Housing Administration or partially guaranteed against loss by

the VeteransAdministration.At June 30, 2021, the servicing portfolio balance consistedof the following loan types: FNMA (

62

%),

GNMA (

10

%), and private investor (

28

%).FNMA and private investor loans are structured as actual/actualpayment remittance.

 

The Company had $

2.8

million and $

4.9

million in delinquent residential mortgage loans currentlyin GNMA pools serviced by the

Company at June 30, 2021 and December 31, 2020,respectively.The right to repurchase these loans and the corresponding liability

has been recorded in other assets and other liabilities, respectively,in the Consolidated Statements of Financial Condition.For the

three and six months ended June 30, 2021, the Companyrepurchased $

0.7

million and $

2.2

million, respectively,of GNMA

delinquent or defaulted mortgage loans with the intentionto modify their terms and include the loans in new GNMA pools.

 

Activity in the capitalized mortgage servicing rights was as follows:

The Company did

no

t record any permanent impairment losses on mortgage servicingrights for the three or six month periods ended

June 30, 2021 and June 30, 2020.

 

The key unobservable inputs used in determining thefair value of the Company’s mortgageservicing rights were as follows:

Changes in residential mortgage interest rates directlyaffect the prepayment speeds used in valuing the Company’smortgage

servicing rights.A separate third party model is used to estimate prepayment speedsbased on interest rates, housing turnover rates,

estimated loan curtailment, anticipated defaults, and other relevantfactors.The weighted average annual prepayment speed was

16.52

% at June 30, 2021 and

17.10

% at December 31, 2020.

 

WarehouseLine Borrowings

 

The Company has the following warehouse lines ofcredit and master repurchase agreements with various financial institutionsat June

30, 2021.

Warehouseline borrowings are classified as short-term borrowings.At June 30, 2021, the Company had mortgage loans held for sale

pledged as collateral under the above warehouse linesof credit and master repurchase agreements.The above agreements also contain

covenants which include certain financial requirements,including maintenance of minimum tangible net worth,minimum liquid

assets, maximum debt to net worth ratio and positive netincome, as defined in the agreements.The Company was in compliance with

all significant debt covenants at June 30, 2021.

 

The Company intends to renew the warehouse lines ofcredit and master repurchase agreements when they mature.

 

The Company has extended a $

50

million warehouse line of credit to CCHL, a

51

% owned subsidiary entity.Balances and

transactions under this line of credit are eliminatedin the Company’s consolidatedfinancial statements and thus notincluded in the

total short term borrowings noted on the ConsolidatedStatement of Financial Condition.The balance of this line of credit at June 30,

2021 was $

27.7

million.