10.MORTGAGE BANKING ACTIVITIES

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Mortgage banking activities primarily consist of the origination, sale, and servicing of RRE mortgage loans.

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The following table presents activity in mortgage loans HFS carried at fair value:

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The following table presents the components of mortgage banking income:

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The following table presents activity for capitalized MSRs:

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There was no valuation allowance recorded for capitalized MSR’s for the three and six months ended June 30, 2026 and 2025.

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The following table presents estimated fair value information for capitalized MSRs:

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Mortgage banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and interest rate lock commitments. Mandatory forward sales contracts represent commitments to deliver mortgage loans at specified prices and dates and are used to manage interest rate risk associated with interest rate lock commitments and mortgage loans HFS. Interest rate lock commitments represent commitments to originate mortgage loans at specified interest rates. These derivative instruments have underlying variables, primarily interest rates, and are designed to manage exposure to market risk. Substantially all of these instruments expire within 90 days of issuance. Notional amounts are used to calculate contractual payments but do not represent credit exposure, which is limited to amounts to be received from or paid to counterparties.

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Mandatory forward sales contracts also expose the Bank to counterparty credit risk, as counterparties may fail to perform under the terms of the agreements. If a counterparty is unable to fulfill its obligations, the Bank could incur additional costs to replace the contracts at then-current market rates. To mitigate this risk, the Bank limits its counterparties to financial institutions approved by management and the Board. The Bank does not anticipate nonperformance by any of its counterparties and, therefore, does not expect to incur material losses related to counterparty default.

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The Bank is exposed to interest rate risk associated with mortgage loans HFS and interest rate lock commitments. Changes in market interest rates may cause the fair value of these instruments to increase or decrease. To manage this risk, the Bank enters into derivative instruments, including mandatory forward sales contracts and, from time to time, forward purchases of TBA securities. The fair value of these derivatives also fluctuates with changes in market interest rates, and such changes are expected to substantially, although not completely, offset changes in the fair value of mortgage loans HFS and interest rate lock commitments.

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The objective of these risk management activities is to reduce the Bank's exposure to losses resulting from changes in market interest rates. The net impact of the derivative instruments on earnings depends on a variety of factors, including interest rate volatility, the volume of interest rate lock commitments that ultimately fund, the Bank's ability to fulfill forward contracts prior to expiration, and the time required to close and sell mortgage loans.

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The following table presents the notional amounts and fair values of mortgage loans HFS and mortgage banking derivatives:

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