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Mortgage Banking and Servicing Rights
 12 Months Ended
Dec. 31, 2023
Mortgage Banking and Servicing Rights [Abstract]  
Mortgage Banking and Servicing Rights
5. Mortgage Banking and Servicing Rights


Mortgage banking activities primarily include residential mortgage originations and servicing.  As discussed in note 1 above, MSRs are carried at fair market value.  The following table presents the components of mortgage banking income:

(in thousands)
Year Ended December 31
  
2023
    
2022
    
2021
  
Net gain on sale of mortgage loans held for sale
  
$
395
    
$
1,525
    
$
6,820
  
Net loan servicing income:
                        
Servicing fees
    
2,080
      
2,226
      
2,058
  
Late fees
    
81
      
78
      
67
  
Ancillary fees
    
36
      
94
      
848
  
Fair value adjustments
    
(965
)
    
1,069
      
428
  
Net loan servicing income
    
1,232
      
3,467
      
3,401
  
Mortgage banking income
  
$
1,627
    
$
4,992
    
$
10,221
  


Mortgage loans serviced for others are not included in the accompanying balance sheets.  Loans serviced for the benefit of others (primarily FHLMC) totaled $725 million, $783 million, and $807 million at December 31, 2023, 2022, and 2021, respectively.  Servicing loans for others generally consist of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures.  Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $2.5 million, $3.0 million, and $2.6 million at December 31, 2023, 2022, and 2021, respectively.


Activity for capitalized MSRs using the fair value method is as follows:

(in thousands)
  
2023
    
2022
    
2021
  
Fair value of MSRs, beginning of year
  
$
8,468
    
$
6,774
    
$
4,068
  
New servicing assets created
    
162
      
625
      
2,278
  
Change in fair value during the year due to:
                        
Time decay (1)
    
(430
)
    
(450
)
    
(259
)
Payoffs (2)
    
(347
)
    
(429
)
    
(587
)
Changes in valuation inputs or assumptions (3)
    
(188
)
    
1,948
      
1,274
  
Fair value of MSRs, end of year
  
$
7,665
    
$
8,468
    
$
6,774
  

(1)
Represents decrease in value due to regularly scheduled loan principal payments and partial loan paydowns.
(2)
Represents decrease in value due to loans that paid off during the period.
(3)
Represents change in value resulting from market-driven changes in interest rates.


The fair values of capitalized MSRs were $7.7 million, $8.5 million, and $6.8 million at December 31, 2023, 2022, and 2021, respectively.  Fair values for the years ended December 31, 2023, 2022, and 2021 were determined by third-party valuations with a resulting 10.0% average discount rate in each of the years 2023 and 2022 compared to the 10.1% average discount rate in 2021 and weighted average default rates of 0.95%, 1.24%, and 1.39%, respectively.  Prepayment speeds generated using the Andrew Davidson Prepayment Model averaged 7.5%, 7.1%, and 10.0% at December 31, 2023, 2022, and 2021, respectively.  MSR values are very sensitive to movement in interest rates as expected future net servicing income depends on the projected balance of the underlying loans, which can be greatly impacted by the level of prepayments.  CTBI does not currently hedge against changes in the fair value of our MSR portfolio.