Loan Servicing, Mortgage Origination, and Loans Held for Sale

9 Months Ended

Sep. 30, 2021

Loan Servicing, Mortgage Origination, and Loans Held for Sale

Loan Servicing, Mortgage Origination, and Loans Held for Sale

Note 20 — Loan Servicing, Mortgage Origination, and Loans Held for Sale

As of September 30, 2021 and December 31, 2020, the portfolio of residential mortgages serviced for others, which is not included in the accompanying balance sheets, was $6.0 billion and $5.1 billion, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts and disbursing payments to investors. The amount of contractually specified servicing fees we earned during the three and nine months ended September 30, 2021 and September 30, 2020 were $3.8 million, $10.5 million, $2.5 million and $6.8 million, respectively. Servicing fees are recorded in mortgage banking income in our Condensed Consolidated Statements of Income.

At September 30, 2021 and December 31, 2020, MSRs were $60.9 million and $43.8 million on our consolidated balance sheets, respectively. MSRs are recorded at fair value with changes in fair value recorded as a component of mortgage banking income in the Condensed Consolidated Statements of Income. The market value adjustments related to MSRs recorded in mortgage banking income for the three and nine months ended September 30, 2021 and September 30, 2020 were gains of $1.7 million and $7.5 million, compared with gain of $1.0 million and loss of $9.1 million, respectively. We used various free-standing derivative instruments to mitigate the income statement effect of changes in fair value due to changes in market value adjustments and to changes in valuation inputs and assumptions related to MSRs.

See Note 15 — Fair Value for the changes in fair value of MSRs. The following table presents the changes in the fair value of the MSR and offsetting hedge.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Increase (decrease) in fair value of MSRs	$	1,659	$	1,020	$	7,543	$	(9,078)
Decay of MSRs		(3,427)		(2,391)		(11,276)		(5,590)
Gain (loss) related to derivatives		(577)		619		(4,178)		10,915
Net effect on statements of income	$	(2,345)	$	(752)	$	(7,911)	$	(3,753)

The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third-party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates increase, mortgage loan prepayments decelerate due to decreased refinance activity, which results in an increase in the fair value of the MSRs. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time. See Note 15 — Fair Value for additional information regarding fair value.

The characteristics and sensitivity analysis of the MSRs are included in the following table.

	September 30,			December 31,
(Dollars in thousands)	2021			2020
Composition of residential loans serviced for others
Fixed-rate mortgage loans		99.9	%		99.9	%
Adjustable-rate mortgage loans		0.1	%		0.1	%
Total		100.0	%		100.0	%
Weighted average life		7.14	years		6.10	years
Constant Prepayment rate (CPR)		8.9	%		12.3	%
Weighted average discount rate		9.0	%		9.0	%
Effect on fair value due to change in interest rates
25 basis point increase	$	3,906		$	2,744
50 basis point increase		7,442			5,520
25 basis point decrease		(4,040)			(2,497)
50 basis point decrease		(7,660)			(4,114)

The sensitivity calculations in the previous table are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, the effects of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumptions, while in reality, changes in one factor may result in changing another, which may magnify or contract the effect of the change.

Custodial escrow balances maintained in connection with the loan servicing were $65.5 million and $26.6 million at September 30, 2021 and December 31, 2020, respectively.

Whole loan sales were $612.5 million and $2.4 billion for the three and nine months ended September 30, 2021, compared to $1.3 billion and $2 billion for the three and nine months ended September 30, 2020. For the three and nine months ended September 30, 2021, $489.8 million and $1.9 billion, or 80.0% and 79.5% were sold with the servicing rights retained by the Company, compared to $1.1 billion and $1.7 billion, or 87.2% and 86.3%, for the three and nine months ended September 30, 2020.

Loans held for sale have historically been comprised of residential mortgage loans awaiting sale in the secondary market, which generally settle in 15 to 45 days. Loans held for sale were $242.8 million and $290.5 million at September 30, 2021 and December 31, 2020, respectively.