Mortgage Loan Servicing, Origination, and Loans Held for Sale

9 Months Ended

Sep. 30, 2023

Mortgage Loan Servicing, Origination, and Loans Held for Sale

Mortgage Loan Servicing, Origination, and Loans Held for Sale

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

The portfolio of residential mortgages serviced for others, which is not included in the accompanying Consolidated Balance Sheets the portfolio of residential mortgages serviced for others, was $6.6 billion, as of September 30, 2023 and December 31, 2022. 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, 2023 and September 30, 2022 were $4.1 million, $12.4 million, $4.2 million, and $12.1 million, respectively. Servicing fees are recorded in Mortgage Banking Income in our Consolidated Statements of Income.

At September 30, 2023 and December 31, 2022, MSRs were $89.5 million and $86.6 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 Consolidated Statements of Net Income. The market value adjustments related to MSRs recorded in Mortgage Banking Income for the three and nine months ended September 30, 2023 and September 30, 2022 were gains of $1.8 million and $2.5 million, compared with gains of $2.7 million and $18.3 million, respectively. The Company has used various free standing derivative instruments to mitigate the income statement effect of changes in fair value resulting from changes in market value adjustments, in addition 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, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Increase in fair value of MSRs	$	1,762	$	2,661	$	2,450	$	18,274
Decay of MSRs		(2,543)		(2,530)		(6,336)		(8,052)
Loss related to derivatives		(2,170)		(3,572)		(4,288)		(17,963)
Net effect on Consolidated Statements of Net Income	$	(2,951)	$	(3,441)	$	(8,174)	$	(7,741)

The fair value of MSRs is highly sensitive to changes in assumptions and 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 decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. 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 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)	2023			2022
Composition of residential loans serviced for others
Fixed-rate mortgage loans		100.0	%		100.0	%
Adjustable-rate mortgage loans		—	%		—	%
Total		100.0	%		100.0	%
Weighted average life		8.26	years		8.37	years
Constant Prepayment rate (CPR)		6.6	%		6.4	%
Weighted average discount rate		10.6	%		10.0	%
Effect on fair value due to change in interest rates
25 basis point increase	$	686		$	774
50 basis point increase		1,231			1,428
25 basis point decrease		(848)			(902)
50 basis point decrease		(1,877)			(1,938)

The sensitivity calculations above are hypothetical and should not be considered 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. The effects of an adverse variation in a particular assumption on the fair value of the MSRs as disclosed in the table above is calculated without changing any other assumptions. In reality, changes in one factor may result in adjusting other factors, which may magnify or contract the effects of the change.

Whole loan sales were $259.2 million and $667.9 million for the three and nine months ended September 30, 2023, compared to $272.8 million and $1.4 billion for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2023, $210.2 million and $534.3 million, or 81.1% and 80.0%, respectively, were sold with the servicing rights retained by the Company, compared to $216.1 million and $1.1 billion, or 79.2% and 77.2%, respectively, for the three and nine months ended September 30, 2022.

The Company retains no beneficial interests in these sales, but may retain the servicing rights for the loans sold. The risks related to the sold loans with the retained servicing rights due to a representation or warranty violation such as noncompliance with eligibility or servicing requirements, or customer fraud, that should have been identified in a loan file review are disclosed in Note 1 — Summary of Significant Accounting Policies, under the “Loans Held for Sale” section, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The Company is obligated to subsequently repurchase a loan if such representation or warranty violation is identified by the purchaser. The aggregated principal balances of loans repurchased for the nine months ended September 30, 2023 and 2022 were approximately $975,000 and $6,708,000 respectively. There were approximately $6,000 and $73,000 in loss reimbursement and settlement claims paid in the nine months ended September 30, 2023 and 2022.

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 $27.4 million and $29.0 million at September 30, 2023 and December 31, 2022, respectively. Please see Note 15 — Fair Value, under the “Fair Value Option”, section in this Quarterly Report on Form 10-Q for summary of the fair value and the unpaid principal balance of loans held for sale and the changes in fair value of these loans.