Mortgage Loan Servicing, Origination, and Loans Held for Sale

9 Months Ended

Sep. 30, 2024

Mortgage Loan Servicing, Origination, and Loans Held for Sale

Mortgage Loan Servicing, Origination, and Loans Held for Sale

Note 19 — 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, was $6.7 billion and $6.6 billion, respectively, as of September 30, 2024, and December 31, 2023. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts and disbursing payments to investors. The amounts of contractually specified servicing fees we earned during the three and nine months ended September 30, 2024, and September 30, 2023, were $4.2 million, $12.6 million, $4.1 million, and $12.4 million, respectively. Servicing fees are recorded in Mortgage Banking Income in our Consolidated Statements of Income.

At September 30, 2024, and December 31, 2023, MSRs were $83.5 million and $85.2 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 Income. The market value adjustments related to MSRs recorded in Mortgage Banking Income for the three and nine months ended September 30, 2024, and September 30, 2023, were losses of $5.6 million and $2.3 million compared with gains of $1.8 million and $2.5 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 14 — 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, 2024		September 30, 2023		September 30, 2024		September 30, 2023
(Decrease)/increase in fair value of MSRs	$	(5,560)	$	1,762	$	(2,346)	$	2,450
Decay of MSRs		(2,508)		(2,543)		(6,515)		(6,336)
Gain (loss) related to derivatives		3,815		(2,170)		(189)		(4,288)
Net effect on Consolidated Statements of Income	$	(4,253)	$	(2,951)	$	(9,050)	$	(8,174)

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 14 — 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)	2024			2023
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		7.64	years		8.03	years
Constant Prepayment rate (CPR)		7.8	%		7.0	%
Estimated impact on fair value of a 10% increase	$	(875)		$	(522)
Estimated impact on fair value of a 20% increase		(1,705)			(1,014)
Estimated impact on fair value of a 10% decrease		943			551
Estimated impact on fair value of a 20% decrease		1,957			1,128
Weighted average discount rate		10.6	%		10.7	%
Estimated impact on fair value of a 10% increase	$	(3,230)		$	(3,270)
Estimated impact on fair value of a 20% increase		(6,340)			(6,458)
Estimated impact on fair value of a 10% decrease		3,243			3,242
Estimated impact on fair value of a 20% decrease		6,338			6,283
Effect on fair value due to change in interest rates
25 basis point increase	$	2,110		$	1,647
50 basis point increase		4,156			3,189
25 basis point decrease		(2,160)			(1,723)
50 basis point decrease		(4,266)			(3,501)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the residential MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. The derivative instruments utilized by the Company would serve to reduce the estimated impacts to fair value included in the table above.

Whole loan sales were $329.6 million and $834.8 million for the three and nine months ended September 30, 2024, respectively, compared to $259.2 million and $667.9 million for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2024, $240.3 million and $607 million, or 72.9% and 72.7%, respectively, were sold with the servicing rights retained by the Company, compared to $210.2 million and $534.3 million, or 81.1% and 80.0%, respectively, for the three and nine months ended September 30, 2023.

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, 2023. 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, 2024, and 2023 were approximately $1.9 million and $975,000 respectively. There were approximately $93,000 and $6,000, respectively, in loss reimbursement and settlement claims paid in the nine months ended September 30, 2024 and 2023.

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. Mortgage loans held for sale were $64.9 million and $50.9 million at September 30, 2024, and December 31, 2023, respectively. Please see Note 14 — 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.