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Note 4 - Mortgage Servicing Rights
 6 Months Ended
Jun. 30, 2024
Notes to Financial Statements  
Transfers and Servicing of Financial Assets [Text Block]

NOTE 4 – MORTGAGE SERVICING RIGHTS

 

Loans serviced for others are not included on the Consolidated Balance Sheets. The unpaid principal balance of permanent loans serviced for others was $1.60 billion and $2.83 billion at June 30, 2024 and December 31, 2023, respectively.

 

The following table summarizes MSRs activity at or for the dates indicated:

 

  

At or For the Three Months Ended

 
  

June 30,

 
  

2024

  

2023

 

Beginning balance, at the lower of cost or fair value

 $9,009  $17,599 

Additions

  817   920 

MSRs amortized

  (528)  (894)

Recovery of MSRs

  54   2 

Ending balance, at the lower of cost or fair value

 $9,352  $17,627 

 

  

At or For the Six Months Ended

 
  

June 30,

 
  

2024

  

2023

 

Beginning balance, at the lower of cost or fair value

 $17,176  $18,017 

Additions

  1,393   1,325 

Sales

  (7,953)  — 

MSRs amortized

  (1,225)  (1,715)

Impairment of MSRs

  (39)  — 

Ending balance, at the lower of cost or fair value

 $9,352  $17,627 

 

The fair value of the MSRs’ assets was $20.8 million and $38.2 million at  June 30, 2024 and December 31, 2023, respectively.  Fair value adjustments to MSRs are mainly due to market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates.  A significant change in prepayments of the loans in the MSRs portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of MSRs.

 

The following provides valuation assumptions used in determining the fair value of MSRs at the dates indicated:

 

  

At June 30,

  

At December 31,

 

Key assumptions:

 

2024

  

2023

 

Weighted average discount rate

  10.0%  9.4%

Conditional prepayment rate (“CPR”)

  8.5%  7.2%

Weighted average life in years

  7.9   8.4 

 

Key economic assumptions of the current fair value for single family MSRs are presented in the table below. Also presented is the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four-family FNMA, FHLMC, GNMA, or FHLB serviced home loan. The table below references a 50 basis point and 100 basis point adverse rate change and the impact on prepayment speeds and discount rates at the dates indicated:

 

  

June 30, 2024

  

December 31, 2023

 

Aggregate portfolio principal balance

 $1,598,388  $2,832,016 

Weighted average rate of loans in MSRs portfolio

  4.1%  3.6%

 

At June 30, 2024

 

Base

  

0.5% Adverse Rate Change

  

1.0% Adverse Rate Change

 

Conditional prepayment rate

  8.5%  10.1%  12.4%

Fair value MSRs

 $20,788  $20,062  $19,188 

Percentage of MSRs

  1.3%  1.3%  1.2%
             

Discount rate

  10.0%  10.5%  11.0%

Fair value MSRs

 $20,788  $20,340  $19,910 

Percentage of MSRs

  1.3%  1.3%  1.2%

 

At December 31, 2023

 

Base

  

0.5% Adverse Rate Change

  

1.0% Adverse Rate Change

 

Conditional prepayment rate

  7.2%  8.0%  9.3%

Fair value MSRs

 $38,163  $37,268  $35,819 

Percentage of MSRs

  1.3%  1.3%  1.3%
             

Discount rate

  9.4%  9.9%  10.4%

Fair value MSRs

 $38,163  $37,301  $36,476 

Percentage of MSRs

  1.3%  1.3%  1.3%

 

These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSRs which is extremely sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on the fair value of MSRs. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of MSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance, however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of the fair value of MSRs is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different time.

 

The Company recorded $1.1 million and $1.8 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for the three months ended June 30, 2024 and 2023, respectively, and $2.5 million and $3.6 million for the six months ended  June 30, 2024 and 2023. The income, net of amortization of MSRs, is reported in “Service charges and fee income” on the Consolidated Statements of Income.