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Note 4 - Mortgage Servicing Rights
 9 Months Ended
Sep. 30, 2025
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 residential mortgage loans serviced for others was $1.64 billion and $1.63 billion at  September 30, 2025 and December 31, 2024, respectively.

 

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

 

  

At or For the Three Months Ended

 
  

September 30,

 
  

2025

  

2024

 

Beginning balance, at the lower of cost or fair value

 $8,652  $9,352 

Additions

  510   498 

MSRs amortized

  (662)  (605)

Recovery (impairment) of MSRs

  6   (506)

Ending balance, at the lower of cost or fair value

 $8,506  $8,739 

 

  

At or For the Nine Months Ended

 
  

September 30,

 
  

2025

  

2024

 

Beginning balance, at the lower of cost or fair value

 $9,204  $17,176 

Additions

  1,242   1,891 

Sales

  —   (7,953)

MSRs amortized

  (1,917)  (1,830)

Impairment of MSRs

  (23)  (545)

Ending balance, at the lower of cost or fair value

 $8,506  $8,739 

 

The fair value of the MSRs’ assets was $21.7 million and $21.0 million at  September 30, 2025 and December 31, 2024, 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.

 

Key economic assumptions of the current fair value for single family MSRs are presented in the table below. Also shown is the sensitivity of the MSR portfolio to changes in market interest rates on the underlying loans, expressed as the impact on prepayment speeds and discount rates.  The table presents the estimated decline in fair value assuming a 10% and 20% adverse change in market interest rates.  Two sets of sensitivities are provided: (i) prepayment-only sensitivity, reflecting the impact of the interest rate change on prepayment speeds, holding discount rates constant; and (ii) combined sensitivity reflecting the impact of the interest rate change on both prepayment speeds and the discount rate used to value the MSRs.

 

  September 30,  December 31, 
  

2025

  

2024

 

Aggregate portfolio principal balance

 $1,639,890  $1,632,141 

Weighted average rate of loans in MSRs portfolio

  4.4%  4.2%

Fair value MSRs

 $21,691  $21,043 

Weighted average life in years

  7.8   7.9 

Weighted average constant prepayment rate

  8.3%  8.3%

Decline in fair value from 10% adverse change (prepayment-only)

 $715  $408 

Decline in fair value from 20% adverse change (prepayment-only)

 $1,075  $776 

Effective discount rate

  9.1%  10.2%

Decline in fair value from 10% adverse change (prepayment + discount rate)

 $901  $911 

Decline in fair value from 20% adverse change (prepayment + discount rate)

 $1,733  $1,819 

 

 

 

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 of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for both the three months ended September 30, 2025 and 2024, and $3.3 million and $3.6 million for the nine months ended  September 30, 2025 and 2024, respectively. The income, net of amortization of MSRs, is reported in “Service charges and fee income” on the Consolidated Statements of Income.