Quarterly report pursuant to Section 13 or 15(d)

MORTGAGE BANKING ACTIVITIES

v3.20.2
MORTGAGE BANKING ACTIVITIES
9 Months Ended
Sep. 30, 2020
Mortgage Banking Activities [Abstract]  
Mortgage Banking Activities

NOTE 4 – MORTGAGE BANKING ACTIVITIES

 

Pursuant to the Brand acquisition on March 1, 2020, the Company’s mortgage banking activities at its subsidiary Capital City Homes Loans have expanded to include mandatory delivery loan sales, forward sales contracts used to manage residential loan pipeline price risk, utilization of warehouse lines to fund secondary market residential loan closings, and residential mortgage servicing. Information provided below reflects CCHL activities post acquisition for the period March 1, 2020 to September 30, 2020 and CCB legacy residential real estate activities for the period January 1, 2020 to March 1, 2020.

 

Residential Mortgage Loan Production

 

The Company originates, markets, and services conventional and government-sponsored residential mortgage loans. Generally, conforming fixed rate residential mortgage loans are held for sale in the secondary market and non-conforming and adjustable-rate residential mortgage loans may be held for investment. The volume of residential mortgage loans originated for sale and secondary market prices are the primary drivers of origination revenue.

 

Residential mortgage loan commitments are generally outstanding for 30 to 90 days, which represents the typical period from commitment to originate a residential mortgage loan to when the closed loan is sold to an investor. Residential mortgage loan commitments are subject to both credit and price risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Price risk is primarily related to interest rate fluctuations and is partially managed through forward sales of residential mortgage-backed securities (primarily to-be announced securities, or TBAs) or mandatory delivery commitments with investors.

 

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values are set- forth below.

 

 

September 30, 2020

 

 

Unpaid Principal

 

 

 

(Dollars in Thousands)

 

Balance/Notional

 

Fair Value

Residential Mortgage Loans Held for Sale

 

$

111,947

 

$

116,561

Residential Mortgage Loan Commitments ("IRLCs")(1)

 

 

192,935

 

 

6,031

Forward Sales Contracts(2)

 

 

210,500

 

 

(400)

 

 

 

 

 

$

122,192

 

 

 

 

 

 

 

(1)Recorded in other assets at fair value

 

 

 

 

 

 

(2)Recorded in other liabilities at fair value

 

 

 

 

 

 

Residential mortgage loans held for sale that were 90 days or more outstanding or on nonaccrual totaled $0.5 million at September 30, 2020.

 

Mortgage banking revenue was as follows:

 

 

Three Months Ended

 

Nine Months Ended

(Dollars in Thousands)

 

September 30, 2020

 

September 30, 2020

Net realized gains on sales of mortgage loans

 

$

21,423

 

$

39,410

Net change in unrealized gain on mortgage loans held for sale

 

 

1,499

 

 

3,329

Net change in the fair value of mortgage loan commitments (IRLCs)

 

 

691

 

 

3,833

Net change in the fair value of forward sales contracts

 

 

560

 

 

791

Pair-Offs on net settlement of forward sales contracts

 

 

(3,049)

 

 

(7,445)

Mortgage servicing rights additions

 

 

763

 

 

2,813

Net origination fees

 

 

1,096

 

 

2,902

Total mortgage banking revenues

 

$

22,983

 

$

45,633

Residential Mortgage Servicing

 

The Company may retain the right to service residential mortgage loans sold. The unpaid principal balance of loans serviced for others is the primary driver of servicing revenue.

 

The following represents a summary of mortgage servicing rights.

(Dollars in Thousands)

 

September 30, 2020

Number of residential mortgage loans serviced for others

 

 

1,544

Outstanding principal balance of residential mortgage loans serviced for others

 

$

409,801

Weighted average interest rate

 

 

3.73%

Remaining contractual term (in months)

 

 

321

Conforming conventional loans serviced by the Company are sold to FNMA on a non-recourse basis, whereby foreclosure losses are generally the responsibility of FNMA and not the Company. The government loans serviced by the Company are secured through GNMA, whereby the Company is insured against loss by the Federal Housing Administration or partially guaranteed against loss by the Veterans Administration. At September 30, 2020, the servicing portfolio balance consisted of the following loan types: FNMA (59%), GNMA (14%), and private investor (27%). FNMA and private investor loans are structured as actual/actual payment remittance.

 

Activity in the capitalized mortgage servicing rights for the nine month period ended September 30, 2020 was as follows:

(Dollars in Thousands)

 

Beginning balance

$

910

Additions due to loans sold with servicing retained

 

2,813

Deletions and amortization

 

(375)

Ending balance

$

3,348

The Company did not record any permanent impairment losses on mortgage servicing rights for the nine month period ended September 30, 2020.

 

At September 30, 2020, the key unobservable inputs used in determining the fair value of the Company’s mortgage servicing rights were as follows:

 

Minimum

 

 

Maximum

Discount rates

 

11.00%

 

 

15.00%

Annual prepayment speeds

 

9.54%

 

 

21.24%

Cost of servicing (basis points)

 

90

 

 

110

Changes in residential mortgage interest rates directly affect the prepayment speeds used in valuing the Company’s mortgage servicing rights. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors. The weighted average annual prepayment speed was 14.64% at September 30, 2020.

 

 

Warehouse Line Borrowings

 

The Company has the following warehouse lines of credit and master repurchase agreements with various financial institutions at September 30, 2020.

 

Amounts

(Dollars in Thousands)

Outstanding

$25 million warehouse line of credit agreement expiring October 2020. Interest is at LIBOR plus 2.25%, with a floor rate of 3.50%. A cash pledge deposit of $0.1 million is required by the lender.(1)

$

23,860

 

 

 

$50 million master repurchase agreement without defined expiration. Interest is at the LIBOR plus 2.24% to 3.00%, with a floor rate of 3.25%. A cash pledge deposit of $0.5 million is required by the lender.

 

41,528

 

 

 

$50 million warehouse line of credit agreement expiring in September 2020. Interest is at the LIBOR plus 2.25%.(2)

 

19,585

 

 

 

 

$

84,973

(1) In October 2020, the warehouse line was extended to November 15, 2020 with a $40 million line of credit.

(2) In October 2020, the warehouse line was renewed through September 30, 2021 with an interest rate of LIBOR plus 2.75%.

 

Warehouse line borrowings are classified as short-term borrowings. At September 30, 2020, the Company had mortgage loans held for sale pledged as collateral under the above warehouse lines of credit and master repurchase agreements. The above agreements also contain covenants which include certain financial requirements, including maintenance of minimum tangible net worth, minimum liquid assets, maximum debt to net worth ratio and positive net income, as defined in the agreements. The Company was in compliance with all significant debt covenants at September 30, 2020.

 

The Company intends to renew the warehouse lines of credit and master repurchase agreements when they mature.

 

The Company has extended a $30 million warehouse line of credit to CCHL, a 51% owned subsidiary entity. Balances and transactions under this line of credit are eliminated in the Company’s consolidated financial statements and thus not included in the total short term borrowings noted on the consolidated statement of financial condition. The balance of this line of credit at September 30, 2020 was $22.8 million.