MORTGAGE OPERATIONS

3 Months Ended

Mar. 31, 2022

MORTGAGE OPERATIONS [Abstract]

MORTGAGE OPERATIONS

5.  MORTGAGE OPERATIONS

Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control.  Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings.  Retained servicing rights on loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer.  Fair values are estimated using discounted cash flows based on a current market interest rate.

The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold and servicing is retained.  The Company sold a substantial portion of its portfolio of conforming long-term residential mortgage loans originated during the three months ended March 31, 2022 on a servicing retained basis, for cash proceeds equal to the fair value of the loans.  At March 31, 2022, and December 31, 2021, the Company serviced real estate mortgage loans for others totaling $206,758,000 and $208,169,000, respectively.

The recorded value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues.  The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates.  Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions.  The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value.  Impairment, if any, is recognized through a valuation allowance for each individual stratum.  Changes in the carrying amount of mortgage servicing rights are reported in earnings under other operating income on the condensed consolidated statements of income.

Key assumptions used in measuring the fair value of mortgage servicing rights as of March 31, 2022 and December 31, 2021 were as follows:

	March 31, 2022			December 31, 2021
Constant prepayment rate		10.16	%		15.73	%
Discount rate		9.50	%		9.50	%
Weighted average life (years)		6.31			4.95

The following table summarizes the Company’s mortgage servicing rights assets as of March 31, 2022 and December 31, 2021. Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets:

	(in thousands)
	December 31, 2021			Additions		Reductions			March 31, 2022
Mortgage servicing rights	$	1,807		$	60	$	(82	)	$	1,785
Valuation allowance		(276	)		—		276			—
Mortgage servicing rights, net of valuation allowance	$	1,531		$	60	$	194		$	1,785

At March 31, 2022 and December 31, 2021, the estimated fair market value of the Company’s mortgage servicing rights asset was $1,885,000 and $1,531,000, respectively.  The changes in fair value of mortgage servicing rights during 2022 was primarily due to changes in prepayment speeds.

The Company received contractually specified servicing fees of $130,000 and $134,000 for the three months ended March 31, 2022 and March 31, 2021, respectively.  Loan servicing income on the condensed consolidated statements of income include contractually specified servicing fees, mortgage servicing rights additions, amortization and changes in the valuation allowance.