SERVICING RIGHTS

3 Months Ended

Mar. 31, 2023

SERVICING RIGHTS

SERVICING RIGHTS

NOTE 5 – 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 $2.78 billion at both March 31, 2023 and December 31, 2022.

The following table summarizes mortgage servicing rights (“MSR”) activity at or for the dates indicated:

	At or For the Three Months Ended
	March 31,
	2023		2022
Beginning balance, at the lower of cost or fair value	$	18,017	$	16,970
Additions		405		2,550
MSR amortized		(821)		(1,480)
(Impairment) recovery of servicing rights		(2)		1
Ending balance, at the lower of cost or fair value	$	17,599	$	18,041

The fair value of the servicing rights’ assets was $35.3 million and $35.5 million at March 31, 2023 and December 31, 2022, respectively. Fair value adjustments to servicing rights 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 servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of servicing rights.

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

	At March 31,		At December 31,
Key assumptions:	2023		2022
Weighted average discount rate	9.1	%	9.6	%
Conditional prepayment rate (“CPR”)	8.4	%	8.2	%
Weighted average life in years	7.7		7.8

Key economic assumptions of the current fair value for single family MSR 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:

				March 31, 2023			December 31, 2022
Aggregate portfolio principal balance				$	2,780,262		$	2,783,458
Weighted average rate of note					3.4	%		3.4	%
At March 31, 2023	Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
Conditional prepayment rate		8.4	%		9.1	%		10.1	%
Fair value MSR	$	35,274		$	34,613		$	33,854
Percentage of MSR		1.3	%		1.2	%		1.2	%
Discount rate		9.1	%		9.6	%		10.1	%
Fair value MSR	$	35,274		$	34,512		$	33,781
Percentage of MSR		1.3	%		1.2	%		1.2	%
At December 31, 2022	Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
Conditional prepayment rate		8.2	%		8.6	%		9.3	%
Fair value MSR	$	35,478		$	34,997		$	34,188
Percentage of MSR		1.3	%		1.3	%		1.2	%
Discount rate		9.6	%		10.1	%		10.6	%
Fair value MSR	$	35,478		$	34,715		$	33,984
Percentage of MSR		1.3	%		1.2	%		1.2	%

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 MSR which is highly 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 MSR. 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 MSR 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 MSR 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 $1.8 million and $1.7 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for the three months ended March 31, 2023 and 2022, respectively.  The

income, net of MSR amortization, is reported in “Service charges and fee income” on the Consolidated Statements of Income.