Servicing Assets

12 Months Ended

Dec. 31, 2022

Transfers and Servicing [Abstract]

Servicing Assets

Servicing Assets

The Corporation sells certain residential mortgage loans and the guaranteed portion of certain SBA loans to third parties and retains servicing rights and receives servicing fees. All such transfers are accounted for as sales. When the Corporation sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the contractual servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized.

Residential Mortgage Loans

The related MSR asset is amortized over the period of the estimated future net servicing life of the underlying assets. MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR. The Corporation serviced $1.0 billion of residential mortgage loans as of December 31, 2022 and 2021. During the year ended December 31, 2022 the Corporation recognized servicing fee income of $2.6 million compared to $2.0 million, during the year ended December 31, 2021.

Changes in the MSR balance are summarized as follows:

	Year Ended December 31,
(dollars in thousands)	2022		2021
Balance at beginning of the period	$	10,756	$	4,647
Servicing rights capitalized	668		6,769
Amortization of servicing rights	(1,488)		(1,087)
Change in valuation allowance	6		427
Balance at end of the period	$	9,942	$	10,756

Activity in the valuation allowance for MSRs was as follows:

	Year Ended December 31,
(dollars in thousands)	2022		2021
Valuation allowance, beginning of period	$	(8)	$	(435)
Impairment	(4)		—
Recovery	10		427
Valuation allowance, end of period	$	(2)	$	(8)

The Corporation uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds and discount rates. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At December 31, 2022, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 8.05% and a discount rate equal to 9.50%. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.23% and a discount rate equal to 9.00%. As interest rates increased and the number of mortgage refinancings have declined, model inputs have been adjusted to align the MSRs fair value with market conditions.

The sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

(dollars in thousands)	December 31, 2022			December 31, 2021
Fair value of residential mortgage servicing rights	$	11,567		$	11,241
Weighted average life (months)	22			11
Prepayment speed	8.05		%	7.23		%
Impact on fair value:
10% adverse change	$	(268)		$	(376)
20% adverse change	(525)			(731)
Discount rate	9.50		%	9.00		%
Impact on fair value:
10% adverse change	$	(404)		$	(436)
20% adverse change	(777)			(840)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a articular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

SBA Loans

SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced $166.1 million and $115.1 million of SBA loans, as of December 31, 2022 and December 31, 2021, respectively.

Changes in the SBA loan servicing asset balance are summarized as follows:

	Year Ended December 31,
(dollars in thousands)	2022		2021
Balance at beginning of the period	$	2,009	$	970
Servicing rights capitalized	1,395		1,488
Amortization of servicing rights	(732)		(392)
Change in valuation allowance	(268)		(57)
Balance at end of the period	$	2,404	$	2,009

Activity in the valuation allowance for SBA loan servicing assets was as follows:

	Year Ended December 31,
(dollars in thousands)	2022		2021
Valuation allowance, beginning of period	$	(96)	$	(39)
Impairment	(408)		(57)
Recovery	140		—
Valuation allowance, end of period	$	(364)	$	(96)

The Corporation uses assumptions and estimates in determining the fair value of SBA loan servicing rights. These assumptions include prepayment speeds, discount rates, and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At December 31, 2022, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 12.73% and a discount rate equal to 18.96%. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 12.38% and a discount rate equal to 9.01%. The change in

valuation allowance due to impairment noted in the tables above, was largely due to the increases in discount rate and prepayment speed as a result of the rising interest rate environment and depressed market pricing on sales of such loans.

The sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

(dollars in thousands)	December 31, 2022			December 31, 2021
Fair value of SBA loan servicing rights	$	2,422		$	2,107
Weighted average life (years)	3.8			3.8
Prepayment speed	12.73		%	12.38		%
Impact on fair value:
10% adverse change	$	(73)		$	(69)
20% adverse change	(141)			(132)
Discount rate	18.96		%	9.01		%
Impact on fair value:
10% adverse change	$	(53)		$	(54)
20% adverse change	(104)			(106)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.