Mortgage Servicing Assets

6 Months Ended

Jun. 30, 2011

Mortgage Servicing Assets.

Mortgage Servicing Assets

Note 6. Mortgage Servicing Assets

We recognize the rights to service residential mortgage loans for others as separate assets, whether the servicing rights are acquired through a separate purchase or through the sale of originated loans with servicing rights retained.  We allocate a portion of the total proceeds of a mortgage loan to servicing rights based on the fair value.  The unpaid principal balance of residential mortgage loans serviced for third parties was $1.07 billion and $1.08 billion at June 30, 2011 and December 31, 2010, respectively.

Mortgage servicing assets are evaluated for impairment.  For purposes of impairment measurement, mortgage servicing assets are stratified based on the predominant risk characteristics of the underlying servicing, principally by loan type and interest rate.  If temporary impairment exists within a tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the fair value.  If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced through a recovery of income.

Changes in the carrying value of mortgage servicing assets and the associated valuation allowance follow:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2011			2010			2011			2010
Mortgage servicing assets:
Balance at beginning of period	$	6,968		$	8,116		$	7,556		$	8,749
Additions	175			970			321			1,541
Amortization	(724		)	(700		)	(1,458		)	(1,461		)
Sales	—			(218		)	—			(661		)
Carrying value before valuation allowance at end of period	6,419			8,168			6,419			8,168
Valuation allowance:
Balance at beginning of period	(5		)	—			—			(1		)
Impairment (charges) recoveries	(11		)	(971		)	(16		)	(970		)
Balance at end of period	$	(16	)	$	(971	)	$	(16	)	$	(971	)
Net carrying value of mortgage servicing assets at end of period	$	6,403		$	7,197		$	6,403		$	7,197
Fair value of mortgage servicing assets at end of period	$	10,241		$	7,489		$	10,241		$	7,489

During the six months ended June 30, 2011 and 2010, management determined that it was not necessary to permanently write-down any previously established valuation allowance.  At June 30, 2011 and 2010, the fair value of mortgage servicing assets exceeded the carrying value reported in the consolidated statement of financial condition by $3.84 million and $0.29 million, respectively.  This difference represents increases in the fair value of certain mortgage servicing assets that could not be recorded above cost basis.

The key economic assumptions used to estimate the fair value of the mortgage servicing rights follow:

	June 30,
	2011		2010
Expected weighted-average life (in years)	3.48		3.56
Weighted-average constant prepayment rate (CPR)	16.74	%	29.46	%
Weighted-average discount rate	9.30	%	8.99	%

Mortgage loan contractual servicing fees, including late fees and ancillary income, were $1.03 million and $0.96 million for the three months ended June 30, 2011 and 2010, respectively.  Mortgage loan contractual servicing fees, including late fees and ancillary income, were $2.05 million and $1.98 million for the six months ended June 30, 2011 and 2010, respectively.  Mortgage loan contractual servicing fees are included in mortgage banking income in the consolidated statements of income.