Mortgage Servicing Rights

3 Months Ended

Mar. 31, 2023

7. MORTGAGE SERVICING RIGHTS

Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The value of mortgage servicing rights (“MSRs”) is included on the Company’s Consolidated Balance Sheets.

The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“MSRs”) at fair value, if practicable. For subsequent measurement purposes, the Company measures servicing assets and liabilities based on the lower of cost or market using the amortization method. MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of the MSRs is analyzed periodically and is adjusted to reflect changes in prepayment rates and other estimates.

The Company evaluates potential impairment of MSRs based on the difference between the carrying amount and current estimated fair value of the servicing rights. In determining impairment, the Company aggregates all servicing rights and stratifies them into tranches based on predominant risk characteristics. If impairment exists, a valuation allowance is established for any excess of amortized cost over the current estimated fair value by a charge to income. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.

Service fee income is recorded for fees earned for servicing mortgage loans under servicing agreements with the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and certain private investors. The fees are based on a contractual percentage of the outstanding principal balance of the loans serviced and are recorded in noninterest income. Amortization of MSRs and mortgage servicing costs are charged to expense when incurred.

The unpaid principal balances of loans serviced for others were approximately $3,280,741 at March 31, 2023 and $3,381,485 at December 31, 2022.

The estimated fair value of the mortgage servicing rights was $39,699 and $41,880 at March 31, 2023 and December 31, 2022, respectively. The estimated fair value of servicing rights at March 31, 2023 was determined using a net servicing fee of 0.25%, average discount rates ranging from 9.54% to 11.63% with a weighted average discount rate of 10.60%, average constant prepayment rates (“CPR”) ranging from 5.32% to 6.25% with a weighted average prepayment rate of 5.79%, depending upon the stratification of the specific servicing right, and a delinquency rate, including loans on forbearance of 1.83%. The estimated fair value of servicing rights at December 31, 2022 was determined using a net servicing fee of 0.25%, average discount rates ranging from 10.50% to 10.74% with a weighted average discount rate of 10.62%, average CPR ranging from 5.66% to 7.62% with a weighted average prepayment rate of 6.30%, depending upon the stratification of the specific servicing right, and a delinquency rate, including loans on forbearance of 2.19%. Please refer to Note 13 in these Notes to Consolidated Financial Statements for additional information concerning the fair value of MSRs.

The following presents the activity in mortgage servicing rights, including their valuation allowance for the three months ended March 31, 2023 and 2022:


	Three Months Ended March 31, 2023			Three Months Ended March 31, 2022
MSRs beginning balance	$	21,022		$	24,027
Amount sold		(235	)		0
Amount capitalized		145			687
Amount amortized		(945	)		(1,625	)

MSRs ending balance	$	19,987		$	23,089

MSRs valuation allowance beginning balance	$	0		$	(883	)
Aggregate additions charged and recoveries credited to operations		0			883
MSRs impairment		0			0

MSRs valuation allowance ending balance	$	0		$	0

MSRs, net of valuation allowance	$	19,987		$	23,089

The Company did not record any temporary impairments on mortgage servicing rights for the three months ended March 31, 2023 and 2022.

The estimated amortization expense is based on current information regarding future loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.