Mortgage Servicing

12 Months Ended

Dec. 31, 2014

Residential real estate mortgages are originated by the Company both for its portfolio and for sale into the secondary market. The Company may sell its loans to institutional investors such as Freddie Mac. Under loan sale and servicing agreements with the investor, the Company generally continues to service the residential real estate mortgages. The Company pays the investor an agreed-upon rate on the loan, which is less than the interest rate received from the borrower. The Company retains the difference as a fee for servicing the residential real estate mortgages. The Company capitalizes MSRs at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and quarterly assesses the asset for impairment. The balance of capitalized MSRs, net of a valuation allowance, included in other assets on the consolidated statements of condition at December 31, 2014 and 2013 was $493,000 and $726,000, respectively. For the same periods, the fair value of MSRs was $1.4 million and $1.5 million, respectively. In evaluating the reasonableness of the carrying values of the MSRs, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes a variety of assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a three-month moving average of weekly prepayment data published by the Public Securities Association and modeled against the serviced loan portfolio by the third party valuation specialist. The discount rate is the quarterly average 10-year U.S. Treasury rate plus 4.77%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of the mortgage servicing rights, as well as write-offs of capitalized rights due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income. Mortgage servicing fee income, net of amortization and write-offs, for the years ended December 31, 2014, 2013, and 2012 was $251,000, $679,000, and $320,000, respectively. Mortgage servicing fee income is presented in mortgage banking income, net on the consolidated statements of income. Also included within mortgage banking income, net on the consolidated statements of income is the net gains or losses recognized upon the sale of originated mortgage loans to Freddie Mac. For the years ended December 31, 2014, 2013, and 2012, the Company sold $799,000, $33.3 million, and $16.9 million of fixed rate residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans of $31,000, $728,000, and $268,000, respectively.

The following summarizes MSRs capitalized and amortized, along with the activity in the related valuation allowance:



	2014			2013			2012
MSRs:
Balance at beginning of year	$	726		$	542		$	768
Capitalized upon sale	15			466			153
Amortization charged against mortgage servicing fee income	(262		)	(340		)	(349		)
Valuation adjustment	14			58			(30		)
Balance at end of year	$	493		$	726		$	542
Valuation Allowance:
Balance at beginning of year	$	(15	)	$	(73	)	$	(43	)
Increase in impairment reserve	—			(34		)	(174		)
Reduction of impairment reserve	14			92			144
Balance at end of year	$	(1	)	$	(15	)	$	(73	)
Fair value, beginning of year⁽¹⁾	$	1,494		$	879		$	1,138
Fair value, end of year⁽¹⁾	1,447			1,494			879

(1) Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.

Mortgage loans serviced for Freddie Mac are not included in the accompanying consolidated statements of condition. Mortgage loans serviced for Freddie Mac at December 31, 2014, 2013 and 2012 were $141.1 million, $157.9 million and $156.1 million, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing for Freddie Mac, and included in demand deposits, were $484,000 and $518,000 at December 31, 2014 and 2013, respectively.

While not capitalized as MSRs, the Company serves as the primary servicer of loans originated by MaineHousing. The Company has entered into a contract with MaineHousing to perform loan servicing on the MaineHousing portfolio for a fee. For the years ended December 31, 2014, 2013, and 2012, the Company earned fees of $1.2 million, $1.1 million, and $1.2 million, respectively, for the servicing of MaineHousing loans included in other income on the consolidated statements of income. The MaineHousing loans serviced by the Company, which are not included in the accompanying consolidated statements of condition, totaled $585.3 million, $614.4 million, and $650.6 million at December 31, 2014, 2013 and 2012, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing for MaineHousing and included in demand deposits were $5.3 million at December 31, 2014 and 2013.

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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