Mortgage Servicing

12 Months Ended

Dec. 31, 2012

Mortgage Servicing [Abstract]

Mortgage Servicing

8. Mortgage Servicing

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 the Federal Home Loan Mortgage Corporation ("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 mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The balance of capitalized mortgage servicing rights, net of a valuation allowance, included in other assets at December 31, 2012, and 2011 was $542,000 and $768,000, respectively. For the same periods, the fair value of the mortgage servicing rights was approximated $879,000 and $1.1 million, respectively. In evaluating the reasonableness of the carrying values of the mortgage servicing rights, 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 4.86%. 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.

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

	2012			2011			2010
Mortgage Servicing Rights:
Balance at beginning of year	$	768		$	898		$	810
Capitalized upon sale		153			204			308
Amortization charged against mortgage servicing fee income		(349	)		(310	)		(235	)
Valuation adjustment		(30	)		(24	)		15
Balance at end of year	$	542		$	768		$	898
Valuation Allowance:
Balance at beginning of year	$	(43	)	$	(19	)	$	(34	)
Increase in impairment reserve		(174	)		(33	)		(43	)
Reduction of impairment reserve		144			9			58
Balance at end of year	$	(73	)	$	(43	)	$	(19	)

Mortgage loans serviced for Freddie Mac are not included in the accompanying Consolidated Statements of Condition. Loans serviced for Freddie Mac totaled $156.1 million, $178.0 million and $179.6 million at December 31, 2012, 2011 and 2010, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing for Freddie Mac, and included in demand deposits, were $449,000 and $429,000 at December 31, 2012 and 2011, respectively.

In 2012 and 2010, the Company expanded its loan servicing business with the Maine State Housing Authority ("MaineHousing") to add approximately 950 and 6,000 mortgage loans, respectively. MaineHousing loans, which are not included in the accompanying Consolidated Statements of Condition, totaled $650.6 million and $709.6 million at December 31, 2012 and 2011, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing for MaineHousing and included in demand deposits were $5.4 million and $5.8 million at December 31, 2012 and 2011, respectively.