8. Mortgage Banking

Net revenues from the sales and servicing of mortgage loans consisted of the following:

	Years Ended December 31
	2014		2013		2012
	(In Thousands)
Gain from sale of mortgage loans	$	3,335	$	5,716	$	10,599
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue		3,552		3,564		3,387
Amortization of mortgage servicing rights		(1,401)		(2,098)		(3,562)
Mortgage servicing rights valuation adjustments		116		1,261		(759)
		2,267		2,727		(934)
Net revenue from sale and servicing of mortgage loans	$	5,602	$	8,443	$	9,665

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.35 billion at December 31, 2014 and $1.37 billion at December 31, 2013.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows:

	Years Ended December 31
	2014		2013		2012
	(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,133	$	10,121	$	10,219
Loans sold, servicing retained		1,191		2,110		3,464
Amortization		(1,401)		(2,098)		(3,562)
Carrying value before valuation allowance at end of period		9,923		10,133		10,121

Valuation allowance:
Balance at beginning of period		(1,027)		(2,288)		(1,529)
Impairment recovery (charges)		116		1,261		(759)
Balance at end of period		(911)		(1,027)		(2,288)
Net carrying value of MSRs at end of period	$	9,012	$	9,106	$	7,833
Fair value of MSRs at end of period	$	9,304	$	9,686	$	7,833

Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced.

The Company established an accrual for secondary market buy-backs totaling $359,000 for 2014, which was partially offset by reversing $67,000 of accrued expenses in the first quarter of 2014 related to the Freddie Mac post-foreclosure review that began in the third quarter of 2013 and was reversed in 2014 with no losses resulting. This resulted in secondary market buy-back expense of $298,000 for the full year of 2014 compared to $597,000 and $73,000 of expense for the same period in 2013 and 2012, respectively.

The Company’s servicing portfolio is comprised of the following:

	December 31
	2014			2013
	Number of	Principal		Number of	Principal
Investor	Loans	Outstanding		Loans	Outstanding
	(In Thousands)
Fannie Mae	5,215	$	503,369	5,304	$	527,666
Freddie Mac	8,911		828,724	8,873		829,594
Federal Home Loan Bank	118		12,972	116		12,093
Other	23		1,573	26		1,888
Totals	14,267	$	1,346,638	14,319	$	1,371,241

Custodial escrow balances maintained in connection with serviced loans were $10.9 million and $10.4 million at December 31, 2014 and 2013, respectively.

Significant assumptions at December 31, 2014 used in determining the value of MSRs include a weighted average prepayment speed assumption (“PSA”) of 209 and a weighted average discount rate of 10.04%. Significant assumptions at December 31, 2013 used in determining the value of MSRs include a weighted average prepayment rate of 212 PSA and a weighted average discount rate of 10.04%.

A sensitivity analysis of the current fair value to immediate 10% and 20% adverse changes in those assumptions as of December 31, 2014 is presented below. These sensitivities are hypothetical. Changes in fair value based on 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSR is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the discount rates), which might magnify or counteract the sensitivities.

	10% Adverse		20% Adverse
	Change		Change
	(In Thousands)
Assumption:
Decline in fair value from increase in prepayment rate	$	358	$	759
Declines in fair value from increase in discount rate		224		492