24.               MORTGAGE SERVICING RIGHTS

 

The Company follows the authoritative guidance under ASC 860-50 - Servicing Assets and Liabilities to account for its MSRs.  The Company has elected the fair value measurement method to value its existing mortgage servicing assets at fair value in accordance with ASC 860-50.  Under the fair value measurement method, the Company records its MSRs on its consolidated statements of financial condition as a component of other assets at fair value with changes in fair value recorded as a component of service charges and other income in the Company’s consolidated statements of income for each period.  As of December 31, 2013 and December 31, 2012, the Company serviced $158.0 million and $169.2 million of residential mortgage loans, respectively.  During the years ended December 31, 2013, 2012 and 2011, the Company recognized $410 thousand, $324 thousand, and $107 thousand of servicing fee income, respectively.

 

The following is an analysis of the activity in the Company’s residential MSRs for the years ended December 31, 2013, 2012 and 2011:

 

		Residential
		Mortgage Servicing Rights
		For the Year Ended December 31,
(Dollars in thousands)		2013			2012			2011
Balance, January 1,		$	1,302		$	647		$	268
Additions		150			948			507
Increase/(decrease) in fair value due to
changes in valuation input or assumptions		270			(215		)	(73		)
Paydowns		(198		)	(78		)	(55		)
Balance, December 31,		$	1,524		$	1,302		$	647

 

The Company uses assumptions and estimates in determining the fair value of MSRs.  These assumptions include prepayment speeds, discount rates, escrow earnings rates and other assumptions.  The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge.  At December 31, 2013, the key assumptions used to determine the fair value of the Company’s MSRs included a lifetime constant prepayment rate equal to 9.71%, a discount rate equal to 10.00% and an escrow earnings credit rate equal to 1.54%.  At December 31, 2012, the key assumptions used to determine the fair value of the Company’s MSRs included a lifetime constant prepayment rate equal to 16.28%, a discount rate equal to 8.50% and an escrow earnings credit rate equal to 0.81%.

 

At December 31, 2013, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

 

		Residential
		Mortgage Servicing Rights
(Dollars in thousands)		December 31, 2013
Fair value of residential mortgage servicing rights		$	1,524
Weighted average life (years)		6
Prepayment speed
Effect on fair value of a 20% increase		$	(101	)
Effect on fair value of a 10% increase		(52		)
Effect on fair value of a 10% decrease		57
Effect on fair value of a 20% decrease		117
Discount rate
Effect on fair value of a 20% increase		$	(106	)
Effect on fair value of a 10% increase		(54		)
Effect on fair value of a 10% decrease		59
Effect on fair value of a 20% decrease		122
Escrow earnings credit
Effect on fair value of a 20% increase		$	32
Effect on fair value of a 10% increase		16
Effect on fair value of a 10% decrease		(14		)
Effect on fair value of a 20% decrease		(32		)

 

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance.  As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.  Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.