MORTGAGE OPERATIONS

9 Months Ended

Sep. 30, 2014

3.	MORTGAGE OPERATIONS

Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Retained interests (mortgage servicing rights) in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interests, if any, based on their relative fair value at the date of transfer. Fair values are estimated using discounted cash flows based on a current market interest rate.

The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The Company sold substantially its entire portfolio of conforming long-term residential mortgage loans originated during the nine months ended September 30, 2014 for cash proceeds equal to the fair value of the loans.

The recorded value of mortgage servicing rights is included in other assets on the condensed consolidated balance sheets, and is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum. Changes in the carrying amount of mortgage servicing rights are reported in earnings under other operating income on the condensed consolidated statements of income.

Key assumptions used in measuring the fair value of mortgage servicing rights as of September 30, 2014 and December 31, 2013 were as follows:

	September 30, 2014			December 31, 2013

Constant prepayment rate		11.36	%		9.09	%
Discount rate		10.05	%		10.05	%
Weighted average life (years)		6.49			7.05

At September 30, 2014 and December 31, 2013, the Company’s mortgage loans held-for-sale was $1,258,000 and $1,263,000, respectively. At September 30, 2014, and December 31, 2013, the Company serviced real estate mortgage loans for others totaling $239,351,000 and $243,299,000, respectively.

The following table summarizes the Company’s mortgage servicing rights assets as of September 30, 2014 and December 31, 2013. Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets:

	(in thousands)
	December 31, 2013		Additions		Reductions			September 30, 2014

Mortgage servicing rights	$	1,968	$	170	$	(260	)	$	1,878
Valuation allowance		—		—		—			—
Mortgage servicing rights, net of valuation allowance	$	1,968	$	170	$	(260	)	$	1,878

At September 30, 2014 and December 31, 2013, the estimated fair market value of the Company’s mortgage servicing rights asset was $2,126,000 and $2,326,000, respectively.

The Company received contractually specified servicing fees of $152,000 and $155,000 for the three month periods ended September 30, 2014 and September 30, 2013, respectively. The Company received contractually specified servicing fees of $456,000 and $462,000 for the nine month periods ended September 30, 2014 and September 30, 2013, respectively. Contractually specified servicing fees are included in other operating Income on the condensed consolidated statements of income.

- 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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