SERVICING RIGHTS

6 Months Ended

Jun. 30, 2022

SERVICING RIGHTS

SERVICING RIGHTS

NOTE 4 - SERVICING RIGHTS

Loans serviced for others are not included on the Consolidated Balance Sheets. The unpaid principal balances of permanent loans serviced for others were $2.79 billion and $2.61 billion at June 30, 2022 and December 31, 2021, respectively.

The following tables summarize servicing rights activity at or for the dates indicated:

	At or For the Three Months Ended
	June 30,
	2022		2021
Beginning balance, at the lower of cost or fair value	$	18,041	$	15,735
Additions		1,460		2,456
Servicing rights amortized		(985)		(1,831)
Impairment of servicing rights		—		(4)
Ending balance, at the lower of cost or fair value	$	18,516	$	16,356

	At or For the Six Months Ended
	June 30,
	2022		2021
Beginning balance, at the lower of cost or fair value	$	16,970	$	12,595
Additions		4,010		5,600
Servicing rights amortized		(2,465)		(3,885)
Recovery of servicing rights		1		2,046
Ending balance, at the lower of cost or fair value	$	18,516	$	16,356

The fair value of the servicing rights’ assets was $34.1 million and $26.1 million at June 30, 2022 and December 31, 2021, respectively. Fair value adjustments to servicing rights are mainly due to market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates. A significant change in prepayments of the loans in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of servicing rights.

The following provides valuation assumptions used in determining the fair value of mortgage servicing rights (“MSR”) at the dates indicated:

	At June 30,		At December 31,
Key assumptions:	2022		2021
Weighted average discount rate	9.1	%	9.1	%
Conditional prepayment rate (“CPR”)	8.8	%	13.8	%
Weighted average life in years	7.6		5.9

Key economic assumptions of the current fair value for single family MSR are presented in the table below.  Also presented is the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four-family FNMA, FHLMC, GNMA, or FHLB serviced home loan.  The table below references a 50 basis point and 100 basis point adverse rate change and the impact on prepayment speeds and discount rates at June  30, 2022 and December 31, 2021:

				June 30, 2022			December 31, 2021
Aggregate portfolio principal balance				$	2,789,663		$	2,609,776
Weighted average rate of note					3.3	%		3.2	%
At June 30, 2022	Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
Conditional prepayment rate		8.8	%		9.4	%		10.4	%
Fair value MSR	$	34,098		$	33,334		$	32,420
Percentage of MSR		1.2	%		1.2	%		1.2	%
Discount rate		9.1	%		9.6	%		10.1	%
Fair value MSR	$	34,098		$	33,364		$	32,659
Percentage of MSR		1.2	%		1.2	%		1.2	%
At December 31, 2021	Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
Conditional prepayment rate		13.8	%		20.0	%		31.5	%
Fair value MSR	$	26,070		$	21,188		$	15,348
Percentage of MSR		1.0	%		0.8	%		0.6	%
Discount rate		9.1	%		9.6	%		10.1	%
Fair value MSR	$	26,070		$	25,586		$	25,119
Percentage of MSR		1.0	%		1.0	%		1.0	%

These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR which is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes 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, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance, however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different time.

The Company recorded $1.8 million and $1.6 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for the three months ended June 30, 2022 and 2021, respectively, and $3.5 million and $3.0 million for the six months ended June 30, 2022 and 2021, respectively.  The income, net of MSR amortization, is reported in noninterest income on the Consolidated Statements of Income.