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12) Mortgage Servicing Rights

9 Months Ended

Sep. 30, 2017

The Company initially records these Mortgage Servicing Rights (“MSRs”) at fair value as discussed in Note 8.

The Company’s subsequent accounting for MSRs is based on the class of MSRs. The Company has identified two classes of MSRs: MSRs backed by mortgage loans with initial term of 30 years and MSRs backed by mortgage loans with initial term of 15 years. The Company distinguishes between these classes of MSRs due to their differing sensitivities to change in value as the result of changes in market. After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. MSR amortization is determined by amortizing the balance straight-line over an estimated seven and nine-year life which estimates the proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.

The Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset’s carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted through a valuation allowance.

Management periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.

The following is a summary of the MSR activity for the periods presented.

	As of September 30 2017	As of December 31 2016
Amortized cost:
Balance before valuation allowance at beginning of year	$ 18,872,362	$ 12,679,755
MSR additions resulting from loan sales	4,057,974	8,603,154
Amortization (1)	(2,533,768)	(2,410,547)
Application of valuation allowance to write down MSRs with other than temporary impairment	-	-
Balance before valuation allowance at end of period	$ 20,396,568	$ 18,872,362

Valuation allowance for impairment of MSRs:
Balance at beginning of year	$ -	$ -
Additions	-	-
Application of valuation allowance to write down MSRs with other than temporary impairment	-	-
Balance at end of period	$ -	$ -

Mortgage servicing rights, net	$ 20,396,568	$ 18,872,362

Estimated fair value of MSRs at end of period	$ 26,785,380	$ 25,496,832

(1) Included in other expenses on the condensed consolidated statements of earnings

The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost:

		Estimated MSR Amortization
2017		$ 162,284
2018		3,372,381
2019		3,372,381
2020		3,372,381
2021		3,372,381
Thereafter		6,744,760
Total		$ 20,396,568

The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the condensed consolidated statement of earnings:

	Three Months Ended September 30		Nine Months Ended September 30
	2017	2016	2017	2016
Contractual servicing fees	$ 1,848,831	$ 1,496,365	$ 5,359,425	$ 4,024,720
Late fees	99,077	67,032	266,218	189,237
Total	$ 1,947,908	$ 1,563,397	$ 5,625,643	$ 4,213,957

The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio for the periods presented:

	As of September 30 2017		As of December 31 2016
Servicing UPB	$ 3,003,608,494		$ 2,720,441,340

The following key assumptions were used in determining MSR value:

	Prepayment Speeds	Average Life (Years)	Discount Rate
September 30, 2017	3.59	6.2	10.01
December 31, 2016	3.77	6.52	10.01