Mortage Servicing Rights

6 Months Ended

Jun. 30, 2020

8. MORTGAGE SERVICING RIGHTS

Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The value of mortgage servicing rights (“MSRs”) is included on the Company’s Consolidated Balance Sheets.

The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale at fair value. For subsequent measurement purposes, the Company measures servicing assets and liabilities based on the lower of cost or market using the amortization method. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of the mortgage servicing rights is analyzed periodically and is adjusted to reflect changes in prepayment rates and other estimates.

The Company evaluates potential impairment of mortgage servicing rights based on the difference between the carrying amount and current estimated fair value of the servicing rights. The valuation of mortgage servicing rights, and the determination of any potential impairment, is performed by aggregating all servicing rights and stratifying them into tranches based on predominant risk characteristics. Generally, loan servicing becomes more valuable when interest rates rise (as prepayments typically decrease) and less valuable when interest rates decline (as prepayments typically increase).

If impairment exists, a valuation allowance is established for any excess of amortized cost over the current estimated fair value by a charge to income. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.

Service fee income is recorded for fees earned for servicing mortgage loans under servicing agreements with the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), Government National Mortgage Association (“GNMA”) and certain private investors. The fees are based on a contractual percentage of the outstanding principal balance of the loans serviced and are recorded in noninterest income. Amortization of mortgage servicing rights and mortgage servicing costs are charged to expense when incurred.

The unpaid principal balances of loans serviced for others were approximately $3,552,292 at June 30, 2020.

The estimated fair value of the mortgage servicing rights was

$20,200 at June 30, 2020. The estimated fair value of servicing rights at June 30, 2020 was determined using a net servicing fee of 0.26%, average discount rates ranging from 10.50% to 12.91% with a weighted average discount rate of 10.63%, average constant prepayment rates (“CPR”) ranging from 7.08% to 15.66% with a weighted average prepayment rate of 14.40%, depending upon the stratification of the specific servicing right, and a delinquency rate of 3.78%.

Please refer to Note 14 in these Notes to Consolidated Financial Statements for additional information concerning the fair value of MSRs.

As disclosed in Note 2

of these Notes to Consolidated Financial Statements

, the Company acquired approximately $20,123 of mortgage servicing rights from its acquisition of Carolina Financial Corporation on May 1, 2020. The following presents the activity in mortgage servicing rights, including their valuation allowance for the three and six months ended June 30, 2020:


	Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
MSRs beginning balance	$	0		$	0
Addition from acquisition of subsidiary		20,123			20,123
Amount capitalized		1,891			1,891
Purchased servicing		0			0
Amount amortized		(1,104	)		(1,104	)

MSRs ending balance	$	20,910		$	20,910

MSRs valuation allowance beginning balance	$	0		$	0
MSRs impairment		(710	)		(710	)

MSRs valuation allowance ending balance	$	(710	)	$	(710	)

MSRs, net of valuation allowance	$	20,200		$	20,200

The Company recorded a $710 temporary impairment of mortgage servicing rights from the date of acquisition to June 30, 2020. The Company does not hedge the mortgage servicing rights positions and the impact of falling long-term interest rates increased prepayment speed assumptions reducing the value of the MSR asset.

The estimated amortization expense is based on current information regarding future loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.