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LOANS AND ALLOWANCE FOR CREDIT LOSSES

3 Months Ended

Mar. 31, 2024

LOANS AND ALLOWANCE FOR CREDIT LOSSES

NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

We evaluate risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan types. The following is a summary of total loans based on regulatory call report code segmentation for certain loan types:


	March 31,		December 31,
(in thousands)	2024		2023
Commercial construction	$	158,270	$	154,048
Commercial real estate owner occupied		323,581		310,015
Commercial real estate non-owner occupied		1,155,297		1,144,566
Tax exempt		39,261		43,688
Commercial and industrial		306,844		310,883
Residential real estate		933,911		940,334
Home equity		86,879		87,683
Consumer other		7,629		7,832
Total loans		3,011,672		2,999,049
Allowance for credit losses		28,355		28,142
Net loans	$	2,983,317	$	2,970,907

Total unamortized net costs and premiums included in loan totals were as follows:


	March 31,		December 31,
(in thousands)	2024		2023
Net unamortized loan origination costs	$	2,774	$	3,039
Net unamortized fair value discount on acquired loans		(2,781)		(2,891)
Total	$	(7)	$	148

We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of

March 31, 2024 and December 31, 2023, accrued interest receivable for loans totaled $13.2 million and $11.9 million, respectively, and is included in the “other assets” line item on the consolidated balance sheets.

Characteristics of each loan portfolio segment are as follows:

Commercial construction - Loans in this segment primarily include raw land, land development and construction of commercial and multifamily residential properties. Collateral values are determined based upon appraisals and evaluations of the completed structure in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy guidelines that are more restrictive than on stabilized commercial real estate transactions. Construction loans are primarily paid by the cash flow generated from the completed structure, such as operating leases, rents, or other operating cash flows from the borrower.

Commercial real estate owner occupied and non-owner occupied - Loans in these segments are primarily owner-occupied or income-producing properties. Loans to Real Estate Investment Trusts and unsecured loans to developers that closely correlate to the inherent risk in commercial real estate markets are also included. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.

Tax Exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made to these borrowers may provide us with tax-exempt income. While governed and underwritten similar to commercial loans they do have unique requirements based on established polices. Almost all state and municipal loans are considered a general obligation of the issuing entity. Given the size of many municipal borrowers, borrowings are normally not rated by major rating agencies.

Commercial and industrial loans - Loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment in this segment. Generally, loans are secured by assets of the business such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other business assets. Some loans in this category may be unsecured or guaranteed by government agencies such as the US Small Business Administration. Loans are primarily paid by the operating cash flow of the borrower.

Residential real estate - All loans in this segment are collateralized by one-to-four family homes. Residential real estate loans held in the loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to various underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Home equity - All loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer other - Loans in this segment include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, recreational equipment, overdraft protection or other consumer loans. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines, as applicable.

Allowance for Credit Losses

The Allowance for Credit Losses (“ACL”) is comprised of the allowance for loan losses and the allowance for unfunded commitments which is accounted for as a separate liability in other liabilities on our consolidated balance sheet. The level of the ACL represents management’s estimate of expected credit losses over the expected life of the loans at the consolidated balance sheet date.

The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off. The ACL is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.

The activity in the ACL for the periods ended are as follows:


	At or for the Three Months Ended March 31, 2024
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	4,261	$	—	$	—	$	(564)	$	3,697
Commercial real estate owner occupied		2,863		(3)		—		221		3,081
Commercial real estate non-owner occupied		9,443		—		—		(288)		9,155
Tax exempt		119		—		—		(6)		113
Commercial and industrial		3,259		(65)		1		639		3,834
Residential real estate		7,352		—		5		294		7,651
Home equity		767		—		3		(18)		752
Consumer other		78		(45)		28		11		72
Total	$	28,142	$	(113)	$	37	$	289	$	28,355


	At or for the Three Months Ended March 31, 2023
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,579	$	—	$	—	$	455	$	3,034
Commercial real estate owner occupied		2,189		—		—		159		2,348
Commercial real estate non-owner occupied		9,341		—		—		3		9,344
Tax exempt		93		—		—		—		93
Commercial and industrial		3,493		(1)		6		117		3,615
Residential real estate		7,274		(4)		8		27		7,305
Home equity		811		—		2		(21)		792
Consumer other		80		(63)		1		58		76
Total	$	25,860	$	(68)	$	17	$	798	$	26,607

Unfunded Commitments

The ACL on unfunded commitments is recognized as a liability (other liabilities on the consolidated balance sheet), with adjustments to the reserve recognized in other non-interest expense in the consolidated statement of operations. The activity in the ACL on unfunded commitments for the periods ended was as follows:


(in thousands)	Three Months Ended March 31, 2024		Three Months Ended March 31, 2023
Beginning Balance	$	3,825	$	3,910
Provision for credit losses		(186)		(175)
Ending Balance	$	3,639	$	3,639

Loan Origination/Risk Management: We have certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. Our Board of Directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Board of Directors with frequent reports related to loan production, loan quality, and concentration of credit, loan delinquencies, non-performing loans and potential problem loans. We seek to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.

Credit Quality Indicators: In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss. Consistent with regulatory guidelines, the

Company provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk-rated 6, 7, 8 and 9, respectively).

The following are the definitions of our credit quality indicators:

Pass: Loans we consider in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low risk of loss related to these loans considered pass-rated.

Special Mention: Loans considered having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control over collateral; or (iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose us to sufficient risks to warrant classification.

Substandard: Loans we consider as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans we consider as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the collectability of the full balance of the loan. The possibility of loss is high but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).

Loss: Loans we consider as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be effected in the future. Losses are taken in the period in which they are determined to be uncollectible.

The following table presents our loans by year of origination, loan segmentation and risk indicator as of March 31, 2024:



(in thousands)	2024		2023		2022		2021		2020		Prior		Total
Commercial construction
Risk rating:
Pass	$	1,219	$	23,199	$	107,106	$	20,918	$	4,415	$	1,413	$	158,270
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	1,219	$	23,199	$	107,106	$	20,918	$	4,415	$	1,413	$	158,270
Current period gross write-offs		—		—		—		—		—		—		—

Commercial real estate owner occupied
Risk rating:
Pass	$	1,328	$	52,491	$	67,078	$	60,467	$	19,975	$	115,429	$	316,768
Special mention		—		152		—		—		1,565		3,382		5,099
Substandard		—		—		—		—		—		1,604		1,604
Doubtful		—		—		—		—		—		110		110
Total	$	1,328	$	52,643	$	67,078	$	60,467	$	21,540	$	120,525	$	323,581
Current period gross write-offs		—		—		—		—		—		3		3

Commercial real estate non-owner occupied
Risk rating:
Pass	$	10,379	$	41,205	$	342,797	$	198,618	$	135,808	$	321,447	$	1,050,254
Special mention		—		7,782		9,363		21,525		27,946		20,597		87,213
Substandard		—		—		—		—		—		17,830		17,830
Doubtful		—		—		—		—		—		—		—
Total	$	10,379	$	48,987	$	352,160	$	220,143	$	163,754	$	359,874	$	1,155,297
Current period gross write-offs		—		—		—		—		—		—		—

Tax exempt
Risk rating:
Pass	$	501	$	2,832	$	8,468	$	724	$	208	$	26,528	$	39,261
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	501	$	2,832	$	8,468	$	724	$	208	$	26,528	$	39,261
Current period gross write-offs		—		—		—		—		—		—		—

Commercial and industrial
Risk rating:
Pass	$	25,552	$	79,412	$	62,520	$	18,175	$	33,714	$	79,651	$	299,024
Special mention		—		306		1,419		124		704		3,442		5,995
Substandard		—		155		201		123		124		1,001		1,604
Doubtful		—		—		—		—		—		221		221
Total	$	25,552	$	79,873	$	64,140	$	18,422	$	34,542	$	84,315	$	306,844
Current period gross write-offs		—		—		—		62		3		—		65


Residential real estate
Performing	$	7,076	$	76,695	$	186,939	$	162,848	$	94,344	$	401,684	$	929,586
Nonperforming		—		—		403		662		—		3,260		4,325
Total	$	7,076	$	76,695	$	187,342	$	163,510	$	94,344	$	404,944	$	933,911
Current period gross write-offs		—		—		—		—		—		—		—

Home equity
Performing	$	2,620	$	15,816	$	15,200	$	7,107	$	6,138	$	39,038	$	85,919
Nonperforming		—		—		—		57		—		903		960
Total	$	2,620	$	15,816	$	15,200	$	7,164	$	6,138	$	39,941	$	86,879
Current period gross write-offs		—		—		—		—		—		—		—

Consumer other
Performing	$	1,913	$	2,618	$	1,476	$	572	$	212	$	827	$	7,618
Nonperforming		—		—		—		6		5		—		11
Total	$	1,913	$	2,618	$	1,476	$	578	$	217	$	827	$	7,629
Current period gross write-offs		—		4		1		—		—		40		45

Total Loans	$	50,588	$	302,663	$	802,970	$	491,926	$	325,158	$	1,038,367	$	3,011,672

The following table presents our loans by year of origination, loan segmentation and risk indicator as of December 31, 2023:



(in thousands)	2023		2022		2021		2020		2019		Prior		Total
Commercial construction
Risk rating:
Pass	$	14,040	$	99,115	$	35,978	$	3,992	$	—	$	923	$	154,048
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	14,040	$	99,115	$	35,978	$	3,992	$	—	$	923	$	154,048
Current period gross write-offs		—		—		—		—		—		—		—

Commercial real estate owner occupied
Risk rating:
Pass	$	57,603	$	61,015	$	43,228	$	20,209	$	20,462	$	91,187	$	293,704
Special mention		160		387		7,488		1,596		—		3,066		12,697
Substandard		—		—		—		—		—		3,497		3,497
Doubtful		—		—		—		—		—		117		117
Total	$	57,763	$	61,402	$	50,716	$	21,805	$	20,462	$	97,867	$	310,015
Current period gross write-offs		—		—		—		—		—		—		—

Commercial real estate non-owner occupied
Risk rating:
Pass	$	41,270	$	353,613	$	199,311	$	127,231	$	78,759	$	238,973	$	1,039,157
Special mention		7,809		—		14,134		37,249		15,246		17,108		91,546
Substandard		—		—		—		—		—		13,863		13,863
Doubtful		—		—		—		—		—		—		—
Total	$	49,079	$	353,613	$	213,445	$	164,480	$	94,005	$	269,944	$	1,144,566
Current period gross write-offs		—		—		—		—		—		—		—

Tax exempt
Risk rating:
Pass	$	6,340	$	8,468	$	787	$	208	$	590	$	27,295	$	43,688
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	6,340	$	8,468	$	787	$	208	$	590	$	27,295	$	43,688
Current period gross write-offs		—		—		—		—		—		—		—

Commercial and industrial
Risk rating:
Pass	$	80,942	$	69,402	$	22,205	$	38,824	$	14,739	$	77,273	$	303,385
Special mention		364		1,446		—		776		28		3,588		6,202
Substandard		58		94		186		109		95		532		1,074
Doubtful		—		—		—		—		87		135		222
Total	$	81,364	$	70,942	$	22,391	$	39,709	$	14,949	$	81,528	$	310,883
Current period gross write-offs		—		—		—		—		5		659		664


Performing	$	72,395	$	194,109	$	165,434	$	96,016	$	62,648	$	345,823	$	936,425
Nonperforming		—		—		41		—		234		3,634		3,909
Total	$	72,395	$	194,109	$	165,475	$	96,016	$	62,882	$	349,457	$	940,334
Current period gross write-offs		—		—		—		—		—		8		8

Home equity
Performing	$	15,582	$	15,334	$	7,873	$	6,633	$	4,800	$	36,652	$	86,874
Nonperforming		—		—		—		—		—		809		809
Total	$	15,582	$	15,334	$	7,873	$	6,633	$	4,800	$	37,461	$	87,683
Current period gross write-offs		—		—		—		—		—		12		12

Consumer other
Performing	$	4,128	$	1,787	$	696	$	301	$	51	$	864	$	7,827
Nonperforming		—		—		4		1		—		—		5
Total	$	4,128	$	1,787	$	700	$	302	$	51	$	864	$	7,832
Current period gross write-offs		—		52		18		5		—		214		289

Total Loans	$	300,691	$	804,770	$	497,365	$	333,145	$	197,739	$	865,339	$	2,999,049

Past Dues

The following is a summary of past due loans for the periods ended:


	March 31, 2024
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	158,270	$	158,270
Commercial real estate owner occupied		262		359		—		621		322,960		323,581
Commercial real estate non-owner occupied		217		—		94		311		1,154,986		1,155,297
Tax exempt		—		—		—		—		39,261		39,261
Commercial and industrial		527		183		1,010		1,720		305,124		306,844
Residential real estate		1,138		1,112		787		3,037		930,874		933,911
Home equity		187		150		348		685		86,194		86,879
Consumer other		66		8		7		81		7,548		7,629
Total	$	2,397	$	1,812	$	2,246	$	6,455	$	3,005,217	$	3,011,672


	December 31, 2023
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	154,048	$	154,048
Commercial real estate owner occupied		—		—		—		—		310,015		310,015
Commercial real estate non-owner occupied		—		—		103		103		1,144,463		1,144,566
Tax exempt		—		—		—		—		43,688		43,688
Commercial and industrial		465		59		330		854		310,029		310,883
Residential real estate		1,520		627		1,999		4,146		936,188		940,334
Home equity		600		—		337		937		86,746		87,683
Consumer other		10		2		—		12		7,820		7,832
Total	$	2,595	$	688	$	2,769	$	6,052	$	2,992,997	$	2,999,049

Non-Accrual Loans

The following is a summary of non-accrual loans for the periods ended:


	March 31, 2024
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		95		—		—
Commercial real estate non-owner occupied		327		201		—
Tax exempt		—		—		—
Commercial and industrial		1,152		516		—
Residential real estate		4,325		726		—
Home equity		960		1		—
Consumer other		11		1		—
Total	$	6,870	$	1,445	$	—


	December 31, 2023
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		103		44		—
Commercial real estate non-owner occupied		340		224		—
Tax exempt		—		—		—
Commercial and industrial		363		6		—
Residential real estate		3,908		1,131		118
Home equity		809		1		22
Consumer other		5		—		—
Total	$	5,528	$	1,406	$	140

Collateral Dependent Loans

Loans that do not share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where we have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.

The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment for the periods ended:


	March 31, 2024				December 31, 2023
(in thousands)	Real Estate		Other		Real Estate		Other
Commercial construction	$	—	$	—	$	—	$	—
Commercial real estate owner occupied		95		—		104		—
Commercial real estate non-owner occupied		327		—		340		—
Tax exempt		—		—		—		—
Commercial and industrial		1,019		133		229		134
Residential real estate		4,325		—		3,908		—
Home equity		960		—		808		—
Consumer other		11		—		5		—
Total	$	6,737	$	133	$	5,394	$	134

Loan Modifications to Borrowers Experiencing Financial Difficulty

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” which eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, we are no longer required to establish a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective category and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the ACL.

These modifications typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.

The following table presents the amortized cost basis of loans that were both experiencing financial difficulty and modified during the three months ended March 31, 2024, by class and by type of modification.


(in thousands)	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Interest Rate Reduction and Term Extension		% of Total Class of Loans
Three Months Ended March 31, 2024
Commercial construction	$	—	$	—	$	—	$	—	$	—	—	%
Commercial real estate owner occupied		—		—		—		—		—	—
Commercial real estate non-owner occupied		—		—		—		—		—	—
Tax exempt		—		—		—		—		—	—
Commercial and industrial		—		—		—		—		—	—
Residential real estate		—		—		33		—		—	0.00
Home equity		—		—		—		—		—	—
Consumer other		—		—		—		—		—	—
Total	$	—	$	—	$	33	$	—	$	—	0.00	%

The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2024.


(in thousands)	Weighted-Average Months of Payment Delay		Weighted-Average Months of Term Extension		Weighted-Average Interest Rate Reduction
Three Months Ended March 31, 2024
Commercial construction		—		—	—	%
Commercial real estate owner occupied		—		—	—
Commercial real estate non-owner occupied		—		—	—
Tax exempt		—		—	—
Commercial and industrial		—		—	—
Residential real estate		—		64	—
Home equity		—		—	—
Consumer other		—		—	—
Total		—		64	—	%

There were no qualifying modifications for the three months ended March 31, 2023.

Foreclosure

There were no residential mortgage loans collateralized by real estate that are in the process of foreclosure as of March 31, 2024. Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of December 31, 2023 totaled $430 thousand.

Mortgage Banking

Loans held for sale at March 31, 2024 had an unpaid principal balance of $3.1 million and $2.2 million as of December 31, 2023. The interest rate exposure on loans held for sale is mitigated through forward sale commitments with certain approved secondary market investors. Forward sale commitments had a notional amount of $6.0 million at March 31, 2024, and $5.0 million at December 31, 2023.

For the three months ended March 31, 2024 and 2023, we sold $8.4 million and $691 thousand, respectively, of residential mortgage loans on the secondary market, which resulted in a net loss on sale of loans (net of costs, including direct and indirect origination costs) of $31 thousand and a gain $8 thousand, respectively.

We sell residential loans on the secondary market while primarily retaining the servicing of these loans. Servicing sold loans helps to maintain customer relationships and earn fees over the servicing period. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to level of prepayments that result from shifts in interest rates. We obtain third-party valuations of our servicing assets portfolio quarterly, and the assumptions are reflected in Fair Value disclosures.