LOAN SERVICING

Mortgage Loan Servicing

The Company retains the servicing rights on mortgage loans sold. The unpaid principal balance of loans serviced for others was $584,440 and $563,802 as of March 31, 2016 and December 31, 2015, respectively. Mortgage servicing rights ("MSRs") are initially recognized at fair value in other assets on the consolidated balance sheets and are subsequently accounted for at the lower of cost or market. MSRs are amortized in proportion to, and over the estimated period, that net servicing income is expected to be received based on estimates of net cash flows on the loans serviced. The amount and timing of estimated future net cash flows are updated based on actual results and updated projections. Mortgage servicing fees, which are recorded in mortgage banking income in the consolidated statements of operations, totaled $358 and $293, respectively, in the three months ended March 31, 2016 and 2015.

The following table summarizes MSR activity for the periods presented.



	Three months ended March 31,
	2016			2015

Balance at beginning of period before valuation allowance	$	5,027		$	4,284
Additions	367			395
Repayments	(84		)	(129		)
Amortization	(200		)	(182		)
Balance at end of period before valuation allowance	5,110			4,368
Valuation allowance at end of period	(53		)	(255		)
Balance at end of period after valuation allowance	$	5,057		$	4,113

MSRs are separated into pools based on common risk characteristics of the underlying loans, and impairment is evaluated at least quarterly at the pool level. If impairment exists at the pool level, the MSR is written down through a valuation allowance and is charged against mortgage income. Valuation allowances at period end are summarized in the preceding table.

The fair value of MSRs is highly sensitive to changes in assumptions and is determined by estimating the present value of the asset's future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

The characteristics and sensitivity of the fair value of MSRs to changes in key assumptions is included in the accompanying table.



	March 31, 2016			December 31, 2015

Composition of mortgage loans serviced for others:
Fixed rate loans	99.90		%	99.90		%
Adjustable rate loans	0.10		%	0.10		%
Total	100.00		%	100.00		%

Weighted average life (years)	6.07			6.60
Prepayment speed	11.3		%	9.98		%
Discount rate	9.46		%	9.66		%
Effect on fair value due to change in interest rates:
+ 0.25%	$	492		$	421
+ 0.50%	864			660
- 0.25%	(536		)	(599		)
- 0.50%	(955		)	(1,104		)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, in the preceding table, the effects of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumptions. Frequently, changes in one factor would result in another factor changing, which would magnify or contract the effect of the change.

SBA-Guaranteed Loan Servicing

The Company retains the servicing rights on SBA-guaranteed loans sold to investors. The standard sale structure under the SBA Secondary Participation Guaranty Agreement provides for the Company to retain a portion of the cash flow from the interest payment received on the loan, which is commonly known as a servicing spread. The unpaid principal balance of SBA-guaranteed loans serviced for investors was $213,056 and $205,879 as of March 31, 2016 and December 31, 2015, respectively. SBA-guaranteed loan servicing assets are initially recognized at fair value in other assets on the consolidated balance sheets and are subsequently accounted for at the lower of cost or market. SBA servicing assets are amortized over the expected life of the related loans serviced as a reduction to the servicing income recognized from the servicing spread. SBA servicing fees, which are recorded in government-guaranteed lending income in the consolidated statements of operations, totaled $524 and $371, respectively, in the three months ended March 31, 2016 and 2015.

The table below summarizes the activity in the SBA-guaranteed loan servicing asset for the periods presented.



	Three months ended March 31,
	2016			2015

Balance at beginning of period	$	4,485		$	3,081
Fair value of SBA servicing assets acquired in NewBridge Merger	16			—
Additions	597			535
Amortization	(397		)	(96		)
Balance at end of period	$	4,701		$	3,520

The fair value of the servicing asset is compared to the amortized basis when certain triggering events occur. If the amortized basis exceeds the fair value, the asset is considered impaired and is written down to fair value through a valuation allowance on the asset and a charge against SBA income. There was no valuation allowance recorded on the SBA-guaranteed loan servicing asset as of March 31, 2016 or December 31, 2015.