LOAN SERVICING RIGHTS

3 Months Ended

Mar. 31, 2020

LOAN SERVICING RIGHTS

LOAN SERVICING RIGHTS

Note 8 – Loan Servicing Rights

Commercial FHA Mortgage Loan Servicing

The Company serviced commercial FHA mortgage loans for others with unpaid principal balances of $4.01 billion and $4.08 billion at March 31, 2020 and December 31, 2019, respectively. Changes in our commercial FHA loan servicing rights for the three months ended March 31, 2020 and 2019 are summarized as follows:

	Three Months Ended
	March 31,
(dollars in thousands)	2020		2019
Loan servicing rights:
Balance, beginning of period	$	57,637	$	56,252
Originated servicing		—		213
Amortization		(728)		(678)
Balance, end of period		56,909		55,787
Valuation allowances:
Balance, beginning of period		4,944		2,805
Additions		8,468		25
Reductions		—		—
Balance, end of period		13,412		2,830
Loan servicing rights, net	$	43,497	$	52,957
Fair value:
At beginning of period	$	52,693	$	53,447
At end of period	$	43,497	$	52,957

The Company recorded impairment on commercial FHA loan servicing rights of $8.5 million and $25,000 for the three months ended March 31, 2020 and 2019, respectively. The impairment recognized in the current quarter was primarily the result of a reduction in the assumed earnings rates related to escrow and replacement reserves.

The fair value of commercial FHA loan servicing rights is determined using key assumptions, representing both general economic and other published information, including the assumed earnings rates related to escrow and replacement reserves, and the weighted average characteristics of the commercial portfolio, including the prepayment rate and discount rate. The prepayment rate considers many factors as appropriate, including lockouts, balloons, prepayment penalties, interest rate ranges, delinquencies and geographic location. The discount rate is based on an average pre-tax internal rate of return utilized by market participants in pricing the servicing portfolio. Significant increases or decreases in any one of these assumptions would result in a significantly lower or higher fair value measurement. The weighted average prepayment rate was 8.38% and 8.20% at March 31, 2020 and December 31, 2019, respectively, while the weighted average discount rate was 11.43% and 11.02% for the same periods, respectively.

United States Small Business Administration (“SBA”) Loan Servicing

At March 31, 2020 and December 31, 2019, the Company serviced SBA loans for others with unpaid principal balances of $47.8 million and $48.2 million, respectively. At March 31, 2020 and December 31, 2019, SBA loan servicing rights of $1.1 million are reflected in loan servicing rights in the consolidated balance sheet.

Residential Mortgage Loan Servicing

At March 31, 2020 and December 31, 2019, the Company serviced residential mortgage loans for others with unpaid principal balances of $365.5 million and $381.6 million, respectively. At March 31, 2020 and December 31, 2019, total residential mortgage servicing rights of $1.5 million and $2.0 million, respectively, are reflected in mortgage servicing rights held for sale in the consolidated balance sheet.