SERVICING RIGHTS

9 Months Ended

Sep. 30, 2016

7.SERVICING RIGHTS

Mortgage Loans

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained. As of September 30, 2016, the Corporation had obligations to service approximately $233.356 million of residential first mortgage loans. The valuation of MSRs is based upon the net present value of the projected revenues over the expected life of the loans being serviced, as reduced by estimated internal costs to service these loans. The fair value of the capitalized servicing rights approximates the carrying value. On a quarterly basis, management evaluates the MSRs for impairment. The key economic assumptions used in determining the fair value of the MSRs include an annual constant prepayment speed of 9.45% and a discount rate of 8.97% for September 30, 2016.

The following table summarizes MSRs capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):


	Nine Months Ended		Year Ended
	September 30,		December 31,
	2016		2015

Balance at beginning of period	$	1,965	$	1,994
Additions from loans sold with servicing retained		—		585
Acquired MSRs		207		—
Amortization		(495)		(614)

Balance at end of period	$	1,677	$	1,965
Balance of loan servicing portfolio	$	233,356	$	224,612
Mortgage servicing rights as % of portfolio		.72%		.87%

Commercial Loans

The Corporation also retains the servicing on commercial loans that have been sold. These loans were originated and underwritten under the SBA and USDA government guarantee programs, in which the guaranteed portion of the loan was sold to a third party with servicing retained. The balance of these sold loans with servicing retained at September 30, 2016 and December 31, 2015 was approximately $43.2 million and $63.0 million, respectively. The Corporation valued these servicing rights at $.147 million as of September 30, 2016 and at $.170 million as of December 31, 2015. This valuation was established in consideration of the discounted cash flow of expected servicing income over the life of the loans.

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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