SERVICING RIGHTS

12 Months Ended

Dec. 31, 2016

NOTE 9 – SERVICING RIGHTS

Mortgage Loans

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained. As of December 31, 2016, the Corporation had obligations to service $221.355 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 mortgage servicing rights include an annual constant prepayment speed of 10.74% and a discount rate of 9.59% for December 31, 2016.

In 2016, management decided to no longer retain the servicing on mortgage loans sold.

The following summarizes the fair value of the mortgage servicing rights capitalized and amortized. There was no valuation allowance required (dollars in thousands):



	December 31,		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		(599)		(614)

Balance at end of period	$	1,573	$	1,965
Balance of loan servicing portfolio	$	221,355	$	224,612
Mortgage servicing rights as % of portfolio		0.71%		.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 December 31, 2016 and December 31, 2015 was approximately $41 million and $63 million, respectively. The Corporation valued these servicing rights at $.140 million as of December 31, 2016 and $.170 million at 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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