SERVICING RIGHTS

6 Months Ended

Jun. 30, 2018

7.SERVICING RIGHTS

Mortgage Loans

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained. As of June 30, 2018, the Corporation had obligations to service approximately $292.739 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 which management estimates at $1.737 million. 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 10.57% and a discount rate of 10.17% for June 30, 2018. During 2016, management decided to no longer regularly retain the servicing on mortgage loans sold.

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


	June 30,		June 30,
	2018		2017
Balance at beginning of period	$	1,033	$	1,573
Additions from loans sold with servicing retained		—		44
Acquired MSRs		386		—
Amortization		(219)		(323)

Balance at end of period	$	1,200	$	1,294
Balance of loan servicing portfolio	$	292,739	$	210,160
Mortgage servicing rights as % of portfolio		.41%		.61%

Commercial Loans

The Corporation periodically retains the servicing on certain 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 June 30, 2018 and June 30, 2017 was approximately $40.809 million and $40.097 million, respectively. The Corporation valued these servicing rights at $95,000 as of June 30, 2018 and at $125,000 as of June 30, 2017. This valuation was established in consideration of the discounted cash flow of net expected servicing income over the life of the loans.