SERVICING RIGHTS

9 Months Ended

Sep. 30, 2019

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, 2019, the Corporation had obligations to service approximately $260.905 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. 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 13.28% and a discount rate of 10.42% as of September 30, 2019. For additional details on the acquired MSRs presented in the table below, please refer to Note 15 – “Business Combinations”.

The following table summarizes MSRs capitalized and amortized (dollars in thousands):


	September 30,		September 30,
	2019		2018
Balance at beginning of period	$	1,144	$	1,033
Final purchase accounting entry for FFNM		500		—
Additions from loans sold with servicing retained		—		19
Acquired MSRs		—		386
Amortization		(105)		(339)

Balance at end of period	$	1,539	$	1,099
Balance of loan servicing portfolio	$	260,905	$	285,661
Mortgage servicing rights as % of portfolio		.59%		.38%
Fair value of servicing rights		2,283		2,898

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 September 30, 2019 was approximately $43 million. The Corporation valued these servicing rights at $165,000 as of September 30, 2019 and at $80,000 as of December 31, 2018. This valuation was established in consideration of the discounted cash flow of net expected servicing income over the life of the loans.