SERVICING RIGHTS

12 Months Ended

Dec. 31, 2019

SERVICING RIGHTS

SERVICING RIGHTS

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, 2019, the Corporation had rights to service $255.757 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 key economic assumptions used in determining the fair value of the mortgage servicing rights include an annual constant prepayment speed of 13.65% and a discount rate of 8.66% for December 31, 2019, which resulted in a fair value of $2.159 million.  In 2018, the fair value was $2.898 million.

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

	December 31,		December 31,
	2019		2018
Balance at beginning of period	$	1,144	$	1,033
Final purchase accounting entry for FFNM		500		18
Additions from loans sold with servicing retained		95		—
Acquired MSRs		—		539
Amortization		(240)		(446)
Balance at end of period (included in Other Assets)	$	1,499	$	1,144
Balance of loan servicing portfolio	$	255,757	$	293,771
Mortgage servicing rights as % of portfolio		0.59%		0.39%
Fair value of servicing rights	$	2,159	$	2,898

Commercial Loans

The Corporation also retains the servicing on commercial loans that have been sold that 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, 2019 and December 31, 2018 was approximately $41 million and $44 million, respectively. The Corporation valued these servicing rights at $218,000  as of December 31, 2019 and $80,000 at December 31, 2018.  This valuation was established in consideration of the discounted cash flow of expected servicing income over the life of the loans.