MORTGAGE BANKING ACTIVITIES

9 Months Ended

Sep. 30, 2016

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.2 billion as of September 30, 2016 and $1.1 billion as of December 31, 2015. Mortgage banking income is comprised of gains recognized on the sale of loans and changes in fair value of mortgage banking derivatives.

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans are as follows:

	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Mortgage loan portfolios serviced for:
FHLMC	$	941,865	$	878,300
FNMA		214,849		233,026

Customer escrow balances with loans serviced for FHLMC and FNMA totaled $10.7 million and $13.2 million at September 30, 2016 and December 31, 2015, respectively.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Balance, beginning of period	$	5,813		$	5,611		$	5,686		$	5,535
Originations		708			450			1,870			1,432
Amortized to expense		(525	)		(449	)		(1,560	)		(1,355	)
Balance, end of period		5,996			5,612			5,996			5,612
Less valuation allowance		(741	)		(150	)		(741	)		(150	)
Net balance	$	5,255		$	5,462		$	5,255		$	5,462

Activity in the valuation allowance for mortgage servicing rights was as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Balance, beginning of period	$	(766	)	$	(12	)	$	(39	)	$	(58	)
Impairment charges		—			(138	)		(727	)		(299	)
Recoveries		25			—			25			207
Balance, end of period	$	(741	)	$	(150	)	$	(741	)	$	(150	)

The fair value of mortgage servicing rights as of September 30, 2016, was approximately $7.7 million and at December 31, 2015, the fair value was approximately $9.1 million.

Key economic assumptions in measuring the value of mortgage servicing rights at September 30, 2016, and December 31, 2015, were as follows:

	September 30, 2016	December 31, 2015
Weighted average prepayment rate	286 PSA	192 PSA
Weighted average life (in years)	3.43	3.47
Weighted average discount rate	9.00%	9.00%

- 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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