7.	MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $1.1 billion as of September 30, 2014 and December 31, 2013. 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, 2014		December 31, 2013
	(Dollars in thousands)
Mortgage loan portfolios serviced for:
FHLMC	$	823,109	$	827,146
FNMA		263,605		283,340

Escrow balances are maintained at the Federal Home Loan Bank (FHLB) in connection with serviced loans totaling $1.3 and $1.1 million at September 30, 2014 and December 31, 2013, respectively.

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

	Nine Months Ended September 30, 2014			Nine Months Ended September 30, 2013
	(Dollars in thousands)
Balance, beginning of year	$	5,941		$	5,506
Originations		958			2,228
Amortized to expense		(1,259	)		(1,712	)
Balance, end of period		5,640			6,022
Less valuation allowance		(4	)		(4	)
Net balance	$	5,636		$	6,018

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

	Nine Months Ended September 30, 2014			Nine Months Ended September 30, 2013
	(Dollars in thousands)
Balance, beginning of year	$	—		$	(680	)
Impairment charges		(6	)		—
Recoveries		2			676
Balance, end of period	$	(4	)	$	(4	)

The fair value of mortgage servicing rights as of September 30, 2014, was approximately $9.8 million and at December 31, 2013, the fair value was approximately $9.9 million.

Key economic assumptions in measuring the value of mortgage servicing rights at September 30, 2014, and December 31, 2013, were as follows:

	September 30, 2014	December 31, 2013
Weighted average prepayment rate	189 PSA	182 PSA
Weighted average life (in years)	3.69	3.94
Weighted average discount rate	8.00%	8.00%