Mortgage Loan Servicing and Loans Originated for Sale

The following summarizes the unpaid principal balance of loans serviced for others by the Corporation at the dates indicated:



(In Thousands)	As of June 30,
(In Thousands)	2013		2012		2011
Loans serviced for Freddie Mac	$	4,160	$	4,727	$	3,269
Loans serviced for Fannie Mae	34,023		24,063		16,791
Loans serviced for FHLB – San Francisco	52,096		68,013		87,022
Loans serviced for other investors	1,877		2,072		2,269
Total loans serviced for others	$	92,156	$	98,875	$	109,351

MSA are recorded when loans are sold to investors and the servicing of those loans is retained by the Bank. MSA are subject to interest rate risk and may become impaired when interest rates fall and the borrowers refinance or prepay their mortgage loans. The MSA are derived primarily from single-family loans.

Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Income from servicing loans is reported as loan servicing and other fees in the Corporation’s consolidated statements of operations, and the amortization of MSA is reported as a reduction to the loan servicing income. Loan servicing income includes servicing fees from investors and certain fees collected from borrowers, such as late payment fees. As of June 30, 2013 and 2012, the Corporation held borrowers’ escrow balances related to loans serviced for others of $283,000 and $302,000, respectively.

In estimating fair values of the MSA at June 30, 2013 and 2012, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 24.90% and 26.61%, respectively, and a weighted-average discount rate of 9.11% and 9.10%, respectively. The CPR was derived from an independent third party vendor and the weighted-average discount rate was derived from market data. The MSA, which is included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition, had a carrying value of $334,000 and a fair value of $395,000 at June 30, 2013. This compares to the MSA at June 30, 2012 which had a carrying value of $327,000 and a fair value of $398,000. An allowance may be recorded to adjust the carrying value of each category of MSA to the lower of cost or market. As of June 30, 2013, a total allowance of $200,000 was required for five categories of MSA, compared to a total allowance of $164,000 from four categories of MSA as of June 30, 2012. Total additions to the MSA during the years ended June 30, 2013, 2012 and 2011 were $104,000, $106,000 and $16,000, respectively. Total amortization of the MSA during the years ended June 30, 2013, 2012 and 2011 was $61,000, $45,000 and $45,000, respectively.

Loans sold to the FHLB – San Francisco were completed under the MPF Program, which entitles the Bank to a credit enhancement fee collected from FHLB – San Francisco on a monthly basis as described in Note 1 under PBM activities.

The following table summarizes the Corporation’s MSA for years ended June 30, 2013 and 2012.



	Year Ended June 30,
(Dollars In Thousands)	2013			2012

MSA balance, beginning of fiscal year	$	491		$	430
Additions	104			106
Amortization	(61		)	(45		)
MSA balance, end of fiscal year, before allowance	534			491
Allowance	(200		)	(164		)
MSA balance, end of fiscal year	$	334		$	327

Fair value, beginning of fiscal year	$	398		$	589
Fair value, end of fiscal year	$	395		$	398

Allowance, beginning of fiscal year	$	164		$	76
Impairment provision	36			88
Allowance, end of fiscal year	$	200		$	164

Key Assumptions:
Weighted-average discount rate	9.11		%	9.10		%
Weighted-average prepayment speed	24.90		%	26.61		%

The following table summarizes the estimated future amortization of MSA for the next five years and thereafter:



	Amount
Year Ending June 30,	(In Thousands)

2014	$	130
2015	94
2016	67
2017	43
2018	23
Thereafter	177
Total estimated amortization expense	$	534

The following table represents the hypothetical effect on the fair value of the Corporation’s MSA using an unfavorable shock analysis of certain key valuation assumptions as of June 30, 2013 and 2012. This analysis is presented for hypothetical purposes only. As the amounts indicate, changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.



	Year Ended June 30,
(Dollars In Thousands)	2013			2012
MSA net carrying value	$	334		$	327

CPR assumption (weighted-average)	24.90		%	26.61		%
Impact on fair value with 10% adverse change in prepayment speed	$	(18	)	$	(18	)
Impact on fair value with 20% adverse change in prepayment speed	$	(33	)	$	(34	)

Discount rate assumption (weighted-average)	9.11		%	9.10		%
Impact on fair value with 10% adverse change in discount rate	$	(12	)	$	(11	)
Impact on fair value with 20% adverse change in discount rate	$	(24	)	$	(21	)

The Corporation has also recorded interest-only strips with a fair value of $98,000, comprised of gross unrealized gains of $96,000 and an unamortized cost of $2,000 at June 30, 2013. This compares to interest-only strips at June 30, 2012 with a fair value of $130,000, comprised of gross unrealized gains of $127,000 and an unamortized cost of $3,000. There were no additions to interest-only strips during fiscal 2013, 2012 or 2011. Total amortization of the interest-only strips during the years ended June 30, 2013, 2012 and 2011 were $1,000, $1,000 and $1,000, respectively.

Loans sold consisted of the following for the years indicated:



(In Thousands)	Year Ended June 30,
(In Thousands)	2013		2012		2011
Loans sold:
Servicing – released	$	3,506,027	$	2,460,281	$	2,115,845
Servicing – retained	16,331		13,121		1,999
Total loans sold	$	3,522,358	$	2,473,402	$	2,117,844

During the years ended June 30, 2013, 2012 and 2011, the Corporation sold 20%, 43% and 45%, respectively, of its loans originated for sale to a single investor, other than Freddie Mac or Fannie Mae. If the Corporation is unable to sell loans to its primary investor, find alternative investors, or change its loan programs to meet investor guidelines, it may have a significant negative impact on the Corporation’s results of operations.

Loans held for sale, at fair value, at June 30, 2013 and 2012 consisted of the following:



(In Thousands)	June 30,
(In Thousands)	2013		2012
Fixed rate	$	183,999	$	228,070
Adjustable rate	4,051		3,569
Total loans held for sale, at fair value	$	188,050	$	231,639