Certain Transfers of Financial Assets

3 Months Ended

Mar. 31, 2020

The table below presents a reconciliation of the changes in loans held for sale:



	Three Months Ended March 31,
(in thousands)	2020			2019
Outstanding balance(1):
Beginning balance	$	2,568,362		$	1,949,785
Loans purchased and originated	2,356,710			1,550,059
Payments and loans sold	(4,165,492		)	(1,617,518		)
Ending balance	759,580			1,882,326
Fair value adjustment:
Beginning balance	8,772			19,689
Increase/(decrease) to fair value	5,712			(378		)
Ending balance	14,484			19,311
Loans held for sale at fair value	$	774,064		$	1,901,637


(1)	Includes $5.8 million of loans held for sale that are carried at lower of cost or market as of December 31, 2019, as well as $299,000 as of December 31, 2018. There were no loans held for sale carried at lower of cost or market as of March 31, 2020 or March 31, 2019.

No loans held for sale were on non-accrual as of March 31, 2020 or December 31, 2019. At March 31, 2020 and December 31, 2019, we had $9.0 million and $8.2 million, respectively, of loans held for sale that were 90 days or more past due. The $9.0 million in loans held for sale that were 90 days or more past due at March 31, 2020 included $5.8 million of loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. Also included in the $9.0 million were $2.9 million in loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met, and therefore must record as held for sale on our balance sheet regardless of whether the repurchase option has been exercised. At December 31, 2019, $6.0 million of the $8.2 million in loans held for sale were loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet and $1.9 million were loans that we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met.

From time to time we retain the right to service the loans sold through our MCA program, creating mortgage servicing rights ("MSRs") which are recorded as assets on our balance sheet. A summary of MSR activity is as follows:



	Three months ended March 31,
(in thousands)	2020			2019
MSRs:
Balance, beginning of year	$	70,707		$	42,474
Capitalized servicing rights	20,615			6,138
Amortization	(4,885		)	(1,593		)
Sales	—			—
Balance, end of period	$	86,437		$	47,019
Valuation allowance:
Balance, beginning of year	$	5,803		$	—
Increase in valuation allowance	10,015			2,931
Balance, end of period	$	15,818		$	2,931
MSRs, net	$	70,619		$	44,088
MSRs, fair value	$	70,619		$	44,691

At March 31, 2020 and December 31, 2019, our servicing portfolio of residential mortgage loans had outstanding principal balances of $8.3 billion and $6.7 billion, respectively.

In connection with the servicing of these loans, we hold deposits in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to the investors. These escrow funds are segregated and held in separate non-interest-bearing deposit accounts at the Bank. These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $99.1 million at March 31, 2020 and $63.7 million at December 31, 2019.

The estimated fair value of the MSR assets is obtained from an independent third party and reviewed by management on a quarterly basis. MSRs typically do not trade in an active, open market with readily observable prices; as such, the fair value of

MSRs is determined using a discounted cash flow model to calculate the present value of the estimated future net servicing income. The assumptions utilized in the discounted cash flow model are based on market data for comparable assets, where available. Each quarter, management and the independent third party review the key assumptions used in the discounted cash flow model and make adjustments as necessary to estimate the fair value of the MSRs. At March 31, 2020, the estimated fair value of MSRs was adjusted as a result of the decline in mortgage interest rates experienced in the first three months of 2020, which resulted in a $10.0 million impairment charge, compared to a $2.9 million impairment charge for the first three months of 2019. The following summarizes the assumptions used by management to determine the fair value of MSRs:



	March 31, 2020		December 31, 2019
Average discount rates	9.08	%	9.06	%
Expected prepayment speeds	14.51	%	13.11	%
Weighted-average life, in years	5.4		5.8

A sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions is presented in the following table:



(in thousands)	March 31, 2020			December 31, 2019
50 bp adverse change in prepayment speed	$	(8,338	)	$	(10,768	)
100 bp adverse change in prepayment speed	(10,091		)	(17,965		)

These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented.

In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from repurchase, indemnification and make-whole agreements. Our estimated exposure related to those agreements totaled $3.5 million and $3.6 million at March 31, 2020 and December 31, 2019, respectively, and is recorded in other liabilities in the consolidated balance sheets. We incurred $2.1 million in losses due to make-whole obligations during the three months ended March 31, 2020 compared to $162,000 during the three months ended March 31, 2019. The increase in make-whole obligation losses is primarily related to an increase in early payoffs resulting from the declining interest rate environment.