Note 9 - Servicing rights

The Company performs servicing activities for third parties, which primarily include collecting principal, interest and other payments from borrowers, remitting the corresponding payments to investors and monitoring delinquencies. The Company’s servicing fees are specified by pooling and servicing Agreements. The Company earned gross servicing fees of $7.1 million and $3.1 million, for the three months ended June 30, 2017 and 2016, respectively. The Company earned gross servicing fees of $14.3 million and $6.2 million, for the six months ended June 30, 2017 and 2016, respectively.

The Company has servicing rights relating to its servicing of SBA and Freddie Mac loans and servicing rights relating to its servicing of residential mortgage loans within the residential mortgage banking business.

Servicing rights – SBA and Freddie Mac

The Company’s commercial loan servicing rights are carried at the lower of cost or amortized cost. The Company estimates the fair value of servicing rights carried at amortized cost using a combination of internal models and data provided by third-party valuation experts. The assumptions used in our internal valuation include the speed at which the mortgages prepay, cost of servicing, discount rate and probability of default.

The Company’s models calculate the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. We derive prepayment speeds, default assumptions and discount rate from historical experience adjusted for prevailing market conditions. Components of the estimated future cash flows include servicing fees, late fees, other ancillary fees and cost of servicing.

The significant assumptions used in the June 30, 2017 valuation of the Company’s servicing rights carried at amortized cost include:

Forward prepayment assumptions ranging from 2.8% to 20.8% (weighted average of 11.6%) depending on the servicing rights pool

Forward default assumptions ranging from 0.0% to 9.4% (weighted average of 1.4%) depending on the servicing rights pool

Discount rate of 12.0%

Servicing expense ranging from 0.2% to 0.4% (weighted average of 0.3%) depending on the servicing rights pool.

The significant assumptions used in the December 31, 2016 valuation of the Company’s servicing rights carried at amortized cost include:

Forward prepayment assumptions ranging from 2.1% to 19.1% (weighted average of 13.9%) depending on the servicing rights pool

Forward default assumptions ranging from 0.0% to 10.8% (weighted average of 1.1%) depending on the servicing rights pool

Discount rate of 12.0%

Servicing expenses ranging from 0.2% to 0.4% (weighted average of 0.3%) depending on the servicing rights pool

These assumptions can change between and at each reporting period as market conditions and projected interest rates change.

Loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balance of loans serviced for others was $930.2 million and $750.0 million at June 30, 2017 and December 31, 2016, respectively.

The following table presents information about the Company’s SBA and Freddie Mac servicing rights:


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2017		2016		2017		2016
Beginning net carrying amount	$	20,372	$	26,038	$	22,478	$	27,250
Additions due to loans sold, servicing retained		1,093		604		1,752		1,369
Amortization		(1,153)		(1,456)		(2,357)		(2,737)
Impairment		(358)		(796)		(1,919)		(1,492)
Ending net carrying value	$	19,954	$	24,390	$	19,954	$	24,390

The following table presents information about the Company’s commercial loan servicing rights:


	As of June 30, 2017				As of December 31, 2016
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Carrying Value		Amount		Carrying Value
SBA	$	415,852	$	17,631	$	449,115	$	20,275
Freddie Mac		342,772		2,323		224,826		2,203
Total	$	758,624	$	19,954	$	673,941	$	22,478

The estimated future amortization expense for the servicing rights is expected to be as follows:


(In Thousands)	June 30, 2017
2017	$	2,175
2018		3,772
2019		3,103
2020		2,538
2021		2,062
Thereafter		6,304
Total	$	19,954

The following table reflects the possible impact of 10% and 20% adverse changes to key assumptions on the carrying amount of the Company’s commercial loan servicing rights.


(In Thousands)	June 30, 2017		December 31, 2016
Default rate
10% adverse change	$	(17)	$	(12)
20% adverse change		(35)		(24)
Prepayment rate
10% adverse change		(664)		(664)
20% adverse change		(1,288)		(1,290)
Discount rate
10% adverse change		(595)		(576)
20% adverse change		(1,153)		(1,119)

Residential mortgage servicing rights

The following table presents information about the Company’s residential mortgage servicing rights carried at fair value:


	As of June 30, 2017				As of December 31, 2016
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Fair Value		Amount		Fair Value
Fannie Mae	$	2,402,429	$	25,621	$	2,211,493	$	23,924
Ginnie Mae		1,987,301		22,198		1,817,009		21,205
Freddie Mac		1,692,852		18,978		1,452,902		16,247
Total	$	6,082,582	$	66,797	$	5,481,404	$	61,376

Refer to “Note 6 - Fair Value Measurements” for activity relating to the Company’s residential mortgage servicing rights carried at fair value.

The significant assumptions used in the June 30, 2017 valuation of the Company’s residential mortgage servicing rights carried at fair include:

Forward prepayment assumptions ranging from 7.2% to 29.4% (weighted average of 8.4%) depending on the servicing rights pool

Discount rate assumptions ranging from 10.5% to 13.0% (weighted average of 10.9%)

Servicing expense ranging from 0.7% to 0.8% (weighted average of 0.7%) depending on the servicing rights pool.

The significant assumptions used in the December 31, 2016 valuation of the Company’s residential mortgage servicing rights carried at fair include:

Forward prepayment assumptions ranging from 6.9% to 11.7% (weighted average of 9.3%) depending on the servicing rights pool

Discount rate assumptions ranging from 10.5% to 11.5% (weighted average of 10.8%)

Servicing expense ranging from 0.4% to 1.7% (weighted average of 0.5%) depending on the servicing rights pool.

These assumptions can change between and at each reporting period as market conditions and projected interest rates change.

Residential loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balance of loans serviced for others was $6.08 billion and $5.48 billion at June 30, 2017 and December 31, 2016, respectively.

The following table reflects the possible impact of 10% and 20% adverse changes to key assumptions on the fair value of the Company’s residential mortgage servicing rights.


(In Thousands)	June 30, 2017		December 31, 2016
Cost of servicing
10% adverse change	$	(1,167)	$	(1,304)
20% adverse change		(2,334)		(2,607)
Prepayment rate
10% adverse change		(2,279)		(2,038)
20% adverse change		(4,425)		(3,983)
Discount rate
10% adverse change		(2,819)		(2,299)
20% adverse change		(5,420)		(4,438)