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 following table presents information about the Company’s portfolios of servicing rights:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2019		2018		2019		2018
SBA servicing rights, at amortized cost
Beginning net carrying amount	$	18,000	$	16,946	$	16,749	$	16,684
Additions due to loans sold, servicing retained		550		697		2,431		2,502
Acquisitions		—		—		894		362
Amortization		(869)		(855)		(2,529)		(2,594)
Impairment		(149)		(100)		(13)		(266)
Ending net carrying value of SBA servicing rights	$	17,532	$	16,688	$	17,532	$	16,688
Freddie Mac multi-family servicing rights, at amortized cost
Beginning net carrying amount	$	11,103	$	8,774	$	10,248	$	5,059
Additions due to loans sold, servicing retained		1,798		1,521		3,745		5,911
Amortization		(591)		(470)		(1,683)		(1,145)
Ending net carrying value of Freddie Mac multi-family servicing rights	$	12,310	$	9,825	$	12,310	$	9,825
Ending net carrying value of SBA and Freddie Mac multi-family servicing rights, at amortized cost	$	29,842	$	26,513	$	29,842	$	26,513
Residential mortgage servicing rights, at fair value
Beginning Balance	$	85,658	$	85,554	$	93,065	$	72,295
Additions due to loans sold, servicing retained		9,028		5,502		18,482		16,657
Loan pay-offs		(2,466)		(1,665)		(5,861)		(4,747)
Unrealized gains (losses)		(7,582)		2,317		(21,048)		7,503
Ending fair value of residential mortgage servicing rights	$	84,638	$	91,708	$	84,638	$	91,708
Total servicing rights	$	114,480	$	118,221	$	114,480	$	118,221

Servicing rights – SBA and Freddie Mac

The Company’s SBA and Freddie Mac multi-family servicing rights are carried at the lower of cost or amortized cost. The Company estimates the fair value of the SBA and Freddie Mac multi-family 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 models include forward prepayment rates, forward default rates, discount rates, and servicing expenses.

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 forward prepayment rates, forward default rates and discount rates 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 following table presents additional information about the Company’s SBA and Freddie Mac multi-family servicing rights:


	As of September 30, 2019				As of December 31, 2018
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Carrying Value		Amount		Carrying Value
SBA	$	555,772	$	17,532	$	506,155	$	16,749
Freddie Mac multi-family		1,120,377		12,310		964,377		10,248
Total	$	1,676,150	$	29,842	$	1,470,532	$	26,997

The significant assumptions used in the September 30, 2019 and December 31, 2018 estimated valuation of the Company’s SBA and Freddie Mac multi-family servicing rights carried at amortized cost include:


		September 30, 2019						December 31, 2018
		Range of input values				Weighted Average		Range of input values				Weighted Average
SBA servicing rights (at amortized cost)
	• Forward prepayment rate	4.6	-	21.3	%	8.4	%	3.8	-	20.2	%	9.2	%
	• Forward default rate	0.0	-	11.7	%	7.6	%	0.0	-	12.2	%	6.4	%
	• Discount rate	8.8	-	8.8	%	8.8	%	12.0	-	12.0	%	12.0	%
	• Servicing expense	0.4	-	0.4	%	0.4	%	0.4	-	0.4	%	0.4	%

Freddie Mac multi-family servicing rights (at amortized cost)
	• Forward prepayment rate	0.1	-	35.4	%	5.3	%	0.0	-	35.0	%	5.0	%
	• Forward default rate	0.0	-	2.0	%	2.0	%	0.0	-	2.0	%	1.3	%
	• Discount rate	6.0	-	6.0	%	6.0	%	12.0	-	12.0	%	12.0	%
	• Servicing expense	0.2	-	0.3	%	0.2	%	0.2	-	0.2	%	0.2	%

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

The following table reflects the possible impact of 10% and 20% adverse changes to key assumptions on the carrying amount of the Company’s SBA and Freddie Mac multi-family servicing rights.


(In Thousands)	September 30, 2019		December 31, 2018
SBA servicing rights (at amortized cost)
• Forward prepayment rate
10% adverse change	$	(530)	$	(470)
20% adverse change		(1,034)		(915)

• Default rate
10% adverse change	$	(101)	$	(63)
20% adverse change		(200)		(125)

• Discount rate
10% adverse change	$	(562)	$	(579)
20% adverse change		(1,091)		(1,118)

Freddie Mac multi-family servicing rights (at amortized cost)
• Forward prepayment rate
10% adverse change	$	(117)	$	(63)
20% adverse change		(231)		(124)

• Default rate
10% adverse change	$	(18)	$	(11)
20% adverse change		(36)		(22)

• Discount rate
10% adverse change	$	(328)	$	(490)
20% adverse change		(645)		(791)

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


(In Thousands)	September 30, 2019
2019	$	1,470
2020		5,429
2021		4,759
2022		4,172
2023		3,633
Thereafter		10,379
Total	$	29,842

Residential mortgage servicing rights

The Company’s residential mortgage servicing rights consist of conforming conventional loans sold to Fannie Mae and Freddie Mac or loans securitized in Ginnie Mae securities. Similarly, the government loans serviced by the Company are securitized through Ginnie Mae, whereby the Company is insured against loss by the Federal Housing Administration or partially guaranteed against loss by the Department of Veteran Affairs.

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


	As of September 30, 2019				As of December 31, 2018
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Fair Value		Amount		Fair Value
Fannie Mae	$	3,245,359	$	33,414	$	2,848,435	$	34,562
Ginnie Mae		2,453,034		28,125		2,350,301		29,586
Freddie Mac		2,283,631		23,099		2,267,943		28,917
Total	$	7,982,024	$	84,638	$	7,466,679	$	93,065

The significant assumptions used in the September 30, 2019 and December 31, 2018 valuation of the Company’s residential mortgage servicing rights carried at fair value include:


		September 30, 2019						December 31, 2018
		Range of input values				Weighted Average		Range of input values				Weighted Average
Residential mortgage servicing rights (at fair value)
	• Forward prepayment rate	7.3	-	18.7	%	10.6	%	6.1	-	13.9	%	8.4	%
	• Discount rate	9.0	-	11.0	%	9.6	%	9.0	-	11.1	%	9.7	%
	• Servicing expense	$ 70	-	$ 85		$ 75		$ 70	-	$ 85		$ 75

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)	September 30, 2019		December 31, 2018
Prepayment rate
10% adverse change	$	(3,880)	$	(3,281)
20% adverse change		(7,451)		(6,330)
Discount rate
10% adverse change	$	(3,153)	$	(3,716)
20% adverse change		(6,082)		(7,159)
Cost of servicing
10% adverse change	$	(1,570)	$	(1,683)
20% adverse change		(3,140)		(3,365)