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 March 31,
(In Thousands)	2020		2019
SBA servicing rights, at amortized cost
Beginning net carrying amount	$	17,660	$	16,749
Additions due to loans sold, servicing retained		961		933
Amortization		(873)		(822)
Impairment		(212)		(412)
Ending net carrying value of SBA servicing rights	$	17,536	$	16,448
Freddie Mac multi-family servicing rights, at amortized cost
Beginning net carrying amount	$	13,135	$	10,248
Additions due to loans sold, servicing retained		1,449		1,267
Amortization		(640)		(529)
Ending net carrying value of Freddie Mac multi-family servicing rights	$	13,944	$	10,986
Ending net carrying value of SBA and Freddie Mac multi-family servicing rights, at amortized cost	$	31,480	$	27,434
Residential mortgage servicing rights, at fair value
Beginning Balance	$	91,174	$	93,065
Additions due to loans sold, servicing retained		7,147		3,593
Loan pay-offs		(3,253)		(1,312)
Unrealized losses		(16,437)		(7,128)
Ending fair value of residential mortgage servicing rights	$	78,631	$	88,218
Total servicing rights	$	110,111	$	115,652

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 March 31, 2020				As of December 31, 2019
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Carrying Value		Amount		Carrying Value
SBA	$	583,614	$	17,536	$	568,017	$	17,660
Freddie Mac multi-family		1,193,274		13,944		1,167,476		13,135
Total	$	1,776,888	$	31,480	$	1,735,493	$	30,795

The significant assumptions used in the March 31, 2020 and December 31, 2019 estimated valuation of the Company’s SBA and Freddie Mac multi-family servicing rights carried at amortized cost include:


		March 31, 2020						December 31, 2019
		Range of input values				Weighted Average		Range of input values				Weighted Average
SBA servicing rights (at amortized cost)
	• Forward prepayment rate	6.6	-	21.5	%	9.1	%	6.3	-	21.2	%	9.3	%
	• Forward default rate	0.0	-	10.6	%	7.5	%	0.0	-	10.8	%	7.3	%
	• Discount rate	9.1	-	9.1	%	9.1	%	8.8	-	8.8	%	8.8	%
	• 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	0.5	-	15.9	%	6.7	%	0.5	-	15.9	%	6.6	%
	• Forward default rate	0.0	-	0.5	%	0.3	%	0.0	-	0.5	%	0.4	%
	• Discount rate	6.0	-	6.0	%	6.0	%	6.0	-	6.0	%	6.0	%
	• Servicing expense	0.2	-	0.3	%	0.2	%	0.2	-	0.3	%	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)	March 31, 2020		December 31, 2019
SBA servicing rights (at amortized cost)
• Forward prepayment rate
10% adverse change	$	(558)	$	(563)
20% adverse change		(1,086)		(1,097)

• Default rate
10% adverse change	$	(97)	$	(94)
20% adverse change		(193)		(186)

• Discount rate
10% adverse change	$	(529)	$	(520)
20% adverse change		(1,027)		(1,011)

Freddie Mac multi-family servicing rights (at amortized cost)
• Forward prepayment rate
10% adverse change	$	(287)	$	(285)
20% adverse change		(568)		(558)

• Default rate
10% adverse change	$	(1)	$	(5)
20% adverse change		(4)		(10)

• Discount rate
10% adverse change	$	(381)	$	(381)
20% adverse change		(752)		(746)

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


(In Thousands)	March 31, 2020
2020	$	4,369
2021		5,167
2022		4,491
2023		3,882
2024		3,337
Thereafter		10,234
Total	$	31,480

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 March 31, 2020				As of December 31, 2019
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Fair Value		Amount		Fair Value
Fannie Mae	$	3,536,350	$	33,084	$	3,388,630	$	37,309
Ginnie Mae		2,513,271		25,587		2,504,993		29,869
Freddie Mac		2,277,047		19,960		2,270,981		23,996
Total	$	8,326,668	$	78,631	$	8,164,604	$	91,174

The significant assumptions used in the March 31, 2020 and December 31, 2019 valuation of the Company’s residential mortgage servicing rights carried at fair value include:


		March 31, 2020						December 31, 2019
		Range of input values				Weighted Average		Range of input values				Weighted Average
Residential mortgage servicing rights (at fair value)
	• Forward prepayment rate	8.5	-	18.9	%	11.1	%	7.1	-	18.7	%	10.1	%
	• Discount rate	9.0	-	11.0	%	9.6	%	9.0	-	11.0	%	9.6	%
	• 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)	March 31, 2020		December 31, 2019
Prepayment rate
10% adverse change	$	(4,245)	$	(4,195)
20% adverse change		(8,110)		(8,091)
Discount rate
10% adverse change	$	(2,849)	$	(3,450)
20% adverse change		(5,501)		(6,654)
Cost of servicing
10% adverse change	$	(1,562)	$	(1,648)
20% adverse change		(3,123)		(3,297)