NOTE 5 - SERVICING RIGHTS

Loans serviced for others are not included on the Consolidated Balance Sheets. The unpaid principal balances of permanent loans serviced for others were $1.46 billion and $1.19 billion at December 31, 2019 and 2018, respectively.

The following table summarizes servicing rights activity for the years ended December 31, 2019 and 2018:


	2019		2018
Beginning balance	$	10,429	$	6,795
Additions		5,400		5,971
Servicing rights amortized		(4,177)		(2,337)
Impairment of servicing rights		(92)		—
Ending balance	$	11,560	$	10,429

The fair market value of the servicing rights’ assets was $13.3 million and $14.6 million at December 31, 2019 and December 31, 2018, respectively. Fair value adjustments to servicing rights are mainly due to market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates. A significant change in prepayments of the loans in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of servicing rights.

The following provides valuation assumptions used in determining the fair value of mortgage servicing rights (“MSR”) at the dates indicated:


	At December 31,		At December 31,
	2019		2018
Key assumptions:
Weighted average discount rate	9.7	%	9.6	%
Conditional prepayment rate (“CPR”)	17.1	%	9.4	%
Weighted average life in years	5.1		7.7

Key economic assumptions and the sensitivity of the current fair value for single family MSR to immediate adverse changes in those assumptions at December 31, 2019 and December 31, 2018 were as follows:


				December 31, 2019			December 31, 2018
Aggregate portfolio principal balance				$	1,463,732		$	1,186,858
Weighted average rate of note					4.2	%		4.3	%

At December 31, 2019	Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
Conditional prepayment rate		17.1	%		24.6	%		32.5	%
Fair value MSR	$	13,255		$	10,582		$	8,674
Percentage of MSR		0.9	%		0.7	%		0.6	%

Discount rate		9.7	%		10.2	%		10.7	%
Fair value MSR	$	13,255		$	13,037		$	12,826
Percentage of MSR		0.9	%		0.9	%		0.9	%

At December 31, 2018	Base			0.5% Adverse Rate Change			1.0% Adverse Rate Change
Conditional prepayment rate		9.4	%		11.6	%		17.7	%
Fair value MSR	$	14,218		$	12,723		$	10,358
Percentage of MSR		1.2	%		1.1	%		0.9	%

Discount rate		9.6	%		10.1	%		10.6	%
Fair value MSR	$	14,218		$	13,912		$	13,617
Percentage of MSR		1.2	%		1.2	%		1.2	%

The above table shows the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four-family FNMA, FHLMC, GNMA, or FHLB serviced home loan. The above table references a 50 basis point and 100 basis point decrease in note rates and the impact on prepayment speeds and discount rates.

These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR which is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.

The Company recorded $3.5 million and $2.4 million of gross contractually specified servicing fees, late fees, and other ancillary fees resulting from servicing of loans for the years ended December 31, 2019 and 2018, respectively. The income, net of amortization, is included in service charges and fee income on the Consolidated Statements of Income.