Mortgage Loan Servicing and Loans Originated for Sale

The following summarizes the unpaid principal balance of loans serviced for others by the Corporation at the dates indicated:



(In Thousands)	As of June 30,
(In Thousands)	2014		2013		2012
Loans serviced for Freddie Mac	$	4,574	$	4,160	$	4,727
Loans serviced for Fannie Mae	38,470		34,023		24,063
Loans serviced for FHLB – San Francisco	38,602		52,096		68,013
Loans serviced for other investors	1,088		1,877		2,072
Total loans serviced for others	$	82,734	$	92,156	$	98,875

MSA are recorded when loans are sold to investors and the servicing of those loans is retained by the Bank. MSA are subject to interest rate risk and may become impaired when interest rates fall and the borrowers refinance or prepay their mortgage loans. The MSA are derived primarily from single-family loans.

Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Income from servicing loans is reported as loan servicing and other fees in the Corporation’s Consolidated Statements of Operations, and the amortization of MSA is reported as a reduction to the loan servicing income. Loan servicing income includes servicing fees from investors and certain fees collected from borrowers, such as late payment fees. As of June 30, 2014 and 2013, the Corporation held borrowers’ escrow balances related to loans serviced for others of $263,000 and $283,000, respectively.

In estimating fair values of the MSA at June 30, 2014 and 2013, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 38.24% and 24.90%, respectively, and a weighted-average discount rate of 9.14% and 9.11%, respectively. The CPR was derived from an independent third party and the weighted-average discount rate was derived from market data. The MSA, which is included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition, had a carrying value of $295,000 and a fair value of $357,000 at June 30, 2014. This compares to the MSA at June 30, 2013 which had a carrying value of $334,000 and a fair value of $395,000. An allowance may be recorded to adjust the carrying value of each category of MSA to the lower of cost or market. As of June 30, 2014, a total allowance of $259,000 was required for five categories of MSA, compared to a total allowance of $200,000 for five categories of MSA as of June 30, 2013. Total additions to the MSA during the years ended June 30, 2014, 2013 and 2012 were $80,000, $104,000 and $106,000, respectively. Total amortization of the MSA during the years ended June 30, 2014, 2013 and 2012 was $60,000, $61,000 and $45,000, respectively.

Loans sold to the FHLB – San Francisco were completed under the MPF Program, which entitles the Bank to a credit enhancement fee collected from FHLB – San Francisco on a monthly basis are described in Note 1 under PBM activities.

The following table summarizes the Corporation’s MSA for years ended June 30, 2014 and 2013:



	Year Ended June 30,
(Dollars In Thousands)	2014			2013

MSA balance, beginning of fiscal year	$	534		$	491
Additions	80			104
Amortization	(60		)	(61		)
MSA balance, end of fiscal year, before allowance	554			534
Allowance	(259		)	(200		)
MSA balance, end of fiscal year	$	295		$	334

Fair value, beginning of fiscal year	$	395		$	398
Fair value, end of fiscal year	$	357		$	395

Allowance, beginning of fiscal year	$	200		$	164
Impairment provision	59			36
Allowance, end of fiscal year	$	259		$	200

Key Assumptions:
Weighted-average discount rate	9.14		%	9.11		%
Weighted-average prepayment speed	38.24		%	24.90		%

The following table summarizes the estimated future amortization of MSA for the next five years and thereafter:



	Amount
Year Ending June 30,	(In Thousands)

2015	$	98
2016	63
2017	22
2018	12
2019	7
Thereafter	352
Total estimated amortization expense	$	554

The following table represents the hypothetical effect on the fair value of the Corporation’s MSA using an unfavorable shock analysis of certain key valuation assumptions as of June 30, 2014 and 2013. This analysis is presented for hypothetical purposes only. As the amounts indicate, changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.



	Year Ended June 30,
(Dollars In Thousands)	2014			2013
MSA net carrying value	$	295		$	334

CPR assumption (weighted-average)	38.24		%	24.90		%
Impact on fair value with 10% adverse change in prepayment speed	$	(16	)	$	(18	)
Impact on fair value with 20% adverse change in prepayment speed	$	(31	)	$	(33	)

Discount rate assumption (weighted-average)	9.14		%	9.11		%
Impact on fair value with 10% adverse change in discount rate	$	(12	)	$	(12	)
Impact on fair value with 20% adverse change in discount rate	$	(24	)	$	(24	)

The Corporation has also recorded interest-only strips with a fair value of $62,000, comprised of gross unrealized gains of $61,000 and an unamortized cost of $1,000 at June 30, 2014. This compares to interest-only strips at June 30, 2013 with a fair value of $98,000, comprised of gross unrealized gains of $96,000 and an unamortized cost of $2,000. There were no additions to interest-only strips during fiscal 2014, 2013 or 2012. Total amortization of the interest-only strips during the years ended June 30, 2014, 2013 and 2012 were $1,000, $1,000 and $1,000, respectively.

Loans sold consisted of the following for the years indicated:



(In Thousands)	Year Ended June 30,
(In Thousands)	2014		2013		2012
Loans sold:
Servicing – released	$	1,990,087	$	3,506,027	$	2,460,281
Servicing – retained	9,189		16,331		13,121
Total loans sold	$	1,999,276	$	3,522,358	$	2,473,402

During the years ended June 30, 2014, 2013 and 2012, the Corporation sold 12%, 20% and 43%, respectively, of its loans originated for sale to a single investor, other than Freddie Mac or Fannie Mae. If the Corporation is unable to sell loans to this investor, find alternative investors, or change its loan programs to meet investor guidelines, it may have a significant negative impact on the Corporation’s results of operations.

Loans held for sale, at fair value, at June 30, 2014 and 2013 consisted of the following:



(In Thousands)	June 30,
(In Thousands)	2014		2013
Fixed rate	$	155,034	$	183,999
Adjustable rate	3,849		4,051
Total loans held for sale, at fair value	$	158,883	$	188,050