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)	2015		2014		2013
Loans serviced for Freddie Mac	$	4,206	$	4,574	$	4,160
Loans serviced for Fannie Mae	46,582		38,470		34,023
Loans serviced for FHLB – San Francisco	28,222		38,602		52,096
Loans serviced for other investors	1,048		1,088		1,877
Total loans serviced for others	$	80,058	$	82,734	$	92,156

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, 2015 and 2014, the Corporation held borrowers’ escrow balances related to loans serviced for others of $309,000 and $263,000, respectively.

In estimating fair values of the MSA at June 30, 2015 and 2014, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 17.50% and 38.24%, respectively, and a weighted-average discount rate of 9.10% and 9.14%, respectively. Management obtained CPR estimates from an independent third party and reviewed for reasonableness given current market data. The discount rates were 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 $396,000 and a fair value of $470,000 at June 30, 2015. This compares to the MSA at June 30, 2014 which had a carrying value of $295,000 and a fair value of $357,000. 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, 2015, a total allowance of $248,000 was required for four categories of MSA, compared to a total allowance of $259,000 for five categories of MSA as of June 30, 2014. Total additions to the MSA during the years ended June 30, 2015, 2014 and 2013 were $150,000, $80,000 and $104,000, respectively. Total amortization of the MSA during the years ended June 30, 2015, 2014 and 2013 was $60,000, $60,000 and $61,000, 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 and are described in Note 1 under PBM activities.

The following table summarizes the Corporation’s MSA for years ended June 30, 2015 and 2014:



	Year Ended June 30,
(Dollars In Thousands)	2015			2014

MSA balance, beginning of fiscal year	$	554		$	534
Additions	150			80
Amortization	(60		)	(60		)
MSA balance, end of fiscal year, before allowance	644			554
Allowance	(248		)	(259		)
MSA balance, end of fiscal year	$	396		$	295

Fair value, beginning of fiscal year	$	357		$	395
Fair value, end of fiscal year	$	470		$	357

Allowance, beginning of fiscal year	$	259		$	200
Impairment (recovery) provision	(11		)	59
Allowance, end of fiscal year	$	248		$	259

Key Assumptions:
Weighted-average discount rate	9.10		%	9.14		%
Weighted-average prepayment speed	17.50		%	38.24		%

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



	Amount
Year Ending June 30,	(In Thousands)

2016	$	85
2017	69
2018	31
2019	22
2020	14
Thereafter	423
Total estimated amortization expense	$	644

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, 2015 and 2014. 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)	2015			2014
MSA net carrying value	$	396		$	295

CPR assumption (weighted-average)	17.50		%	38.24		%
Impact on fair value with 10% adverse change in prepayment speed	$	(19	)	$	(16	)
Impact on fair value with 20% adverse change in prepayment speed	$	(36	)	$	(31	)

Discount rate assumption (weighted-average)	9.10		%	9.14		%
Impact on fair value with 10% adverse change in discount rate	$	(18	)	$	(12	)
Impact on fair value with 20% adverse change in discount rate	$	(35	)	$	(24	)

The Corporation has also recorded interest-only strips with a fair value of $63,000, comprised of gross unrealized gains of $62,000 and an unamortized cost of $1,000 at June 30, 2015. This compares to interest-only strips at June 30, 2014 with a fair value of $62,000, comprised of gross unrealized gains of $61,000 and an unamortized cost of $1,000. There were no additions to interest-only strips during fiscal 2015, 2014 or 2013. Total amortization of the interest-only strips during the years ended June 30, 2015, 2014 and 2013 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)	2015		2014		2013
Loans sold:
Servicing – released	$	2,392,251	$	1,990,087	$	3,506,027
Servicing – retained	17,663		9,189		16,331
Total loans sold	$	2,409,914	$	1,999,276	$	3,522,358

During the years ended June 30, 2015, 2014 and 2013, the Corporation sold 13%, 12% and 20%, 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, 2015 and 2014 consisted of the following:



(In Thousands)	June 30,
(In Thousands)	2015		2014
Fixed rate	$	222,529	$	155,034
Adjustable rate	2,186		3,849
Total loans held for sale, at fair value	$	224,715	$	158,883