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Mortgage Servicing Rights
 3 Months Ended
Mar. 31, 2015
Transfers and Servicing of Financial Assets [Abstract]  
Mortgage Servicing Rights
Mortgage Servicing Rights

The Company’s portfolio of residential mortgage loans serviced for third parties was $2.8 billion as of March 31, 2015 and $2.9 billion as of December 31, 2014.  Substantially all of these loans were originated by the Company and sold to third parties on a non-recourse basis with servicing rights retained.  These retained servicing rights are recorded as a servicing asset and are initially recorded at fair value (see Note 13 to the Consolidated Financial Statements for more information). Changes to the balance of mortgage servicing rights are recorded in mortgage banking income in the Company’s consolidated statements of income.

The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors.  Servicing income, including late and ancillary fees, was $1.9 million and $2.0 million for the three months ended March 31, 2015 and 2014.  Servicing income is recorded in mortgage banking income in the Company’s consolidated statements of income.  The Company’s residential mortgage investor loan servicing portfolio is primarily comprised of fixed rate loans concentrated in Hawaii.

For the three months ended March 31, 2015 and 2014, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:
 
 
Three Months Ended
March 31,
(dollars in thousands)
 
2015

 
2014

Balance at Beginning of Period
 
$
2,604

 
$
3,826

Change in Fair Value:
 
 

 
 

Due to Change in Valuation Assumptions 1
 
(251
)
 
(349
)
Due to Payoffs
 
(76
)
 
(96
)
Total Changes in Fair Value of Mortgage Servicing Rights
 
(327
)
 
(445
)
Balance at End of Period
 
$
2,277

 
$
3,381

1 
Principally represents changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates.

For the three months ended March 31, 2015 and 2014, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method, net of valuation allowance, was as follows:
 
Three Months Ended
March 31,
(dollars in thousands)
2015

 
2014

Balance at Beginning of Period
$
22,091

 
$
24,297

Servicing Rights that Resulted From Asset Transfers
134

 
354

Amortization
(839
)
 
(654
)
Valuation Allowance Provision
(20
)
 
—

Balance at End of Period
$
21,366


$
23,997

 
 
 
 
Valuation Allowance:
 
 
 
Balance at Beginning of Period
$
(57
)
 
$
—

Valuation Allowance Provision
(20
)
 
—

Balance at End of Period
$
(77
)

$
—

 
 
 
 
Fair Value of Mortgage Servicing Rights Accounted for
 Under the Amortization Method
 

 
 

Beginning of Period
$
22,837

 
$
30,100

End of Period
$
21,431

 
$
28,303



The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of March 31, 2015 and December 31, 2014 were as follows:
 
March 31,
2015

 
December 31, 2014

Weighted-Average Constant Prepayment Rate 1
12.96
%
 
11.62
%
Weighted-Average Life (in years)
5.83

 
6.28

Weighted-Average Note Rate
4.27
%
 
4.28
%
Weighted-Average Discount Rate 2
10.32
%
 
10.61
%
1 
Represents annualized loan repayment rate assumption.
2 
Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.
A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in certain key assumptions as of March 31, 2015 and December 31, 2014 is presented in the following table.
(dollars in thousands)
March 31,
2015

 
December 31,
2014

Constant Prepayment Rate
 

 
 

Decrease in fair value from 25 basis points (“bps”) adverse change
$
(236
)
 
$
(265
)
Decrease in fair value from 50 bps adverse change
(467
)
 
(524
)
Discount Rate
 

 
 

Decrease in fair value from 25 bps adverse change
(224
)
 
(250
)
Decrease in fair value from 50 bps adverse change
(445
)
 
(495
)


This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s mortgage servicing rights usually is not linear.  Also, the effect of changing one key assumption without changing other assumptions is not realistic.