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Mortgage Servicing Rights
 12 Months Ended
Dec. 31, 2017
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 $2.9 billion as of December 31, 2017, and $2.7 billion as of December 31, 2016 and 2015. 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 21 Fair Value of Assets and Liabilities 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 $7.1 million, $6.9 million, and $7.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. 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 years ended December 31, 2017, 2016, and 2015, the change in the fair value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:
(dollars in thousands)
2017

 
2016

 
2015

Balance at Beginning of Year
$
1,655

 
$
1,970

 
$
2,604

Changes in Fair Value:
 
 
 
 
 
Due to Change in Valuation Assumptions 1
—

 
—

 
(251
)
Due to Payoffs
(201
)
 
(315
)
 
(383
)
Total Changes in Fair Value of Mortgage Servicing Rights
(201
)
 
(315
)
 
(634
)
Balance at End of Year
$
1,454

 
$
1,655

 
$
1,970

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

For the years ended December 31, 2017, 2016, and 2015, 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:
(dollars in thousands)
2017

 
2016

 
2015

Balance at Beginning of Year
$
22,008

 
$
21,032

 
$
22,091

Servicing Rights that Resulted From Asset Transfers
3,976

 
3,847

 
1,737

Amortization
(2,816
)
 
(2,892
)
 
(2,832
)
Valuation Allowance Recovery (Provision)
—

 
21

 
36

Balance at End of Year
$
23,168

 
$
22,008

 
$
21,032

 
 
 
 
 
 
Valuation Allowance:
 
 
 
 
 
Balance at Beginning of Year
$
—

 
$
(21
)
 
$
(57
)
Valuation Allowance Recovery (Provision)
—

 
21

 
36

Balance at End of Year
$
—

 
$
—

 
$
(21
)
 
 
 
 
 
 
Fair Value:
 
 
 
 
 
Balance at Beginning of Year
$
25,148

 
$
24,804

 
$
22,837

Balance at End of Year
$
26,716

 
$
25,148

 
$
24,804



The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of December 31, 2017 and 2016 were as follows:
 
December 31,
 
2017
 
2016
 
Weighted-Average Constant Prepayment Rate 1
8.50
%
8.13
%
Weighted-Average Life (in years)
7.09
 
7.43
 
Weighted-Average Note Rate
4.04
%
4.10
%
Weighted-Average Discount Rate 2
8.87
%
9.33
%
1 
Represents annualized loan prepayment rate assumption.
2 
Derived from multiple interest rate scenarios that incorporate a spread to a market yield 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 December 31, 2017 and 2016 is presented in the following table.
 
December 31,
(dollars in thousands)
2017

 
2016

Constant Prepayment Rate
 
 
 
Decrease in fair value from 25 basis points (“bps”) adverse change
$
(332
)
 
$
(321
)
Decrease in fair value from 50 bps adverse change
(657
)
 
(636
)
Discount Rate
 
 
 
Decrease in fair value from 25 bps adverse change
(289
)
 
(288
)
Decrease in fair value from 50 bps adverse change
(572
)
 
(570
)


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.