Mortgage Servicing Rights

3 Months Ended

Mar. 31, 2018

Transfers and Servicing of Financial Assets [Abstract]

The Company’s portfolio of residential mortgage loans serviced for third parties was $2.9 billion as of March 31, 2018 and December 31, 2017. 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 14 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 $1.8 million and $1.7 million for the three months ended March 31, 2018 and 2017, 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 three months ended March 31, 2018 and 2017, 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)	2018			2017
Balance at Beginning of Period	$	1,454		$	1,655
Change in Fair Value:
Due to Payoffs	(50		)	(69		)
Total Changes in Fair Value of Mortgage Servicing Rights	(50		)	(69		)
Balance at End of Period	$	1,404		$	1,586

For the three months ended March 31, 2018 and 2017, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method was as follows:



	Three Months Ended March 31,
(dollars in thousands)	2018			2017
Balance at Beginning of Period	$	23,168		$	22,008
Servicing Rights that Resulted From Asset Transfers	621			1,315
Amortization	(700		)	(618		)
Balance at End of Period	$	23,089		$	22,705

Fair Value of Mortgage Servicing Rights Accounted for Under the Amortization Method
Beginning of Period	$	26,716		$	25,148
End of Period	$	28,600		$	25,946

The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of March 31, 2018 and December 31, 2017 were as follows:



	March 31, 2018		December 31, 2017
Weighted-Average Constant Prepayment Rate ¹	7.07	%	8.50	%
Weighted-Average Life (in years)	7.78		7.09
Weighted-Average Note Rate	4.04	%	4.04	%
Weighted-Average Discount Rate ²	9.77	%	8.87	%


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 March 31, 2018 and December 31, 2017 is presented in the following table.



(dollars in thousands)	March 31, 2018			December 31, 2017
Constant Prepayment Rate
Decrease in fair value from 25 basis points (“bps”) adverse change	$	(360	)	$	(332	)
Decrease in fair value from 50 bps adverse change	(717		)	(657		)
Discount Rate
Decrease in fair value from 25 bps adverse change	(314		)	(289		)
Decrease in fair value from 50 bps adverse change	(621		)	(572		)

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.

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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