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Mortgage Servicing Rights
 9 Months Ended
Sep. 30, 2019
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 $3.0 billion and $2.9 billion as of September 30, 2019 and December 31, 2018, respectively.  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 for the three months ended September 30, 2019 and 2018, and $5.4 million for the nine months ended September 30, 2019 and 2018.  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 and nine months ended September 30, 2019 and 2018, 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
September 30,
 
Nine Months Ended
September 30,
(dollars in thousands)
2019

 
2018

 
2019

 
2018

Balance at Beginning of Period
$
1,212

 
$
1,366

 
$
1,290

 
$
1,454

Change in Fair Value:
 

 
 

 
 

 
 

Due to Payoffs
(38
)
 
(39
)
 
(116
)
 
(127
)
Total Changes in Fair Value of Mortgage Servicing Rights
(38
)
 
(39
)
 
(116
)
 
(127
)
Balance at End of Period
$
1,174

 
$
1,327

 
$
1,174

 
$
1,327



For the three and nine months ended September 30, 2019 and 2018, 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
September 30,
 
Nine Months Ended
September 30,
(dollars in thousands)
2019

 
2018

 
2019

 
2018

Balance at Beginning of Period
$
23,021

 
$
23,217

 
$
23,020

 
$
23,168

Servicing Rights that Resulted From Asset Transfers
1,263

 
562

 
2,788

 
1,957

Amortization
(1,032
)
 
(643
)
 
(2,546
)
 
(1,989
)
Valuation Allowance Provision
(18
)
 
—

 
(28
)
 
—

Balance at End of Period
$
23,234

 
$
23,136


$
23,234


$
23,136

 
 
 
 
 
 
 
 
Valuation Allowance:
 
 
 
 
 
 
 
Balance at Beginning of Period
$
(10
)
 
$
—

 
$
—

 
$
—

Valuation Allowance Provision
(18
)
 
—

 
(28
)
 
—

Balance at End of Period
$
(28
)
 
$
—


$
(28
)

$
—

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

 
 

 
 

 
 

Beginning of Period
$
24,905

 
$
29,746

 
$
29,218

 
$
26,716

End of Period
$
23,674

 
$
30,063

 
$
23,674

 
$
30,063



The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of September 30, 2019 and December 31, 2018 were as follows:
 
September 30,
2019

 
December 31, 2018

Weighted-Average Constant Prepayment Rate 1
11.81
%
 
7.01
%
Weighted-Average Life (in years)
5.79

 
7.89

Weighted-Average Note Rate
4.03
%
 
4.06
%
Weighted-Average Discount Rate 2
6.96
%
 
9.59
%
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 September 30, 2019 and December 31, 2018 is presented in the following table.
(dollars in thousands)
September 30,
2019

 
December 31,
2018

Constant Prepayment Rate
 

 
 

Decrease in fair value from 25 basis points (“bps”) adverse change
$
(268
)
 
$
(361
)
Decrease in fair value from 50 bps adverse change
(529
)
 
(716
)
Discount Rate
 

 
 

Decrease in fair value from 25 bps adverse change
(231
)
 
(325
)
Decrease in fair value from 50 bps adverse change
(458
)
 
(643
)


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.