Mortgage Servicing Rights

9 Months Ended

Sep. 30, 2024

Transfers and Servicing of Financial Assets [Abstract]

Mortgage Servicing Rights

Note 5. Mortgage Servicing Rights

The Company’s portfolio of residential mortgage loans serviced for third parties was $2.5 billion as of September 30, 2024 and $2.6 billion as of December 31, 2023. 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 Fair Value of Assets and Liabilities for more information). Changes to the balance of mortgage servicing rights are recorded in Mortgage Banking in the Company’s unaudited 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 $1.4 million for both the three months ended September 30, 2024 and 2023, and $4.1 million and $4.2 million for the nine months ended September 30, 2024 and 2023, respectively. Servicing income is recorded in Mortgage Banking in the Company’s unaudited consolidated statements of income. The Company’s residential mortgage investor loan servicing portfolio is primarily comprised of fixed rate loans concentrated in Hawai‘i.

For the three and nine months ended September 30, 2024 and 2023, 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)	2024			2023			2024			2023
Balance at Beginning of Period	$	668		$	695		$	678		$	717
Change in Fair Value Due to Payoffs		(8	)		(10	)		(18	)		(32	)
Balance at End of Period	$	660		$	685		$	660		$	685

For the three and nine months ended September 30, 2024 and 2023, 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)	2024			2023			2024			2023
Balance at Beginning of Period	$	19,286		$	20,931		$	20,201		$	21,902
Servicing Rights that Resulted From Asset Transfers		157			206			316			382
Amortization		(532	)		(549	)		(1,606	)		(1,696	)
Balance at End of Period	$	18,911		$	20,588		$	18,911		$	20,588
Fair Value of Mortgage Servicing Rights Accounted for    Under the Amortization Method
Beginning of Period	$	25,326		$	26,327		$	26,173		$	27,323
End of Period	$	25,265		$	26,423		$	25,265		$	26,423

The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of September 30, 2024 and December 31, 2023, were as follows:

	September 30, 2024			December 31, 2023
Weighted-Average Constant Prepayment Rate 1		4.20	%		4.06	%
Weighted-Average Life (in years)		9.20			9.44
Weighted-Average Note Rate		3.72	%		3.67	%
Weighted-Average Discount Rate 2		9.28	%		9.48	%

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, 2024 and December 31, 2023, is presented in the following table.

(dollars in thousands)	September 30, 2024			December 31, 2023
Constant Prepayment Rate
Decrease in fair value from 25 basis points (“bps”) adverse change	$	(311	)	$	(326	)
Decrease in fair value from 50 bps adverse change		(615	)		(645	)
Discount Rate
Decrease in fair value from 25 bps adverse change		(291	)		(303	)
Decrease in fair value from 50 bps adverse change		(576	)		(600	)

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.