Mortgage Servicing Rights

6 Months Ended

Jun. 30, 2021

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 $2.7 billion as of June 30, 2021, and $2.8 billion as of December 31, 2020.  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 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 $1.6 million and $1.8 million for the three months ended June 30, 2021, and June 30, 2020, and $3.2 million and $3.7 million for the six months ended June 30, 2021 and June 30, 2020, 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 and six months ended June 30, 2021, and June 30, 2020, 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 June 30,						Six Months Ended June 30,
(dollars in thousands)	2021			2020			2021			2020
Balance at Beginning of Period	$	919		$	1,101		$	958		$	1,126
Change in Fair Value:
Due to Payoffs		(44	)		(33	)		(83	)		(58	)
Total Changes in Fair Value of Mortgage Servicing Rights		(44	)		(33	)		(83	)		(58	)
Balance at End of Period	$	875		$	1,068		$	875		$	1,068

For the three and six months ended June 30, 2021, and June 30, 2020, 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 June 30,						Six Months Ended June 30,
(dollars in thousands)	2021			2020			2021			2020
Balance at Beginning of Period	$	21,401		$	21,436		$	18,694		$	23,896
Servicing Rights that Resulted From Asset Transfers		1,260			1,005			2,940			2,170
Amortization		(996	)		(1,301	)		(2,159	)		(2,413	)
Valuation Allowance Recovery (Provision)		(1,067	)		696			1,123			(1,817	)
Balance at End of Period	$	20,598		$	21,836		$	20,598		$	21,836
Valuation Allowance:
Balance at Beginning of Period	$	(1,702	)	$	(2,513	)	$	(3,892	)	$	—
Valuation Allowance Recovery (Provision)		(1,067	)		696			1,123			(1,817	)
Balance at End of Period	$	(2,769	)	$	(1,817	)	$	(2,769	)	$	(1,817	)
Fair Value of Mortgage Servicing Rights Accounted for    Under the Amortization Method
Beginning of Period	$	21,401		$	21,436		$	18,694		$	25,714
End of Period	$	20,598		$	21,836		$	20,598		$	21,836

The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of June 30, 2021, and December 31, 2020, were as follows:

	June 30, 2021			December 31, 2020
Weighted-Average Constant Prepayment Rate 1		12.00	%		14.42	%
Weighted-Average Life (in years)		5.80			4.99
Weighted-Average Note Rate		3.72	%		3.87	%
Weighted-Average Discount Rate 2		6.51	%		5.81	%

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 June 30, 2021, and December 31, 2020, is presented in the following table.

(dollars in thousands)	June 30, 2021			December 31, 2020
Constant Prepayment Rate
Decrease in fair value from 25 basis points (“bps”) adverse change	$	(234	)	$	(203	)
Decrease in fair value from 50 bps adverse change		(463	)		(401	)
Discount Rate
Decrease in fair value from 25 bps adverse change		(213	)		(184	)
Decrease in fair value from 50 bps adverse change		(422	)		(365	)

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.