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Loan Servicing, Mortgage Origination, and Loans Held for Sale

12 Months Ended

Dec. 31, 2019

Loan Servicing, Mortgage Origination, and Loans Held for Sale

Loan Servicing, Mortgage Origination, and Loans Held for Sale

Note 28—Loan Servicing, Mortgage Origination, and Loans Held for Sale

The portfolio of residential mortgages serviced for others, which are not included in the accompanying balance sheets, was $3.3 billion and $3.1 billion at December 31, 2019 and 2018, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts and disbursing payments to investors. The amount of contractually specified servicing fees earned by the Company during the year ended December 31, 2019 and 2018 was $7.8 million and $7.6 million, respectively. Servicing fees are recorded in mortgage banking income in the Company’s consolidated statements of income.

At December 31, 2019 and 2018, MSRs were $30.5 million and $34.7 million, respectively, on the Company’s consolidated balance sheet. MSRs are recorded at fair value with changes in fair value recorded as a component of mortgage banking income in the Consolidated Statements of Income. The market value adjustments related to MSRs recorded in mortgage banking income for the years ended December 31, 2019 and 2018 were a loss of $7.0 million and a gain of $1.9 million, respectively. The Company has used various free standing derivative instruments to mitigate the income statement effect of changes in fair value due to changes in market value adjustments and to changes in valuation inputs and assumptions related to MSRs.

The following table presents the changes in the fair value of MSRs and its offsetting hedge.


			Year Ended December 31,
(Dollars in thousands)			2019			2018			2017
Increase (decrease) in fair value of MSRs			$	(6,976)		$	1,861		$	(595)
Decay of MSRs				(4,589)			(4,215)			(3,762)
Gain (loss) related to derivatives				3,967			(953)			200
Net effect on statements of income			$	(7,598)		$	(3,307)		$	(4,157)

The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time. See Note 24 — Fair Value for additional information regarding fair value.

The characteristics and sensitivity analysis of the MSRs are included in the following table.


		December 31,
(Dollars in thousands)		2019			2018
Composition of residential loans serviced for others
Fixed-rate mortgage loans			99.8	%		99.8	%
Adjustable-rate mortgage loans			0.2	%		0.2	%
Total			100.0	%		100.0	%
Weighted average life			6.55	years		7.88	years
Constant Prepayment rate (CPR)			10.3	%		7.3	%
Weighted average discount rate			9.4	%		9.4	%
Effect on fair value due to change in interest rates
25 basis point increase		$	2,477		$	1,504
50 basis point increase			4,452			2,740
25 basis point decrease			(2,938)			(1,981)
50 basis point decrease			(6,228)			(4,421)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, in this table, the effects of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumptions, while in reality, changes in one factor may result in changing another, which may magnify or contract the effect of the change.

Custodial escrow balances maintained in connection with the loan servicing were $16.5 million and $16.2 million at December 31, 2019 and 2018.

Whole loan sales were $812.3 million and $645.7 million for the years ended December 31, 2019 and 2018, of which $660.6 million and $498.7 million or 81.3% and 77.2% were sold with the servicing rights retained by the Company.

Loans held for sale have historically been comprised of residential mortgage loans awaiting sale in the secondary market, which generally settle in 15 to 45 days. At December 31, 2019, loans held for sale were $59.4 million, compared with $22.9 million at December 31, 2018.