Mortgage Servicing Rights

6 Months Ended

Jun. 30, 2011

Mortgage Servicing Rights

Mortgage Servicing Rights

Note 4.  Mortgage Servicing Rights

The Company’s portfolio of residential mortgage loans serviced for third parties was $3.2 billion as of June 30, 2011 and December 31, 2010.  Generally, the Company’s residential mortgage loans sold to third parties are sold on a non-recourse basis.  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 $2.1 million and $2.0 million for the three months ended June 30, 2011 and 2010, respectively, and $4.2 million and $4.1 million for the six months ended June 30, 2011 and 2010, respectively.  Servicing income is recorded as a component of 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, 2011 and 2010, 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						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2011			2010			2011			2010
Balance at Beginning of Period	$	9,692		$	14,807		$	10,226		$	15,332
Changes in Fair Value:
Due to Change in Valuation Assumptions 1	(553		)	(554		)	(487		)	(646		)
Due to Paydowns and Other 2	(287		)	(413		)	(887		)	(846		)
Total Changes in Fair Value of Mortgage Servicing Rights	(840		)	(967		)	(1,374		)	(1,492		)
Balance at End of Period	$	8,852		$	13,840		$	8,852		$	13,840

1Principally represents changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates.

2Principally represents changes due to loan payoffs.

For the three and six months ended June 30, 2011 and 2010, 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						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2011			2010			2011			2010
Balance at Beginning of Period	$	16,227		$	11,275		$	15,153		$	10,638
Servicing Rights that Resulted From Asset Transfers	473			896			1,962			1,841
Amortization	(480		)	(365		)	(895		)	(673		)
Balance at End of Period	$	16,220		$	11,806		$	16,220		$	11,806
Fair Value of Mortgage Servicing Rights Accounted for Under the Amortization Method
Beginning of Period	$	22,661		$	16,453		$	20,340		$	14,853
End of Period	$	21,483		$	15,044		$	21,483		$	15,044

The key assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of June 30, 2011 and December 31, 2010 were as follows:

	June 30,		December 31,
	2011		2010
Weighted-Average Constant Prepayment Rate 1	13.31	%	13.71	%
Weighted-Average Life (in years)	6.06		5.90
Weighted-Average Note Rate	4.94	%	5.02	%
Weighted-Average Discount Rate 2	7.19	%	7.29	%

1Represents annualized loan repayment rate assumption.

2Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap 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, 2011 and December 31, 2010 is presented in the following table.

	June 30,			December 31,
(dollars in thousands)	2011			2010
Constant Prepayment Rate
Decrease in fair value from 25 basis points (“bps”) adverse change	$	(337	)	$	(338	)
Decrease in fair value from 50 bps adverse change	(667		)	(671		)
Discount Rate
Decrease in fair value from 25 bps adverse change	(423		)	(421		)
Decrease in fair value from 50 bps adverse change	(836		)	(830		)

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.