Note 29—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 $2.7 billion and $2.6 billion at December 31, 2016 and 2015, 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, 2016 and 2015 was $6.8 million and $6.3 million, respectively. Servicing fees are recorded in mortgage banking income in the Company’s consolidated statements of income.

At December 31, 2016 and 2015, MSRs were $29.0 million and $26.2 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, 2016 and 2015 were a gain of $560,000 and $1.0 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)	2016		2015		2014
Increase (decrease) in fair value of MSRs	$	560	$	1,015	$	(1,618)
Decay of MSRs		(4,153)		(3,371)		(2,381)
Gains (losses) related to derivatives		(402)		751		3,872
Net effect on statements of income	$	(3,995)	$	(1,605)	$	(127)

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 25 — Fair Value for additional information regarding fair value.

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


	December 31,
(Dollars in thousands)	2016			2015
Composition of residential loans serviced for others
Fixed-rate mortgage loans		99.6	%		99.4	%
Adjustable-rate mortgage loans		0.4	%		0.6	%
Total		100.0	%		100.0	%
Weighted average life		7.70	years		7.05	years
Constant Prepayment rate (CPR)		7.7	%		9.6	%
Weighted average discount rate		9.8	%		9.8	%
Effect on fair value due to change in interest rates
25 basis point increase	$	1,399		$	1,562
50 basis point increase		2,557			2,950
25 basis point decrease		(1,713)			(1,866)
50 basis point decrease		(3,670)			(4,021)

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 $13.2 million and $10.7 million at December 31, 2016 and 2015.

Whole loan sales were $745.7 million and $843.0 million for the years ended December 31, 2016 and 2015, of which $605.6 million and $631.1 million or 81.2% and 74.9% 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. Loans held for sale, which consists of residential mortgage loans to be sold in the secondary market, was $50.6 million at December 31, 2016, compared with $41.6 million at December 31, 2015.