Note 19 — Loan Servicing, Mortgage Origination, and Loans Held for Sale

As of March 31, 2017, December 31, 2016, and March 31, 2016, the portfolio of residential mortgages serviced for others, which is not included in the accompanying balance sheets, was $2.8 billion, $2.7 billion, and $2.6 billion, 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 three months ended March 31, 2017 and March 31, 2016 was $1.8 million and $1.5 million, respectively. Servicing fees are recorded in mortgage banking income in the Company’s consolidated statements of income.

At March 31, 2017, December 31, 2016, and March 31, 2016, mortgage servicing rights (“MSRs”) were $30.1 million, $29.0 million, and $23.7 million on the Company’s consolidated balance sheets, respectively. 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 three months ended March 31, 2017 and March 31, 2016 were a gain of $444,000 and a loss of $2.6 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.

See Note 14 — Fair Value for the changes in fair value of MSRs. The following table presents the changes in the fair value of the offsetting hedge.


	Three Months Ended
(Dollars in thousands)	March 31, 2017		March 31, 2016
Increase (decrease) in fair value of MSRs	$	444	$	(2,606)
Decay of MSRs		(803)		(780)
Gains related to derivatives	$	266	$	3,045
Net effect on statements of income	$	(93)	$	(341)

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 14 — Fair Value for additional information regarding fair value.

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


	March 31,			December 31,			March 31,
(Dollars in thousands)	2017			2016			2016
Composition of residential loans serviced for others
Fixed-rate mortgage loans		99.6	%		99.6	%		99.4	%
Adjustable-rate mortgage loans		0.4	%		0.4	%		0.6	%
Total		100.0	%		100.0	%		100.0	%
Weighted average life		7.68	years		7.70	years		6.10	years
Constant Prepayment rate (CPR)		7.8	%		7.7	%		11.8	%
Weighted average discount rate		9.8	%		9.8	%		9.8	%
Effect on fair value due to change in interest rates
25 basis point increase	$	1,375		$	1,399		$	1,884
50 basis point increase		2,431			2,557			3,532
25 basis point decrease		(1,746)			(1,713)			(2,206)
50 basis point decrease		(3,774)			(3,670)			(4,477)

The sensitivity calculations in the previous table 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, 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 $18.2 million and $16.4 million at March 31, 2017 and March 31, 2016, respectively.

Mandatory cash forwards and whole loan sales were $177.7 million and $135.9 million for the three months ended March 31, 2017 and March 31, 2016, respectively, of which $120.6 million and $93.3 million, or 67.9% and 68.7%, respectively, 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 primarily of residential mortgage loans to be sold in the secondary market, were $47.0 million, $50.6 million, and $34.9 million at March 31, 2017, December 31, 2016, and March 31, 2016, respectively.