Note 18 — Loan Servicing, Mortgage Origination, and Loans Held for Sale

As of June 30, 2018, December 31, 2017, and June 30, 2017, the portfolio of residential mortgages serviced for others, which is not included in the accompanying balance sheets, was $3.0 billion, $2.9 billion, and $2.8 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 and six months ended June 30, 2018 and June 30, 2017 was $1.9 million and $3.8 million, and $1.8 million and $3.6 million, respectively. Servicing fees are recorded in mortgage banking income in the Company’s consolidated statements of income.

At June 30, 2018, December 31, 2017, and June 30, 2017, MSRs were $35.1 million, $31.1 million, and $29.9 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 and six months ended June 30, 2018 and June 30, 2017 were gains of $429,000 and $2.9 million, compared with losses of $815,000 and $370,000, 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 13 — 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				Six Months Ended
(Dollars in thousands)	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017
Increase (decrease) in fair value of MSRs	$	429	$	(815)	$	2,945	$	(370)
Decay of MSRs		(1,141)		(1,029)		(2,069)		(1,832)
Gain (loss) related to derivatives		(339)		829	$	(1,893)	$	1,095
Net effect on statements of income	$	(1,051)	$	(1,015)	$	(1,017)	$	(1,107)

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 increase, mortgage loan prepayments decelerate due to decreased refinance activity, which results in an increase in the fair value of the MSRs. 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 13 — Fair Value for additional information regarding fair value.

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


	June 30,			December 31,			June 30,
(Dollars in thousands)	2018			2017			2017
Composition of residential loans serviced for others
Fixed-rate mortgage loans		99.7	%		99.7	%		99.7	%
Adjustable-rate mortgage loans		0.3	%		0.3	%		0.3	%
Total		100.0	%		100.0	%		100.0	%
Weighted average life		8.56	years		7.64	years		7.52	years
Constant Prepayment rate (CPR)		6.1	%		7.7	%		8.1	%
Weighted average discount rate		9.4	%		9.6	%		9.6	%
Effect on fair value due to change in interest rates
25 basis point increase	$	934		$	1,485		$	1,457
50 basis point increase		1,626			2,664			2,651
25 basis point decrease		(1,379)			(1,850)			(1,783)
50 basis point decrease		(3,112)			(4,014)			(3,914)

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 $26.0 million and $23.5 million at June 30, 2018 and June 30, 2017, respectively.

Whole loan sales were $173.7 million and $328.5 million for the three and six months ended June 30, 2018, respectively, compared to $193.9 million and $358.3 million for the three and six months ended June 30, 2017, respectively. For the three and six months ended June 30, 2018, $134.6 million and $253.0 million, or 77.5% and 77.0%, respectively, were sold with the servicing rights retained by the company, compared to $153.6 million and $274.2 million, or 79.2% and 76.5%, for the three and six months ended June 30, 2017, respectively

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 were $37.0 million, $70.9 million and $66.0 million at June 30, 2018, December 31, 2017 and June 30, 2017, respectively. At December 31, 2017, loans held for sale included $25.4 million in commercial loans (Shared National Credits) which were acquired in the PSC acquisition that were sold in the first quarter of 2018, resulting in no material gains or losses. Loans held for sale, consisting of residential mortgage loans to be sold in the secondary market, were $37.0 million, $45.5 million, and $66.0 million at June 30, 2018, December 31, 2017, and June 30, 2017, respectively.