Transfers of Financial Assets and Mortgage Servicing Assets

9 Months Ended

Sep. 30, 2013

Transfers of Financial Assets and Mortgage Servicing Assets

Transfers of Financial Assets

The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loan sales primarily to government-sponsored enterprises through established programs, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. For loans sold under participation agreements, the Company also considers the terms of the loan participation agreement and whether they meet the definition of a participating interest, and thus, qualify for derecognition.

With the exception of servicing rights and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and limited to market customary representations and warranties, for which the Company enters into agreements covering certain characteristics of the mortgage loans sold and its origination process. The Company may be required to repurchase a loan in the event of certain breaches of these representations and warranties or in the event of default of the borrower within 90 days of origination. The reserve for loan repurchases provides for estimated losses associated with the repurchase of loans sold in connection with the Company’s mortgage banking operations. The reserve reflects management’s continual evaluation of loss experience and the quality of loan originations. It also reflects management’s expectation of losses from repurchase requests for which management has not yet been notified. Factors considered in the evaluation process for establishing the reserves include the identity of counterparty, the vintage of the loans sold, the amount of open repurchase requests, specific loss estimates for each open request, current level of loan losses in similar vintages held in the residential loan portfolio, and estimated recoveries on the underlying collateral. While management uses its best judgment and information available, the adequacy of this reserve is dependent upon factors outside the Company’s control including the performance of loans sold and the quality of the servicing provided by the acquirer. The provision recorded at the time of loan sale is netted from mortgage banking activities, while any incremental provision, post loan sale, is recorded in other non-interest expense in the accompanying Condensed Consolidated Statements of Income. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in exchange for the transferred assets.

The following table provides detail of activity in the Company’s reserve for loan repurchases:



	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2013			2012			2013			2012
Beginning balance	$	2,648		$	2,394		$	2,617		$	2,269
Provision	447			522			1,462			1,103
Loss on repurchased loans and settlements	(586		)	(312		)	(1,570		)	(768		)
Ending balance	$	2,509		$	2,604		$	2,509		$	2,604

The Company sold residential loans totaling $199.2 million and $643.6 million for the three and nine months ended September 30, 2013, respectively, and $211.9 million and $510.8 million for the three and nine months ended September 30, 2012, respectively. Servicing rights were retained on $192.3 million and $622.6 million and on $206.3 million and $497.6 million of the residential loans sold for the three and nine months ended September 30, 2013 and 2012, respectively. In addition, the Company sold commercial loans totaling $13.0 million for the nine months ended September 30, 2013, and $1.0 million and $4.7 million for the three and nine months ended September 30, 2012.

The net gain on the sale of residential loans of $0.7 million and $13.9 million and $6.2 million and $14.2 million for the three and nine months ended September 30, 2013 and 2012, respectively, and commercial loan sale losses of $315 thousand for the nine months ended September 30, 2013, and gains of $275 thousand and $308 thousand for the three and nine months ended September 30, 2012, respectively, are included as mortgage banking activities in the accompanying Condensed Consolidated Statements of Income.

Mortgage Servicing Assets

The Company has retained servicing rights on consumer loans totaling $2.3 billion at September 30, 2013 and $2.1 billion at December 31, 2012, resulting in mortgage servicing assets of $20.6 million at September 30, 2013 and $14.0 million at December 31, 2012, which are carried at the lower of cost or fair value. See Note 14 - Fair Value Measurements for a further discussion on the fair value of mortgage servicing assets.

Loan servicing fees, net of mortgage servicing rights amortization, were $0.4 million and $2.5 million and $0.4 million and $1.6 million for the three and nine months ended September 30, 2013 and 2012, respectively, and are included as a component of loan related fees in the accompanying Condensed Consolidated Statements of Income.

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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