Note 7. Mortgage Servicing Rights

The Company had mortgage servicing rights (“MSRs”) of $95.8 million at September 30, 2011. The Company has two classes of MSRs (residential and securitized) for which it separately manages the economic risk.

Residential MSRs are carried at fair value, with changes in fair value recorded as a component of non-interest income in each period. The Company uses various derivative instruments to mitigate the income statement-effect of changes in fair value due to changes in valuation inputs and assumptions regarding its residential MSRs. MSRs do not trade in an active open market with readily observable prices. Accordingly, the Company utilizes a valuation model that calculates the present value of estimated future cash flows. The model incorporates various assumptions, including estimates of prepayment speeds, discount rates, refinance rates, servicing costs, and ancillary income. The Company reassesses and periodically adjusts the underlying inputs and assumptions in the model to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset.

The value of MSRs is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of MSRs declines due to an increase in prepayments attributable to increased mortgage refinancing activity. Conversely, during periods of rising interest rates, the value of MSRs generally increases due to reduced mortgage refinancing activity.

Securitized MSRs are carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and are amortized in proportion to, and over the period of, estimated net servicing income. Such MSRs are periodically evaluated for impairment based on the difference between the carrying amount and current fair value. If it is determined that impairment exists, the resultant loss is charged against earnings.

The following table sets forth the changes in residential and securitized MSRs for the nine months ended September 30, 2011 and the year ended December 31, 2010:


	For the Nine Months Ended September 30, 2011						For the Year Ended December 31, 2010
(in thousands)	Residential			Securitized			Residential			Securitized
Carrying value, beginning of year		$	106,186		$	1,192		$	8,617		$	1,965
Additions			50,519			--			100,767			--
Increase (decrease) in fair value:
Due to changes in valuation assumptions			(32,547)			--			--			--
Due to other changes⁽¹⁾			(29,144)			--			(3,198)			--
Amortization			--			(451)			--			(773)

Carrying value, end of period		$	95,014		$	741		$	106,186		$	1,192

(1)	Includes net servicing cash flows and the passage of time.

The following table presents the key assumptions used in calculating the fair value of the Company’s residential MSRs at the dates indicated:


	September 30, 2011			December 31, 2010
Weighted Average Expected Life	60 months			85 months
Constant Prepayment Speed		17.1	%		10.1	%
Discount Rate		10.0			10.0
Primary Mortgage Rate to Refinance		4.1			5.0
Cost to Service (per loan per year):
30 days or less delinquent		$ 53			$ 53
31-60 days delinquent		178			178
61-90 days delinquent		303			303
91-120 days delinquent		553			553

As of September 30, 2011, there were no changes in assumed future servicing costs since December 31, 2010.