Note 7. Mortgage Servicing Rights

The Company had mortgage servicing rights (“MSRs”) of $122.5 million and $117.0 million, respectively, at September 30, 2012 and December 31, 2011. The Company has two classes of MSRs for which it separately manages the economic risk: residential and securitized.

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 bases the fair value of its MSRs on the present value of estimated future net servicing income cash flows utilizing an internal valuation model. The Company estimates future net servicing income cash flows with assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, 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 at any given time is significantly affected by mortgage interest rates then currently available in the marketplace, which influence mortgage loan prepayment speeds. During periods of declining interest rates, the value of MSRs generally declines due to increasing prepayments attributable to increased mortgage refinancing activity. Conversely, during periods of rising interest rates, the value of MSRs generally increases as mortgage refinancing activity declines.

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 their carrying amount and their current fair value. If it is determined that impairment exists, the resultant loss is charged against earnings.

The following tables set forth the changes in residential and securitized MSRs for the periods indicated below:


	For the Three Months Ended
	September 30, 2012				September 30, 2011
(in thousands)	Residential		Securitized		Residential		Securitized
Carrying value, beginning of period		$136,176		$386		$126,771		$ 886
Additions		28,178		--		13,200		--
Increase (decrease) in fair value:
Due to changes in valuation assumptions		(23,720)		--		(32,547)		--
Due to other changes⁽¹⁾		(18,394)		--		(12,410)		--
Amortization		--		(96)		--		(145)

Carrying value, end of period		$122,240		$ 290		$ 95,014		$ 741

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


	For the Nine Months Ended
	September 30, 2012				September 30, 2011
(in thousands)	Residential		Securitized		Residential		Securitized
Carrying value, beginning of period		$116,416		$ 596		$106,186		$1,192
Additions		85,977		--		50,519		--
Increase (decrease) in fair value:
Due to changes in valuation assumptions		(31,255)		--		(32,547)		--
Due to other changes⁽¹⁾		(48,898)		--		(29,144)		--
Amortization		--		(306)		--		(451)

Carrying value, end of period		$122,240		$ 290		$ 95,014		$ 741

(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, 2012			December 31, 2011
Weighted Average Expected Life		56 months			69 months
Constant Prepayment Speed		17.7	%		14.2	%
Discount Rate		10.5			10.0
Primary Mortgage Rate to Refinance		3.5			4.1
Cost to Service (per loan per year):
Current		$ 53			$ 53
30-59 days or less delinquent		103			103
60-89 days delinquent		203			203
90-119 days delinquent		303			303
Over 120 days delinquent		553			553

As of September 30, 2012, there were no changes in assumed future servicing costs.