Note 8. Mortgage Servicing Rights

The Company had MSRs of $220.4 million and $227.3 million, respectively, at March 31, 2015 and December 31, 2014, with both balances consisting entirely of residential MSRs.

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. The effects of changes in the fair value of the derivatives are recorded in “Non-interest income” in the Consolidated Statements of Income and Comprehensive Income. 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. 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 to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset.

The value of residential MSRs at any given time is significantly affected by the mortgage interest rates that are then currently available in the marketplace which, in turn, influence mortgage loan prepayment speeds. During periods of declining interest rates, the value of MSRs generally declines as an increase in mortgage refinancing activity results in an increase in prepayments. Conversely, during periods of rising interest rates, the value of MSRs generally increases as mortgage refinancing activity declines.

The following table sets forth the changes in the balances of residential MSRs for the periods indicated:


	For the Three Months Ended March 31,
(in thousands)	2015		2014
Carrying value, beginning of year	$	227,297	$	241,018
Additions		15,017		6,808
Increase (decrease) in fair value:
Due to changes in interest rates and valuation assumptions		(6,448)		43
Due to other changes⁽¹⁾		(15,495)		(9,865)
Amortization		--		--

Carrying value, end of period	$	220,371	$	238,004

(1)	Net servicing cash flows, including loan payoffs, 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:


	March 31, 2015			December 31, 2014
Expected Weighted Average Life		83 months			83 months
Constant Prepayment Speed		10.5	%		9.3	%
Discount Rate		10.0			10.0
Primary Mortgage Rate to Refinance		3.8			4.0
Cost to Service (per loan per year):
Current		$ 63			$ 63
30-59 days or less delinquent		213			213
60-89 days delinquent		313			313
90-119 days delinquent		413			413
120 days or more delinquent		563			563

As indicated in the preceding table, there were no changes in the assumed servicing costs.