Note 8. Mortgage Servicing Rights

The Company had MSRs of $237.2 million and $241.0 million, respectively, at September 30, 2014 and December 31, 2013, 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.” 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.

Up to and including the third quarter of 2013, the Company securitized MSRs in addition to residential MSRs. Securitized MSRs were carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and were amortized in proportion to, and over the period of, estimated net servicing income. Such MSRs were periodically evaluated for impairment, based on the difference between their carrying amount and their current fair value. If it was determined that impairment existed, the resultant loss was charged to earnings. Reflecting amortization, the Company had no securitized MSRs at December 31, 2013.

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

	For the Three Months Ended					For the Three Months Ended
	September 30, 2014					September 30, 2013
(in thousands)	Residential			Securitized		Residential			Securitized
Carrying value, beginning of period	$	228,815		$	--	$	214,959		$	97
Additions		9,637			--		18,725			--
Increase (decrease) in fair value:
Due to changes in valuation assumptions		13,583			--		6,589			--
Due to other changes ⁽¹⁾		(14,814	)		--		(12,168	)		--
Amortization		--			--		--			(97	)
Carrying value, end of period	$	237,221		$	--	$	228,105		$	--

(1)	Net servicing cash flows, including loan payoffs, and the passage of time.

	For the Nine Months Ended					For the Nine Months Ended
	September 30, 2014					September 30, 2013
(in thousands)	Residential			Securitized		Residential			Securitized
Carrying value, beginning of period	$	241,018		$	--	$	144,520		$	193
Additions		23,620			--		73,398			--
Increase (decrease) in fair value:
Due to changes in valuation assumptions		13,091			--		54,437			--
Due to other changes ⁽¹⁾		(40,508	)		--		(44,250	)		--
Amortization		--			--		--			(193	)
Carrying value, end of period	$	237,221		$	--	$	228,105		$	--

(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:

	September 30, 2014			December 31, 2013
Expected weighted average life	88 months			93 months
Constant prepayment speed		8.4	%		8.3	%
Discount rate		10.0		10.5
Primary mortgage rate to refinance		4.2		4.5
Cost to service (per loan per year):
Current	$	63		$	53
30-59 days or less delinquent		213			103
60-89 days delinquent		313			203
90-119 days delinquent		413			303
120 days or more delinquent		563			553