Loan Servicing Rights

Loan servicing rights ("LSRs") are created as a result of selling residential mortgage and commercial real estate loans in the secondary market while retaining the right to service these loans and receive servicing income over the life of the loan, and from acquisitions of other banks that had LSRs. Loans serviced for others are not reported as assets in the Consolidated Statements of Financial Position.

The Corporation elected to account for LSRs acquired related to the merger with Talmer under the fair value measurement method. Prior to January 1, 2017, the Corporation accounted for all other LSRs at the lower of cost or fair value ("Amortized LSRs"). The Company elected as of January 1, 2017 to account for all previously Amortized LSRs under the fair value measurement method. This change in accounting policy resulted in a cumulative adjustment to retained earnings as of January 1, 2017 in the amount of $3.7 million. For further information on this election, refer to Footnote 1, Basis of Presentation and Accounting Policies.

LSRs are established and recorded at the estimated fair value by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The following table represents the activity for LSRs and the related fair value changes:



	For the three months ended March 31, 2017
(Dollars in thousands)	Commercial Real Estate			Mortgage			Total
Fair value, beginning of period	$	344		$	47,741		$	48,085
Transfers based on new accounting policy election	—			15,891			15,891
Additions from loans sold with servicing retained	—			1,753			1,753
Changes in fair value due to:
Reductions from pay-offs, pay downs and run-off	(24		)	(582		)	(606		)
Changes in estimates of fair value ⁽¹⁾	—			(519		)	(519		)
Fair value, end of period	$	320		$	64,284		$	64,604
Principal balance of loans serviced for others that have servicing capitalized	$	50,942		$	7,253,396		$	7,304,338

(1) Represents estimated LSR value change resulting primarily from market-driven changes in interest rates and prepayments. Included in "Mortgage banking revenue" in the Consolidated Statements of Income.

During the three months ended March 31, 2016, the Corporation accounted for LSRs using the amortization method. Activity for LSRs and the related valuation allowance for the three months ended March 31, 2016 are as follows:



(Dollars in thousands)	For the three months ended March 31, 2016
Balance at beginning of period	$	11,122
Additions	331
Amortization	(975		)
Balance at end of period	$	10,478

Expected and actual loan prepayment speeds are the most significant factors driving the fair value of loan servicing rights. The following table presents assumptions utilized in determining the fair value of loan servicing rights as of March 31, 2017 and December 31, 2016.



	Mortgage
As of March 31, 2017
Prepayment speed	0.0 - 36.6%
Weighted average (“WA”) discount rate	10.1		%
Cost to service/per year	$	65
Ancillary income/per year	$	31
WA float range	0.98		%
As of December 31, 2016
Prepayment speed	0.0 - 99.8%
WA discount rate	10.1		%
Cost to service/per year	$65-$90
Ancillary income/per year	$	28
WA float range	1.0		%

The Corporation realized total loan servicing fee income, included in "Mortgage banking revenue" in the Consolidated Statements of Income, of $4.5 million and $1.3 million for the three months ended March 31, 2017 and 2016, respectively.