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 Corporation 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 Note 1, Basis of Presentation and Significant 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:



(Dollars in thousands)	Commercial Real Estate			Mortgage			Total
For the three months ended September 30, 2017
Fair value, beginning of period	$	486		$	64,036		$	64,522
Additions from loans sold with servicing retained	—			2,324			2,324
Changes in fair value due to:
Reductions from pay-offs, pay downs and run-off	(31		)	(579		)	(610		)
Changes in estimates of fair value ⁽¹⁾	—			(4,041		)	(4,041		)
Fair value, end of period	$	455		$	61,740		$	62,195
For the nine months ended September 30, 2017	344			47741			48085
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	188			6,273			6,461
Changes in fair value due to:	0			0
Reductions from pay-offs, pay downs and run-off	(77		)	(1,803		)	(1,880		)
Changes in estimates of fair value ⁽¹⁾	—			(6,362		)	(6,362		)
Fair value, end of period	$	455		$	61,740		$	62,195
Principal balance of loans serviced for others that have servicing capitalized	$	41,798		$	7,102,485		$	7,144,283
For the three and nine months ended September 30, 2016	0			0			0
Fair value, beginning of period	$	—		$	—		$	—
Acquired in Talmer Bancorp, Inc. merger	$	365		$	42,097		$	42,462
Additions from loans sold with servicing retained	—			810			810
Changes in fair value due to:							0
Reductions from pay-offs, pay downs and run-off	(2		)	(685		)	(687		)
Changes in estimates of fair value⁽¹⁾	—			(657		)	(657		)
Fair value, end of period	$	363		$	41,565		$	41,928
Principal balance of loans serviced	$	79,405		$	5,523,423		$	5,602,828


⁽¹⁾	Represents estimated LSR value change resulting primarily from market-driven changes in interest rates and prepayments. Included in "Net gain on sale of loans and other mortgage banking revenue" in the Consolidated Statements of Income.

During the three and nine months ended September 30, 2016, the Corporation accounted for LSRs using the amortization method. Activity for LSRs and the related valuation allowance for the three and nine months ended September 30, 2016 are as follows:



(Dollars in thousands)	For the Three Months Ended September 30, 2016			For the Nine Months Ended September 30, 2016
Balance at beginning of period	$	9,677		$	11,122
Additions	695			1,612
Amortization	(1,105		)	(3,055		)
Change in valuation allowance	198			(214		)
Balance at end of period	$	9,465		$	9,465

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 September 30, 2017 and December 31, 2016.



	Mortgage
As of September 30, 2017
Prepayment speed	0.0 - 37.66%
Weighted average ("WA") discount rate	10.1		%
Cost to service/per year	$	66
Ancillary income/per year	$	31
WA float range	1.2		%
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 "Net gain on sale of loans and other mortgage banking revenue" in the Consolidated Statements of Income, of $4.5 million and $2.1 million for the three months ended September 30, 2017 and 2016, respectively, and $13.6 million and $4.7 million for the nine months ended September 30, 2017 and 2016, respectively.