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 and all other 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, Summary of 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 year ended December 31, 2018
Fair value, beginning of period	$	427		$	63,414		$	63,841
Additions from loans sold with servicing retained	139			8,087			8,226
Changes in fair value due to:
Reductions from pay-offs, pay downs and run-off	(115		)	(2,766		)	(2,881		)
Changes in estimates of fair value ⁽¹⁾	—			1,827			1,827
Fair value, end of period	$	451		$	70,562		$	71,013
Principal balance of loans serviced	$	41,127		$	6,826,952		$	6,868,079
For the year ended December 31, 2017
Fair value, beginning of period	$	344		$	47,741		$	48,085
Transfers in based on new accounting policy election ⁽²⁾	—			15,891			15,891
Additions from loans sold with servicing retained	188			8,557			8,745
Changes in fair value due to:
Reductions from pay-offs, pay downs and run-off	(105		)	(2,400		)	(2,505		)
Changes in estimates of fair value ⁽¹⁾	—			(6,375		)	(6,375		)
Fair value, end of period	$	427		$	63,414		$	63,841
Principal balance of loans serviced	$	40,316		$	7,068,431		$	7,108,747
For the year ended December 31, 2016
Fair value, beginning of period	$	—		$	—		$	—
Acquired in Talmer Bancorp, Inc. merger	365			42,097			42,462
Additions from loans sold with servicing retained	—			1,030			1,030
Changes in fair value due to:
Reductions from pay-offs, pay downs and run-off	(17		)	(502		)	(519		)
Changes in estimates of fair value ⁽¹⁾	(4		)	5,116			5,112
Fair value, end of period	$	344		$	47,741		$	48,085
Principal balance of loans serviced under the fair value measurement method	$	64,756		$	5,235,415		$	5,300,171


⁽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.


⁽²⁾	The Corporation elected as of January 1, 2017 to account for all loan servicing rights previously accounted for at the lower of cost or fair value under the fair value measurement method. For further information on this election, refer to Note 1, Summary of Significant Accounting Policies.

The following shows the net carrying value and fair value of LSRs and the total loans that the Corporation serviced for others accounted for at the lower of cost or fair value for the year ended December 31, 2016:



	Year Ended December 31,
(Dollars in thousands)	2016
Net carrying value of LSRs	$	10,230
Fair value of LSRs	$	15,891
Valuation allowance	$	8
Loans serviced for others that have servicing rights capitalized	$	2,074,057

Activity for LSRs accounted for at the lower of cost or fair value and the related valuation allowance for the year ended December 31, 2016 is as follows:



	Year Ended December 31,
(Dollars in thousands)	2016
Balance at beginning of period	$	11,122
Additions	3,303
Amortization	(4,187		)
Change in valuation allowance	(8		)
Balance at end of period	$	10,230

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 December 31, 2018 and 2017.



	Mortgage
As of December 31, 2018
Prepayment speed	0.00 - 26.4%
Weighted average ("WA") discount rate	10.1		%
WA Cost to service/per year	$	66
WA Ancillary income/per year	$	31
WA float range	2.5		%
As of December 31, 2017
Prepayment speed	0.00 - 38.8%
WA discount rate	10.1		%
WA Cost to service/per year	$	66
Ancillary income/per year	$	31
WA float range	1.6		%

The Corporation realized total loan servicing fee income of $17.6 million, $18.2 million and $8.7 million for the years ended December 31, 2018, 2017 and 2016, respectively, recorded as a component of "Net gain on sale of loans and other mortgage banking revenue" in the Consolidated Statements of Income.