Mortgage Servicing Rights and Mortgage Servicing Activity

In the years ended December 31, 2011 and 2010, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $533.5 million and $558.6 million, respectively, and recognized pretax gains of $4.8 million and $5.5 million, respectively, which are included as a component of loan sales and servicing income. As of December 31, 2011 and 2010, the Corporation retained the related mortgage servicing rights on $481.1 million and $484.0 million, respectively, of the loans sold and receives servicing fees.

The Corporation serviced for third parties approximately $2.2 billion of residential mortgage loans at December 31, 2011 and $2.1 billion at December 31, 2010. Loan servicing fees, not including valuation changes included in loan sales and servicing income, were $5.4 million, $5.1 million and $5.0 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Servicing rights are presented within other assets on the accompanying consolidated balance sheets. The retained servicing rights are initially valued at fair value. Since mortgage servicing rights do not trade in an active market with readily observable prices, the Corporation relies primarily on a discounted cash flow analysis model to estimate the fair value of its mortgage servicing rights. Additional information can be found in Note 16 (Fair Value Measurement). Mortgage servicing rights are subsequently measured using the amortization method. Accordingly, the mortgage servicing rights are amortized over the period of, and in proportion to, the estimated net servicing income and is recorded in loan sales and servicing income.

Changes in the carrying amount of mortgage servicing rights are as follows:



	Years Ended December 31,
	2011			2010			2009
Balance at beginning of period	$	21,317		$	20,784		$	18,778
Addition of mortgage servicing rights	4,442			4,966			4,862
Amortization	(4,580		)	(4,433		)	(3,641		)
Changes in allowance for impairment	(3,539		)	—			785
Balance at end of period	$	17,640		21,317			20,784
Fair value at end of period	$	17,749		21,579			22,241

On a quarterly basis, the Corporation assesses its capitalized servicing rights for impairment based on their current fair value. For purposes of the impairment, the servicing rights are disaggregated based on loan type and interest rate which are the predominant risk characteristics of the underlying loans. A valuation allowance is established through a charge to earnings to the extent the amortized cost of the mortgage servicing rights exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for the stratification, the valuation is reduced through a recovery to earnings. There was a valuation allowance of $3.5 million as of December 31, 2011. No valuation allowances were required as of December 31, 2010 and 2009. No permanent impairment losses were written off against the allowance during the years ended December 31, 2011, 2010, and 2009.

Key economic assumptions and the sensitivity of the current fair value of the mortgage servicing rights related to immediate 10% and 25% adverse changes in those assumptions at December 31, 2011 are presented in the following table below. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in the fair value based on 10% variation in the prepayment speed assumption generally cannot be extrapolated because the relationship of the change in the prepayment speed assumption to the change in fair value may not be linear. Also, in the below table, the effect of a variation in the discount rate assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in the discount rates), which might magnify or counteract the sensitivities.



Prepayment speed assumption (annual CPR)	15.90		%
Decrease in fair value from 10% adverse change	$	908
Decrease in fair value from 25% adverse change	2,152
Discount rate assumption	9.70		%
Decrease in fair value from 100 basis point adverse change	$	500
Decrease in fair value from 200 basis point adverse change	969
Expected weighted-average life (in months)	74.1



The following table shows the estimated future amortization for mortgage servicing rights as of December 31, 2011:
Years Ended December 31,
2012	$	3,304
2013	2,844
2014	2,306
2015	1,861
2016	1,499
more than 5 years	5,826
	$	17,640