Mortgage Servicing Rights and Mortgage Servicing Activity

In the years ended December 31, 2015 and 2014, the Corporation sold residential mortgage loans from the held for sale portfolio with unpaid principal balances of $76.7 million and $356.5 million, respectively, and recognized pretax gains of $1.2 million and $7.2 million, respectively, which are included as a component of loan sales and servicing income. As of December 31, 2015 and 2014, the Corporation retained the related MSRs, for which it receives servicing fees, on $60.3 million and $314.4 million, respectively, of the loans sold.

The Corporation serviced for third parties approximately $2.4 billion of residential mortgage loans at December 31, 2015, and $2.6 billion at December 31, 2014. Loan servicing fees, not including valuation changes on MSRs included in loan sales and servicing income, were $6.3 million, $6.6 million, and $6.4 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Servicing rights are presented within other assets on the accompanying Consolidated Balance Sheet. The retained servicing rights are initially valued at fair value. Since MSRs 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 17 (Fair Value Measurement). MSRs are subsequently measured using the amortization method. Accordingly, the MSRs are amortized over the period of, and in proportion to, the estimated net servicing income and the related amortization is recorded in loan sales and servicing income.

Changes in the carrying amount of MSRs and the MSR valuation allowance are as follows:



	Year Ended December 31,
(In thousands)	2015			2014			2013
Balance at beginning of period	$	22,011		$	22,760		$	21,316
Addition of Citizens’ MSRs on Acquisition Date	—			—			1,065
Additions	619			3,049			4,952
Amortization	(3,693		)	(3,798		)	(4,573		)
Balance at end of period	18,937			22,011			22,760
Valuation allowance at beginning of period	(955		)	(282		)	(2,564		)
Recoveries (Additions)	556			(673		)	2,282
Valuation Allowance at end of period	(399		)	(955		)	(282		)
MSRs, net carrying balance	$	18,538		$	21,056		$	22,478
Fair value at end of period	$	19,149		$	21,228		$	23,041

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 MSRs 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. No permanent impairment losses were written off against the allowance during the years ended December 31, 2015, 2014, and 2013.

Key economic assumptions and the sensitivity of the current fair value of the MSRS related to immediate 10% and 25% adverse changes in those assumptions at December 31, 2015, 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 MSRs 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.



(Dollars in thousands)
Prepayment speed assumption (annual CPR)	10.93		%
Decrease in fair value from 10% adverse change	$	1,032
Decrease in fair value from 25% adverse change	$	1,292
Discount rate assumption	9.39		%
Decrease in fair value from 100 basis point adverse change	$	599
Decrease in fair value from 200 basis point adverse change	$	1,155
Expected weighted-average life (in months)	97.6

The following table shows the estimated future amortization for net MSRs as of December 31, 2015:



(In thousands)
Year Ended December 31,
2016	$	3,075
2017	2,723
2018	2,281
2019	1,917
2020	1,608
more than 5 years	6,934
Total estimated future amortization	$	18,538