SERVICING RIGHTS

The Company retains MSRs from certain of its sales of residential mortgage loans. MSRs on residential mortgage loans are reported at fair value. Income earned by the Company on its MSRs is derived primarily from contractually specified mortgage servicing fees and late fees, net of curtailment costs and third party subservicing costs. The Company retains servicing rights in connection with its SBA loan operations, which are measured using the amortization method.

The following table presents a composition of total income from servicing rights, which is reported in Loan Servicing Income on the Consolidated Statements of Operations, on a consolidated operations basis, for the periods indicated:



	Year Ended December 31,
($ in thousands)	2017			2016			2015
Servicing fees for sold loans with servicing retained	$	19,642		$	23,117		$	11,739
Losses on the fair value and runoff of servicing rights	(17,066		)	(17,732		)	(8,765		)
Total income from servicing rights	$	2,576		$	5,385		$	2,974

During the year ended December 31, 2016, the Company entered into a flow-agreement establishing general terms for the purchase and sale to a third party MSR investor in connection with residential mortgage loan sales to GSEs. The flow-agreement allowed the Company to sell its MSRs to a third party MSR investor contemporaneous with the Company’s sales of its servicing retained residential mortgages to the GSEs. Accordingly, entering into the flow-agreement reduced the impact of volatility associated with the Company's MSRs by allowing the Company to sell its MSRs immediately, thus reducing the Company's exposure to market and other conditions. During the three months ended March 31, 2017, the Company suspended sales of MSRs under the flow-agreement. The Company does not expect to resume sales under the flow-agreement, as the Company has discontinued its Mortgage Banking segment operations.

The following table presents a composition of servicing rights as of the dates indicated:



	December 31,
($ in thousands)	2017		2016
Mortgage servicing rights, at fair value	$	31,852	$	76,121
SBA servicing rights, at cost	1,856		1,496
Total	$	33,708	$	77,617

Mortgage loans sold with servicing retained are not reported as assets and are subserviced by a third party vendor. The unpaid principal balance of these loans at December 31, 2017 and 2016 was $3.94 billion and $7.58 billion, respectively. Custodial escrow balances maintained in connection with serviced loans were $17.8 million and $34.2 million at December 31, 2017 and 2016, respectively. The reductions in these balances were principally driven by the sale of $37.8 million of MSRs during the year ended December 31, 2017 as a part of discontinued operations.

Mortgage Servicing Rights

At December 31, 2017, MSRs held-for-sale of $29.8 million were valued based on a market bid adjusted for value associated with early payoffs and paydowns and included as Level 3 fair value. The following table presents the key characteristics, inputs and economic assumptions used to estimate the Level 3 fair value of the MSRs, other than the MSRs held-for-sale, as of the dates indicated:



	December 31,
($ in thousands)	2017			2016
Fair value of retained MSRs	$	2,059		$	76,121
Discount rate	13.00		%	10.18		%
Constant prepayment rate	16.54		%	11.84		%
Weighted-average life	5.07 years			6.50 years

The following table presents activity in the MSRs for the periods indicated:



	Year Ended December 31,
($ in thousands)	2017			2016			2015
Balance at beginning of year	$	76,121		$	49,939		$	19,082
Additions	12,127			49,293			45,263
Changes in fair value resulting from valuation inputs or assumptions	(10,240		)	(5,709		)	(3,568		)
Sales of servicing rights ⁽¹⁾	(39,345		)	(5,382		)	(5,862		)
Other—loans paid off	(6,811		)	(12,020		)	(4,976		)
Balance at end of year	$	31,852		$	76,121		$	49,939

(1) Includes $37.8 million of MSRs sold as a part of discontinued operations for the year ended December 31, 2017.

SBA Servicing Rights

The Company used a discount rate of 8.50 percent to calculate the present value of cash flows and an estimated prepayment speed based on prepayment data available. Discount rates and prepayment speeds are reviewed quarterly and adjusted as appropriate. The following table presents activity in the SBA servicing rights for the periods indicated:



	Year Ended December 31,
($ in thousands)	2017			2016			2015
Balance at beginning of year	$	1,496		$	788		$	484
Additions	761			877			597
Amortization, including prepayments	(318		)	(157		)	(71		)
Impairment	(83		)	(12		)	(222		)
Balance at end of year	$	1,856		$	1,496		$	788