Annual report pursuant to Section 13 and 15(d)

LOAN SALES AND SECURITIZATIONS

v3.6.0.2
LOAN SALES AND SECURITIZATIONS
 12 Months Ended
Dec. 31, 2016
Transfers and Servicing [Abstract]  
LOAN SALES AND SECURITIZATIONS
LOAN SALES AND SECURITIZATIONS
Residential Mortgage Portfolio
The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the years ended December 31, 2016, 2015, and 2014:
 
  
Year Ended December 31,
(dollar amounts in thousands)
2016
 
2015
 
2014
Residential mortgage loans sold with servicing retained
$
3,632,024

 
$
3,322,723

 
$
2,330,060

Pretax gains resulting from above loan sales (1)
96,585

 
83,148

 
57,590

 
(1)
Recorded in mortgage banking income.
The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for the years ended December 31, 2016 and 2015:
Fair Value Method
 
(dollar amounts in thousands)
2016
 
2015
Fair value, beginning of year
$
17,585

 
$
22,786

Change in fair value during the period due to:
 
 
 
Time decay (1)
(950
)
 
(1,295
)
Payoffs (2)
(1,827
)
 
(3,031
)
Changes in valuation inputs or assumptions (3)
(1,061
)
 
(875
)
Fair value, end of year
$
13,747

 
$
17,585

Weighted-average life (years)
5.7

 
4.6

 
(1)
Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2)
Represents decrease in value associated with loans that paid off during the period.
(3)
Represents change in value resulting primarily from market-driven changes in interest rates and prepayment speeds.
Amortization Method
 
(dollar amounts in thousands)
2016
 
2015
Carrying value, beginning of year
$
143,133

 
$
132,812

New servicing assets created
37,813

 
35,407

Servicing assets acquired
15,317

 
—

Impairment recovery (charge)
1,918

 
(2,732
)
Amortization and other
(25,715
)
 
(22,354
)
Carrying value, end of year
$
172,466

 
$
143,133

Fair value, end of year
$
172,779

 
$
143,435

Weighted-average life (years)
7.2

 
5.9


MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.
MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. Huntington economically hedges the value of certain MSRs against changes in value attributable to changes in interest rates using a combination of derivative instruments and trading securities.
For MSRs under the fair value method, a summary of key assumptions and the sensitivity of the MSR value to changes in these assumptions at December 31, 2016, and 2015 follows:
 
December 31, 2016
 
December 31, 2015
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
10.90
%
 
$
(501
)
 
$
(970
)
 
14.70
%
 
$
(864
)
 
$
(1,653
)
Spread over forward interest rate swap rates
536 bps

 
(454
)
 
(879
)
 
539 bps

 
(559
)
 
(1,083
)
For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value to changes in these assumptions at December 31, 2016, and 2015 follows:
 
 
December 31, 2016
 
December 31, 2015
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
7.80
%
 
$
(4,510
)
 
$
(8,763
)
 
11.10
%
 
$
(5,543
)
 
$
(10,648
)
Spread over forward interest rate swap rates
1,173 bps

 
(5,259
)
 
(10,195
)
 
875 bps

 
(4,662
)
 
(9,017
)

Total servicing, late and other ancillary fees included in mortgage banking income was $50 million, $47 million, and $44 million for the years ended December 31, 2016, 2015, and 2014, respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $18.9 billion, $16.2 billion, and $15.6 billion at December 31, 2016, 2015, and 2014, respectively.
Automobile Loans and Leases
The following table summarizes activity relating to automobile loans securitized with servicing retained for the years ended December 31, 2016, 2015, and 2014:
 
 
Year Ended December 31,
(dollar amounts in thousands)
2016
 
2015
 
2014 (1)
UPB of automobile loans securitized with servicing retained
$
1,500,000

 
750,000

 
—

Net proceeds received in loan securitizations
1,551,679

 
780,117

 
—

Servicing asset recognized in loan securitizations (2)
15,670

 
11,180

 
—

Pretax gains resulting from above loan securitizations (3)
5,632

 
5,333

 
—

 
(1)
Huntington did not sell or securitize any automobile loans in 2014.
(2)
Recorded in servicing rights.
(3)
Recorded in gain on sale of loans.
Huntington has retained servicing responsibilities on sold automobile loans and receives annual servicing fees and other ancillary fees on the outstanding loan balances. Automobile loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired.
Changes in the carrying value of automobile loan servicing rights for the years ended December 31, 2016, and 2015, and the fair value at the end of each period were as follows:
(dollar amounts in thousands)
2016
 
2015
Carrying value, beginning of year
$
8,771

 
$
6,898

New servicing assets created
15,670

 
11,180

Amortization and other
(6,156
)
 
(9,307
)
Carrying value, end of year
$
18,285

 
$
8,771

Fair value, end of year
$
18,388

 
$
9,127

Weighted-average life (years)
4.2

 
3.2


A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at December 31, 2016, and 2015 follows:
 
December 31, 2016
 
December 31, 2015
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
19.98
%
 
$
(1,047
)
 
$
(2,026
)
 
18.36
%
 
$
(500
)
 
$
(895
)
Spread over forward interest rate swap rates
500 bps

 
(26
)
 
(53
)
 
500 bps

 
(10
)
 
(19
)

Servicing income was $9 million, $5 million, and $8 million for the years ended December 31, 2016, 2015, and 2014, respectively. The unpaid principal balance of automobile loans serviced for third parties was $1.7 billion, $0.9 billion, and $0.8 billion at December 31, 2016, 2015, and 2014, respectively.
Small Business Association (SBA) Portfolio
The following table summarizes activity relating to SBA loans sold with servicing retained for the years ended December 31, 2016, 2015, and 2014:
 
Year Ended December 31,
(dollar amounts in thousands)
2016
 
2015
 
2014
SBA loans sold with servicing retained
$
269,923

 
$
232,848

 
$
214,760

Pretax gains resulting from above loan sales (1)
20,516

 
18,626

 
24,579

 
(1)
Recorded in gain on sale of loans.
Huntington has retained servicing responsibilities on sold SBA loans and receives annual servicing fees on the outstanding loan balances. SBA loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale using a discounted future cash flow model. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows.
The following tables summarize the changes in the carrying value of the servicing asset for the years ended December 31, 2016, and 2015:
(dollar amounts in thousands)
2016
 
2015
Carrying value, beginning of year
$
19,747

 
$
18,536

New servicing assets created
8,705

 
8,012

Amortization and other
(7,372
)
 
(6,801
)
Carrying value, end of year
$
21,080

 
$
19,747

Fair value, end of year
$
24,270

 
$
22,649

Weighted-average life (years)
3.3

 
3.3


A summary of key assumptions and the sensitivity of the SBA loan servicing rights value to changes in these assumptions at December 31, 2016, and 2015 follows:
 
December 31, 2016
 
December 31, 2015
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
(dollar amounts in thousands)
Actual
 
10%
adverse
change
 
20%
adverse
change
 
Actual
 
10%
adverse
change
 
20%
adverse
change
Constant prepayment rate (annualized)
7.40
%
 
$
(324
)
 
$
(644
)
 
7.60
%
 
$
(313
)
 
$
(622
)
Discount rate
15.00

 
(1,270
)
 
(1,870
)
 
15.00

 
(610
)
 
(1,194
)

Servicing income was $9 million, $8 million, and $7 million for the years ended December 31, 2016, 2015, and 2014, respectively. The unpaid principal balance of SBA loans serviced for third parties was $1.1 billion, $1.0 billion and $0.9 billion at December 31, 2016, 2015, and 2014, respectively.