Quarterly report pursuant to Section 13 or 15(d)

LOAN SALES AND SECURITIZATIONS

v3.7.0.1
LOAN SALES AND SECURITIZATIONS
 3 Months Ended
Mar. 31, 2017
Transfers and Servicing [Abstract]  
LOAN SALES AND SECURITIZATIONS
LOAN SALES AND SECURITIZATIONS
Residential Mortgage Loans
The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the three-month periods ended March 31, 2017 and 2016:
 

 
Three months ended
March 31,
(dollar amounts in thousands)
 
 
2017
 
2016
Residential mortgage loans sold with servicing retained
 
 
$
845,415

 
$
632,466

Pretax gains resulting from above loan sales (1)
 
 
22,190

 
14,113

(1)
Recorded in mortgage banking income.
A MSR is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. At initial recognition, the MSR asset is established at its fair value using assumptions consistent with assumptions used to estimate the fair value of existing MSRs. Subsequent to the initial recognition, MSRs may be measured using either the fair value method or the amortization method. The election of the fair value method or amortization method is made at the time each servicing class is established. Subsequently, servicing rights are accounted for based on the methodology chosen for each respective servicing class. Any increase or decrease in the fair value of MSRs carried under the fair value method, as well as amortization or impairment of MSRs recorded using the amortization method, during the period is recorded as an increase or decrease in mortgage banking income, which is reflected in noninterest income in the Unaudited Condensed Consolidated Statements of Income.
The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for the three-month periods ended March 31, 2017 and 2016:
Fair Value Method:
 
 
Three months ended
March 31,
(dollar amounts in thousands)
 
 
2017
 
2016
Fair value, beginning of period
 
 
$
13,747

 
$
17,585

Change in fair value during the period due to:
 
 
 
 
 
Time decay (1)
 
 
(231
)
 
(273
)
Payoffs (2)
 
 
(364
)
 
(504
)
Changes in valuation inputs or assumptions (3)
 
 
155

 
(1,989
)
Fair value, end of period:
 
 
$
13,307

 
$
14,819

Weighted-average life (years)
 
 
5.6

 
5.2

(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:
 
 
Three months ended
March 31,
(dollar amounts in thousands)
 
 
2017
 
2016
Carrying value, beginning of period
 
 
$
172,466

 
$
143,133

New servicing assets created
 
 
9,635

 
6,109

Impairment (charge) / recovery
 
 
1,800

 
(16,340
)
Amortization and other
 
 
(6,089
)
 
(5,627
)
Carrying value, end of period
 
 
$
177,812

 
$
127,275

Fair value, end of period
 
 
$
178,581

 
$
127,516

Weighted-average life (years)
 
 
7.1

 
6.5


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 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 at March 31, 2017 and December 31, 2016, to changes in these assumptions follows:
 
March 31, 2017
 
December 31, 2016
 
 
 
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)
11.90
%
 
$
(522
)
 
$
(1,007
)
 
10.90
%
 
$
(501
)
 
$
(970
)
Spread over forward interest rate swap rates
839 bps

 
(411
)
 
(798
)
 
536 bps

 
(454
)
 
(879
)

For MSRs under the amortization method, a summary of key assumptions and the sensitivity of the MSR value at March 31, 2017 and December 31, 2016, to changes in these assumptions follows:
 
March 31, 2017
 
December 31, 2016
 
 
 
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)
8.10
%
 
$
(4,756
)
 
$
(9,242
)
 
7.80
%
 
$
(4,510
)
 
$
(8,763
)
Spread over forward interest rate swap rates
1,064 bps

 
(5,518
)
 
(10,692
)
 
1,173 bps

 
(5,259
)
 
(10,195
)

Total servicing, late and other ancillary fees included in mortgage banking income amounted to $14 million and $12 million for the three-month periods ended March 31, 2017 and 2016, respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $19.1 billion and $18.9 billion at March 31, 2017 and December 31, 2016, respectively.
Automobile 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 three-month periods ended March 31, 2017 and 2016, and the fair value at the end of each period were as follows:
 
 
 
Three months ended
March 31,
(dollar amounts in thousands)
 
 
2017
 
2016
Carrying value, beginning of period
 
 
$
18,285

 
$
8,771

New servicing assets created
 
 
—

 
—

Amortization and other
 
 
(3,126
)
 
(1,742
)
Carrying value, end of period
 
 
$
15,159

 
$
7,029

Fair value, end of period
 
 
$
15,278

 
$
7,250

Weighted-average life (years)
 
 
4.0

 
3.3


A summary of key assumptions and the sensitivity of the automobile loan servicing rights value to changes in these assumptions at March 31, 2017 and December 31, 2016 follows:
 
March 31, 2017
 
December 31, 2016
 
 
 
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)
19.95
%
 
$
(877
)
 
$
(1,695
)
 
19.98
%
 
$
(1,047
)
 
$
(2,026
)
Spread over forward interest rate swap rates
500 bps

 
(22
)
 
(45
)
 
500 bps

 
(26
)
 
(53
)


Servicing income amounted to $5 million and $3 million for the three-month periods ending March 31, 2017, and 2016, respectively. The unpaid principal balance of automobile loans serviced for third parties was $1.5 billion and $1.7 billion at March 31, 2017 and December 31, 2016, respectively.
Small Business Administration (SBA) Portfolio
The following table summarizes activity relating to SBA loans sold with servicing retained for the three-month periods ended March 31, 2017 and 2016:
 
 
 
Three months ended
March 31,
(dollar amounts in thousands)
 
 
2017
 
2016
SBA loans sold with servicing retained
 
 
$
77,672

 
$
45,889

Pretax gains resulting from above loan sales (1)
 
 
5,818

 
3,521


(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 three-month periods ended March 31, 2017 and 2016, and the fair value at the end of each period were as follows:
 
 
 
Three months ended
March 31,
(dollar amounts in thousands)
 
 
2017
 
2016
Carrying value, beginning of period
 
 
$
21,080

 
$
19,747

New servicing assets created
 
 
1,475

 
1,511

Amortization and other
 
 
(1,156
)
 
(1,733
)
Carrying value, end of period
 
 
$
21,399

 
$
19,525

Fair value, end of period
 
 
$
25,857

 
$
23,048

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 March 31, 2017 and December 31, 2016 follows:
 
March 31, 2017
 
December 31, 2016
 
 
 
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
%
 
$
(346
)
 
$
(687
)
 
7.40
%
 
$
(324
)
 
$
(644
)
Discount rate
15.00

 
(696
)
 
(1,363
)
 
15.00

 
(1,270
)
 
(1,870
)

Servicing income amounted to $3 million and $2 million for the three-month periods ending March 31, 2017, and 2016, respectively. The unpaid principal balance of SBA loans serviced for third parties was $1.2 billion and $1.1 billion at March 31, 2017 and December 31, 2016, respectively.