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Certain Transfers of Financial Assets
 12 Months Ended
Dec. 31, 2017
Transfers and Servicing [Abstract]  
Certain Transfers of Financial Assets
Certain Transfers of Financial Assets
Servicing rights
Loan servicing rights are recorded at the lower of cost or market and are amortized over the remaining service life of the underlying loans. The carrying value of the Company’s loan servicing assets is shown in the table below:
 
 
December 31,
(in thousands)
 
2017
 
2016
Servicing rights
 
 
 
 
Residential mortgage
 
$
100,679

 
$
86,131

SBA
 
4,818

 
5,707

Indirect automobile
 
7,118

 
7,457

Total servicing rights
 
$
112,615

 
$
99,295


Residential Mortgage Loans
The Company originates and sells certain first-lien and second-lien residential mortgage loans to third party investors, primarily Fannie Mae, Ginnie Mae, and Freddie Mac. The Company retains the related mortgage servicing rights (“MSRs”) and receives servicing fees on certain of the first-lien residential mortgage loans. During the years ended December 31, 2017, and 2016, the Company sold $2.6 billion and $2.8 billion in residential mortgage loans, respectively.
The net gain on loan sales, MSRs impairment and amortization, and servicing fees are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from mortgage banking activities. During the years ended December 31, 2017, 2016, and 2015, the Company recorded gains on sales of residential mortgage loans of $76.4 million, $82.5 million, and $69.8 million, respectively. During the years ended December 31, 2017, 2016, and 2015, the Company recorded servicing fees of $22.2 million, $19.1 million, and $15.8 million, respectively.
The table below is an analysis of the activity in the Company’s MSRs and impairment:
 
 
For the Years Ended
December 31,
(in thousands)
 
2017
 
2016
Residential mortgage servicing rights
 
 
 
 
Beginning carrying value, net
 
$
86,131

 
$
72,766

Additions
 
28,874

 
28,207

Amortization
 
(13,660
)
 
(15,213
)
(Impairment) recovery, net
 
(666
)
 
371

Ending carrying value, net
 
$
100,679

 
$
86,131

 
 
For the Years Ended
December 31,
(in thousands)
 
2017
 
2016
Residential mortgage servicing impairment
 
 
 
 
Beginning balance
 
$
9,152

 
$
9,523

Additions
 
7,081

 
15,119

Recoveries
 
(6,415
)
 
(15,490
)
Ending balance
 
$
9,818

 
$
9,152


The fair value of MSRs, key metrics, and the sensitivity of the fair value to adverse changes in model inputs and/or assumptions are summarized below:
 
 
December 31,
($ in thousands)
 
2017
 
2016
Residential Mortgage Servicing Rights
 
 
 
 
Fair Value
 
$
103,725

 
$
88,502

Composition of residential loans serviced for others:
 
 
 
 
Fixed-rate
 
99.55
%
 
99.47
%
Adjustable-rate
 
0.45
%
 
0.53
%
Total
 
100.00
%
 
100.00
%
Weighted average remaining term (years)
 
25.7

 
25.7

Modeled prepayment speed
 
8.19
%
 
7.98
%
Decline in fair value due to a 10% adverse change
 
$
(3,497
)
 
$
(2,918
)
Decline in fair value due to a 20% adverse change
 
(6,796
)
 
(5,643
)
Weighted average discount rate
 
9.95
%
 
9.91
%
Decline in fair value due to a 10% adverse change
 
$
(4,299
)
 
$
(3,619
)
Decline in fair value due to a 20% adverse change
 
(8,223
)
 
(6,889
)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the fair value of the MSRs is calculated without changing any other input or assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.
Information about the asset quality of residential mortgage loans serviced by the Company is shown in the table below.
Residential mortgage loans serviced
 
December 31, 2017
 
Net Charge-offs
for the Year Ended
December 31, 2017
 
Unpaid
Principal
Balance
 
 
 
 
 
Delinquent (days)
 
(in thousands)
30 to 89
 
90+
 
Serviced for others
 
$
8,924,808

 
$
145,059

 
$
17,773

 
$
—

Held-for-sale(1)
 
262,315

 
—

 
121

 
—

Held-for-investment(2)
 
487,805

 
11,405

 
17,036

 
(21
)
Total residential mortgage loans serviced
 
$
9,674,928

 
$
156,464

 
$
34,930

 
$
(21
)

(1) The fair value of the amount that was 90+ days past due was $109 after applicable discount recorded under the fair value option for mortgage loans held for sale.
(2) Delinquent loans held-for-investment include repurchased loans covered by Government Agency guarantees that were 30-89 days past due and 90+ days past due of $3,389 and $13,713, respectively.
Loans serviced for others are not included in the Consolidated Statements of Financial Condition as they are not assets of the Company.
Mortgage Recourse Liability
During the last five calendar years, the Company has sold approximately 50,000 loans with an aggregate principal balance of approximately $12.4 billion. Purchasers generally have recourse to return a sold loan to the Company under limited circumstances for the life of the loan. As seller, the Company has made various representations and warranties related to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and the compliance with origination criteria established by the purchasers. In the event of a breach of these representations and warranties, the Company is obligated to repurchase loans with identified defects and/or to indemnify the purchasers. Some of these conditions include underwriting errors or emissions, fraud or material misstatements, and invalid collateral values. The contractual obligation arises only when the breach of representations and warranties is discovered and repurchase/indemnification is demanded. Generally, the maximum amount the Company would be required to make would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers, plus accrued interest and certain expenses. To date, the claims to the Company from the purchasers to be reimbursed for realized losses have been de minimis. In addition, the Company’s loan sale contracts define a condition in which the borrower defaults during a short period of time as an early payment default (“EPD”). In the event of an EPD, the Company may be required to return the premium paid for the loan, pay certain administrative fees, and may be required to repurchase the loan or indemnify the purchaser unless an EPD waiver is obtained. The Company also makes a number of representations and warranties that it will service the originated loans in accordance with investor servicing guidelines and standards.
Management recognizes the potential risk from costs related to breaches of representations and warranties made in connection with residential loan sales and subsequent required repurchases, indemnifications, and EPD claims. As a result, the Company has established a liability to cover potential costs related to these events based on historical experience, adjusted for any risk factors not captured in the historical losses, current business volume, and known claims outstanding. The recourse liability totaled $1.4 million at December 31, 2017, and 2016, and management believes this amount is adequate for potential exposure related to loan sale indemnification, repurchase loans, and EPD claims. There is a significant degree of judgment involved in estimating the recourse liability as the estimation process is inherently uncertain and subject to imprecision. Management will continue to monitor the adequacy of the reserve level and may decide that further additions to the reserve are appropriate in the future. However, there can be no assurance that the current balance of this reserve will prove sufficient to cover actual future losses.
It should be noted that the Company’s historical loan sale activity began to increase at a time when underwriting requirements were strengthened from prior years and limited documentation conventional loans (i.e., non-government insured) were no longer eligible for purchase in the secondary market. Accordingly, the population of conventional loans the Company has sold has been underwritten based on fully documented information. While this does not eliminate all risk of repurchase or indemnification costs, management believes it significantly mitigates that risk.
SBA Loans
The Company customarily executes certain transfers of selected government loans, primarily SBA loans, with third parties in the secondary market. These loans are typically partially guaranteed by the SBA or otherwise credit enhanced and are generally secured by business property such as real estate, inventory, equipment, and accounts receivable. During the years ended December 31, 2017, and 2016, the Company sold $47.5 million and $63.1 million in SBA loans, respectively.
The Company retains the unguaranteed portion of the loans sold and receives servicing fees to service the loans as required under various government lending programs. The net gain on SBA loan sales, servicing rights amortization, impairment and servicing fees are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from SBA lending activities. During the years ended December 31, 2017, 2016, and 2015, the Company recorded gains on sales of SBA loans of $4.2 million, $4.5 million, and $3.4 million, respectively. During each of the years ended December 31, 2017, and 2016, the Company recorded servicing fees of $2.5 million. During the year ended December 31, 2015, the Company recorded servicing fees of $2.3 million.
The table below is an analysis of the activity in the Company’s SBA loan servicing rights and impairment:
 
 
For the Years Ended
December 31,
(in thousands)
 
2017
 
2016
SBA loan servicing rights
 
 
 
 
Beginning carrying value, net
 
$
5,707

 
$
5,358

Additions
 
1,240

 
1,669

Amortization
 
(1,995
)
 
(1,563
)
(Impairment) recovery, net
 
(134
)
 
243

Ending carrying value, net
 
$
4,818

 
$
5,707

 
 
For the Years Ended
December 31,
(in thousands)
 
2017
 
2016
SBA servicing rights impairment
 
 
 
 
Beginning balance
 
$
—

 
$
243

Additions
 
134

 
—

Recoveries
 
—

 
(243
)
Ending balance
 
$
134

 
$
—


The fair value of the SBA loan servicing rights, key metrics, and the sensitivity of the fair value to adverse changes in the model inputs/assumptions are summarized below:
 
 
December 31,
($ in thousands)
 
2017
 
2016
SBA loan servicing rights
 
 
 
 
Fair value
 
$
5,275

 
$
6,424

Composition of loans serviced for others:
 
 
 
 
Fixed-rate
 
—
%
 
0.19
%
Adjustable-rate
 
100.00
%
 
99.81
%
Total
 
100.00
%
 
100.00
%
Weighted average remaining term (years)
 
18.9

 
19.6

Modeled prepayment speed
 
11.33
%
 
8.62
%
Decline in fair value due to a 10% adverse change
 
$
(181
)
 
$
(161
)
Decline in fair value due to a 20% adverse change
 
(351
)
 
(314
)
Weighted average discount rate
 
13.13
%
 
13.13
%
Decline in fair value due to a 10% adverse change
 
$
(199
)
 
$
(226
)
Decline in fair value due to a 20% adverse change
 
(384
)
 
(443
)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the value of the SBA loan servicing rights is calculated without changing any other input or assumption. In reality, changes in one factor may magnify or counteract the effect of the change.
Information about the asset quality of SBA loans serviced by the Company is shown in the table below:
SBA loans serviced
 
December 31, 2017
 
Net Charge-offs
for the Year Ended
December 31, 2017
 
 
Unpaid
Principal
Balance
 
 
 
 
 
 
Delinquent (days)
 
(in thousands)
 
30 to 89
 
90+
 
Serviced for others
 
$
261,425

 
$
8,210

 
$
1,957

 
$
—

Held-for-sale
 
13,615

 
—

 
—

 
—

Held-for-investment
 
146,650

 
5,305

 
2,466

 
160

Total SBA loans serviced
 
$
421,690

 
$
13,515

 
$
4,423

 
$
160


Loans serviced for others are not included in the Consolidated Statements of Financial Condition as they are not assets of the Company.
Indirect Automobile Loans
The Company purchases, on a nonrecourse basis, consumer installment contracts secured by new and used vehicles purchased by consumers from franchised motor vehicle dealers and select independent dealers. A portion of the indirect automobile loans originated is sold with servicing retained and the Company receives servicing fees. During the years ended December 31, 2017, and 2016, the Company sold $431.2 million, and $510.5 million in indirect automobile loans, respectively.
The gain on loan sales and servicing fees are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from indirect lending activities. During the years ended December 31, 2017, 2016, and 2015, the Company recorded gains on sales of indirect automobile loans of $6.7 million, $9.1 million, and $12.4 million, respectively. During each of the years ended December 31, 2017, and 2016, the Company recorded servicing fees of $9.2 million. During the year ended December 31, 2015, the Company recorded servicing fees of $8.5 million.
The table below is an analysis of the activity in the Company’s indirect automobile loan servicing rights:
 
 
For the Years Ended
December 31,
(in thousands)
 
2017
 
2016
Indirect automobile loan servicing rights
 
 
 
 
Beginning carrying value
 
$
7,457

 
$
6,820

Additions
 
3,012

 
4,002

Amortization
 
(3,351
)
 
(3,365
)
Ending carrying value
 
$
7,118

 
$
7,457


The Company has not recorded impairment on its indirect automobile loan servicing rights.
The fair value of the indirect automobile loan servicing rights, key metrics, and the sensitivity of the fair value to adverse changes in model inputs/assumptions are summarized below:
 
 
December 31,
($ in thousands)
 
2017
 
2016
Indirect loan servicing rights
 
 
 
 
Fair value
 
$
7,436

 
$
7,579

Composition of loans serviced for others:
 
 
 
 
Fixed-rate
 
100
%
 
100
%
Adjustable-rate
 
—
%
 
—
%
Total
 
100
%
 
100
%
Weighted average remaining term (years)
 
4.5

 
4.8

Modeled prepayment speed
 
20.59
%
 
18.95
%
Decline in fair value due to a 10% adverse change
 
$
(192
)
 
$
(190
)
Decline in fair value due to a 20% adverse change
 
(377
)
 
(371
)
Weighted average discount rate
 
7.18
%
 
6.94
%
Decline in fair value due to a 10% adverse change
 
$
(69
)
 
$
(71
)
Decline in fair value due to a 20% adverse change
 
(137
)
 
(141
)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the fair value of the indirect automobile loan servicing rights is calculated without changing any other input or assumption. In reality, changes in one factor may magnify or counteract the effect of the change.
Information about the asset quality of the indirect automobile loans serviced by the Company is shown in the table below:
Indirect automobile loans serviced
 
December 31, 2017
 
Net Charge-offs
for the Year Ended
December 31, 2017
 
 
Unpaid
Principal
Balance
 
 
 
 
 
 
Delinquent (days)
 
(in thousands)
 
30 to 89
 
90+
 
Serviced for others
 
$
1,056,509

 
$
3,850

 
$
3,916

 
$
2,874

Held-for-sale
 
75,000

 
—

 
—

 
—

Held-for-investment
 
1,716,156

 
4,635

 
4,219

 
4,679

Total indirect automobile loans serviced
 
$
2,847,665

 
$
8,485

 
$
8,135

 
$
7,553


Loans serviced for others are not included in the Consolidated Statements of Financial Condition as they are not assets of the Company.