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Servicing Assets

9 Months Ended

Sep. 30, 2020

Servicing Assets [Abstract]

Servicing Assets

NOTE 8 - SERVICING ASSETS

Oriental periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In addition, Oriental may purchase or assume the right to service mortgage loans originated by others. Whenever Oriental undertakes an obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate Oriental for servicing the loans and leases. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate Oriental for its expected cost. On December 31, 2019, Oriental completed the Scotiabank PR & USVI Acquisition, increasing its servicing assets by $40.1 million.

All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value measurement method, Oriental measures servicing rights at fair value at each reporting date, reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and includes these changes, if any, with mortgage banking activities in the consolidated statements of operations. The fair value of servicing rights is subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. The impact of COVID-19 has been considered in the fair value for the quarter and nine-month period ended September 30, 2020.

The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.

At September 30, 2020, the servicing asset amounted to $47.2 million ($50.8 million — December 31, 2019) related to mortgage servicing rights.

The following table presents the changes in servicing rights measured using the fair value method for the quarters and nine-month periods ended September 30, 2020 and 2019:

	Quarter Ended September 30,						Nine-Month Period Ended September 30,
	2020			2019			2020			2019
	(In thousands)
Fair value at beginning of period	$	47,926		$	10,134		$	50,779		$	10,716
Servicing from mortgage securitizations or asset transfers		656			352			1,236			860
Changes due to payments on loans		(1,365)			(243)			(2,810)			(694)
Changes in fair value due to changes in valuation model inputs or assumptions		25			(118)			(1,963)			(757)
Fair value at end of period	$	47,242		$	10,125		$	47,242		$	10,125

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the nine-month periods ended September 30, 2020 and 2019:

	Nine-Month Period Ended September 30,
	2020		2019
Constant prepayment rate	5.02% - 25.8%		4.38% - 9.44%
Discount rate	10.00% - 15.50%		10.00% - 12.00%

The sensitivity of the current fair value of servicing assets to immediate 10 percent and 20 percent adverse changes in the above key assumptions were as follows:

	September 30, 2020
	(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset	$	47,242
Constant prepayment rate
Decrease in fair value due to 10% adverse change	$	(1,040)
Decrease in fair value due to 20% adverse change	$	(2,042)
Discount rate
Decrease in fair value due to 10% adverse change	$	(1,889)
Decrease in fair value due to 20% adverse change	$	(3,648)

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption.

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 offset the sensitivities. Mortgage banking activities, a component of total banking and financial service revenue in the consolidated statements of operations, include the changes from period to period in the fair value of the

mortgage loan servicing rights, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection/realization of expected cash flows.

Servicing fee income is based on a contractual percentage of the outstanding principal balance and is recorded as income when earned. Servicing fees on mortgage loans for the quarters ended September 30, 2020 and 2019 totaled $4.5 million and $1.0 million, respectively. Servicing fees on mortgage loans for the nine-month periods ended September 30, 2020 and 2019 totaled $13.4 million and $3.2 million, respectively.