Transfers of financial assets and mortgage servicing assets

9 Months Ended

Sep. 30, 2023

Transfers and Servicing of Financial Assets

Transfers Of Financial Assets And Mortgage Servicing Assets

Note 11 – Transfers of financial assets and mortgage servicing assets

The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA, FNMA and FHLMC

securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. As seller, the Corporation

has made certain representations and warranties with respect to the originally transferred loans and, in the past, has sold certain

loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Note 20 to the Consolidated Financial

Statements for a description of such arrangements. 

No

 liabilities were incurred as a result of these securitizations during the quarters and nine months ended September 30, 2023 and

2022 because they did not contain any credit recourse arrangements. 

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized

during the quarters and nine months ended September 30, 2023 and 2022:

Proceeds Obtained During the Quarter Ended September 30, 2023

(In thousands)

Level 1

Level 2

Level 3

Initial Fair Value

Assets

Trading account debt securities:

Mortgage-backed securities - GNMA

$

-

$

1,421

$

-

$

1,421

Mortgage-backed securities - FNMA

-

10,178

-

10,178

Total trading account debt securities

$

-

$

11,599

$

-

$

11,599

Mortgage servicing rights

$

-

$

-

$

301

$

301

Total 

$

-

$

11,599

$

301

$

11,900

Proceeds Obtained During the Nine months Ended September 30, 2023

(In thousands)

Level 1

Level 2

Level 3

Initial Fair Value

Assets

Trading account debt securities:

Mortgage-backed securities - GNMA

$

-

$

2,488

$

-

$

2,488

Mortgage-backed securities - FNMA

-

33,470

-

33,470

Total trading account debt securities

$

-

$

35,958

$

-

$

35,958

Mortgage servicing rights

$

-

$

-

$

945

$

945

Total 

$

-

$

35,958

$

945

$

36,903

Proceeds Obtained During the Quarter Ended September 30, 2022

(In thousands)

Level 1

Level 2

Level 3

Initial Fair Value

Assets

Trading account debt securities:

Mortgage-backed securities - GNMA

$

-

$

14,190

$

-

$

14,190

Mortgage-backed securities - FNMA

-

21,685

-

21,685

Total trading account debt securities

$

-

$

35,875

$

-

$

35,875

Mortgage servicing rights

$

-

$

-

$

809

$

809

Total 

$

-

$

35,875

$

809

$

36,684

Proceeds Obtained During the Nine months Ended September 30, 2022

(In thousands)

Level 1

Level 2

Level 3

Initial Fair Value

Assets

Trading account debt securities:

Mortgage-backed securities - GNMA

$

-

$

169,352

$

-

$

169,352

Mortgage-backed securities - FNMA

-

117,015

-

117,015

Mortgage-backed securities - FHLMC

-

8,505

-

8,505

Total trading account debt securities

$

-

$

294,872

$

-

$

294,872

Mortgage servicing rights

$

-

$

-

$

5,179

$

5,179

Total 

$

-

$

294,872

$

5,179

$

300,051

During the nine months ended September 30, 2023, the Corporation retained servicing rights on whole loan sales involving

approximately $

39

 million in principal balance outstanding (September 30, 2022 - $

50

 million), with net realized gains of

approximately $

0.6

 million (September 30, 2022 - gains of $

0.8

 million). All loan sales performed during the nine months ended

September 30, 2023 and 2022 were without credit recourse agreements. 

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset

transfers such as sales and securitizations. These mortgage servicing rights (“MSRs”) are measured at fair value.

The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model

incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of

prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late

fees, among other considerations. Prepayment speeds are adjusted for the loans’ characteristics and portfolio behavior. 

The following table presents the changes in MSRs measured using the fair value method for the nine months ended September 30,

2023 and 2022.

Residential MSRs

(In thousands)

September 30, 2023

September 30, 2022

Fair value at beginning of period

$

128,350

$

121,570

Additions

1,814

6,195

Changes due to payments on loans

 [1]

(7,569)

(8,178)

Reduction due to loan repurchases

(468)

(646)

Changes in fair value due to changes in valuation model inputs or assumptions

(1,828)

11,556

Other

(1,269)

44

Fair value at end of period

 [2]

$

119,030

$

130,541

[1] Represents changes due to collection / realization of expected cash flows over time.

[2] At September 30, 2023, PB had MSRs amounting to $

1.9

 million (September 30, 2022 - $

2.0

 million).

During the quarter ended June 30, 2023 the Corporation terminated a servicing agreement, in which it acted as sub-servicer for a

third party, for a portfolio with an unpaid principal balance of approximately $

260

 million and a related MSR fair value of

approximately $

2

 million. The transaction did not result in a material effect on the financial results of the Corporation.

Residential mortgage loans serviced for others were $

10.1

 billion at September 30, 2023 (December 31, 2022 -$

11.1

 billion).

Net mortgage servicing fees, a component of mortgage banking activities in the Consolidated Statements of Operations, include the

changes from period to period in the fair value of the MSRs, including changes due to collection / realization of expected cash flows.

The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. These servicing fees are

credited to income when they are collected. At September 30, 2023, those weighted average mortgage servicing fees were

0.31

%

(September 30, 2022 -

0.31

%). Under these servicing agreements, the banking subsidiaries do not generally earn significant

prepayment penalty fees on the underlying loans serviced.

The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased. Key

economic assumptions used in measuring the servicing rights derived from loans securitized or sold by the Corporation during the

quarters and nine months ended September 30, 2023 and 2022 were as follows:

Quarters ended

Nine months ended

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

BPPR

PB

BPPR

PB

BPPR

PB

BPPR

PB

Prepayment speed

7.3

%

7.0

%

5.5

%

7.2

%

7.1

%

7.1

%

5.2

%

8.4

%

Weighted average life (in years)

9.2

8.0

9.5

8.2

9.2

8.0

9.7

7.7

Discount rate (annual rate)

9.6

%

11.0

%

10.7

%

10.0

%

9.6

%

10.7

%

10.5

%

9.8

%

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans

performed by the banking subsidiaries and servicing rights purchased from other financial institutions, and the sensitivity to

immediate changes in those assumptions, were as follows as of the end of the periods reported:

Originated MSRs

Purchased MSRs

September 30,

December 31,

September 30,

December 31, 

(In thousands)

2023

2022

2023

2022

Fair value of servicing rights

$

40,346

$

41,548

$

78,684

$

86,802

Weighted average life (in years)

6.6

6.8

6.7

6.9

Weighted average prepayment speed (annual rate)

6.0

%

5.9

%

7.0

%

7.0

%

Impact on fair value of 10% adverse change

$

(728)

$

(730)

$

(1,491)

$

(1,602)

Impact on fair value of 20% adverse change

$

(1,427)

$

(1,433)

$

(2,924)

$

(3,143)

Weighted average discount rate (annual rate)

11.2

%

11.2

%

10.9

%

11.0

%

Impact on fair value of 10% adverse change

$

(1,387)

$

(1,485)

$

(2,842)

$

(3,256)

Impact on fair value of 20% adverse change

$

(2,688)

$

(2,876)

$

(5,508)

$

(6,304)

The sensitivity analyses presented in the table above for servicing rights are hypothetical and should be used with caution. As the

figures indicate, changes in fair value based on a 10 and 20 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 the sensitivity tables

included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without

changing any other 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 and increased credit losses), which might magnify or counteract the sensitivities.

At September 30, 2023, the Corporation serviced $

0.6

 billion in residential mortgage loans with credit recourse to the Corporation

(December 31, 2022 - $

0.6

 billion). Also refer to Note 20 to the Consolidated Financial Statements for information on changes in the

Corporation’s liability of estimated losses related to loans serviced with credit recourse.

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and

without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain

delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for

repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At

September 30, 2023, the Corporation had recorded $

8

 million in mortgage loans on its Consolidated Statements of Financial

Condition related to this buy-back option program (December 31, 2022 - $

14

 million). Loans in our serviced GNMA portfolio benefit

from payment forbearance programs but continue to reflect the contractual delinquency until the borrower repays deferred payments

or completes a payment deferral modification or other borrower assistance alternative. As long as the Corporation continues to

service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the

Corporation. 

During the nine months ended September 30, 2023, the Corporation repurchased approximately $

34

 million (September 30, 2022 -

$

49

 million) of mortgage loans from its GNMA servicing portfolio. The determination to repurchase these loans was based on the

economic benefits of the transaction, which results in a reduction of the servicing costs for these severely delinquent loans, mainly

related to principal and interest advances. The risk associated with the loans is reduced due to their guaranteed nature. The

Corporation may place these loans under modification programs offered by FHA, VA or United States Department of Agriculture

(USDA) or other loss mitigation programs offered by the Corporation, and once brought back to current status, these may be either

retained in portfolio or re-sold in the secondary market.