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NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS | 9 Months Ended
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Sep. 30, 2018
Transfers and Servicing [Abstract] |
NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS | NOTE 14 – NON CONSOLIDATED VARIABLE INTEREST ENTITIES (“VIE”) AND SERVICING ASSETS The Corporation transfers residential mortgage loans in sale or securitization transactions in which it has continuing involvement, including servicing responsibilities and guarantee arrangements. All such transfers have been accounted for as sales as required by applicable accounting guidance. When evaluating the need to consolidate counterparties to which the Corporation has transferred assets, or with which the Corporation has entered into other transactions, the Corporation first determines if the counterparty is an entity for which a variable interest exists. If no scope exception is applicable and a variable interest exists, the Corporation then evaluates if it is the primary beneficiary of the VIE and whether the entity should be consolidated or not. Below is a summary of transfers of financial assets to VIEs for which the Corporation has retained some level of continuing involvement: GNMA Th e Corporation typically transfers first lien residential mortgage loans in conjunction with GNMA securitization transactions in which the loans are exchanged for cash or securities that are readily redeemed for cash proceeds and servicing rights. The secur ities issued through these transactions are guaranteed by the issuer and, under seller/servicer agreements, the Corporation is required to service the loans in accordance with the issuers’ servicing guidelines and standards. As of September 30, 2018, t he Corporation serviced loans securitized through GNMA with a principal balance of $1.7 billion. Trust-Preferred Securities In 2004, FBP Statutory Trust I, a financing trust that is wholly owned by the Corporation, sold to institutional investors $1 00 million of its variable-rate trust-preferred securities. FBP Statutory Trust I used the proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.1 million of FBP Statutory Trust I variable-rate common securities, to purchase $103.1 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. Also in 2004, FBP Statutory Trust II, a financing trust that is wholly owned by the Corporation, sold to institutional investors $125 million of its variable-rate trust-preferred securities. FBP Statutory Trust II used the proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $3.9 million of FBP Statutory Trust II variable-rate common securities, to purchase $128.9 million aggregate principal amount of the Corporation’s Junior Subordinated Deferrable Debentures. The debentures are presented in the Corporation’s consolidated statement of financial condition as Other Borrowings, net of related issuance costs. T he variable-rate trust-preferred securities are fully and unconditionally guaranteed by the Corporation. The Junior Subordinated Deferrable Debentures issued by the Corporation in April 2004 and September 2004 mature on June 17, 2034 and September 20, 2034, respectively; however, under certain circumstances, the maturity of Junior Subordinated Deferrable Debentures may be shortened (such shortening would result in a mandatory redemption of the variable-rate trust-preferred securities). During the first quarter of 2018, the Corporation completed the repurchase of $23.8 million of trust preferred securities of the FBP Statutory Trust I that were auctioned in a public sale at which the Corporation was invited to participate. The Corporation repurchased and cancelled the repurchased trust preferred securities, which resulted in a commensurate reduction in the related Floating Rate Junior Subordinated Debenture. The Corporation’s winning bid equated to 90% of the $23.8 million par value. The 10% di scount resulted in a gain of approximately $2.3 million, which is reflected in the statement of income as a “Gain on early extinguishment of debt.” The Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated cer tain trust-preferred securities from Tier 1 Capital; however, these instruments may remain in Tier 2 capital until the instruments are redeemed or mature. Under the indentures, the Corporation has the right, from time to time, and without causing an event of default, to defer payments of interest on the Junior Subordinated Deferrable Debentures by extending the interest payment period at any time and from time to time during the term of the subordinated debentures for up to twenty consecutive quarterly peri ods. During the second quarter of 2016, the Corporation, having received approval from the Federal Reserve, paid $31.2 million for all of the accrued but deferred interest payments plus the interest for the second quarter of 2016 on the Corporation’s subor dinated debentures associated with its trust preferred securities. Subsequently, the Corporation has received quarterly approvals that have enabled it to make scheduled quarterly interest payments. As of September 30, 2018, the Corporation was current on a ll interest payments due on its subordinated debt. In October 2017, the New York FED terminated the formal written agreement (the “Written Agreement”) entered into on June 3, 2010 between the Corporation and the Reserve Bank. However, the Corporation has a greed with its regulators to continue to obtain approval before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or trust-preferred securities, incurring or guaranteeing debt or purchasing or redeeming any corporate stock. The Corporation has received approval to make the subordinated debentures’ qua rterly payment for December 2018. Grantor Trusts During 2004 and 2005, an unaffiliated party, referred to in this subsection as the seller, established a series o f statutory trusts to effect the securitization of mortgage loans and the sale of trust certificates (the “Grantor Trusts”). The seller initially provided the servicing for a fee, which is senior to the obligations to pay trust certificate holders. The sel ler then entered into a sales agreement through which it sold and issued the trust certificates in favor of the Corporation’s banking subsidiary. Currently, the Bank is the sole owner of the trust certificates; the servicing of the underlying residential m ortgages that generate the principal and interest cash flows is performed by another third party, which receives a servicing fee. The trust certificates are variable-rate securities indexed to 90-day LIBOR plus a spread. The principal payments from the underlying loans are remitted to a paying agent (servicer), who then remits interest to the Bank. Interest income is shared to a certain extent with the FDIC, which has an interest only strip (“IO”) tied to the cash flows of the underlying loans and is entitled to re ceive the excess of the interest income less a servicing fee over the variable rate income that the Bank earns on the securities. This IO is limited to the weighted-average coupon on the securities. The FDIC became the owner of the IO upon its intervention of the seller, a failed financial institution. No recourse agreement exists, and the Bank, as a sole holder of the certificates, absorbs all risks from losses on non-accruing loans and repossessed collateral. As of September 30, 2018, the amortized c ost and fair value of the Grantor Trusts amounted to $20.0 million and $14.6 million, respectively, with a weighted average yield of 4.57%, which is included as part of the Corporation’s available-for-sale investment securities portfolio. Investment in un consolidated entity On February 16, 2011, FirstBank sold an asset portfolio consisting of performing and non-performing construction, commercial mortgage and commercial and industrial loans with an aggregate book value of $269.3 million to CPG/GS, an e ntity organized under the laws of the Commonwealth of Puerto Rico and majority owned by PRLP Ventures LLC (“PRLP”), a company created by Goldman, Sachs & Co. and Caribbean Property Group. In connection with the sale, the Corporation received $88.5 million in cash and a 35% interest in CPG/GS, and made a loan in the amount of $136.1 million representing seller financing provided by FirstBank. The loan matured in February 2018 and was refinanced and consolidated with other outstanding loans of CPG/GS in the second quarter of 2018. As of September 30, 2018, the carrying amount of the refinanced loan was $8.4 million, which was included in the Corporation’s commercial mortgage loans held for investment portfolio. This loan has a three-year maturity, bea rs a fixed-interest rate, and is primarily secured by income-producing real estate properties and certain residential units. FirstBank’s equity interest in CPG/GS is accounted for under the equity method. FirstBank recorded a loss on its interest in CPG/GS in 2014 that reduced to zero the carrying amount of the Bank’s investment in CPG/GS. No negative investment needs to be reported as the Bank has no legal obligation or commitment to provide further financial support to this entity; thus, no further losses have been or will be recorded on this investment. Cash proceeds received by CPG/GS have been first used to cover operating expenses and debt service payments, including those related to the refinanced loan described above, which must be substantially repaid before proceeds can be used for other purposes, including the return of capital to both PRLP and FirstBank. FirstBank will not receive any return on its equity interest until PRLP receives an aggregate amount equivalent to its initial investment an d a priority return of at least 12%, which has not occurred, resulting in FirstBank’s interest in CPG/GS being subordinate to PRLP’s interest. CPG/GS will then begin to make payments pro rata to PRLP and FirstBank, 35% and 65%, respectively, until FirstBan k has achieved a 12% return on its invested capital and the aggregate amount of distributions is equal to FirstBank’s capital contributions to CPG/GS. The Bank has determined that CPG/GS is a VIE in which the Bank is not the primary beneficiary. I n determining the primary beneficiary of CPG/GS, the Bank considered applicable guidance that requires the Bank to qualitatively assess the determination of the primary beneficiary (or consolidator) of CPG/GS based on whether it has both the power to direc t the activities of CPG/GS that most significantly affect the entity’s economic performance and the obligation to absorb losses of, or the right to receive benefits from, CPG/GS that could potentially be significant to the VIE. The Bank determined that it does not have the power to direct the activities that most significantly impact the economic performance of CPG/GS as it does not have the right to manage or influence the loan portfolio, foreclosure proceedings, or the construction and sale of the propert y; therefore, the Bank concluded that it is not the primary beneficiary of CPG/GS. Servicing Assets The Corporation sells residential mortgage loans to GNMA, which generally securitizes the transferred loans into mortgage-backed securities. Also, certain conventional conforming loans are sold to FNMA or FHLMC with servicing retained. The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased.
The changes in servicing assets are shown below: |  |  |  |  |  |  |  |  |  |  |  |
|  | Quarter Ended |  | Nine-Month Period Ended |
|  | September 30, |  | September 30, |
(In thousands) | 2018 |  | 2017 |  | 2018 |  | 2017 |
Balance at beginning of period | $ | 27,191 |  | $ | 26,502 |  | $ | 25,255 |  | $ | 26,244 |
Capitalization of servicing assets |  | 1,003 |  |  | 833 |  |  | 3,028 |  |  | 2,757 |
Amortization |  | (722) |  |  | (775) |  |  | (2,188) |  |  | (2,342) |
Adjustment to fair value |  | (65) |  |  | (690) |  |  | 1,265 |  |  | (1,047) |
Other (1) |  | 186 |  |  | 129 |  |  | 233 |  |  | 387 |
Balance at end of period | $ | 27,593 |  | $ | 25,999 |  | $ | 27,593 |  | $ | 25,999 |
(1) | Amount represents the adjustment to fair value related to the repurchase of loans serviced for others. |  |  |  |  |  |
Impairment charges are recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized.
Changes in the impairment allowance were as follows: |  |  |  |  |  |
| Quarter Ended |  | Nine-Month Period Ended |
| September 30, |  | September 30, |
| 2018 |  | 2017 |  | 2018 |  | 2017 |
(In thousands) |
Balance at beginning of period | $ | 56 |  | $ | 197 |  | $ | 1,451 |  | $ | 461 |
Temporary impairment charges |  | 65 |  |  | 690 |  |  | 102 |  |  | 1,047 |
OTTI of servicing assets |  | - |  |  | - |  |  | (65) |  |  | (621) |
Recoveries |  | - |  |  | - |  |  | (1,367) |  |  | - |
Balance at end of period | $ | 121 |  | $ | 887 |  | $ | 121 |  | $ | 887 |
| The components of net servicing income are shown below: |  |  |  |  |  |
|  | Quarter Ended |  | Nine-Month Period Ended |
|  | September 30, |  | September 30, |
| 2018 |  | 2017 |  | 2018 |  | 2017 |
(In thousands) |
Servicing fees | $ | 2,084 |  | $ | 1,898 |  | $ | 6,262 |  | $ | 5,897 |
Late charges and prepayment penalties |  | 114 |  |  | 103 |  |  | 380 |  |  | 340 |
Adjustment for loans repurchased |  | 186 |  |  | 129 |  |  | 233 |  |  | 387 |
Other |  | (8) |  |  | - |  |  | (8) |  |  | (35) |
Servicing income, gross |  | 2,376 |  |  | 2,130 |  |  | 6,867 |  |  | 6,589 |
Amortization and impairment of servicing assets |  | (787) |  |  | (1,464) |  |  | (923) |  |  | (3,389) |
Servicing income, net | $ | 1,589 |  | $ | 666 |  | $ | 5,944 |  | $ | 3,200 |
The Corporation’s servicing assets are subject to prepayment and interest rate risks. Key economic assumptions used in determining the fair value at the time of sale of the related mortgages ranged as follows:
| Maximum |  | Minimum
Nine-Month Period Ended September 30, 2018: |  |  |  |  |
Constant prepayment rate: |  |  |  |  |
Government-guaranteed mortgage loans | 5.9 | % |  | 5.6 | %
Conventional conforming mortgage loans | 6.4 | % |  | 6.2 | %
Conventional non-conforming mortgage loans | 9.8 | % |  | 9.1 | %
Discount rate: |  |  |  |  |
Government-guaranteed mortgage loans | 12.0 | % |  | 12.0 | %
Conventional conforming mortgage loans | 10.0 | % |  | 10.0 | %
Conventional non-conforming mortgage loans | 14.3 | % |  | 14.3 | %
Nine-Month Period Ended September 30, 2017: |  |  |  |  |
Constant prepayment rate: |  |  |  |  |
Government-guaranteed mortgage loans | 6.2 | % |  | 6.0 | %
Conventional conforming mortgage loans | 6.7 | % |  | 6.3 | %
Conventional non-conforming mortgage loans | 9.5 | % |  | 9.1 | %
Discount rate: |  |  |  |  |
Government-guaranteed mortgage loans | 12.0 | % |  | 12.0 | %
Conventional conforming mortgage loans | 10.0 | % |  | 10.0 | %
Conventional non-conforming mortgage loans | 14.3 | % |  | 14.3 | %
The weighted averages of the key economic assumptions that the Corporation used in its valuation model and the sensitivity of the current fair value to immediate 1 0% and 20% adverse changes in those as sumptions for mortgage loans as of September 30, 2018 were as follows:
| (Dollars in thousands)
Carrying amount of servicing assets | $ | 27,593 |
Fair value | $ | 32,304 |
Weighted-average expected life (in years) |  | 8.45 |
Constant prepayment rate (weighted-average annual rate) |  | 6.14% |
Decrease in fair value due to 10% adverse change | $ | 774 |
Decrease in fair value due to 20% adverse change | $ | 1,516 |
Discount rate (weighted-average annual rate) |  | 11.25% |
Decrease in fair value due to 10% adverse change | $ | 1,613 |
Decrease in fair value due to 20% adverse change | $ | 3,088 |
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship between the change in assumption and 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 servicing asset is calculated without changing any other assumption; in reality, changes in one factor may resul t in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the sensitivities.

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- Definition The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 860 -URI http://asc.fasb.org/topic&trid=2197590 + Details
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