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NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS
 9 Months Ended
Sep. 30, 2022
Transfers and Servicing [Abstract]  
NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS [Text Block]
NOTE 7 – 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
 
whether
 
it
 
is
 
the
primary beneficiary of the VIE and whether the entity should be consolidated
 
or not.
Below is a summary of transactions with VIEs for which the Corporation has retained
 
some level of continuing involvement:
Trust-Preferred
 
Securities
In April
 
2004, FBP Statutory
 
Trust I,
 
a financing trust
 
that is wholly
 
owned by
 
the Corporation, sold
 
to institutional
 
investors $
100
million of its
 
variable-rate trust-preferred
 
securities (“TRuPs”). 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.
 
In September 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 TRuPs. 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,
 
net
 
of
 
related
 
issuance
 
costs,
 
are
 
presented
 
in
 
the
Corporation’s
 
consolidated
 
statements
 
of
 
financial
 
condition
 
as
 
other
 
borrowings.
 
The
 
variable-rate
 
TRuPs
 
are
 
fully
 
and
unconditionally
 
guaranteed
 
by
 
the
 
Corporation.
The Junior Subordinated Deferrable Debentures 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 TRuPs). As of each of September 30,
2022 and December 31, 2021, these Junior Subordinated Deferrable Debentures amounted to $183.8 million.
 
The Collins Amendment to the Dodd
 
-Frank Wall
 
Street Reform and Consumer Protection
 
Act eliminated certain TRuPs 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 periods.
 
As of September 30,
 
2022, the Corporation
 
was current on all
interest payments due on its subordinated debt.
 
Private Label MBS
During
 
2004
 
and
 
2005,
 
an
 
unaffiliated
 
party,
 
referred
 
to
 
in this
 
subsection
 
as
 
the
 
seller,
 
established
 
a
 
series
 
of
 
statutory
 
trusts
 
to
effect
 
the
 
securitization
 
of
 
mortgage
 
loans
 
and
 
the
 
sale
 
of
 
trust
 
certificates
 
(“private
 
label
 
MBS”).
 
The
 
seller
 
initially
 
provided
 
the
servicing for
 
a fee, which
 
is senior to
 
the obligations to
 
pay private label
 
MBS holders. The
 
seller then entered
 
into a sales
 
agreement
through
 
which
 
it sold
 
and
 
issued
 
the
 
private
 
label
 
MBS in
 
favor
 
of
 
the
 
Corporation’s
 
banking
 
subsidiary,
 
FirstBank.
 
Currently,
 
the
Bank is the
 
sole owner
 
of the private
 
label MBS; the
 
servicing of
 
the underlying residential
 
mortgages that
 
generate the principal
 
and
interest
 
cash
 
flows
 
is
 
performed
 
by
 
another
 
third
 
party,
 
which
 
receives
 
a
 
servicing
 
fee.
 
These
 
private
 
label
 
MBS
 
are
 
variable-rate
securities indexed
 
to
3-month 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 receive
 
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
mortgage
 
loans. 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
 
the
 
sole
 
holder
 
of
 
the
 
securities,
 
absorbs
 
all
 
risks
 
from
 
losses
 
on
 
non-accruing
 
loans
 
and
repossessed
 
collateral.
 
As
 
of
 
September
 
30,
 
2022,
 
the
 
amortized
 
cost
 
and
 
fair
 
value
 
of
 
these
 
private
 
label
 
MBS
 
amounted
 
to
 
$
8.6
million
 
and
 
$
6.2
 
million,
 
respectively,
 
with
 
a
 
weighted
 
average
 
yield
 
of
5.93
%,
 
which
 
is
 
included
 
as
 
part
 
of
 
the
 
Corporation’s
available-for-sale
 
debt
 
securities
 
portfolio.
 
As
 
described
 
in
 
Note
 
2
 
–
 
Debt
 
Securities,
 
above,
 
the
 
ACL
 
on
 
these
 
private
 
label
 
MBS
amounted to $
0.3
 
million as of September 30, 2022.
Investment in Unconsolidated Entity
On
 
February
 
16,
 
2011,
 
FirstBank
 
sold
 
an
 
asset
 
portfolio
 
consisting
 
of
 
performing
 
and
 
nonaccrual
 
construction,
 
commercial
mortgage and
 
commercial and industrial
 
loans with an
 
aggregate book
 
value of $
269.3
 
million to CPG/GS,
 
an entity 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 was
 
refinanced and consolidated
 
with other outstanding
 
loans of CPG/GS
 
in the second
 
quarter of 2018
 
and was paid
 
in full
in
 
October
 
2019.
 
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.
CPG/GS
 
used
 
cash
 
proceeds
 
of
 
the
 
aforementioned
 
seller-financed
 
loan
 
to
 
cover
 
operating
 
expenses
 
and
 
debt
 
service
 
payments,
including those
 
related to
 
the loan
 
that was paid
 
off in
 
October 2019.
 
FirstBank will
 
not receive
 
any return
 
on its equity
 
interest until
PRLP receives
 
an aggregate
 
amount equivalent
 
to its
 
initial investment
 
and 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
 
FirstBank
 
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.
 
In
 
determining
 
the
 
primary
beneficiary
 
of CPG/GS,
 
the Bank
 
considered
 
applicable
 
guidance
 
that requires
 
the Bank
 
to qualitatively
 
assess the
 
determination
 
of
whether
 
it is
 
the primary
 
beneficiary (or
 
consolidator) of
 
CPG/GS based
 
on whether
 
it has
 
both
 
the power
 
to direct
 
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 property; therefore, the
 
Bank concluded that it is not
 
the
primary beneficiary of CPG/GS.
Servicing Assets (MSRs)
The
 
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
 
securities
issued
 
through
 
these
 
transactions
 
are
 
guaranteed
 
by
 
GNMA
 
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,
 
2022,
 
the
 
Corporation
serviced
 
loans securitized
 
through
 
GNMA with
 
a principal
 
balance
 
of
 
$
2.1
 
billion.
 
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. MSRs are included
 
as part of other
 
assets in the consolidated
 
statements of
financial condition.
The changes in MSRs are shown below for the indicated periods:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
(In thousands)
2022
2021
2022
2021
Balance at beginning of period
$
30,277
$
32,335
$
30,986
$
33,071
Capitalization of servicing assets
679
1,146
2,637
4,046
Amortization
(1,247)
(1,817)
(3,850)
(5,374)
Temporary impairment
 
recoveries, net
1
12
65
49
Other
(1)
(20)
9
(148)
(107)
Balance at end of period
$
29,690
$
31,685
$
29,690
$
31,685
(1)
 
Mainly represents adjustments 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 for the indicated periods:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Balance at beginning of period
$
14
$
165
$
78
$
202
Recoveries
(1)
(12)
(65)
(49)
Balance at end of period
$
13
$
153
$
13
$
153
The components
 
of net servicing
 
income, included
 
as part of
 
mortgage banking
 
activities in the
 
consolidated statements of
 
income,
are shown below for the indicated periods:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Servicing fees
$
2,758
$
3,213
$
8,398
$
9,146
Late charges and prepayment penalties
201
87
614
543
Adjustment for loans repurchased
(20)
(32)
(148)
(148)
Servicing income, gross
2,939
3,268
8,864
9,541
Amortization and impairment of servicing assets
(1,246)
(1,764)
(3,785)
(5,284)
Servicing income, net
$
1,693
$
1,504
$
5,079
$
4,257
The Corporation’s MSRs 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 for the indicated periods
 
ranged as follows:
Weighted
Average
Maximum
Minimum
Nine-Month Period Ended September 30, 2022:
Constant prepayment rate:
 
 
Government-guaranteed mortgage loans
6.6
%
18.3
%
4.8
%
 
Conventional conforming mortgage loans
6.6
%
18.4
%
3.4
%
 
Conventional non-conforming mortgage loans
6.0
%
21.9
%
3.8
%
Discount rate:
 
Government-guaranteed mortgage loans
11.8
%
12.0
%
11.5
%
 
Conventional conforming mortgage loans
9.8
%
10.0
%
9.5
%
 
Conventional non-conforming mortgage loans
12.4
%
14.5
%
11.5
%
Nine-Month Period Ended September 30, 2021:
Constant prepayment rate:
 
 
Government-guaranteed mortgage loans
6.1
%
17.4
%
3.7
%
 
Conventional conforming mortgage loans
6.2
%
17.4
%
2.8
%
 
Conventional non-conforming mortgage loans
-
%
-
%
-
%
Discount rate:
 
Government-guaranteed mortgage loans
12.0
%
12.0
%
12.0
%
 
Conventional conforming mortgage loans
10.0
%
10.0
%
10.0
%
 
Conventional non-conforming mortgage loans
-
%
-
%
-
%
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 10% and
 
20% adverse changes in
 
those assumptions for mortgage
 
loans as of September
 
30, 2022 and
December 31, 2021 were as follows:
September 30,
December 31,
(Dollars in thousands)
2022
2021
Carrying amount of servicing assets
$
29,690
$
30,986
Fair value
$
44,621
$
42,132
Weighted-average
 
expected life (in years)
7.86
7.96
Constant prepayment rate (weighted-average annual
 
rate)
6.45
%
6.55
%
 
Decrease in fair value due to 10% adverse change
$
1,048
$
1,027
 
Decrease in fair value due to 20% adverse change
$
2,052
$
2,011
Discount rate (weighted-average annual rate)
10.68
%
11.17
%
 
Decrease in fair value due to 10% adverse change
$
1,923
$
1,852
 
Decrease in fair value due to 20% adverse change
$
3,700
$
3,561
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 MSR 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), which may magnify or counteract the sensitivities.