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NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS | 3 Months Ended
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Mar. 31, 2023
NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS [Abstract] |
NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS | NOTE 7 – NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (“VIEs”) 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 (“TRuPs”) 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 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 long-term 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 March 31, 2023 and December 31, 2022, these Junior Subordinated Deferrable Debentures amounted to $ 183.8 million. 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 March 31, 2023, 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 these 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. As mentioned above in Note 2, Debt Securities, pursuant to the provisions of the LIBOR Act and Regulation ZZ, the LIBOR reference of these private label MBS shall be replaced by the 3-month CME Term SOFR rate plus a spread adjustment of 0.26161% on the first reset date after USD LIBOR ceases publication in June 2023. 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 March 31, 2023, the amortized cost and fair value of these private label MBS amounted to $ 7.7 million and $ 5.4 million, respectively, with a weighted average yield of 7.25 %, which is included as part of the Corporation’s available-for-sale debt securities portfolio. As described in Note 2 – Debt Securities, the ACL on these private label MBS amounted to $ 0.1 million as of March 31, 2023. 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 March 31, 2023, 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 March 31, 2023 2022 (In thousands) Balance at beginning of year $ 29,037 $ 30,986 Capitalization of servicing assets 532 1,130 Amortization (1,128) (1,330) Temporary impairment recoveries 4 55 Other (1) (14) (88) Balance at end of period $ 28,431 $ 30,753 (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 March 31, 2023 2022 (In thousands) Balance at beginning of year $ 12 $ 78 Recoveries (4) (55) Balance at end of period $ 8 $ 23 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 March 31, 2023 2022 (In thousands) Servicing fees $ 2,718 $ 2,819 Late charges and prepayment penalties 199 194 Adjustment for loans repurchased (14) (88) Servicing income, gross 2,903 2,925 Amortization and impairment of servicing assets (1,124) (1,275) Servicing income, net $ 1,779 $ 1,650 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 Quarter Ended March 31, 2023 Constant prepayment rate: Government-guaranteed mortgage loans 6.7 % 11.6 % 4.8 % Conventional conforming mortgage loans 7.7 % 16.0 % 3.8 % Conventional non-conforming mortgage loans 5.7 % 7.0 % 2.1 % Discount rate: Government-guaranteed mortgage loans 11.5 % 11.5 % 11.5 % Conventional conforming mortgage loans 9.5 % 9.5 % 9.5 % Conventional non-conforming mortgage loans 12.8 % 14.0 % 11.5 % Quarter Ended March 31, 2022 Constant prepayment rate: Government-guaranteed mortgage loans 6.7 % 18.3 % 4.8 % Conventional conforming mortgage loans 6.6 % 18.4 % 3.4 % Conventional non-conforming mortgage loans 6.6 % 21.9 % 4.9 % 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 12.3 % 14.5 % 12.0 % 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 March 31, 2023 and December 31, 2022 were as follows: March 31, December 31, 2023 2022 (In thousands) Carrying amount of servicing assets $ 28,431 $ 29,037 Fair value $ 45,270 $ 44,710 Weighted-average expected life (in years) 7.80 7.80 Constant prepayment rate (weighted-average annual rate) 6.34 % 6.40 % Decrease in fair value due to 10% adverse change $ 1,040 $ 1,048 Decrease in fair value due to 20% adverse change $ 2,036 $ 2,054 Discount rate (weighted-average annual rate) 10.70 % 10.69 % Decrease in fair value due to 10% adverse change $ 1,960 $ 1,925 Decrease in fair value due to 20% adverse change $ 3,770 $ 3,704 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 .

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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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 860 -SubTopic 30 -Section 50 -Paragraph 1A -Subparagraph (c)(3) -URI 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