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NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (VIEs) AND SERVICING ASSETS
 6 Months Ended
Jun. 30, 2023
NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (VIEs) AND SERVICING ASSETS [Abstract]  
NON-CONSOLIDATED VARIABLE INTEREST ENTITIES (VIEs) 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.
 
Upon the discontinuance of
 
LIBOR after June 30, 2023,
and
 
following
 
the
 
provisions
 
of
 
the
 
LIBOR
 
Act
 
and
 
Regulation
 
ZZ,
 
the
 
interest
 
rate
 
on
 
the
 
TRuPs
 
will
 
transition
 
during
 
the
 
third
quarter of
 
2023 from
3-month LIBOR
 
plus a
 
spread to
 
3-month CME
 
Term
 
SOFR plus
 
a tenor
 
spread adjustment
 
of
0.26161
%.
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).
 
During the second quarter of 2023, the Corporation
 
completed the repurchase of $
21.4
 
million of TRuPs of FBP Statutory Trust I as
part
 
of
 
a
 
privately-negotiated
 
transaction
 
with
 
investors,
 
resulting
 
in
 
a
 
commensurate
 
reduction
 
in
 
the
 
related
 
floating
 
rate
 
junior
subordinated
 
debentures.
 
The
 
purchase
 
price
 
paid
 
by
 
the
 
Corporation
 
equated
 
to
92.5
%
 
of
 
the
 
$
21.4
 
million
 
par
 
value.
 
The
7.5
%
discount resulted
 
in a
 
gain of
 
approximately
 
$
1.6
 
million, which
 
is reflected
 
in the
 
consolidated statements
 
of income
 
as a
 
“Gain on
early
 
extinguishment
 
of
 
debt.”
 
As
 
of
 
June
 
30,
 
2023
 
and
 
December
 
31,
 
2022,
 
these
 
Junior
 
Subordinated
 
Deferrable
 
Debentures
amounted to $
161.7
 
million and $
183.8
 
million, respectively.
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
 
June
 
30,
 
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.
 
As
 
mentioned
 
above,
 
upon
 
the
discontinuance of LIBOR
 
after June 30,
 
2023, and following
 
the provisions of
 
the LIBOR Act and
 
Regulation ZZ, the
 
interest rate on
these private
 
label MBS
 
will transition
 
during
 
the third
 
quarter of
 
2023 from
 
3-month LIBOR
 
plus a
 
spread to
 
3-month CME
 
Term
SOFR plus
 
a tenor
 
spread adjustment
 
of
0.26161
% and
 
the original
 
spread limited
 
to the
 
weighted-average coupon
 
of the
 
underlying
collateral. 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. 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 June
 
30, 2023, the amortized cost and fair
 
value of these private label MBS
 
amounted to $
7.5
 
million and
$
5.2
 
million,
 
respectively,
 
with
 
a
 
weighted
 
average
 
yield
 
of
7.6
%,
 
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
June 30, 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
 
June
 
30,
 
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 June 30,
 
Six-Month Period Ended June 30,
 
2023
2022
2023
2022
(In thousands)
Balance at beginning of period
$
28,431
$
30,753
$
29,037
$
30,986
Capitalization of servicing assets
706
828
1,238
1,958
Amortization
(1,102)
(1,273)
(2,230)
(2,603)
Recoveries
1
9
5
64
Other
(1)
(2)
(40)
(16)
(128)
Balance at end of period
$
28,034
$
30,277
$
28,034
$
30,277
(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 June 30,
Six-Month Period Ended June 30,
 
2023
2022
2023
2022
(In thousands)
Balance at beginning of period
$
8
$
23
$
12
$
78
Recoveries
(1)
(9)
(5)
(64)
 
Balance at end of period
$
7
$
14
$
7
$
14
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 June 30,
 
Six-Month Period Ended June 30,
 
2023
2022
2023
2022
(In thousands)
Servicing fees
$
2,660
$
2,821
$
5,378
$
5,640
Late charges and prepayment penalties
211
219
410
413
Adjustment for loans repurchased
(2)
(40)
(16)
(128)
 
Servicing income, gross
2,869
3,000
5,772
5,925
Amortization and impairment of servicing assets
(1,101)
(1,264)
(2,225)
(2,539)
 
Servicing income, net
$
1,768
$
1,736
$
3,547
$
3,386
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
Six-Month Period Ended June 30,
 
2023
Constant prepayment rate:
 
 
Government-guaranteed mortgage loans
6.7
%
11.6
%
4.8
%
 
Conventional conforming mortgage loans
7.4
%
16.0
%
3.8
%
 
Conventional non-conforming mortgage loans
5.9
%
9.0
%
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
12.9
%
14.0
%
11.5
%
Six-Month Period Ended June 30,
 
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
6.3
%
21.9
%
4.5
%
Discount rate:
 
Government-guaranteed mortgage loans
11.9
%
12.0
%
11.5
%
 
Conventional conforming mortgage loans
9.9
%
10.0
%
9.5
%
 
Conventional non-conforming mortgage loans
12.4
%
14.5
%
11.5
%
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
 
June
 
30,
 
2023
 
and
December 31, 2022 were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
December 31,
2023
2022
(In thousands)
Carrying amount of servicing assets
$
28,034
$
29,037
Fair value
$
44,420
$
44,710
Weighted-average
 
expected life (in years)
7.79
7.80
Constant prepayment rate (weighted-average annual
 
rate)
6.28
%
6.40
%
 
Decrease in fair value due to 10% adverse change
$
1,025
$
1,048
 
Decrease in fair value due to 20% adverse change
$
2,008
$
2,054
Discount rate (weighted-average annual rate)
10.71
%
10.69
%
 
Decrease in fair value due to 10% adverse change
$
1,902
$
1,925
 
Decrease in fair value due to 20% adverse change
$
3,660
$
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
.