NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS

12 Months Ended

Dec. 31, 2021

Transfers and Servicing [Abstract]

NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS [Text Block]

NOTE 15 – 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 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. 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 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 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 TRuPs).

 During the third quarter of 2020, the Corporation completed the repurchase of $

0.4

 million of TRuPs of the FBP Statutory Trust I,

which resulted in a commensurate reduction in the related Floating Rate Junior Subordinated Debentures. The Corporation’s purchase

price equated to

75

% of the $

0.4

 million par value. The

25

% discount resulted in a gain of approximately $

0.1

 million. This gain is

reflected in the consolidated statements of income as gain on early extinguishment of debt. As of each December 31, 2021 and 2020,

the Corporation had subordinated debentures outstanding in the aggregate amount of $

183.8

 million.

The Collins Amendment to the Dodd-Frank 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 December 31, 2021, 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 these 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

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 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 of the

underlying 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 December 31, 2021, the amortized cost and fair value of these private label MBS amounted to $

10.0

million and $

7.2

 million, respectively, with a weighted average yield of

2.21

%, which is included as part of the Corporation’s

available-for-sale investment securities portfolio. As described in Note 5 – Investment Securities, above, the ACL on these private

label MBS amounted to $

0.8

 million as of December 31, 2021.

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 December 31, 2021, 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:

Year Ended December 31, 

2021

2020

2019

(In thousands)

Balance at beginning of year

$

33,071

$

26,762

$

27,428

Purchases of servicing assets

(1)

-

7,781

-

Capitalization of servicing assets

5,194

4,864

4,039

Amortization

(7,215)

(5,777)

(4,592)

Temporary impairment recoveries (charges), net

124

(206)

(43)

Other

(2)

(188)

(353)

(70)

Balance at end of year

$

30,986

$

33,071

$

26,762

(1)

Represents MSRs acquired in the BSPR acquisition.

(2)

Amount represents adjustments related to the repurchase of loans serviced for others, including MSRs related to loans previously serviced for BSPR

and eliminated as part of the acquisition in the third quarter of 2020.

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:

Year Ended December 31,

2021

2020

2019

(In thousands)

Balance at beginning of year

$

202

$

73

$

30

Temporary impairment charges

-

301

78

OTTI of servicing assets

-

(77)

-

Recoveries

(124)

(95)

(35)

 Balance at end of year

$

78

$

202

$

73

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:

Year Ended December 31,

2021

2020

2019

(In thousands)

Servicing fees

$

12,176

$

9,268

$

8,522

Late charges and prepayment penalties

697

570

610

Adjustment for loans repurchased

(188)

(353)

(70)

Other 

(1)

-

(15)

 Servicing income, gross

12,684

9,485

9,047

Amortization and impairment of servicing assets

(7,091)

(5,983)

(4,635)

 Servicing income, net

$

5,593

$

3,502

$

4,412

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:

Maximum

Minimum

Year Ended December 31, 2021

Constant prepayment rate:

 Government-guaranteed mortgage loans

6.4

%

6.3

%

 Conventional conforming mortgage loans

6.8

%

6.6

%

 Conventional non-conforming mortgage loans

8.6

%

8.2

%

Discount rate:

 Government-guaranteed mortgage loans

12.0

%

12.0

%

 Conventional conforming mortgage loans

10.0

%

10.0

%

 Conventional non-conforming mortgage loans

13.7

%

13.5

%

Year Ended December 31, 2020

Constant prepayment rate:

 Government-guaranteed mortgage loans

6.5

%

6.2

%

 Conventional conforming mortgage loans

7.2

%

6.9

%

 Conventional non-conforming mortgage loans

9.2

%

8.6

%

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

%

13.7

%

Year Ended December 31, 2019

Constant prepayment rate:

 Government-guaranteed mortgage loans

6.4

%

6.2

%

 Conventional conforming mortgage loans

6.9

%

6.7

%

 Conventional non-conforming mortgage loans

9.3

%

8.9

%

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

10

% and

20

% adverse changes in those assumptions for mortgage loans as of December 31, 2021 and

2020 were as follows:

December 31,

December 31,

2021

2020

(In thousands)

Carrying amount of servicing assets

$

30,986

$

33,071

Fair value

$

42,132

$

40,294

Weighted-average expected life (in years)

7.96

7.86

Constant prepayment rate (weighted-average annual rate)

6.55

%

6.73

%

 Decrease in fair value due to 10% adverse change

$

1,027

$

1,006

 Decrease in fair value due to 20% adverse change

$

2,011

$

1,970

Discount rate (weighted-average annual rate)

11.17

%

11.20

%

 Decrease in fair value due to 10% adverse change

$

1,852

$

1,772

 Decrease in fair value due to 20% adverse change

$

3,561

$

3,409

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

.