NON-CONSOLIDATED VARIABLE INTEREST ENTITIES AND SERVICING ASSETS

3 Months Ended

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

.