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REGULATORY MATTERS, COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2019

Commitments And Contingencies Disclosure [Abstract]

REGULATORY MATTERS, COMMITMENTS AND CONTINGENCIES

NOTE 27 – REGULATORY MATTERS, COMMITMENTS AND CONTINGENCIES

The Corporation and FirstBank are each subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Corporation’s financial statements and activities. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s and FirstBank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are also subject to qualitative judgments and adjustment by the regulators with respect to minimum capital requirements, components, risk weightings, and other factors.

On October 3, 2017, the New York FED terminated the Written Agreement entered into on June 3, 2010 by the Corporation and the New York FED. However, the Corporation has agreed with the New York FED to continue to obtain the approval of the New York FED before paying dividends, receiving dividends from the Bank, making payments on subordinated debt or TRuPs, incurring or guaranteeing debt or purchasing or redeeming any corporate stock.

Although the Corporation and FirstBank became subject to the U.S. Basel III capital rules (“Basel III rules”) beginning on January 1, 2015, certain elements of the Basel III have been deferred by the federal banking agencies. The Corporation and FirstBank compute risk-weighted assets using the Standardized Approach required by the Basel III rules.

The Basel III rules require the Corporation to maintain an additional capital conservation buffer of 2.5% to avoid limitations on both (i) capital distributions (e.g., repurchases of capital instruments, dividends and interest payments on capital instruments,) and (ii) discretionary bonus payments to executive officers and heads of major business lines. The phase-in of the capital conservation buffer began on January 1, 2016 with a first year requirement of 0.625% of additional Common Equity Tier 1 Capital (“CET1”), which was progressively increased over a four-year period, increasing by that same percentage amount on each subsequent January 1 until it reached the fully phased-in 2.5% CET1 requirement on January 1, 2019.

Under the fully phased-in Basel III rules, in order to be considered adequately capitalized and not subject to the above described limitations, the Corporation is required to maintain: (i) a minimum CET1 capital to risk-weighted assets ratio of at least 4.5%, plus the 2.5% “capital conservation buffer,” resulting in a required minimum CET1 ratio of at least 7%; (ii) a minimum ratio of total Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum Tier 1 capital ratio of 8.5%; (iii) a minimum ratio of total Tier 1 plus Tier 2 capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, resulting in a required minimum total capital ratio of 10.5%; and (iv) a required minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average on-balance sheet (non-risk adjusted) assets.

In addition, as required under the Basel III rules, the Corporation’s TRuPs were fully phased-out from Tier 1 capital as of January 1, 2016. However, the Corporation’s TRuPs may continue to be included in Tier 2 capital until the instruments are redeemed or mature.

The Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency (collectively “the agencies”) have issued several rulemakings over the last two years to simplify certain aspects of the capital rule. For example, the capital rule included transitional arrangements for certain requirements. Under such transitional arrangements in the capital rule, any amount of mortgage servicing assets, temporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions that a banking organization did not deduct from common equity tier 1 capital was risk weighted at 100 percent until January 1, 2018. In 2017, the agencies adopted a rule (transition rule) to allow non-advanced approaches banking organizations, such as the Corporation and FirstBank, to continue to apply the transition treatment in effect in 2017 (including the 100 percent risk weight for mortgage servicing assets, temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions) while the agencies considered the simplifications proposal.

On July 9, 2019, the agencies adopted a final rule that supersedes the regulatory capital transition rules and eliminates the transition provisions that are no longer operative. The final rule will be generally effective April 1, 2020 and eliminates: (i) the 10 percent common equity tier 1 capital deduction threshold, which applies individually to holdings of mortgage servicing assets, temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions in the form of common stock; (ii) the 15 percent common equity tier 1 capital deduction threshold, which applies to the aggregate amount of such items; (iii) the 10 percent threshold for non-significant investments, which applies to holdings of regulatory capital of unconsolidated financial institutions; and (iv) the deduction treatment for significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. Instead of the current capital rule's treatments for mortgage servicing assets, temporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions, the final rule requires non-advanced approaches banking organizations to deduct from common equity tier 1 capital any amount of mortgage servicing assets, temporary difference deferred tax assets, and investments in the capital of unconsolidated financial institutions that individually exceed 25 percent of common equity tier 1 capital of the banking organization (the 25 percent common equity tier 1 capital deduction threshold). The final rule retains the deferred requirement that requires a banking organization to apply a 250 percent risk weight to non-deducted mortgage servicing assets or temporary difference deferred tax assets.

Please refer to the discussion in “Part I, – Item 1, – Business – Supervision and Regulation,” included in the 2018 Form 10-K for a more complete discussion of supervision and regulatory matters and activities that affect the Corporation and its subsidiaries.

The regulatory capital positions of the Corporation and FirstBank as of June 30, 2019 and December 31, 2018 were as follows:

	Regulatory Requirements

	Actual			For Capital Adequacy Purposes			To be Well-Capitalized-General Thresholds
	Actual			For Capital Adequacy Purposes			To be Well-Capitalized-General Thresholds
	Amount		Ratio	Amount		Ratio	Amount		Ratio

(Dollars in thousands)
As of June 30, 2019
Total Capital (to
Risk-Weighted Assets)
First BanCorp.	$	2,203,045	24.25%	$	726,759	8.0%		N/A	N/A
FirstBank	$	2,157,718	23.74%	$	727,167	8.0%	$	908,959	10.0%
Common Equity Tier 1 Capital
(to Risk-Weighted Assets)
First BanCorp.	$	1,874,143	20.63%	$	408,802	4.5%		N/A	N/A
FirstBank	$	1,735,483	19.09%	$	409,031	4.5%	$	590,823	6.5%
Tier I Capital (to
Risk-Weighted Assets)
First BanCorp.	$	1,910,247	21.03%	$	545,069	6.0%		N/A	N/A
FirstBank	$	2,043,485	22.48%	$	545,375	6.0%	$	727,167	8.0%
Leverage ratio
First BanCorp.	$	1,910,247	15.64%	$	488,558	4.0%		N/A	N/A
FirstBank	$	2,043,485	16.75%	$	488,108	4.0%	$	610,135	5.0%

As of December 31, 2018
Total Capital (to
Risk-Weighted Assets)
First BanCorp.	$	2,118,940	24.00%	$	706,418	8.0%		N/A	N/A
FirstBank	$	2,075,894	23.51%	$	706,426	8.0%	$	883,032	10.0%
Common Equity Tier 1 Capital
(to Risk-Weighted Assets)
First BanCorp.	$	1,792,880	20.30%	$	397,360	4.5%		N/A	N/A
FirstBank	$	1,656,563	18.76%	$	397,365	4.5%	$	573,971	6.5%
Tier I Capital (to
Risk-Weighted Assets)
First BanCorp.	$	1,828,984	20.71%	$	529,814	6.0%		N/A	N/A
FirstBank	$	1,964,563	22.25%	$	529,819	6.0%	$	706,426	8.0%
Leverage ratio
First BanCorp.	$	1,828,984	15.37%	$	475,924	4.0%		N/A	N/A
FirstBank	$	1,964,563	16.53%	$	475,490	4.0%	$	594,362	5.0%

The Corporation enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit. As of June 30, 2019, commitments to extend credit amounted to approximately $1.3 billion, of which $658.2 million relates to credit card loans. Commercial and financial standby letters of credit amounted to approximately $52.2 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. For most of the commercial lines of credit, the Corporation has the option to reevaluate the agreement prior to additional disbursements. In the case of credit cards and personal lines of credit, the Corporation can cancel the unused credit facility at any time and without cause.

As of June 30, 2019, First BanCorp. and its subsidiaries were defendants in various legal proceedings arising in the ordinary course of business. On at least a quarterly basis, the Corporation assesses its liabilities and contingencies in connection with threatened and outstanding legal cases, matters and proceedings, utilizing the latest information available. For cases, matters and proceedings where it is both probable the Corporation will incur a loss and the amount can be reasonably estimated, the Corporation establishes an accrual for the loss. Once established, the accrual is adjusted as appropriate to reflect any relevant developments. For cases, matters or proceedings where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established.

Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that some of them are currently in preliminary stages), the existence in some of the current proceedings of multiple defendants whose share of liability has yet to be determined, the numerous unresolved issues in the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, the Corporation’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

While the final outcome of legal cases, matters, and proceedings is inherently uncertain, based on information currently available, management believes that the final disposition of the Corporation’s legal cases, matters or proceedings, to the extent not previously provided for, will not have a material negative adverse effect on the Corporation’s consolidated financial position as a whole.

If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess of any accrual) will be incurred in connection with any legal actions, the Corporation discloses an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that an estimate cannot be made. Based on the Corporation’s assessment as of June 30, 2019, no such disclosures were necessary. However in the event of unexpected future developments, it is possible that the ultimate resolution of these cases, matters and proceedings, if unfavorable, may be material to the Corporation’s consolidated financial position on a particular period.

Set forth below is a description of the Corporation’s significant legal proceedings:

Ramírez Torres, et al. v. Banco Popular de Puerto Rico, et al. FirstBank Puerto Rico has been named a defendant in a punitive class action complaint, filed in February 2017 at the Court of First Instance in San Juan, Puerto Rico. The Complaint seeks damages and preliminary injunctive relief on behalf of the purported class (“Plaintiffs”) against Banco Popular de Puerto Rico and other financial institutions with insurance agency subsidiaries in Puerto Rico (“Defendants”). Plaintiffs allege that Defendants have been unjustly enriched by failing to reimburse them for "good experience" commissions allegedly paid by Antilles Insurance Company and Puerto Rico Home Insurance Company. In March 2017, FirstBank Puerto Rico filed a Motion to Dismiss and a Motion for Declaratory Judgment and Third-Party Complaint against Antilles Insurance Company and the Insurance Commissioner's Office. All other co-defendants filed motions to dismiss the complaint and opposed the request for preliminary injunctive relief. Antilles Insurance Company filed a Motion against the Third-Party Complaint filed by FirstBank Puerto Rico, which FirstBank Puerto Rico opposed. The Insurance Commissioner's Office filed a Motion for Summary Judgment. In July 2017, the Court issued a Judgment granting the Motions to Dismiss filed by Defendants, dismissing the Complaint with prejudice, except the Third-Party Complaint filed by FirstBank Puerto Rico which was dismissed without prejudice. In August 2017, Plaintiffs filed an appeal before the Puerto Rico Court of Appeals and FirstBank Puerto Rico and other co-defendants filed their Oppositions to Plaintiffs’ appeal. In March 2018, the Court of Appeals entered a Judgment revoking the lower court’s Judgment. One co-defendant filed for reconsideration, which was denied, and all other co-defendants filed their respective Petitions of Certiorari before the Puerto Rico Supreme Court, which also denied review. Co-defendants have filed for reconsideration. All Motions for Reconsideration were denied, and the case was remanded to the Court of First Instance for the continuation of proceedings. A Class certification hearing scheduled for May 2, 2019 was changed to a status hearing. Parties discussed their respective positions, specifically that prior to celebrating any other hearing, it is imperative that the Court enters to resolve FirstBank’s suit seeking Declaratory Judgment. Memorandums of law regarding the validity of the Antilles Insurance policy endorsement were filed on June 3, 2019 in compliance with a court order. A preliminary injunction hearing is scheduled for September 2019.