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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
____________
FORM
10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2022
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to
___________________
COMMISSION FILE NUMBER
001-14793
FIRST BANCORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED
IN ITS CHARTER)
Puerto Rico
66-0561882
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1519 Ponce de León Avenue, Stop 23
San Juan
,
Puerto Rico
(Address of principal executive offices)
00908
(Zip Code)
(
787
)
729-8200
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock ($0.10 par value per share)
FBP
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days.
Yes
☑
No
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required
to submit such files).
Yes
☑
No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to
use the extended transition period for complying with any
new or revised
financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☑
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest practicable date.
Common stock:
184,611,527
shares outstanding as of October 31, 2022.
2
FIRST BANCORP.
INDEX PAGE
PART
I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Statements of
Financial Condition
(Unaudited) as of
September 30, 2022
and December 31,
2021
6
Consolidated Statements of Income (Unaudited) – Quarters ended
September 30, 2022 and 2021 and nine-
month periods ended September 30, 2022 and 2021
7
Consolidated
Statements of
Comprehensive (Loss)
Income (Unaudited)
– Quarters
ended September
30,
2022 and 2021 and nine-month periods ended September 30, 2022 and 2021
8
Consolidated Statements of Cash Flows (Unaudited) – Nine-month
periods ended September 30, 2022 and
2021
9
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited) – Quarters ended September 30,
2022 and 2021 and nine-month periods ended September 30, 2022 and 2021
10
Notes to Consolidated Financial Statements (Unaudited)
11
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
81
Item 3. Quantitative and Qualitative Disclosures About Market Risk
142
Item 4. Controls and Procedures
142
PART
II. OTHER INFORMATION
Item 1.
Legal Proceedings
143
Item 1A. Risk Factors
143
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
144
Item 6.
Exhibits
145
SIGNATURES
3
Forward-Looking Statements
This Form 10-Q contains
forward-looking statements within
the meaning of Section
27A of the Securities Act
of 1933, as amended
(the “Securities Act”),
and Section 21E
of the Securities
Exchange Act
of 1934, as
amended (the
“Exchange Act”),
which are subject
to the safe harbor created by such sections. When used
in this Form 10-Q or future filings by
First BanCorp. (the “Corporation,” “we,”
“us,” or “our”)
with the U.S.
Securities and
Exchange Commission (the
“SEC”), in the
Corporation’s
press releases or
in other public
or
stockholder
communications
made
by
the
Corporation,
or
in
oral
statements
made
on
behalf
of
the
Corporation
by,
or
with
the
approval of, an
authorized executive officer,
the words or
phrases “would,” “intends,”
“will,” “expect,”
“should,” “plans,”
“forecast,”
“anticipate,” “look forward,”
“believes,” and other
terms of similar meaning
or import, or the
negatives of these terms
or variations of
them,
in
connection
with
any
discussion
of
future
operating,
financial
or
other
performance
are
meant
to
identify
“forward-looking
statements.”
The Corporation cautions readers
not to place undue reliance
on any such “forward-looking
statements,” which speak only as
of the
date
made,
and
advises
readers
that
these
forward-looking
statements
are
not
guarantees
of
future
performance
and
involve
certain
risks,
uncertainties,
estimates,
and
assumptions
by
us
that
are
difficult
to
predict.
Various
factors,
some
of
which
are
beyond
our
control, could cause actual results to differ materially from
those expressed in, or implied by,
such forward-looking statements.
Factors that could
cause results to
differ from
those expressed in
the Corporation’s
forward-looking statements
include, but are
not
limited to, risks
described
or referenced in
Part I, Item 1A.,
“Risk Factors,” in the
Corporation’s
Annual Report on
Form 10-K for the
year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”)
and the following:
●
the
impact
that
Hurricane
Fiona
will
have
on
the
economy
in
the
regions
impacted,
both
positive
and
negative,
for
the
Corporation’s
commercial and
retail customers,
which will
depend on
the extent to
which rebuilding
efforts and
disaster relief
money stimulate economic activity and the ultimate effect
on loan collection;
●
the impact
of rising
interest rates
and inflation
on the
Corporation, including
a decrease
in demand
for new
loan originations
and
refinancings,
increased
competition
for
borrowers,
attrition
in
deposits,
and
an
increase
in
non-interest
expenses
which
would
have
an
impact
on
the
Corporation’s
margins
and
may
have
an
adverse
impact
on
origination
volumes
and
financial
performance;
●
uncertainties
relating
to
the
duration
of
the
COVID-19
pandemic
and
its
impact
on
the
Corporation’s
business,
operations,
employees, credit quality,
financial condition and net income;
●
risks related to
the Corporation’s
participation in
government responses
or programs
related to the
COVID-19 pandemic,
such
as the
Small Business
Administration Paycheck
Protection Program
(“SBA PPP”)
established by
the Coronavirus
Aid, Relief,
and
Economic
Security
Act
of 2020,
as amended
(the
“CARES Act”),
including
any
judgments,
claims,
damages,
penalties,
fines
or
reputational
damage
resulting
from
claims
or
challenges
against
the
Corporation
by
governments,
regulators,
customers or otherwise, relating to the Corporation’s
participation in any such responses or programs;
●
the Corporation’s ability to
identify and prevent cyber-security incidents,
such as data security breaches, ransomware, malware,
“denial of service”
attacks, “hacking,” identity
theft and state-sponsored
cyberthreats, and the
occurrence of any
of which may
result in
misuse or
misappropriation of
confidential or
proprietary information
and could
result in
the disruption
or damage
to
our systems, increased costs and losses or an adverse effect
to our reputation;
●
general
competitive
factors,
industry
consolidation
and
other
market
risks
as
well
as
the
implementation
of
strategic
growth
opportunities, including risks, uncertainties and other factors or events to
any business acquisitions or dispositions;
4
●
uncertainty as to the
ultimate outcome of
the debt restructuring plan
of Puerto Rico (“Plan
of Adjustment” or “PoA”)
and 2022
Fiscal Plan
for Puerto
Rico as
certified by
the Financial
Oversight and
Management Board
for Puerto
Rico (“the
2022 Fiscal
Plan”),
or
any
revisions
to
it,
on
our
clients
and
loan
portfolios
and
any
potential
impact
from
future
economic
or
political
developments in Puerto Rico;
●
the
impact
that
a
slowdown
in
the
economy
and
an
increase
in
unemployment
or
underemployment
may
have
on
the
performance of our loan and lease portfolio,
the market price of our investment
securities, the availability of sources
of funding
and the demand for our products;
●
uncertainty
as
to
the
availability
of
wholesale
funding
sources,
such
as
securities
sold
under
agreements
to
repurchase,
advances from the Federal Home Loan Bank (“FHLB”), and brokered certificates
of deposit (“brokered CDs”);
●
the effect
of deteriorating
economic
conditions in
the real
estate markets
and the
consumer
and commercial
sectors and
their
impact on
the credit
quality of
the Corporation’s
loans and
other assets,
which may
contribute to,
among other
things, higher
than targeted
levels of
non-performing assets,
charge-offs
and provisions
for credit
losses, and
may subject
the Corporation
to
further risk from loan defaults and foreclosures;
●
the impact
of changes
in accounting
standards or
assumptions in
applying those
standards, including
the continuing
impact of
the COVID-19 pandemic,
or geopolitical concerns, such
as the ongoing conflict
in Ukraine, on forecasts
of economic variables
considered
for
the
determination
of
the
allowance
for
credit
losses
(“ACL”)
required
by
the
current
expected
credit
losses
(“CECL”) accounting standard;
●
the ability
of the
Corporation’s
banking subsidiary,
FirstBank Puerto
Rico (“FirstBank”
or the
“Bank”) to
realize the
benefits
of its net deferred tax assets;
●
the ability of FirstBank to generate sufficient cash flow to make dividend
payments to the Corporation;
●
adverse
changes
in
general
economic
conditions
in
Puerto
Rico,
the
United
States
(“U.S.”),
the
U.S.
Virgin
Islands
(the
“USVI”),
and
the
British
Virgin
Islands
(the
“BVI”),
including
the
interest
rate
environment,
market
liquidity,
housing
absorption rates, real estate prices, and disruptions in
the U.S. capital markets, including as a result of past
or future widespread
health
emergencies,
natural
disasters
or
geopolitical
concerns,
such
as
the
ongoing
conflict
in
Ukraine,
which
may
reduce
interest
margins,
affect
funding
sources
and
demand
for
all
of
the
Corporation’s
products
and
services,
and
reduce
the
Corporation’s revenues and
earnings and the value of the Corporation’s assets;
●
the
effect
of
changes
in
the
interest
rate
environment,
including
uncertainty
about
the
effect
of
the
cessation
of
the
London
Interbank
Offered
Rate
(“LIBOR”),
which
could
adversely
affect
the
Corporation’s
results
of
operations,
cash
flows,
and
liquidity;
●
an adverse change in
the Corporation’s
ability to attract new clients,
retain existing ones, and
gain acceptance from current
and
prospective
customers
for
new products
and
services,
including
those related
to
the offering
of digital
banking
and
financial
services;
●
the
risk
that
additional
portions
of
the
unrealized
losses
in
the
Corporation’s
debt
securities
portfolio
are
determined
to
be
credit-related,
resulting
in
additional
charges
to
the
provision
for
credit
losses
on
the
Corporation’s
available-for-sale
debt
securities portfolio;
●
uncertainty
about legislative,
tax or
regulatory changes
that affect
financial services
companies in
Puerto
Rico, the
U.S., and
the USVI and BVI,
which could affect
the Corporation’s
financial condition or
performance and could cause
the Corporation’s
actual results for future periods to differ materially from prior
results and anticipated or projected results;
5
●
the effect
of changes
in the
fiscal and
monetary policies
and regulations
of the
U.S. federal
government
and the
Puerto Rico
and other
governments, particularly
in response
to rising
inflation, including
those determined
by the
Board of
the Governors
of the
Federal Reserve
System (the
“Federal Reserve
Board”), the
Federal Reserve
Bank of
New York
(the “New
York
FED”
or “Federal
Reserve”), the
Federal Deposit
Insurance Corporation
(the “FDIC”), governmen
t-sponsored housing
agencies, and
regulators in Puerto Rico, and the USVI and BVI;
●
the
risk
of
possible
failure
or
circumvention
of
the
Corporation’s
internal
controls
and
procedures
and
the
risk
that
the
Corporation’s risk management
policies may not be adequate;
●
the risk
that the
FDIC may
further increase
the deposit
insurance premium
and/or require
special assessments
to replenish
its
insurance fund, causing an additional increase in the Corporation’s
non-interest expenses;
●
a
need
to
recognize
impairments
on
the
Corporation’s
financial
instruments,
goodwill
and
other
intangible
assets
relating
to
business acquisitions;
●
the
risk
that
the
impact
of
the
occurrence
of
any
of
these
uncertainties
on
the
Corporation’s
capital
would
preclude
further
growth of FirstBank and preclude the Corporation’s
Board of Directors from declaring dividends;
●
uncertainty
as to
whether
FirstBank
will
be
able
to
continue
to
satisfy
its
regulators
regarding,
among
other
things,
its asset
quality,
liquidity
plans,
maintenance
of
capital
levels
and
compliance
with
applicable
laws,
regulations,
and
related
requirements; and
●
general competitive factors and industry consolidation.
The
Corporation
does
not
undertake,
and
specifically
disclaims
any
obligation,
to
update
any
“forward-looking
statements”
to
reflect
occurrences
or
unanticipated
events
or
circumstances
after
the
date
of
such
statements,
except
as
required
by
the
federal
securities laws.
6
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, 2022
December 31, 2021
(In thousands, except for share information)
ASSETS
Cash and due from banks
$
552,933
$
2,540,376
Money market investments:
Time deposits with other financial institutions
300
300
Other short-term investments
1,757
2,382
Total money market investments
2,057
2,682
Available-for-sale debt securities, at fair value:
Securities pledged with creditors’ rights to repledge
205,635
321,180
Other available-for-sale debt securities
5,463,054
6,132,581
Total available-for-sale debt securities, at fair value (amortized cost 2022 - $
6,527,684
;
2021 - $
6,534,503
; ACL of $
664
as of September 30, 2022 and $
1,105
as of December 31, 2021)
5,668,689
6,453,761
Held-to-maturity debt securities, at amortized cost, net of ACL
of $
8,257
as of September 30, 2022 and $
8,571
as of December 31, 2021 (fair value 2022 - $
429,530
; 2021 - $
167,147
)
437,605
169,562
Equity securities
24,727
32,169
Loans, net of ACL of $
257,859
(2021 - $
269,030
)
11,040,759
10,791,628
Mortgage loans held for sale, at lower of cost or market
12,169
35,155
Total loans, net
11,052,928
10,826,783
Premises and equipment, net
143,429
146,417
Other real estate owned (“OREO”)
38,682
40,848
Accrued interest receivable on loans and investments
61,108
61,507
Deferred tax asset, net
166,100
208,482
Goodwill
38,611
38,611
Intangible assets
23,245
29,934
Other assets
231,920
234,143
Total assets
$
18,442,034
$
20,785,275
LIABILITIES
Non-interest-bearing deposits
$
6,235,782
$
7,027,513
Interest-bearing deposits
10,333,799
10,757,381
Total deposits
16,569,581
17,784,894
Securities sold under agreements to repurchase
200,000
300,000
FHLB advances
-
200,000
Other borrowings
183,762
183,762
Accounts payable and other liabilities
223,358
214,852
Total liabilities
17,176,701
18,683,508
STOCKHOLDERSʼ EQUITY
Common stock, $$
0.10
par value, authorized,
2,000,000,000
shares;
223,663,116
shares issued;
186,257,659
shares
outstanding (2021 -
201,826,505
shares outstanding)
22,366
22,366
Additional paid-in capital (See Note 1)
969,370
972,547
Retained earnings, includes legal surplus reserve of $
137,591
1,593,284
1,427,295
Treasury stock at cost (See Note 1)
(456,994)
(236,442)
Accumulated other comprehensive loss, net of tax of $
9,786
(862,693)
(83,999)
Total stockholdersʼ equity
1,265,333
2,101,767
Total liabilities and stockholders' equity
$
18,442,034
$
20,785,275
The accompanying notes are an integral part of these financial
statements.
7
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands, except per share information)
Interest and dividend income:
Loans
$
191,740
$
178,956
$
544,788
$
541,763
Investment securities
26,289
20,248
76,027
52,760
Money market investments and interest-bearing cash accounts
4,654
968
8,347
1,750
Total interest and dividend income
222,683
200,172
629,162
596,273
Interest expense:
Deposits
9,978
9,682
25,324
32,806
Securities sold under agreements to repurchase
1,993
2,571
6,147
7,392
Advances from FHLB
529
1,899
2,667
6,428
Other borrowings
2,273
1,277
5,304
3,856
Total interest expense
14,773
15,429
39,442
50,482
Net interest income
207,910
184,743
589,720
545,791
Provision for credit losses - expense (benefit):
Loans and finance leases
14,352
(8,734)
10,028
(49,479)
Unfunded loan commitments
2,071
(971)
2,705
(3,346)
Debt securities
(640)
(2,377)
(749)
(664)
Provision for credit losses - expense (benefit)
15,783
(12,082)
11,984
(53,489)
Net interest income after provision for credit losses
192,127
196,825
577,736
599,280
Non-interest income:
Service charges and fees on deposit accounts
9,820
8,690
28,649
25,782
Mortgage banking activities
3,400
6,098
12,688
19,775
Insurance commission income
2,624
2,318
10,845
9,774
Other non-interest income
13,849
12,840
41,310
35,455
Total non-interest income
29,693
29,946
93,492
90,786
Non-interest expenses:
Employees’ compensation and benefits
52,939
50,220
153,797
150,776
Occupancy and equipment
22,543
23,306
66,434
71,664
Business promotion
5,136
3,370
12,641
9,565
Professional service fees
12,549
13,554
35,179
48,019
Taxes, other than income taxes
5,349
5,238
15,056
17,013
FDIC deposit insurance
1,466
1,381
4,605
5,291
Net gain on OREO operations
(1,064)
(2,288)
(3,269)
(529)
Credit and debit card processing expenses
6,410
5,573
16,374
16,646
Communications
2,272
2,250
6,401
7,119
Merger and restructuring costs
-
2,268
-
24,582
Other non-interest expenses
7,589
9,164
22,956
27,363
Total non-interest expenses
115,189
114,036
330,174
377,509
Income before income taxes
106,631
112,735
341,054
312,557
Income tax expense
32,028
37,057
109,156
105,171
Net income
$
74,603
$
75,678
$
231,898
$
207,386
Net income attributable to common stockholders
$
74,603
$
75,009
$
231,898
$
205,379
Net income per common share:
Basic
$
0.40
$
0.36
$
1.20
$
0.97
Diluted
$
0.40
$
0.36
$
1.19
$
0.96
The accompanying notes are an integral part of these financial statements.
8
FIRST BANCORP.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS)
INCOME
(Unaudited)
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Net income
$
74,603
$
75,678
$
231,898
$
207,386
Other comprehensive loss, net of tax:
Available-for-sale debt securities:
Net unrealized holding losses on debt securities
(270,937)
(18,740)
(778,694)
(89,173)
Other comprehensive loss for the period, net of tax
(270,937)
(18,740)
(778,694)
(89,173)
Total comprehensive (loss) income
$
(196,334)
$
56,938
$
(546,796)
$
118,213
The accompanying notes are an integral part of these financial statements.
9
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine-Month Period Ended
September 30,
September 30,
2022
2021
(In thousands)
Cash flows from operating activities:
Net income
$
231,898
$
207,386
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
16,810
18,936
Amortization of intangible assets
6,689
8,652
Provision for credit losses - expense (benefit)
11,984
(53,489)
Deferred income tax expense
42,382
85,969
Stock-based compensation
3,994
4,100
Unrealized gain on derivative instruments
(1,502)
(3,516)
Net gain on disposals or sales of premises and equipment and other
assets
(897)
(23)
Net gain on sales of loans
(4,827)
(11,743)
Net amortization of premiums, discounts, and deferred loan fees
and costs
(7,532)
(19,538)
Originations and purchases of loans held for sale
(184,544)
(386,102)
Sales and repayments of loans held for sale
204,182
413,521
Amortization of broker placement fees
89
177
Net amortization of premiums and discounts on investment securities
2,648
21,798
Decrease in accrued interest receivable
85
10,849
Decrease in accrued interest payable
(1,467)
(2,217)
Decrease in other assets
663
21,563
Increase (decrease) in other liabilities
14,097
(12,768)
Net cash provided by operating activities
334,752
303,555
Cash flows from investing activities:
Net (disbursements) repayments on loans held for investment
(308,386)
552,426
Proceeds from sales of loans held for investment
39,069
63,509
Proceeds from sales of repossessed assets
31,638
42,711
Purchases of available-for-sale debt securities
(512,327)
(3,290,077)
Proceeds from principal repayments and maturities of available-for-sale
debt securities
515,602
1,149,394
Purchases of held-to-maturity debt securities
(289,784)
-
Proceeds from principal repayments and maturities of held-to-maturity
debt securities
23,320
12,678
Additions to premises and equipment
(15,442)
(10,783)
Proceeds from sales of premises and equipment and other assets
1,138
807
Net redemptions of other investment securities
6,988
122
Payment related to previous acquisition
-
(3,382)
Net cash used in investing activities
(508,184)
(1,482,595)
Cash flows from financing activities:
Net (decrease) increase in deposits
(1,221,614)
2,662,219
Repayments of long-term borrowings
(300,000)
(120,000)
Repurchase of outstanding common stock
(227,256)
(152,100)
Dividends paid on common stock
(65,766)
(44,732)
Dividends paid on preferred stock
-
(2,007)
Net cash (used in) provided by financing activities
(1,814,636)
2,343,380
Net (decrease) increase in cash and cash equivalents
(1,988,068)
1,164,340
Cash and cash equivalents at beginning of period
2,543,058
1,493,833
Cash and cash equivalents at end of period
$
554,990
$
2,658,173
Cash and cash equivalents include:
Cash and due from banks
$
552,933
$
2,655,491
Money market instruments
2,057
2,682
$
554,990
$
2,658,173
The accompanying notes are an integral part of these financial
statements.
10
FIRST BANCORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
(Unaudited)
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Preferred Stock
$
-
$
36,104
$
-
$
36,104
Common Stock:
Balance at beginning of period
22,366
22,363
22,366
22,303
Common stock issued under stock-based compensation plan
-
2
-
62
Balance at end of period
22,366
22,365
22,366
22,365
Additional Paid-In-Capital
(See Note 1)
:
Balance at beginning of period
968,217
968,144
972,547
965,385
Stock-based compensation expense
1,414
1,346
3,994
4,100
Common stock reissued/issued under stock-based compensation
plan
(302)
(2)
(7,304)
(62)
Restricted stock forfeited
41
93
133
158
Balance at end of period
969,370
969,581
969,370
969,581
Retained Earnings:
Balance at beginning of period
1,541,334
1,315,352
1,427,295
1,215,321
Net income
74,603
75,678
231,898
207,386
Dividends on common stock ($
0.12
per share and $
0.07
per share for the quarters ended
September 30, 2022 and 2021, respectively; $
0.34
per share and $
0.21
per share for the
nine-month periods ended September 30, 2022 and 2021, respectively)
(22,653)
(14,564)
(65,909)
(44,903)
Dividends on preferred stock
-
(669)
-
(2,007)
Balance at end of period
1,593,284
1,375,797
1,593,284
1,375,797
Treasury stock (at cost)
(See Note 1)
:
Balance at beginning of period
(382,245)
(122,030)
(236,442)
(19,389)
Common stock repurchases (See Note 14)
(75,010)
(50,041)
(227,723)
(152,618)
Common stock reissued under stock-based compensation
plan
302
-
7,304
-
Restricted stock forfeited
(41)
(93)
(133)
(157)
Balance at end of period
(456,994)
(172,164)
(456,994)
(172,164)
Accumulated Other Comprehensive (Loss) Income, net of tax:
Balance at beginning of period
(591,756)
(14,978)
(83,999)
55,455
Other comprehensive loss, net of tax
(270,937)
(18,740)
(778,694)
(89,173)
Balance at end of period
(862,693)
(33,718)
(862,693)
(33,718)
Total stockholdersʼ equity
$
1,265,333
$
2,197,965
$
1,265,333
$
2,197,965
The accompanying notes are an integral part of these financial
statements.
11
FIRST BANCORP.
INDEX TO NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
PAGE
Note 1 –
Basis of Presentation and Significant Accounting Policies
12
Note 2 –
Debt Securities
14
Note 3 –
Loans Held for Investment
24
Note 4
–
Allowance for Credit Losses for Loans and Finance Leases
42
Note 5 –
Other Real Estate Owned
44
Note 6
–
Goodwill and Other Intangibles
45
Note 7 –
Non-Consolidated Variable
Interest Entities (“VIE”) and Servicing Assets
47
Note 8 –
Deposits
51
Note 9 –
Securities Sold Under Agreements to Repurchase
52
Note 10 –
Advances from Federal Home Loan Bank
53
Note 11 –
Other Borrowings
53
Note 12 –
Earnings per Common Share
54
Note 13 –
Stock-Based Compensation
55
Note 14 –
Stockholders’ Equity
57
Note 15 –
Other Comprehensive Loss
59
Note 16 –
Employee Benefit Plans
60
Note 17 –
Income Taxes
61
Note 18
–
Fair Value
63
Note 19
–
Revenue from Contracts with Customers
69
Note 20 –
Supplemental Statement of Cash Flows Information
72
Note 21 –
Segment Information
73
Note 22 –
Regulatory Matters, Commitments, and Contingencies
76
Note 23 –
First BanCorp. (Holding Company Only) Financial Information
79
12
FIRST BANCORP.
NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
NOTE 1 – BASIS
OF PRESENTATION AND
SIGNIFICANT
ACCOUNTING
POLICIES
The Consolidated Financial Statements (unaudited)
of First BanCorp. (the
“Corporation”)
have been prepared in
conformity with the
accounting
policies
stated
in the
Corporation’s
Audited
Consolidated
Financial
Statements
for the
fiscal
year ended
December
31, 2021
(the
“audited consolidated financial statements”) included
in
the
2021 Annual
Report on
Form 10-K,
except for
the
change in
accounting
method for accounting for its treasury
stock discussed below. Certain information
and note disclosures normally
included in the financial
statements prepared in accordance with generally accepted accounting principles in the
United States of
America (“GAAP”) have been
condensed or omitted from these statements
pursuant to the rules and regulations of the SEC and, accordingly, these financial statements
should be read in conjunction with the audited
consolidated
financial statements,
which are included in the 2021 Annual Report on Form
10-K. All
adjustments (consisting only
of
normal recurring adjustments) that
are, in
the
opinion of
management, necessary for
a
fair
presentation of the
statement of financial position, results of
operations and cash flows
for the
interim periods have been
reflected. All
significant
intercompany
accounts
and transactions
have been
eliminated
in consolidation.
Effective September 30, 2022, the Corporation
changed the
accounting
method for accounting
for its treasury
stock from a par
value to
a cost method.
We believe the
cost method
is preferable
as it more
accurately
reflects
in treasury
stock the
cost of stocks
repurchased
and it
enhances
our comparability
of financial
results with
other financial
institutions.
We reflected the
application
of this new
accounting
method
retrospectively
by adjusting
prior period
amounts
for treasury
stock and
additional
paid-in
capital.
The results of operations
for the quarter and nine-month period ended September
30, 2022 are not necessarily indicative
of the results
to be expected
for the
entire
year.
Adoption
of New Accounting
Requirements
The Corporation
was not
impacted
by the adoption
of the following
Accounting
Standards
Updates
(“ASUs”)
during 2022:
●
ASU 2021-05,
“Leases
(Topic 842): Lessors
– Certain
Leases
with Variable Lease
Payments”
●
ASU 2021-04,
“Earnings
Per Share (Topic 260),
Debt – Modifications
and Extinguishments
(Subtopic
470-50), Compensation
–
Stock Compensation (Topic
718), and
Derivatives and
Hedging –
Contracts in
Entity’s Own
Equity (Subtopic 815-40):
Issuer’s
Accounting
for
Certain
Modifications or
Exchanges
of
Freestanding Equity-Classified
Written
Call
Options
(a
Consensus
of the Emerging
Issues Task Force)”
●
ASU 2020-06,
“Debt – Debt
with Conversion
and other
Options
(Subtopic
470-20) and
Derivatives
and Hedging
– Contracts
in
an Entity’s Own
Equity (Subtopic
815-40):
Accounting
for Convertible
Instruments
and Contracts
in an Entity’s
Own Equity”
13
Recently Issued Accounting Standards Not Yet
Effective or Not Yet
Adopted
Standard
Description
Effective Date
Effect on the financial
statements
ASU 2022-03, “Fair Value
Measurement (Topic
820): Fair
Value
Measurement of Equity
Securities Subject to
Contractual Sale Restrictions”
In June 2022, the Financial
Accounting Standards Board
(“FASB”) issued ASU 2022
-03
which, among other things,
clarifies that a contractual
restriction on the sale of an
equity security is not considered
part of the unit of account and,
therefore, is not considered in
measuring fair value; and
introduces new disclosure
requirements for equity
securities subject to contractual
sale restrictions.
January 1, 2024. Early adoption
is permitted for both interim
and annual financial statements
that have not yet been issued or
made available for issuance.
The Corporation is evaluating the
impact that this ASU will have
on its financial statements and
disclosures. The Corporation
does not expect to be materially
impacted by the adoption of this
ASU during the first quarter of
2024.
ASU 2022-02, “Financial
Instruments – Credit Losses
(Topic 326):
Troubled Debt
Restructurings and Vintage
Disclosures”
In March 2022, the FASB
issued ASU 2022-02 which
eliminates the troubled debt
restructurings (“TDRs”)
recognition and measurement
guidance, enhances disclosure
requirements for loan
restructurings by creditors made
to borrowers experiencing
financial difficulty for which
the terms of the receivables
have been modified, and
amends the guidance on vintage
disclosures to require disclosure
of gross write-offs by year of
origination.
January 1, 2023, unless early
adopted in which case the
amendments should be applied
as of the beginning of the fiscal
year that includes the interim
period
The Corporation is evaluating the
impact that this ASU will have
on its financial statements and
disclosures. The Corporation
expects to adopt the amendments
of this update during the first
quarter of 2023 using a modified
retrospective transition method to
account for any adjustments to
the ACL that had been calculated
using a discounted cash flow
methodology for loans modified
as a TDR prior to the adoption of
these amendments. As of
September 30, 2022, the
Corporation expects that the
adoption of this ASU will result
in a cumulative effect adjustment
to retained earnings, at the
adoption date, in a range of $
1
million to $
2
million, after-tax.
ASU 2022-01, “Derivatives and
Hedging (Topic 815):
Fair
Value
Hedging – Portfolio
Layer Method”
In March 2022, the FASB
issued ASU 2022-01 which,
among others, expands the
current last-of-layer method to
allow multiple hedged layers
and the scope of the portfolio
layer method to non-prepayable
financial assets.
January 1, 2023, unless early
adopted in which case the
amendments should be applied
as of the beginning of the fiscal
year that includes the interim
period
The Corporation does not expect
to be impacted by the
amendments of this update since
it does not apply fair value hedge
accounting to any of its
derivatives.
For other recently
issued Accounting
Standards
not yet effective
or not yet adopted,
see Note 1 – Nature
of Business and
Summary of
Significant Accounting Policies included in
the 2021
Annual Report
on Form
10-K.
14
NOTE 2 – DEBT
SECURITIES
Available-for-Sale
Debt Securities
The
amortized
cost,
gross
unrealized
gains
and
losses
recorded
in
other
comprehensive
loss,
ACL,
estimated
fair
value,
and
weighted-average yield of available-for-sale
debt securities by contractual maturities as of September 30, 2022 were as follows:
September 30, 2022
Amortized cost
(1)
Gross Unrealized
ACL
Fair value
Weighted-
Gains
Losses
average yield%
(Dollars in thousands)
U.S. Treasury securities:
After 1 to 5 years
$
149,061
$
-
$
10,803
$
-
$
138,258
0.67
U.S. government-sponsored agencies' obligations:
Due within one year
73,817
-
2,629
-
71,188
0.28
After 1 to 5 years
2,306,065
22
224,427
-
2,081,660
0.81
After 5 to 10 years
200,606
21
30,433
-
170,194
1.01
After 10 years
12,919
58
-
-
12,977
3.46
Puerto Rico government obligations:
After 10 years
(2)
3,365
-
798
374
2,193
-
United States and Puerto Rico government obligations
2,745,833
101
269,090
374
2,476,470
0.82
Mortgage-backed securities ("MBS"):
Freddie Mac (“FHLMC”) certificates:
After 1 to 5 years
4,655
-
184
-
4,471
2.34
After 5 to 10 years
200,216
-
19,255
-
180,961
1.48
After 10 years
1,133,339
-
203,768
-
929,571
1.37
1,338,210
-
223,207
-
1,115,003
1.39
Ginnie Mae (“GNMA”) certificates:
Due within one year
6
-
-
-
6
1.84
After 1 to 5 years
17,672
1
731
-
16,942
2.02
After 5 to 10 years
43,643
-
4,100
-
39,543
1.21
After 10 years
245,557
25
30,668
-
214,914
2.28
306,878
26
35,499
-
271,405
2.11
Fannie Mae (“FNMA”) certificates:
Due within one year
14,565
110
-
-
14,675
3.01
After 1 to 5 years
10,514
-
531
-
9,983
1.76
After 5 to 10 years
406,597
-
40,958
-
365,639
1.64
After 10 years
1,230,573
161
204,452
-
1,026,282
1.37
1,662,249
271
245,941
-
1,416,579
1.45
Collateralized mortgage obligations issued or guaranteed
by the FHLMC, FNMA and GNMA ("CMOs"):
`
After 1 to 5 years
32,101
-
4,225
-
27,876
2.09
After 10 years
433,302
-
78,616
-
354,686
1.36
465,403
-
82,841
-
382,562
1.41
Private label:
After 10 years
8,611
-
2,151
290
6,170
5.93
Total MBS
3,781,351
297
589,639
290
3,191,719
1.49
Other
Due within one year
500
-
-
-
500
0.84
Total available-for-sale debt securities
$
6,527,684
$
398
$
858,729
$
664
$
5,668,689
1.21
(1)
Excludes accrued interest receivable on available-for-sale debt securities that totaled $
10.9
million as of September 30, 2022, was reported as part of accrued interest receivable on loans and investment securities in the
consolidated statements of financial condition and is excluded from the estimate of credit losses.
(2)
Consists of a residential
pass-through MBS issued by the
Puerto Rico Housing Finance Authority
(“PRHFA”) that
is collateralized by certain
second mortgages originated under
a program launched by the
Puerto Rico
government in 2010. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.
15
The
amortized
cost,
gross
unrealized
gains
and
losses
recorded
in
other
comprehensive
loss,
ACL,
estimated
fair
value,
and
weighted-average yield of available-for-sale
debt securities by contractual maturities as of December 31, 2021 were as follows:
December 31, 2021
Amortized cost
(1)
Gross Unrealized
ACL
Fair value
Weighted-
Gains
Losses
average yield%
(Dollars in thousands)
U.S. Treasury securities:
After 1 to 5 years
$
149,660
$
59
$
1,233
$
-
$
148,486
0.68
U.S. government-sponsored agencies' obligations:
After 1 to 5 years
1,877,181
240
29,555
-
1,847,866
0.60
After 5 to 10 years
403,785
175
10,856
-
393,104
0.90
After 10 years
15,788
224
-
-
16,012
0.63
Puerto Rico government obligations:
After 10 years
(2)
3,574
-
416
308
2,850
-
United States and Puerto Rico government obligations
2,449,988
698
42,060
308
2,408,318
0.67
MBS:
FHLMC certificates:
After 1 to 5 years
2,811
119
-
-
2,930
2.65
After 5 to 10 years
193,234
2,419
1,122
-
194,531
1.29
After 10 years
1,240,964
3,748
23,503
-
1,221,209
1.18
1,437,009
6,286
24,625
-
1,418,670
1.20
GNMA certificates:
Due within one year
2
-
-
-
2
1.32
After 1 to 5 years
16,714
572
-
-
17,286
2.90
After 5 to 10 years
27,271
80
139
-
27,212
0.51
After 10 years
338,927
7,091
2,174
-
343,844
1.45
382,914
7,743
2,313
-
388,344
1.45
FNMA certificates:
Due within one year
4,975
21
-
-
4,996
2.03
After 1 to 5 years
21,337
424
-
-
21,761
2.87
After 5 to 10 years
298,771
4,387
1,917
-
301,241
1.41
After 10 years
1,389,381
8,953
21,747
-
1,376,587
1.21
1,714,464
13,785
23,664
-
1,704,585
1.27
CMOs
After 1 to 5 years
24,007
1
778
-
23,230
1.31
After 5 to 10 years
14,316
97
-
-
14,413
0.76
After 10 years
500,811
290
13,134
-
487,967
1.23
539,134
388
13,912
-
525,610
1.22
Private label:
After 10 years
9,994
-
1,963
797
7,234
2.21
Total MBS
4,083,515
28,202
66,477
797
4,044,443
1.26
Other
Due within one year
500
-
-
-
500
0.72
After 1 to 5 years
500
-
-
-
500
0.84
1,000
-
-
-
1,000
0.78
Total available-for-sale debt securities
$
6,534,503
$
28,900
$
108,537
$
1,105
$
6,453,761
1.03
(1)
Excludes accrued interest receivable on available-for-sale debt securities that totaled $
10.1
million as of December 31, 2021, was reported as part of accrued interest receivable on loans and investment securities in the
consolidated statements of financial condition and is excluded from the estimate of credit losses.
(2)
Consists of a residential pass-through MBS issued by the PRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010. During 2021, the
Corporation placed this instrument in nonaccrual status based on this delinquency status of the underlying second mortgage loans collateral.
16
Maturities
of
available-for-sale
debt
securities
are
based
on
the
period
of
final
contractual
maturity.
Expected
maturities
might
differ
from
contractual
maturities
because
they
may
be
subject
to
prepayments
and/or
call
options.
The
weighted-average
yield
on
available-for-sale
debt
securities
is
based
on
amortized
cost
and,
therefore,
does
not
give
effect
to
changes
in
fair
value.
The
net
unrealized gain or loss on available-for-sale debt securities is presented as part
of other comprehensive (loss) income.
The
following
tables
show
the
fair
value
and
gross
unrealized
losses
of
the
Corporation’s
available-for-sale
debt
securities,
aggregated by
investment category
and length of
time that individual
securities have
been in a
continuous unrealized
loss position, as
of September 30, 2022 and December 31, 2021. The tables also include debt
securities for which an ACL was recorded.
As of September 30, 2022
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
(In thousands)
Debt securities:
U.S. Treasury and U.S. government agenciesʼ
obligations
$
379,287
$
25,696
$
2,072,728
$
242,596
$
2,452,015
$
268,292
Puerto Rico-government obligations
-
-
2,193
798
(1)
2,193
798
MBS:
FHLMC
342,188
61,298
772,815
161,909
1,115,003
223,207
GNMA
177,448
15,418
91,617
20,081
269,065
35,499
FNMA
484,050
65,795
907,828
180,146
1,391,878
245,941
CMOs
71,518
9,260
311,044
73,581
382,562
82,841
Private label
-
-
6,170
2,151
(1)
6,170
2,151
$
1,454,491
$
177,467
$
4,164,395
$
681,262
$
5,618,886
$
858,729
(1)
Unrealized losses do not include the credit loss component recorded
as part of the ACL. As of September 30, 2022, PRHFA
bond and private label MBS had an ACL of $
0.4
million and
$
0.3
million, respectively.
As of December 31, 2021
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
(In thousands)
Debt securities:
U.S. Treasury and U.S. government agenciesʼ
obligations
$
1,717,340
$
25,401
$
606,179
$
16,243
$
2,323,519
$
41,644
Puerto Rico-government obligations
-
-
2,850
416
(1)
2,850
416
MBS:
FHLMC
986,345
16,144
221,896
8,481
1,208,241
24,625
GNMA
194,271
1,329
41,233
984
235,504
2,313
FNMA
1,237,701
19,843
112,559
3,821
1,350,260
23,664
CMOs
466,004
13,552
16,656
360
482,660
13,912
Private label
-
-
7,234
1,963
(1)
7,234
1,963
$
4,601,661
$
76,269
$
1,008,607
$
32,268
$
5,610,268
$
108,537
(1)
Unrealized losses do not include the credit loss component recorded
as part of the ACL. As of December 31, 2021, PRHFA
bond and private label MBS had an ACL of $
0.3
million and
$
0.8
million, respectively.
17
Assessment for Credit Losses
Debt
securities
issued
by
U.S.
government
agencies,
U.S.
government-sponsored
entities
(“GSEs”),
and
the
U.S.
Treasury,
including
notes
and
MBS, accounted
for
substantially
all of
the
total
available-for-sale
portfolio
as of
September
30, 2022,
and
the
Corporation
expects
no
credit
losses
on
these
securities,
given
the
explicit
and
implicit
guarantees
provided
by
the
U.S.
federal
government.
Because
the
decline
in
fair
value
is
attributable
to
changes
in
interest
rates,
and
not
credit
quality,
and
because
the
Corporation
does
not
have
the
intent
to
sell
these
U.S.
government
and
agencies
debt
securities
and
it
is
likely
that
it
will
not
be
required to sell the securities before
their anticipated recovery,
the Corporation does not consider impairments
on these securities to be
credit related as
of September 30,
2022. The Corporation’s
credit loss assessment
was concentrated mainly
on private label MBS,
and
on Puerto Rico government debt securities, for which credit losses are evaluated on
a quarterly basis.
The
Corporation’s
available-for-sale
MBS
portfolio
included
private
label
MBS
with
a
fair
value
of
$
6.2
million,
which
had
unrealized losses
of approximately
$
2.4
million as
of September
30, 2022,
of which
$
0.3
million is
due to
credit deterioration
and is
part of the ACL.
The interest rate on these private-label MBS is variable, tied to 3-month LIBOR, and limited to the weighted-average
coupon on the underlying collateral.
The underlying collateral is fixed-rate, single-family residential mortgage loans in the United
States with original FICO scores over 700 and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels.
As
of September 30, 2022,
the Corporation did not have
the intent to sell these securities
and determined that
it is likely that it will not
be
required to sell the securities before
anticipated recovery.
The Corporation determined the ACL
for private label MBS based on
a risk-
adjusted
discounted
cash
flow
methodology
that
considers
the
structure
and
terms
of
the
instruments.
The
Corporation
utilized
probability of
default (“PDs”)
and loss
given default
(“LGDs”) that
considered, among
other things,
historical payment
performance,
loan-to-value attributes
and relevant current
and forward-looking
macroeconomic variables, such
as regional unemployment
rates and
the housing price
index. Under this approac
h, expected cash flows
(interest and principal) were
discounted at the Treasury
yield curve
as of the reporting date. Significant assumptions in the valuation of
the private label MBS were as follows:
As of
As of
September 30, 2022
December 31, 2021
Weighted
Range
Weighted
Range
Average
Minimum
Maximum
Average
Minimum
Maximum
Discount rate
16.4%
16.4%
16.4%
12.9%
12.9%
12.9%
Prepayment rate
12.6%
1.9%
17.4%
15.2%
7.6%
24.9%
Projected Cumulative Loss Rate
6.9%
0.2%
17.3%
7.6%
0.2%
15.7%
18
The Corporation
evaluates if
a credit
loss exists,
primarily
by monitoring
adverse variances
in the
present value
of expected
cash
flows. As
of September
30, 2022,
the ACL
for these
private label
MBS was
$
0.3
million, compared
to $
0.8
million as
of December
31, 2021.
As
of
September
30,
2022,
the
Corporation’s
available-for-sale
debt
securities
portfolio
also
included
a
residential
pass-through
MBS issued by the PRHFA,
collateralized by certain second mortgages, with
a fair value of $
2.2
million, which had an unrealized loss
of approximately
$
1.2
million. Approximately
$
0.4
million of
the unrealized
losses was
due to
credit deterioration
and is
part of
the
ACL. The underlying
second mortgage loans
were originated under
a program launched by
the Puerto Rico
government in 2010. This
residential pass-through MBS
was structured as
a zero-coupon bond
for the first ten
years (up to July 2019).
The underlying source
of
repayment on this
residential pass-through
MBS are second mortgage
loans in Puerto Rico.
PRHFA, not
the Puerto Rico
government,
provides
a
guarantee
in
the
event
of
default
and
subsequent
foreclosure
of
the
properties
underlying
the
second
mortgage
loans.
During
2021,
the Corporation
placed
this instrument
in
nonaccrual
status based
on
the
delinquency
status of
the
underlying
second
mortgage loans collateral.
The Corporation determined
the ACL on this
instrument based on
a discounted cash flow
methodology that
considered the
structure and
terms of
the debt security.
The Corporation
utilized PDs and
LGDs that
considered, among
other things,
historical payment
performance, loan-to-value
attributes and
relevant current
and forward-looking
macroeconomic variables,
such as
regional
unemployment
rates,
the
housing
price
index
and
expected
recovery
from
the
PRHFA
guarantee. Under
this
approach,
expected
cash
flows
(interest
and
principal)
were
discounted
at
the
Treasury
yield
curve
plus
a
spread
as
of
the
reporting
date
and
compared
to
the
amortized
cost.
In
the
event
that
the
second
mortgage
loans
default
and
the
collateral
is
insufficient
to
satisfy
the
outstanding
balance
of
this
residential
pass-through
MBS,
PRHFA’s
ability
to
honor
its
insurance
will
depend
on,
among
other
factors,
the financial
condition of
PRHFA
at the
time
such obligation
becomes due
and payable.
Further deterioration
of the
Puerto
Rico
economy
or
fiscal
health
of
the
PRHFA
could
impact
the
value
of
these
securities,
resulting
in
additional
losses
to
the
Corporation. As
of September
30, 2022,
the Corporation
did not
have the
intent to
sell this security
and determined
that it was
likely
that it will not be required to sell the security before its anticipated recovery.
19
The
following
tables
present a
roll-forward
by major
security type
for
the quarters
and nine
-month
periods
ended September
30,
2022 and 2021 of the ACL on available-for-sale debt
securities:
Quarter Ended September 30, 2022
Private label MBS
Puerto Rico
Government Obligations
Total
(In thousands)
Beginning Balance
$
290
$
386
$
676
Provision for credit losses - (benefit)
-
(12)
(12)
ACL on available-for-sale debt securities
$
290
$
374
$
664
Quarter Ended September 30, 2021
Private label MBS
Puerto Rico Government
Obligations
Total
(In thousands)
Beginning Balance
$
858
$
308
$
1,166
Provision for credit losses - (benefit)
(9)
-
(9)
ACL on available-for-sale debt securities
$
849
$
308
$
1,157
Nine-Month Period Ended September 30, 2022
Private label MBS
Puerto Rico
Government Obligations
Total
(In thousands)
Beginning Balance
$
797
$
308
$
1,105
Provision for credit losses - (benefit) expense
(501)
66
(435)
Net charge-offs
(6)
-
(6)
ACL on available-for-sale debt securities
$
290
$
374
$
664
Nine-Month Period Ended September 30, 2021
Private label MBS
Puerto Rico
Government Obligations
Total
(In thousands)
Beginning Balance
$
1,002
$
308
$
1,310
Provision for credit losses - (benefit)
(136)
-
(136)
Net charge-offs
(17)
-
(17)
ACL on available-for-sale debt securities
$
849
$
308
$
1,157
20
Held-to-Maturity Debt Securities
The
amortized
cost,
gross
unrecognized
gains
and
losses,
estimated
fair
value,
ACL,
weighted-average
yield
and
contractual
maturities of held-to-maturity debt securities as of September 30, 2022
and December 31, 2021 were as follows:
September 30, 2022
Amortized cost
(1)
Gross Unrecognized
Fair value
ACL
Weighted-
average yield%
Gains
Losses
(Dollars in thousands)
Puerto Rico municipal bonds:
Due within one year
$
1,200
$
-
$
24
$
1,176
$
4
4.49
After 1 to 5 years
42,426
694
2,457
40,663
704
5.51
After 5 to 10 years
55,737
2,451
1,599
56,589
3,295
4.82
After 10 years
66,023
-
3,473
62,550
4,254
5.63
Total Puerto Rico municipal bonds
165,386
3,145
7,553
160,978
8,257
5.32
MBS:
FHLMC certificates:
After 5 to 10 years
$
22,850
$
-
$
1,071
$
21,779
$
-
3.03
After 10 years
19,662
-
1,060
18,602
-
4.14
42,512
-
2,131
40,381
-
3.55
GNMA certificates:
After 10 years
19,978
-
1,157
18,821
-
3.31
FNMA certificates:
After 1 to 5 years
9,664
-
390
9,274
-
3.48
After 10 years
73,764
-
3,883
69,881
-
4.12
83,428
-
4,273
79,155
-
4.04
CMOs
After 10 years
134,558
-
4,363
130,195
-
3.25
Total MBS
280,476
-
11,924
268,552
-
3.53
Total held-to-maturity debt securities
$
445,862
$
3,145
$
19,477
$
429,530
$
8,257
4.20
(1)
Excludes accrued interest receivable on held-to-maturity debt securities that totaled $
2.8
million as of September 30, 2022, was reported as part of accrued interest receivable on loans and investment securities in the
consolidated statements of financial condition and is excluded from the estimate of credit losses.
December 31, 2021
Amortized cost
(1)
Gross Unrecognized
Fair value
ACL
Weighted-
average yield%
Gains
Losses
(Dollars in thousands)
Puerto Rico municipal bonds:
Due within one year
$
2,995
$
5
$
-
$
3,000
$
70
5.39
After 1 to 5 years
14,785
526
156
15,155
347
2.35
After 5 to 10 years
90,584
1,555
3,139
89,000
3,258
4.25
After 10 years
69,769
-
9,777
59,992
4,896
4.06
Total held-to-maturity debt securities
$
178,133
$
2,086
$
13,072
$
167,147
$
8,571
4.04
(1)
Excludes accrued interest receivable on held-to-maturity debt securities that totaled $
3.4
million as of December 31, 2021, was reported as part of accrued interest receivable on loans and investment securities in the
consolidated statements of financial condition and is excluded from the estimate of credit losses.
21
During the nine-month period
ended September 30, 2022,
the Corporation purchased approximately
$
289.9
million of GSEs’ MBS,
which were classified as held-to-maturity debt securities.
The following
tables show the
Corporation’s
held-to-maturity debt securities
’
fair value
and gross unre
cognized losses, aggregated
by
category
and
length
of
time
that
individual
securities
had
been
in
a
continuous
unrecognized
loss
position,
as
of
September
30,
2022 and December 31, 2021, including debt securities for which an ACL was recorded:
As of September 30, 2022
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
(In thousands)
Debt securities:
Puerto Rico municipal bonds
$
-
$
-
$
121,440
$
7,553
$
121,440
$
7,553
MBS:
FHLMC certificates
40,381
2,131
-
-
40,381
2,131
GNMA certificates
18,821
1,157
-
-
18,821
1,157
FNMA certificates
79,155
4,273
-
-
79,155
4,273
CMOs
130,195
4,363
-
-
130,195
4,363
Total held-to-maturity
debt securities
$
268,552
$
11,924
$
121,440
$
7,553
$
389,992
$
19,477
As of December 31, 2021
Less than 12 months
12 months or more
Total
Unrecognized
Unrecognized
Unrecognized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
(In thousands)
Debt securities:
Puerto Rico municipal bonds
$
-
$
-
$
140,732
$
13,072
$
140,732
$
13,072
The
Corporation
classifies
the
held-to-maturity
debt
securities
portfolio
into
the
following
major
security
types:
MBS
issued
by
GSEs and
Puerto
Rico municipal
bonds.
As of
September 30,
2022,
all of
the MBS
included
in the
held-to-maturity
debt
securities
portfolio were
issued by
GSEs. The
Corporation does
not recognize
an ACL
for these
securities since
they are
highly rated
by major
rating agencies and have a
long history of no credit losses. In
the case of Puerto Rico
municipal bonds, the Corporation determines
the
ACL based on
the product of
a cumulative PD
and LGD, and
the amortized cost
basis of the
bonds over their
remaining expected life
as described
in
Note
1
–
Nature
of
Business
and
Summary
of
Significant
Accounting
Policies
in
the
audited
consolidated
financial
statements included in the 2021
Annual Report on Form 10-K.
The
Corporation
performs
periodic
credit
quality
reviews
on
these
issuers.
All
Puerto
Rico
municipal
bonds
were
current
as
to
scheduled
contractual
payments
as
of
September
30,
2022.
The
Puerto
Rico
municipal
bonds
had
an
ACL
of
$
8.3
million
as
of
September 30,
2022, a
$
0.3
million decrease
from $
8.6
million as
of December
31, 2021,
mostly related
to a
reduction in
qualitative
reserves driven by updated financial information received during the
third quarter of 2022.
22
The following tables
present the activity
in the ACL for
held-to-maturity debt
securities by major
security type for
the quarters and
nine-month periods ended September 30, 2022 and 2021:
Puerto Rico Municipal Bonds
Quarter Ended September 30,
2022
Quarter Ended September 30,
2021
(In thousands)
Beginning Balance
$
8,885
$
10,685
Provision for credit losses - (benefit)
(628)
(2,368)
ACL on held-to-maturity debt securities
$
8,257
$
8,317
Puerto Rico Municipal Bonds
Nine-Month Period Ended
Nine-Month Period Ended
September 30, 2022
September 30, 2021
(In thousands)
Beginning Balance
$
8,571
$
8,845
Provision for credit losses - (benefit)
(314)
(528)
ACL on held-to-maturity debt securities
$
8,257
$
8,317
During
the
second
quarter
of
2019,
the
oversight
board
established
by
the
Puerto
Rico
Oversight,
Management,
and
Economic
Stability
Act
(“PROMESA”)
announced
the
designation
of
Puerto
Rico’s
78
municipalities
as
covered
instrumentalities
under
PROMESA.
Municipalities
may
be
affected
by
the
negative
economic
and
other
effects
resulting
from
expense,
revenue
or
cash
management
measures
taken
by
the
Puerto
Rico
government
to
address
its
fiscal
situation,
or
measures
included
in
fiscal
plans
of
other
government
entities,
and,
more
recently,
by
the
effect
of
the
COVID-19
pandemic
on
the
Puerto
Rico
and
global
economy.
Given
the inherent
uncertainties about
the fiscal
situation
of the
Puerto
Rico central
government,
the COVID-19
pandemic, and
the
measures
taken,
or
to
be
taken,
by
other
government
entities
in
response
to
the
COVID-19
pandemic
on
municipalities,
the
Corporation cannot be certain whether future charges
to the ACL on these securities will be required.
From
time
to
time,
the
Corporation
has
securities
held
to
maturity
with
an
original
maturity
of
three
months
or
less
that
are
considered
cash
and
cash
equivalents
and
are
classified
as
money
market
investments
in
the
consolidated
statements
of
financial
condition.
As
of
September
30,
2022
and
December
31,
2021,
the
Corporation
had
no outstanding
securities
held
to
maturity
that
were classified as cash and cash equivalents.
23
Credit Quality Indicators:
The held-to-maturity debt securities
portfolio consisted of GSE’s
MBS and financing arrangements
with Puerto Rico municipalities
issued in
bond form.
As previously
mentioned,
the Corporation
expects
no credit
losses on
GSEs MBS.
The Puerto
Rico municipal
bonds
are
accounted
for
as
securities,
but
are
underwritten
as
loans
with
features
that
are
typically
found
in
commercial
loans.
Accordingly, the
Corporation monitors the credit quality of these municipal bonds through the
use of internal credit-risk ratings, which
are generally updated
on a quarterly basis.
The Corporation considers
a municipal bond
as a criticized asset
if its risk rating
is Special
Mention,
Substandard,
Doubtful
or
Loss.
Puerto
Rico
municipal
bonds
that
do
not
meet
the
criteria
for
classification
as
criticized
assets
are
considered
to
be
pass-rated
securities.
For
the
definitions
of
the
internal
credit-risk
ratings,
refer
to
Note
5
–
Investment
Securities included in the 2021 Annual Report on Form 10-K.
The Corporation
periodically reviews
its Puerto
Rico municipal
bonds to
evaluate if
they are
properly classified,
and to
determine
impairment, if
any.
The frequency
of these
reviews will
depend on
the amount
of the
aggregate outstanding
debt, and
the risk
rating
classification of the obligor.
The
Corporation
has
a
Loan
Review
Group
that
reports
directly
to
the
Corporation’s
Risk
Management
Committee
and
administratively
to
the
Chief
Risk
Officer.
The
Loan
Review
Group
performs
annual
comprehensive
credit
process
reviews
of
the
Bank’s
commercial
loan
portfolios,
including
the
above-mentioned
Puerto
Rico
municipal
bonds
accounted
for
as
held-to-maturity
debt
securities.
The objective
of
these
loan
reviews
is to
assess
accuracy
of the
Bank’s
determination
and
maintenance
of
loan
risk
rating
and
its
adherence
to
lending
policies,
practices
and
procedures.
The
monitoring
performed
by
this
group
contributes
to
the
assessment
of
compliance
with
credit
policies
and
underwriting
standards,
the
determination
of
the
current
level
of
credit
risk,
the
evaluation of
the effectiveness
of the
credit management
process and
the identification
of any
deficiency that
may arise in
the credit-
granting process. Based
on its findings, the
Loan Review Group recommends
corrective actions, if
necessary,
that help in maintaining
a sound credit process. The Loan Review Group reports the results of the credit
process reviews to the Risk Management Committee.
As of September 30, 2022 and December 31, 2021,
all Puerto Rico municipal bonds classified as held-to-maturity
were classified as
Pass.
No
held-to-maturity debt
securities were
on nonaccrual
status, 90 days
past due
and still accruing,
or past
due as
of September
30,
2022 and
December 31,
2021. A security
is considered
to be past
due once
it is
30
days contractually
past due under
the terms of
the
agreement.
24
NOTE 3 – LOANS HELD FOR INVESTMENT
The
following table
provides information
about the
loan
portfolio held
for
investment by
portfolio segment
and
disaggregated by
geographic location
as of the indicated
dates:
As of September 30, 2022
As of December 31, 2021
(In thousands)
Puerto Rico and Virgin Island region:
Residential mortgage loans, mainly secured by first mortgages
$
2,415,232
$
2,549,573
Construction loans
27,716
43,133
Commercial mortgage loans
1,754,447
1,702,231
Commercial and Industrial ("C&I") loans
1,842,166
1,946,597
Consumer loans
3,208,437
2,872,384
Loans held for investment
9,247,998
9,113,918
Florida region:
Residential mortgage loans, mainly secured by first mortgages
$
415,742
$
429,322
Construction loans
96,278
95,866
Commercial mortgage loans
511,167
465,238
C&I loans
1,016,120
940,654
Consumer loans
11,313
15,660
Loans held for investment
2,050,620
1,946,740
Total:
Residential mortgage loans, mainly secured by first mortgages
$
2,830,974
$
2,978,895
Construction loans
123,994
138,999
Commercial mortgage loans
2,265,614
2,167,469
C&I loans
(1)
2,858,286
2,887,251
Consumer loans
3,219,750
2,888,044
Loans held for investment
(2)
$
11,298,618
$
11,060,658
(1)
As of September 30, 2022 and December 31, 2021, includes
$
870.3
million and $
952.1
million, respectively, of commercial loans that were secured by real estate
but were not dependent upon the real estate for repayment.
(2)
Includes accretable fair value net purchase discounts of $
30.7
million and $
35.3
million as of September 30, 2022 and December 31, 2021,
respectively.
25
The
Corporation’s
aging
of
the
loan
portfolio
held
for
investment
by
portfolio
classes
and
nonaccrual
loans
with
no
ACL
as
of
September 30, 2022 and December 31, 2021 are as follows:
As of September 30, 2022
Days Past Due and Accruing
Current
30-59
60-89
90 +
(1) (2) (3)
Nonaccrual
(4) (5)
Total loans
held for
investment
Nonaccrual
Loans with
no ACL
(6)
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
FHA/VA government-guaranteed loans
(1)
(3) (7)
$
67,095
$
-
$
2,824
$
49,044
$
-
$
118,963
$
-
Conventional residential mortgage loans
(2) (7)
2,621,897
-
29,012
18,066
43,036
2,712,011
3,412
Commercial loans:
Construction loans
121,757
-
-
-
2,237
123,994
976
Commercial mortgage loans
(2) (7)
2,238,580
1,415
417
1,461
23,741
2,265,614
15,699
C&I loans
2,827,076
4,463
1,943
9,089
15,715
2,858,286
10,854
Consumer loans:
Auto loans
1,695,594
41,935
8,068
-
8,703
1,754,300
2,054
Finance leases
659,097
7,033
1,554
-
1,430
669,114
216
Personal loans
341,220
3,852
1,884
-
1,146
348,102
-
Credit cards
293,555
4,212
2,320
3,985
-
304,072
-
Other consumer loans
139,621
1,779
1,254
-
1,508
144,162
-
Total loans held for investment
$
11,005,492
$
64,689
$
49,276
$
81,645
$
97,516
$
11,298,618
$
33,211
(1)
It is the Corporation's policy to report delinquent FHA/VA
government-guaranteed residential mortgage loans
as past-due loans 90 days and still accruing as opposed
to nonaccrual
loans. The Corporation continues accruing interest on these
loans until they have passed the 15 months delinquency mark, taking
into consideration the FHA interest curtailment process.
These balances include $
31.0
million of residential mortgage loans guaranteed by the FHA that were
over 15 months delinquent.
(2)
Includes purchased credit deteriorated ("PCD") loans previously accounted
for under Accounting Standard Codification ("ASC") Subtopic
310-30, "Loans and Debt Securities Acquired
with Deteriorated Credit Quality" ("ASC Subtopic 310-30") for
which the Corporation made the accounting policy election of maintaining
pools of loans as “units of account” both at the
time of adoption of CECL on January 1, 2020 and on an
ongoing basis for credit loss measurement. These loans
will continue to be excluded from nonaccrual loan statistics
as long as
the Corporation can reasonably estimate the timing and amount
of cash flows expected to be collected on the loan
pools. The portion of such loans contractually past due 90
days or
more, amounting to $
12.8
million as of September 30, 2022 ($
11.8
million conventional residential mortgage loans and $
1.0
million commercial mortgage loans), is presented in the
loans past due 90 days or more and still accruing category in
the table above.
(3)
Include rebooked loans, which were previously pooled into
GNMA securities, amounting to $
8.0
million as of September 30, 2022. Under the GNMA program, the
Corporation has the
option but not the obligation to repurchase loans that meet GNMA’s
specified delinquency criteria. For accounting purposes,
these loans subject to the repurchase option are required to
be reflected on the financial statements with an offsetting liability.
(4)
Nonaccrual loans in the Florida region amounted to $
6.5
million as of September 30, 2022, primarily nonaccrual residential
mortgage loans.
(5)
Nonaccrual loans exclude $
340.1
million of TDR loans that were in compliance with modified terms
and in accrual status as of September 30, 2022.
(6)
Includes $
0.6
million of nonaccrual C&I loans with no ACL in the Florida region
as of September 30, 2022.
(7)
According to the Corporation's delinquency policy and consistent
with the instructions for the preparation of the Consolidated
Financial Statements for Bank Holding Companies (FR Y-
9C) required by the Federal Reserve Board, residential mortgage,
commercial mortgage, and construction loans are considered past
due when the borrower is in arrears on two or more
monthly payments. FHA/VA
government-guaranteed loans, conventional residential mortgage loans,
and commercial mortgage loans past due 30-59 days,
but less than two payments in
arrears, as of September 30, 2022 amounted to $
6.0
million, $
71.7
million, and $
1.9
million, respectively.
26
As of December 31, 2021
Days Past Due and Accruing
Current
30-59
60-89
90+
(1) (2) (3)
Nonaccrual
(4) (5)
Total loans
held for
investment
Nonaccrual
Loans with
no ACL
(6)
(In thousands)
Residential mortgage loans, mainly secured by first mortgages:
FHA/VA government-guaranteed loans
(1) (3) (7)
$
57,522
$
-
$
2,355
$
65,515
$
-
$
125,392
$
-
Conventional residential mortgage loans
(2) (7)
2,738,111
-
31,832
28,433
55,127
2,853,503
3,689
Commercial loans:
Construction loans
136,317
18
-
-
2,664
138,999
1,000
Commercial mortgage loans
(2) (7)
2,129,375
2,402
436
9,919
25,337
2,167,469
8,289
C&I loans
2,858,397
2,047
1,845
7,827
17,135
2,887,251
11,393
Consumer loans:
Auto loans
1,533,445
26,462
4,949
-
6,684
1,571,540
3,146
Finance leases
568,606
4,820
713
-
866
575,005
196
Personal loans
310,390
3,299
1,285
-
1,208
316,182
-
Credit cards
282,179
3,158
1,904
2,985
-
290,226
-
Other consumer loans
130,588
1,996
811
-
1,696
135,091
20
Total loans held for investment
$
10,744,930
$
44,202
$
46,130
$
114,679
$
110,717
$
11,060,658
$
27,733
(1)
It is the Corporation's policy to report delinquent FHA/VA
government-guaranteed residential mortgage loans
as past-due loans 90 days and still accruing as opposed
to nonaccrual loans.
The Corporation continues accruing interest on these loans
until they have passed the 15 months delinquency mark, taking into consideration
the FHA interest curtailment process. These
balances include $
46.6
million of residential mortgage loans guaranteed by the FHA that
were over 15 months delinquent.
(2)
Includes PCD loans previously accounted for under ASC Subtopic 310-30
for which the Corporation made the accounting policy
election of maintaining pools of loans as “units of account”
both at the time of adoption of CECL on January 1, 2020 and on
an ongoing basis for credit loss measurement. These
loans will continue to be excluded from nonaccrual loan statistics
as
long as the Corporation can reasonably estimate the timing and
amount of cash flows expected to be collected on the
loan pools. The portion of such loans contractually past
due 90 days or
more, amounting to $
20.6
million as of December 31, 2021 ($
19.1
million conventional residential mortgage loans and $
1.5
million commercial mortgage loans), is presented in the loans
past due 90 days or more and still accruing category in the table
above.
(3)
Include rebooked loans, which were previously pooled into
GNMA securities, amounting to $
7.2
million as of December 31, 2021. Under the GNMA program,
the Corporation has the
option but not the obligation to repurchase loans that meet GNMA’s
specified delinquency criteria. For accounting purposes,
these loans subject to the repurchase option are required to be
reflected on the financial statements with an offsetting liability.
(4)
Nonaccrual loans in the Florida region amounted to $
8.2
million as of December 31, 2021, primarily nonaccrual residential mortgage
loans.
(5)
Nonaccrual loans exclude $
363.4
million of TDR loans that were in compliance with modified terms
and in accrual status as of December 31, 2021.
(6)
Includes $
0.5
million of nonaccrual C&I loans with no ACL in the Florida region
as of December 31, 2021.
(7)
According to the Corporation's delinquency policy and consistent
with the instructions for the preparation of the Consolidated
Financial Statements for Bank Holding Companies (FR Y-9C)
required by the Federal Reserve Board, residential mortgage,
commercial mortgage, and construction loans are considered past
due when the borrower is in arrears on two or more monthly
payments.
FHA/VA government
-guaranteed loans, conventional residential mortgage
loans, and commercial mortgage loans past due 30-59 days,
but less than two payments in arrears, as
of December 31, 2021 amounted to $
6.1
million, $
66.0
million, and $
0.7
million, respectively.
When a
loan
is placed
on nonaccrual
status, any
accrued but
uncollected
interest income
is reversed
and
charged
against interest
income
and the
amortization of
any net
deferred fees
is suspended.
The amount
of accrued
interest reversed
against interest
income
totaled $
0.5
million and $
1.2
million for the
quarter and nine-month
period ended September
30, 2022, respectively
($
0.4
million and
$
1.7
million for
the quarter
and nine-month
period ended
September 30,
2021, respectively).
For the
quarter and
nine-month
period
ended September
30, 2022, the
cash interest recognized
on nonaccrual
loans amounted
to $
0.3
million and
$
1.0
million, respectively,
compared with $
0.4
million and $
1.7
million for the quarter and nine-month period ended September 30, 2021, respectively.
As of
September 30,
2022, the
recorded investment
on residential
mortgage loans
collateralized by
residential real
estate property
that
were
in
the
process
of
foreclosure
amounted
to
$
76.1
million,
including
$
32.6
million
of
FHA/VA
government-guaranteed
mortgage
loans,
and
$
10.0
million
of
PCD
loans
acquired
prior
to
the
adoption,
on
January
1,
2020,
of
CECL.
The
Corporation
commences the foreclosure
process on residential
real estate loans when
a borrower becomes
120
days delinquent, in accordance
with
the
requirements
of
the
Consumer
Financial
Protection
Bureau
(“CFPB”).
Foreclosure
procedures
and
timelines
vary
depending
on
whether
the
property
is
located
in
a
judicial
or
non-judicial
state.
Occasionally,
foreclosures
may
be
delayed
due
to,
among
other
reasons, mandatory mediations, bankruptcy,
court delays and title issues.
Credit Quality Indicators:
The Corporation
categorizes loans
into risk
categories based
on relevant
information
about the
ability of
the borrowers
to service
their debt
such as
current financial
information, historical
payment experience,
credit documentation,
public information,
and current
economic trends, among other
factors.
The Corporation analyzes non-homogeneous
loans, such as commercial mortgage,
commercial
and industrial,
and construction
loans individually
to classify the
loans’ credit risk.
As mentioned above,
the Corporation periodically
reviews its
commercial and
construction loans
to evaluate
if they
are properly
classified. The frequency
of these
reviews will depend
on the
amount of
the aggregate
outstanding debt,
and the
risk rating
classification of
the obligor.
In addition,
during the
renewal and
annual review
process of
applicable credit
facilities, the
Corporation evaluates
the corresponding
loan grades.
The Corporation
uses
the
same
definition
for
risk
ratings
as
those
described
for
Puerto
Rico
municipal
bonds
accounted
for
as
held-to-maturity
debt
securities, as discussed in Note 5 – Investment Securities, in the 2021
Annual Report on Form 10-K.
For residential mortgage and consumer loans, the Corporation also evaluates credit
quality based on its interest accrual status.
27
Based on
the most
recent analysis
performed, the
amortized cost
of commercial
and construction
loans by portfolio
classes and by
origination
year
based
on
the
internal
credit-risk
category
as
of
September
30,
2022
and
the
amortized
cost
of
commercial
and
construction loans by portfolio classes based on the internal credit-risk
category as of December 31, 2021 was as follows:
As of September 30, 2022
Puerto Rico and Virgin Islands region
Term Loans
As of December 31, 2021
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
Risk Ratings:
Pass
$
8,853
$
11,978
$
-
$
-
$
-
$
3,958
$
-
$
24,789
$
38,066
Criticized:
Special Mention
-
-
-
-
-
-
-
-
765
Substandard
-
-
-
-
-
2,927
-
2,927
4,302
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
8,853
$
11,978
$
-
$
-
$
-
$
6,885
$
-
$
27,716
$
43,133
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
241,870
$
150,940
$
365,144
$
222,211
$
179,280
$
308,966
$
232
$
1,468,643
$
1,395,569
Criticized:
Special Mention
1,218
-
3,611
83,664
30,832
130,324
-
249,649
259,263
Substandard
138
-
-
2,927
761
32,329
-
36,155
47,399
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
243,226
$
150,940
$
368,755
$
308,802
$
210,873
$
471,619
$
232
$
1,754,447
$
1,702,231
COMMERCIAL AND INDUSTRIAL
Risk Ratings:
Pass
$
116,025
$
200,628
$
189,639
$
324,443
$
126,946
$
258,087
$
541,962
$
1,757,730
$
1,852,552
Criticized:
Special Mention
145
-
-
-
236
2,652
24,830
27,863
32,650
Substandard
65
4,093
1,360
14,113
1,958
33,310
1,674
56,573
61,395
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial and industrial loans
$
116,235
$
204,721
$
190,999
$
338,556
$
129,140
$
294,049
$
568,466
$
1,842,166
$
1,946,597
(1) Excludes accrued interest receivable.
28
As of September 30, 2022
Term Loans
As of December 31, 2021
Florida region
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
Risk Ratings:
Pass
$
46,944
$
45,284
$
-
$
14
$
-
$
-
$
4,036
$
96,278
$
95,866
Criticized:
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
46,944
$
45,284
$
-
$
14
$
-
$
-
$
4,036
$
96,278
$
95,866
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
157,109
$
70,922
$
42,997
$
55,184
$
72,273
$
71,565
$
19,232
$
489,282
$
404,304
Criticized:
Special Mention
-
-
7,024
13,384
-
-
-
20,408
60,618
Substandard
-
-
1,168
-
-
309
-
1,477
316
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
157,109
$
70,922
$
51,189
$
68,568
$
72,273
$
71,874
$
19,232
$
511,167
$
465,238
COMMERCIAL AND INDUSTRIAL
Risk Ratings:
Pass
$
255,508
$
169,329
$
82,074
$
224,772
$
67,508
$
45,828
$
96,639
$
941,658
$
826,823
Criticized:
Special Mention
-
-
-
5,972
-
12,185
-
18,157
49,946
Substandard
-
-
24,193
27,456
-
4,356
300
56,305
63,885
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial and industrial loans
$
255,508
$
169,329
$
106,267
$
258,200
$
67,508
$
62,369
$
96,939
$
1,016,120
$
940,654
(1) Excludes accrued interest receivable.
29
As of September 30, 2022
Total
Term Loans
As of December 31, 2021
Amortized Cost Basis by Origination Year
(1)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
(In thousands)
CONSTRUCTION
Risk Ratings:
Pass
$
55,797
$
57,262
$
-
$
14
$
-
$
3,958
$
4,036
$
121,067
$
133,932
Criticized:
Special Mention
-
-
-
-
-
-
-
-
765
Substandard
-
-
-
-
-
2,927
-
2,927
4,302
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total construction loans
$
55,797
$
57,262
$
-
$
14
$
-
$
6,885
$
4,036
$
123,994
$
138,999
COMMERCIAL MORTGAGE
Risk Ratings:
Pass
$
398,979
$
221,862
$
408,141
$
277,395
$
251,553
$
380,531
$
19,464
$
1,957,925
$
1,799,873
Criticized:
Special Mention
1,218
-
10,635
97,048
30,832
130,324
-
270,057
319,881
Substandard
138
-
1,168
2,927
761
32,638
-
37,632
47,715
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial mortgage loans
$
400,335
$
221,862
$
419,944
$
377,370
$
283,146
$
543,493
$
19,464
$
2,265,614
$
2,167,469
COMMERCIAL AND INDUSTRIAL
Risk Ratings:
Pass
$
371,533
$
369,957
$
271,713
$
549,215
$
194,454
$
303,915
$
638,601
$
2,699,388
$
2,679,375
Criticized:
Special Mention
145
-
-
5,972
236
14,837
24,830
46,020
82,596
Substandard
65
4,093
25,553
41,569
1,958
37,666
1,974
112,878
125,280
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total commercial and industrial loans
$
371,743
$
374,050
$
297,266
$
596,756
$
196,648
$
356,418
$
665,405
$
2,858,286
$
2,887,251
(1) Excludes accrued interest receivable.
30
The
following
tables
present
the
amortized
cost
of
residential
mortgage
loans
by
origination
year
based
on
accrual
status
as
of
September 30, 2022, and the amortized cost of residential mortgage loans by
accrual status as of December 31, 2021:
As of September 30, 2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
(In thousands)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Puerto Rico and Virgin Islands Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
705
$
323
$
828
$
1,291
$
3,871
$
111,199
$
-
$
118,217
$
124,652
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
705
$
323
$
828
$
1,291
$
3,871
$
111,199
$
-
$
118,217
$
124,652
Conventional residential mortgage loans:
Accrual Status:
Performing
$
113,963
$
77,357
$
32,059
$
49,797
$
73,631
$
1,912,690
$
-
$
2,259,497
$
2,376,946
Non-Performing
-
35
-
113
279
37,091
-
37,518
47,975
Total conventional residential mortgage loans
$
113,963
$
77,392
$
32,059
$
49,910
$
73,910
$
1,949,781
$
-
$
2,297,015
$
2,424,921
Total:
Accrual Status:
Performing
$
114,668
$
77,680
$
32,887
$
51,088
$
77,502
$
2,023,889
$
-
$
2,377,714
$
2,501,598
Non-Performing
-
35
-
113
279
37,091
-
37,518
47,975
Total residential mortgage loans in Puerto Rico
and Virgin Islands Region
$
114,668
$
77,715
$
32,887
$
51,201
$
77,781
$
2,060,980
$
-
$
2,415,232
$
2,549,573
(1)
Excludes accrued interest receivable.
As of September 30, 2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
(In thousands)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Florida Region:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
746
$
-
$
746
$
740
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
-
$
-
$
-
$
-
$
-
$
746
$
-
$
746
$
740
Conventional residential mortgage loans:
Accrual Status:
Performing
$
58,261
$
50,307
$
32,160
$
33,150
$
38,744
$
196,856
$
-
$
409,478
$
421,430
Non-Performing
-
-
-
274
-
5,244
-
5,518
7,152
Total conventional residential mortgage loans
$
58,261
$
50,307
$
32,160
$
33,424
$
38,744
$
202,100
$
-
$
414,996
$
428,582
Total:
Accrual Status:
Performing
$
58,261
$
50,307
$
32,160
$
33,150
$
38,744
$
197,602
$
-
$
410,224
$
422,170
Non-Performing
-
-
-
274
-
5,244
-
5,518
7,152
Total residential mortgage loans in Florida region
$
58,261
$
50,307
$
32,160
$
33,424
$
38,744
$
202,846
$
-
$
415,742
$
429,322
(1)
Excludes accrued interest receivable.
31
As of September 30, 2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
(In thousands)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Total:
FHA/VA government-guaranteed loans
Accrual Status:
Performing
$
705
$
323
$
828
$
1,291
$
3,871
$
111,945
$
-
$
118,963
$
125,392
Non-Performing
-
-
-
-
-
-
-
-
-
Total FHA/VA
government-guaranteed loans
$
705
$
323
$
828
$
1,291
$
3,871
$
111,945
$
-
$
118,963
$
125,392
Conventional residential mortgage loans:
Accrual Status:
Performing
$
172,224
$
127,664
$
64,219
$
82,947
$
112,375
$
2,109,546
$
-
$
2,668,975
$
2,798,376
Non-Performing
-
35
-
387
279
42,335
-
43,036
55,127
Total conventional residential mortgage loans
$
172,224
$
127,699
$
64,219
$
83,334
$
112,654
$
2,151,881
$
-
$
2,712,011
$
2,853,503
Total:
Accrual Status:
Performing
$
172,929
$
127,987
$
65,047
$
84,238
$
116,246
$
2,221,491
$
-
$
2,787,938
$
2,923,768
Non-Performing
-
35
-
387
279
42,335
-
43,036
55,127
Total residential mortgage loans
$
172,929
$
128,022
$
65,047
$
84,625
$
116,525
$
2,263,826
$
-
$
2,830,974
$
2,978,895
(1)
Excludes accrued interest receivable.
32
The following tables
present the amortized
cost of consumer
loans by origination
year based on
accrual status as
of September 30,
2022 and the amortized cost of consumer loans by accrual status as of December 31,
2021:
As of September 30, 2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
(In thousands)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Puerto Rico and Virgin Islands Region:
Auto loans:
Accrual Status:
Performing
$
530,902
$
544,149
$
275,432
$
227,501
$
112,215
$
50,723
$
-
$
1,740,922
$
1,556,097
Non-Performing
552
1,656
1,353
2,408
1,414
1,308
-
8,691
6,684
Total auto loans
$
531,454
$
545,805
$
276,785
$
229,909
$
113,629
$
52,031
$
-
$
1,749,613
$
1,562,781
Finance leases:
Accrual Status:
Performing
$
212,139
$
200,819
$
94,148
$
88,244
$
54,392
$
17,942
$
-
$
667,684
$
574,139
Non-Performing
39
298
321
248
204
320
-
1,430
866
Total finance leases
$
212,178
$
201,117
$
94,469
$
88,492
$
54,596
$
18,262
$
-
$
669,114
$
575,005
Personal loans:
Accrual Status:
Performing
$
141,759
$
63,308
$
33,960
$
62,696
$
27,401
$
17,474
$
-
$
346,598
$
314,867
Non-Performing
87
281
192
381
81
124
-
1,146
1,208
Total personal loans
$
141,846
$
63,589
$
34,152
$
63,077
$
27,482
$
17,598
$
-
$
347,744
$
316,075
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
304,072
$
304,072
$
290,226
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
304,072
$
304,072
$
290,226
Other consumer loans:
Accrual Status:
Performing
$
65,494
$
27,107
$
10,670
$
14,597
$
4,983
$
4,672
$
8,985
$
136,508
$
126,734
Non-Performing
218
364
88
184
61
335
136
1,386
1,563
Total other consumer loans
$
65,712
$
27,471
$
10,758
$
14,781
$
5,044
$
5,007
$
9,121
$
137,894
$
128,297
Total:
Performing
$
950,294
$
835,383
$
414,210
$
393,038
$
198,991
$
90,811
$
313,057
$
3,195,784
$
2,862,063
Non-Performing
896
2,599
1,954
3,221
1,760
2,087
136
12,653
10,321
Total consumer loans in Puerto Rico and Virgin
Islands region
$
951,190
$
837,982
$
416,164
$
396,259
$
200,751
$
92,898
$
313,193
$
3,208,437
$
2,872,384
(1)
Excludes accrued interest receivable.
33
As of September 30, 2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
(In thousands)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Florida Region:
Auto loans:
Accrual Status:
Performing
$
-
$
-
$
-
$
377
$
2,830
$
1,468
$
-
$
4,675
$
8,759
Non-Performing
-
-
-
-
-
12
-
12
-
Total auto loans
$
-
$
-
$
-
$
377
$
2,830
$
1,480
$
-
$
4,687
$
8,759
Finance leases:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total finance leases
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Personal loans:
Accrual Status:
Performing
$
274
$
71
$
13
$
-
$
-
$
-
$
-
$
358
$
107
Non-Performing
-
-
-
-
-
-
-
-
-
Total personal loans
$
274
$
71
$
13
$
-
$
-
$
-
$
-
$
358
$
107
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Other consumer loans:
Accrual Status:
Performing
$
50
$
233
$
469
$
-
$
39
$
2,929
$
2,426
$
6,146
$
6,661
Non-Performing
-
-
-
-
-
22
100
122
133
Total other consumer loans
$
50
$
233
$
469
$
-
$
39
$
2,951
$
2,526
$
6,268
$
6,794
Total:
Performing
$
324
$
304
$
482
$
377
$
2,869
$
4,397
$
2,426
$
11,179
$
15,527
Non-Performing
-
-
-
-
-
34
100
134
133
Total consumer loans in Florida region
$
324
$
304
$
482
$
377
$
2,869
$
4,431
$
2,526
$
11,313
$
15,660
(1)
Excludes accrued interest receivable.
34
As of September 30, 2022
As of
December 31,
2021
Term Loans
Amortized Cost Basis by Origination Year
(1)
(In thousands)
2022
2021
2020
2019
2018
Prior
Revolving
Loans
Amortized
Cost Basis
Total
Total
Total:
Auto loans:
Accrual Status:
Performing
$
530,902
$
544,149
$
275,432
$
227,878
$
115,045
$
52,191
$
-
$
1,745,597
$
1,564,856
Non-Performing
552
1,656
1,353
2,408
1,414
1,320
-
8,703
6,684
Total auto loans
$
531,454
$
545,805
$
276,785
$
230,286
$
116,459
$
53,511
$
-
$
1,754,300
$
1,571,540
Finance leases:
Accrual Status:
Performing
$
212,139
$
200,819
$
94,148
$
88,244
$
54,392
$
17,942
$
-
$
667,684
$
574,139
Non-Performing
39
298
321
248
204
320
-
1,430
866
Total finance leases
$
212,178
$
201,117
$
94,469
$
88,492
$
54,596
$
18,262
$
-
$
669,114
$
575,005
Personal loans:
Accrual Status:
Performing
$
142,033
$
63,379
$
33,973
$
62,696
$
27,401
$
17,474
$
-
$
346,956
$
314,974
Non-Performing
87
281
192
381
81
124
-
1,146
1,208
Total personal loans
$
142,120
$
63,660
$
34,165
$
63,077
$
27,482
$
17,598
$
-
$
348,102
$
316,182
Credit cards:
Accrual Status:
Performing
$
-
$
-
$
-
$
-
$
-
$
-
$
304,072
$
304,072
$
290,226
Non-Performing
-
-
-
-
-
-
-
-
-
Total credit cards
$
-
$
-
$
-
$
-
$
-
$
-
$
304,072
$
304,072
$
290,226
Other consumer loans:
Accrual Status:
Performing
$
65,544
$
27,340
$
11,139
$
14,597
$
5,022
$
7,601
$
11,411
$
142,654
$
133,395
Non-Performing
218
364
88
184
61
357
236
1,508
1,696
Total other consumer loans
$
65,762
$
27,704
$
11,227
$
14,781
$
5,083
$
7,958
$
11,647
$
144,162
$
135,091
Total:
Performing
$
950,618
$
835,687
$
414,692
$
393,415
$
201,860
$
95,208
$
315,483
$
3,206,963
$
2,877,590
Non-Performing
896
2,599
1,954
3,221
1,760
2,121
236
12,787
10,454
Total consumer loans
$
951,514
$
838,286
$
416,646
$
396,636
$
203,620
$
97,329
$
315,719
$
3,219,750
$
2,888,044
(1)
Excludes accrued interest receivable.
35
Accrued interest
receivable on
loans totaled
$
47.4
million as of
September 30,
2022 ($
48.1
million as of
December 31, 2021),
was
reported as
part of accrued
interest receivable on
loans and investment
securities in the
consolidated statements
of financial
condition
and is excluded from the estimate of credit losses.
The
following
tables
present
information
about
collateral
dependent
loans
that
were
individually
evaluated
for
purposes
of
determining the ACL as of September 30, 2022 and December 31, 2021:
September 30, 2022
Collateral Dependent Loans - With
Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Amortized Cost
Related Allowance
Amortized Cost
Amortized Cost
Related Allowance
(In thousands)
Residential mortgage loans:
FHA/VA government
-guaranteed loans
$
-
$
-
$
-
$
-
$
-
Conventional residential mortgage loans
38,898
2,706
592
39,490
2,706
Commercial loans:
Construction loans
-
-
956
956
-
Commercial mortgage loans
3,070
933
62,366
65,436
933
C&I loans
17,695
2,788
19,940
37,635
2,788
Consumer loans:
Auto loans
-
-
-
-
-
Finance leases
-
-
-
-
-
Personal loans
57
1
-
57
1
Credit cards
-
-
-
-
-
Other consumer loans
280
34
-
280
34
$
60,000
$
6,462
$
83,854
$
143,854
$
6,462
December 31, 2021
Collateral Dependent Loans - With
Allowance
Collateral Dependent
Loans - With No
Related Allowance
Collateral Dependent Loans - Total
Amortized Cost
Related Allowance
Amortized Cost
Amortized Cost
Related Allowance
(In thousands)
Residential mortgage loans:
FHA/VA government
-guaranteed loans
$
-
$
-
$
-
$
-
$
-
Conventional residential mortgage loans
51,771
3,966
781
52,552
3,966
Commercial loans:
Construction loans
-
-
1,797
1,797
-
Commercial mortgage loans
9,908
1,152
56,361
66,269
1,152
C&I loans
5,781
670
34,043
39,824
670
Consumer loans:
Auto loans
-
-
-
-
-
Finance leases
-
-
-
-
-
Personal loans
78
1
-
78
1
Credit cards
-
-
-
-
-
Other consumer loans
782
98
-
782
98
$
68,320
$
5,887
$
92,982
$
161,302
$
5,887
The allowance related
to collateral dependent loans
reported in the tables
above includes qualitative
adjustments applied to
the loan
portfolio
that
consider
possible
changes
in
circumstances
that
could
ultimately
impact
credit
losses
and
might
not
be
reflected
in
historical
data
or
forecasted
data
incorporated
in
the
quantitative
models.
The
underlying
collateral
for
residential
mortgage
and
consumer
collateral
dependent
loans
consisted
of
single-family
residential
properties,
and
for
commercial
and
construction
loans
consisted
primarily
of
office
buildings,
multifamily
residential
properties,
and
retail
establishments.
The
weighted-average
loan-to-
value coverage
for collateral dependent
loans as of
September 30, 2022
was
76
%, compared to
78
% as of
December 31, 2021,
which
was not considered a significant change in the extent to which collateral secured
these loans.
36
Purchases and Sales of Loans
During
the
first
nine
months
of
2022,
loans
pooled
into
GNMA
MBS
amounted
to
approximately
$
115.7
million,
compared
to
$
147.4
million
for
the
same
period
in
2021.
Also,
during
the
first
nine
months
of
2022,
the
Corporation
sold
approximately
$
90.8
million
of
performing
residential
mortgage
loans
to
FNMA
and
FHLMC,
compared
to
sales of
$
259.6
million
during
the
first
nine
months
of
2021.
The
Corporation’s
continuing
involvement
with
the
loans
that
it
sells
consists
primarily
of
servicing
the
loans.
In
addition,
the
Corporation
agrees
to
repurchase
loans
if
it
breaches
any
of
the
representations
and
warranties
included
in
the
sale
agreement. These
representations and
warranties are consistent
with the GSEs’
selling and servicing
guidelines (
i.e.
, ensuring that
the
mortgage was properly underwritten according to established guidelines).
For loans
pooled into
GNMA MBS,
the Corporation,
as servicer,
holds an
option to
repurchase individual
delinquent loans
issued
on or
after January 1,
2003 when certain
delinquency criteria are
met. This option
gives the Corporation
the unilateral ability,
but not
the obligation, to
repurchase the delinquent
loans at par without
prior authorization from
GNMA. Since the
Corporation is considered
to
have
regained
effective
control
over
the
loans,
it
is
required
to
recognize
the
loans
and
a
corresponding
repurchase
liability
regardless of its
intent to repurchase
the loans. As
of September
30, 2022 and
December 31, 2021,
rebooked GNMA delinquent
loans
that were included in the residential mortgage loan portfolio amounted
to $
8.1
million and $
7.2
million, respectively.
In addition,
on
September 29,
2022,
GNMA expanded
the criteria
to permit
issuers to
repurchase
loans of
borrowers
affected
by
Hurricane Fiona
that meet
the following
eligibility requirements:
(i) the
property securing
the loans
has been
damaged and
is located
within
a
designated
disaster
area;
and
(ii)
the
borrower
is
experiencing
economic
hardship
related
to
the
designated
disaster,
as
established by the
underlying insuring or
guaranteeing agency.
Issuers must request
and obtain prior
written approval from
GNMA to
repurchase eligible loans.
During
the
first
nine
months
of
2022
and
2021,
the
Corporation
repurchased,
pursuant
to
the
aforementioned
repurchase
option,
$
8.2
million and $
0.4
million, respectively,
of loans previously pooled
into GNMA MBS. The
principal balance of these
loans is fully
guaranteed, and
the risk
of loss
related to
the repurchased
loans is
generally limited
to the
difference
between the
delinquent interest
payment advanced
to GNMA, which
is computed at
the loan’s
interest rate, and
the interest payments
reimbursed by FHA,
which are
computed
at a
pre-determined
debenture
rate. Repurchases
of GNMA
loans allow
the
Corporation,
among
other
things, to
maintain
acceptable delinquency rates on outstanding GNMA pools and remain as a seller and
servicer in good standing with GNMA.
Loan
sales
to
FNMA
and
FHLMC
are
without
recourse
in
relation
to
the
future
performance
of
the
loans.
The
Corporation
repurchased at par loans previously sold to FNMA and FHLMC in the amount
of $
0.3
million during the first nine months of 2022 and
2021. The
Corporation’s
risk of
loss with
respect to
these loans
is also
minimal as
these repurchased
loans are
generally performing
loans with documentation deficiencies.
During
the
first
nine
months
of
2022,
the
Corporations
sold
a
$
35.2
million
commercial
and
industrial
loan
participation
in
the
Puerto
Rico region.
Also, during
the first
nine
months of
2021,
three criticized
commercial loan
participations
in the
Florida
region
totaling $
28.0
million were
sold. In
addition, during
the first
nine months
of 2022
and 2021,
the Corporation
purchased commercial
and industrial loans participations in the Florida region totaling $
135.4
million and $
78.1
million, respectively.
During
the
third
quarter
of
2021,
the
Corporation
sold
$
52.5
million
of non-performing
residential
mortgage
loans
and
related
servicing
advances
of
$
2.0
million.
The
Corporation
received
$
31.5
million,
or
58
%
of
book
value
before
reserves,
for
the
$
54.5
million of non-performing
loans and related
servicing advances.
Approximately $
20.9
million of reserves
had been allocated
to
the loans
sold. The
transaction resulted
in total
net charge-offs
of $
23.1
million and
an additional
loss of
approximately $
2.1
million
recorded as a charge to the provision for credit losses in the third
quarter of 2021.
Loan Portfolio Concentration
The Corporation’s
primary lending
area is
Puerto Rico.
The Corporation’s
banking subsidiary,
FirstBank, also
lends in
the USVI
and BVI markets
and in the
United States (principally
in the state of
Florida). Of
the total gross
loans held for
investment portfolio
of
$
11.3
billion as
of September
30, 2022,
credit risk
concentration
was approximately
79
% in
Puerto Rico,
18
% in
the United
States,
and
3
% in the USVI and BVI.
As of
September
30,
2022,
the Corporation
had $
158.4
million outstanding
in loans
extended
to the
Puerto
Rico government,
its
municipalities
and
public
corporations,
compared
to
$
178.4
million
as
of
December
31,
2021.
As
of
September
30,
2022,
approximately
$
89.9
million
consisted
of
loans
extended
to
municipalities
in
Puerto
Rico
that
are
general
obligations
supported
by
assigned
property
tax
revenues,
and
$
29.0
million
of
loans
which
are
supported
by
one
or
more
specific
sources
of
municipal
revenues.
The
vast
majority
of
revenues
of
the
municipalities
included
in
the
Corporation’s
loan
portfolio
are
independent
of
budgetary subsidies provided by the Puerto Rico
central government. These municipalities are required
by law to levy special property
taxes in such amounts as are required to
satisfy the payment of all of their respective general obligation
bonds and notes. In addition to
37
loans extended to
municipalities, the Corporation’s
exposure to the
Puerto Rico government
as of September
30, 2022 included
$
11.5
million in loans granted to an affiliate of
the Puerto Rico Electric Power Authority (“PREPA”)
and $
28.0
million in loans to an agency
of the Puerto Rico central government.
In
addition,
as
of
September
30,
2022,
the
Corporation
had
$
86.7
million
in
exposure
to
residential
mortgage
loans
that
are
guaranteed by
the PRHFA,
a governmental
instrumentality that
has been
designated as
a covered
entity under
PROMESA, compared
to
$
92.8
million
as
of
December
31,
2021.
Residential
mortgage
loans
guaranteed
by
the
PRHFA
are
secured
by
the
underlying
properties and the guarantees serve to cover shortfalls in collateral in the event
of a borrower default.
The
Corporation
also
has
credit
exposure
to
USVI
government
entities.
As
of
September
30,
2022,
the
Corporation
had
$
37.6
million in loans
to USVI government
public corporations,
compared to $
39.2
million as of
December 31,
2021.
As of September
30,
2022, all loans were currently performing and up to date on principal
and interest payments.
Troubled Debt
Restructurings
The Corporation
provides
homeownership
preservation
assistance to
its customers
through
a loss
mitigation
program.
Depending
upon
the
nature
of
a
borrower’s
financial
condition,
restructurings
or
loan
modifications
through
this
program,
as
well
as
other
restructurings of
individual
C&I, commercial
mortgage, construction,
and residential
mortgage loans,
fit the
definition of
a TDR.
As
of September
30, 2022,
the Corporation’s
total TDR
loans held
for investment
amounted to
$
387.7
million, of
which $
340.1
million
were in accruing
status. See Note 8
– Loans Held for
Investment to the
consolidated financial statements
included in the
2021 Annual
Report on
Form 10-K,
for information
on when
the Corporation
classifies TDR
loans as
either accrual
or nonaccrual
loans. The
total
TDR loans held for investment
consisted of $
242.4
million of residential mortgage
loans, $
67.2
million of C&I loans, $
64.2
million of
commercial mortgage
loans, $
1.3
million of
construction loans,
and $
12.6
million of
consumer loans.
As of
September 30,
2022, the
Corporation
included
as
TDRs
$
1.6
million
of
residential
mortgage
loans
that
were
participating
in
or
had
been
offered
a
trial
modification,
which
generally
represents
a
six-month
period
during
which
the
borrower
makes
monthly
payments
under
the
anticipated modified payment terms prior
to a formal modification. TDR loans
exclude restructured
residential mortgage loans that are
government-guaranteed
(
e.g
.,
FHA/VA
loans)
totaling
$
54.8
million
as
of
September
30,
2022,
compared
with
$
57.6
million
as
of
December
31,
2021.
As
of
September
30,
2022,
the
Corporation
has
committed
to
lend
up
to
additional
$
16
thousand
on
TDR
consumer loans.
To
assist
borrowers
affected
by
the
passing
of
Hurricane
Fiona
through
Puerto
Rico
on
September
17,
2022,
the
Corporation
established a
Natural Disaster
Deferral or
Extension Program,
with a
term not
to extend
beyond December
31, 2022,
for residents
of
Puerto Rico that were
directly impacted by
the passing of the hurricane.
This program provides payment
deferral or term extension
on
a one payment
basis, not to
exceed three payments,
to retail borrowers
(
i.e.,
borrowers with personal
loans, auto loans,
finance leases,
credit cards and
residential mortgage loans)
that contacted the
Corporation by October
31, 2022 to
request the payment
extension and
opted-in based
on conditions
below.
Loans will
continue
to accrue
interest during
the deferral
or extension
period.
For credit
cards,
borrowers who
were 30
days past
due or
less as
of September
16, 2022
are eligible
for this
program. For
residential mortgage
loans
and consumer
loans, borrowers
who were
60 days
past due
or less
as of
September 16,
2022 are
eligible for
this program.
For both
consumer and residential mortgage loans subject to the deferral programs,
each borrower is required to opt in on a monthly basis to the
program
and
must
resume
making
their
regularly
scheduled
loan
payments
at
the
end
of
the
deferral
period.
For
consumer
loans,
deferred amounts
will extend
the maturity
date by
the number
of deferred
periods. For
residential mortgage
loans, deferred
amounts
will be
moved to
the end
of the
loan term.
Borrowers that
make a
payment during
any given
month are
not eligible
for the
program
during that
month. Furthermore,
for customers
that opted
into the
program, the
delinquency
status of
loans subject
to the
deferral or
extension program will be frozen to the status that existed in the month previous
to the month in which the relief is granted.
38
Loans subject
to the above-described
program are not
considered TDRs since
the deferral or
extension is not
considered more than
insignificant.
Borrowers
were
eligible
to
payment
deferral
or
extension
of
three
payments
only
if
cumulative
payment
extensions
granted during
the last 12
months did not
exceed six payments,
including the
extensions granted through
this program. As
of October
31, 2022, the Corporation has entered into deferral or extension
payment agreements on
3,366
retail loans totaling $
63.6
million.
The
following
tables
present
TDR
loans
completed
during
the
quarters
and
nine-month
periods
ended
September
30,
2022
and
2021:
Quarter Ended September 30, 2022
Interest rate
below market
Maturity or
term extension
Combination of
reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or interest
Other
(1)
Total
(In thousands)
TDRs:
Conventional residential mortgage loans
$
-
$
132
$
-
$
-
$
1,022
$
1,154
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
-
-
-
C&I loans
495
-
-
-
-
495
Consumer loans:
Auto loans
661
42
84
-
-
787
Finance leases
-
82
-
-
-
82
Personal loans
-
75
58
-
-
133
Credit cards
-
-
-
-
252
252
Other consumer loans
10
56
-
19
-
85
Total TDRs
$
1,166
$
387
$
142
$
19
$
1,274
$
2,988
(1)
Other concessions granted by the Corporation include payment
plans under judicial stipulation or loss mitigation
programs, or a combination of two or more of
the concessions listed in the
table. Amounts included in Other that represent a combination
of concessions are excluded from the amounts reported in the column
for such individual concessions.
Nine-Month Period Ended September 30, 2022
Interest rate
below market
Maturity or
term extension
Combination of
reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or interest
Other
(1)
Total
(In thousands)
TDRs:
Conventional residential mortgage loans
$
215
$
1,484
$
190
$
-
$
3,709
$
5,598
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
245
5,178
-
467
5,890
C&I loans
895
-
-
825
1,083
2,803
Consumer loans:
Auto loans
2,120
126
264
-
-
2,510
Finance leases
-
451
-
-
18
469
Personal loans
99
135
84
-
-
318
Credit cards
-
-
-
-
647
647
Other consumer loans
93
188
-
37
-
318
Total TDRs
$
3,422
$
2,629
$
5,716
$
862
$
5,924
$
18,553
(1)
Other concessions granted by the Corporation include payment
plans under judicial stipulation or loss mitigation programs, or
a combination of two or more of the concessions listed
in the
table. Amounts included in Other that represent a combination
of concessions are excluded from the amounts reported in the column
for such individual concessions.
39
Quarter Ended September 30, 2021
Interest rate
below market
Maturity or
term extension
Combination of
reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or interest
Other
(1)
Total
(In thousands)
TDRs:
Conventional residential mortgage loans
$
345
$
759
$
92
$
-
$
1,454
$
2,650
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
10,331
-
-
10,331
C&I loans
-
-
9,100
-
-
9,100
Consumer loans:
Auto loans
364
14
58
-
-
436
Finance leases
-
165
26
-
-
191
Personal loans
13
23
67
-
-
103
Credit cards
-
-
-
-
207
207
Other consumer loans
17
28
-
15
-
60
Total TDRs
$
739
$
989
$
19,674
$
15
$
1,661
$
23,078
(1)
Other concessions granted by the Corporation include payment
plans under judicial stipulation or loss mitigation programs, or
a combination of two or more of the concessions listed
in the
table. Amounts included in Other that represent a combination
of concessions are excluded from the amounts reported in the column
for such individual concessions.
Nine-Month Period Ended September 30, 2021
Interest rate
below market
Maturity or
term extension
Combination of
reduction in
interest rate
and extension
of maturity
Forgiveness of
principal
and/or interest
Other
(1)
Total
(In thousands)
TDRs:
Conventional residential mortgage loans
$
365
$
759
$
1,605
$
-
$
2,718
$
5,447
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
10,586
-
442
11,028
C&I loans
-
300
9,100
-
171
9,571
Consumer loans:
Auto loans
1,372
309
196
-
-
1,877
Finance leases
-
526
26
-
-
552
Personal loans
13
52
263
-
8
336
Credit cards
-
-
-
-
1,171
1,171
Other consumer loans
105
68
-
61
-
234
Total TDRs
$
1,855
$
2,014
$
21,776
$
61
$
4,510
$
30,216
(1)
Other concessions granted by the Corporation include payment
plans under judicial stipulation or loss mitigation programs, or
a combination of two or more of the concessions listed
in the
table. Amounts included in Other that represent a combination
of concessions are excluded from the amounts reported in the column
for such individual concessions.
40
Quarter Ended September 30, 2022
Quarter Ended September 30, 2021
Number of
contracts
Pre-modification
Amortized Cost
Post-modification
Amortized Cost
Number of
contracts
Pre-modification
Amortized Cost
Post-modification
Amortized Cost
(Dollars in thousands)
TDRs:
Conventional residential mortgage loans
12
$
1,220
$
1,154
23
$
2,654
$
2,650
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
-
-
-
2
10,433
10,331
C&I loans
3
495
495
3
9,100
9,100
Consumer loans:
Auto loans
35
790
787
22
435
436
Finance leases
5
82
82
10
190
191
Personal loans
7
116
133
9
103
103
Credit Cards
50
251
252
40
207
207
Other consumer loans
29
83
85
14
59
60
Total TDRs
141
$
3,037
$
2,988
123
$
23,181
$
23,078
Nine-Month Period Ended September 30, 2022
Nine-Month Period Ended September 30, 2021
Number of
contracts
Pre-modification
Amortized Cost
Post-modification
Amortized Cost
Number of
contracts
Pre-modification
Amortized Cost
Post-modification
Amortized Cost
(Dollars in thousands)
TDRs:
Conventional residential mortgage loans
49
$
5,668
$
5,598
48
$
5,552
$
5,447
Construction loans
-
-
-
-
-
-
Commercial mortgage loans
3
5,897
5,890
6
11,091
11,028
C&I loans
15
3,031
2,803
5
9,694
9,571
Consumer loans:
Auto loans
123
2,512
2,510
101
1,875
1,877
Finance leases
26
469
469
33
550
552
Personal loans
19
301
318
32
330
336
Credit Cards
139
646
647
203
1,171
1,171
Other consumer loans
77
311
318
55
233
234
Total TDRs
451
$
18,835
$
18,553
483
$
30,496
$
30,216
41
Loan modifications considered
TDR loans that defaulted
(failure by the borrower
to make payments
of either principal, interest,
or
both
for
a
period
of
90
days
or
more)
during
the
quarters
and
nine-month
periods
ended
September
30,
2022
and
2021,
and
had
become TDR loans during the 12-months preceding the default date, were
as follows:
Quarter Ended September 30, 2022
Quarter Ended September 30, 2021
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
1
$
50
2
$
126
Construction loans
-
-
-
-
Commercial mortgage loans
-
-
-
-
C&I loans
-
-
-
-
Consumer loans:
Auto loans
31
776
23
433
Finance leases
-
-
-
-
Personal loans
-
-
1
1
Credit cards
14
60
13
68
Other consumer loans
1
2
-
-
Total
47
$
888
39
$
628
Nine-Month Period Ended September
30, 2022
Nine-Month Period Ended September
30, 2021
Number of
contracts
Amortized Cost
Number of
contracts
Amortized Cost
(Dollars in thousands)
Conventional residential mortgage loans
5
$
534
4
$
304
Construction loans
-
-
-
-
Commercial mortgage loans
-
-
-
-
C&I loans
-
-
-
-
Consumer loans:
Auto loans
75
1,674
69
1,164
Finance leases
1
16
-
-
Personal loans
-
-
1
1
Credit cards
39
201
25
161
Other consumer loans
5
19
9
36
Total
125
$
2,444
108
$
1,666
For
certain
TDR
loans,
the
Corporation
splits
the
loans
into
two
new
notes
(the
“Note
A”
and
the
“Note
B”).
The
A
Note
is
restructured to comply
with the Corporation’s
lending standards at
current market rates
and is tailored to
suit the customer’s
ability to
make
timely
interest
and
principal
payments.
The
B
Note
includes
the
granting
of
the
concession
to
the
borrower
and
varies
by
situation. The
B Note is
fully charged-off,
unless it is
collateral-dependent and
the source of
repayment is
independent of
the A Note
in which
case a
partial charge
-off may
be recorded.
At the
time of
the restructuring,
the A Note
is identified
and classified
as a
TDR
loan. During the nine months ended September 30, 2022 and 2021, there were
no new Note A and B restructurings.
42
NOTE 4 – ALLOWANCE
FOR CREDIT LOSSES FOR LOANS AND FINANCE LEASES
The following tables present the activity in the ACL for loans and finance leases by portfolio
segment for the indicated periods:
Residential
Mortgage Loans
Construction Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended September 30, 2022
(In thousands)
ACL:
Beginning balance
$
65,231
$
2,020
$
32,619
$
36,203
$
116,079
$
252,152
Provision for credit losses - expense (benefit)
755
(179)
(2,383)
(1,228)
17,387
14,352
Charge-offs
(1,466)
(63)
(3)
(8)
(12,522)
(14,062)
Recoveries
559
43
57
494
4,264
5,417
Ending balance
$
65,079
$
1,821
$
30,290
$
35,461
$
125,208
$
257,859
Residential
Mortgage Loans
Construction Loans
Commercial
Mortgage
Commercial &
Industrial Loans
Consumer Loans
Total
Nine-Month Period Ended September 30, 2022
(In thousands)
ACL:
Beginning balance
$
74,837
$
4,048
$
52,771
$
34,284
$
103,090
$
269,030
Provision for credit losses - (benefit) expense
(6,913)
(2,242)
(23,758)
(575)
43,516
10,028
Charge-offs
(6,073)
(123)
(42)
(366)
(32,765)
(39,369)
Recoveries
3,228
138
1,319
2,118
11,367
18,170
Ending balance
$
65,079
$
1,821
$
30,290
$
35,461
$
125,208
$
257,859
Residential
Mortgage Loans
Construction Loans
Commercial
Mortgage Loans
Commercial &
Industrial Loans
Consumer Loans
Total
Quarter Ended September 30, 2021
(In thousands)
ACL:
Beginning balance
$
112,882
$
4,757
$
72,452
$
37,470
$
97,397
$
324,958
Provision for credit losses - (benefit) expense
(6,206)
527
(4,660)
(4,449)
6,054
(8,734)
Charge-offs
(25,418)
(7)
(429)
(167)
(8,345)
(34,366)
Recoveries
1,968
42
43
494
3,955
6,502
Ending balance
$
83,226
$
5,319
$
67,406
$
33,348
$
99,061
$
288,360
Residential
Mortgage Loans
Construction Loans
Commercial
Mortgage Loans
Commercial &
Industrial Loans
Consumer Loans
Total
Nine-Month Period Ended September 30, 2021
(In thousands)
ACL:
Beginning balance
$
120,311
$
5,380
$
109,342
$
37,944
$
112,910
$
385,887
Provision for credit losses - (benefit) expense
(9,556)
(125)
(40,779)
(10,187)
11,168
(49,479)
Charge-offs
(31,170)
(52)
(1,304)
(1,036)
(34,904)
(68,466)
Recoveries
3,641
116
147
6,627
9,887
20,418
Ending balance
$
83,226
$
5,319
$
67,406
$
33,348
$
99,061
$
288,360
43
The
Corporation
estimates
the
ACL
following
the
methodologies
described
in
Note
1
–
Nature
of
Business
and
Summary
of
Significant Accounting
Policies, in
the audited
consolidated financial
statements included
in the
2021 Annual
Report on
Form 10-K,
for each portfolio segment.
During
the
first
nine
months
of
2022,
the
Corporation
applied
probability
weights
to
the
baseline
and
alternative
downside
economic
scenarios
to estimate
the ACL
with the
baseline
scenario
carrying
the highest
weight.
In weighting
these macroeconomic
scenarios,
the
Corporation
applied judgment
based
on
a variety
of
factors
such
as economic
uncertainties
associated
to
a
continued
conflict in Ukraine, the overall inflationary
environment and a potential slowdown
in economic activity as a result of
the FED’s policy
to control inflationary economic conditions. For periods prior to 2022,
the Corporation calculated the ACL using the baseline scenario.
As
of
September
30,
2022,
the
ACL
for
loans
and
finance
leases
was
$
257.9
million,
down
approximately
$
11.1
million
from
December
31,
2021.
The
ACL
reduction
for
commercial
and
construction
loans
was
$
23.5
million
during
the
first
nine
months
of
2022,
primarily reflecting
reduced COVID-19
uncertainties and,
to a
lesser extent,
a reduction
in qualitative
reserves due
to updated
borrowers’ financial information received during
the third quarter of 2022. In addition, there was an ACL reduction
of $
9.7
million for
residential
mortgage
loans,
partially
offset
by
a
$
22.1
million
increase
in
the
ACL
for
consumer
loans.
The
net
reduction
for
residential mortgage
loans was
primarily driven
by the
overall decrease
in the
size of
this portfolio.
The ACL
increase for
consumer
loans consisted of charges
to the provision of $
43.5
million recorded in the first
nine months of 2022
to account for the increase
in the
size
of
the
portfolio
of
auto
loans
and
finance
leases;
a
deterioration
in
the
long-term
outlook
of
certain
macroeconomic
variables,
such as the regional
unemployment rate; and an
increase in charge-off
levels mostly related
to the auto and
credit card loan portfolios,
partially offset
by net
charge-offs
of $
21.4
million. For
those loans
where the
ACL was
determined based
on a
discounted cash
flow
model, the change in the ACL due to the passage of time is recorded as part of the provision for
credit losses.
On September 17, 2022, Hurricane Fiona made landfall
in the southwestern part of Puerto Rico as a Category 1 storm.
As part of its
ACL calculation,
the Corporation
considers
the need
for qualitative
adjustments
that include
factors such
as natural
disasters. As
of
September 30,
2022, management
determined that
no separate qualitative
reserves for
this natural disaster
were required
on the ACL.
Notwithstanding, estimates of the storm’s
effect on loan losses may
change over time as additional
information becomes available and
any related revisions in the ACL calculation will be reflected in the provision
for credit losses as they occur.
Total
net
charge-offs
decreased
by
$
19.3
million
to
$
8.6
million,
when
compared
to
the
third
quarter
of
2021.
The
variance
consisted of
a $
22.6
million decrease
in net
charge-offs
on residential
mortgage loans,
of which
$
23.1
million was
related to
charge-
offs
recognized
as
part
of
the
bulk
sale
of
nonaccrual
residential
mortgage
loans
and
related
servicing
advances
during
the
third
quarter of
2021; and
a $
0.5
million increase in
net recoveries in
the commercial
and construction
loans portfolio;
partially offset
by a
$
3.8
million
increase
in
net
charge-offs
on
consumer
and
finance
leases,
primarily
reflected
in
the
auto
loans
portfolios.
Total
net
charge-offs
decreased
by $
26.8
million
to $
21.1
million,
when
compared
to
the nine-month
period
ended
September 30,
2021.
The
variance
consisted of
a $
3.5
million
decrease
in net
charge-offs
on consumer
and finance
leases, primarily
reflected in
the auto
and
credit
card
loan
portfolios;
and
a
$
24.7
million
decrease
in
net
charge-offs
on
residential
mortgage
loans
mainly
due
to
the
aforementioned
bulk sale
completed
during the
third quarter
of 2021;
partially offset
by lower
net recoveries
in the
commercial
and
construction loans portfolio by $
1.4
million.
44
The tables below present the ACL related to loans and finance leases and the carrying
value of loans by portfolio segment as of
September 30, 2022 and December 31, 2021:
Residential
Mortgage Loans
Construction Loans
Commercial
Mortgage Loans
Commercial and
Industrial Loans
(1)
Consumer Loans
Total
As of September 30, 2022
(Dollars in thousands)
Total loans held for investment:
Amortized cost of loans
$
2,830,974
$
123,994
$
2,265,614
$
2,858,286
$
3,219,750
$
11,298,618
Allowance for credit losses
65,079
1,821
30,290
35,461
125,208
257,859
Allowance for credit losses to
amortized cost
2.30
%
1.47
%
1.34
%
1.24
%
3.89
%
2.28
%
As of December 31, 2021
Residential
Mortgage Loans
Construction Loans
Commercial
Mortgage Loans
Commercial and
Industrial Loans
(1)
Consumer Loans
Total
(Dollars in thousands)
Total loans held for investment:
Amortized cost of loans
$
2,978,895
$
138,999
$
2,167,469
$
2,887,251
$
2,888,044
11,060,658
Allowance for credit losses
74,837
4,048
52,771
34,284
103,090
269,030
Allowance for credit losses to
amortized cost
2.51
%
2.91
%
2.43
%
1.19
%
3.57
%
2.43
%
(1)
As of September 30, 2022 and December 31, 2021, includes $
17.9
million and $
145.0
million of SBA PPP loans, respectively, which require no ACL as these loans are 100% guaranteed by the SBA.
In
addition,
the
Corporation
estimates
expected
credit
losses
over
the
contractual
period
in
which
the
Corporation
is
exposed
to
credit
risk
via
a
contractual
obligation
to
extend
credit,
such
as
unfunded
loan
commitments
and
standby
letters
of
credit
for
commercial and construction loans,
unless the obligation is unconditionally
cancellable by the Corporation. The
Corporation estimates
the ACL for
these off-balance
sheet exposures
following the methodology
described in
Note 1 –
Nature of Business
and Summary
of
Significant
Accounting
Policies,
in
the audited
consolidated
financial
statements,
which are
included
in
the 2021
Annual Report
on
Form 10-K.
As of
September 30,
2022, the
ACL for
off-balance
sheet credit
exposures was
$
4.2
million, up
$
2.7
million from
$
1.5
million
as of
December
31,
2021,
mainly
driven
by an
increase
in
unfunded
loan
commitments
principally
due
to
newly
originated
facilities which remained undrawn as of September 30, 2022.
The following
table presents
the activity
in the
ACL for
unfunded loan
commitments and
standby letters
of credit
for the
quarters
and nine-month periods ended September 30, 2022 and 2021:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Beginning Balance
$
2,171
$
2,730
$
1,537
$
5,105
Provision for credit losses - expense (benefit)
2,071
(971)
2,705
(3,346)
Ending balance
$
4,242
$
1,759
$
4,242
$
1,759
NOTE 5
–
OTHER REAL ESTATE
OWNED
The following table presents the OREO inventory as of the indicated dates:
September 30,
December 31,
2022
2021
(In thousands)
OREO
OREO balances, carrying value:
Residential
(1)
$
30,036
$
29,533
Commercial
6,033
7,331
Construction
2,613
3,984
Total
$
38,682
$
40,848
(1)
Excludes $
24.3
million and $
22.2
million as of September 30, 2022 and December 31, 2021, respectively, of foreclosures
that meet the conditions of ASC Subtopic
310-40 "Reclassification of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure," and are
presented as a receivable as part of other
assets in the consolidated statements of financial condition.
45
NOTE 6 – GOODWILL AND OTHER INTANGIBLES
Goodwill
as
of
each
of
September
30,
2022
and
December
31,
2021
amounted
to
$
38.6
million.
The
Corporation’s
policy
is
to
assess goodwill and
other intangibles for
impairment on an annual
basis during the
fourth quarter of each
year, and
more frequently if
events
or
circumstances
lead
management
to
believe
that
the
values
of
goodwill
or
other
intangibles
may
be
impaired.
During
the
fourth quarter
of 2021, as
part of its
annual evaluation,
the Corporation performed
a qualitative assessment
to determine if
a goodwill
impairment
test was necessary.
This assessment involved
identifying the inputs
and assumptions that
most affect
fair value, including
evaluating
significant
and
relevant
events
impacting
each
reporting
entity,
and
evaluating
such
factors
to
determine
if
a
positive
assertion can be
made that it is more
likely than not that
the fair value of
each reporting unit is
greater than its carrying
amount. As of
December 31,
2021, the
Corporation concluded
that it
is more-likely-than-not
that the
fair value
of the
reporting units
exceeded their
carrying
value.
The
Corporation
determined
that
there
have
been
no
significant
events
since
the
last
annual
assessment
that
could
indicate potential
goodwill impairment
on reporting
units for
which the
goodwill is
allocated. As a
result,
no
impairment charges
for
goodwill were recorded during the first nine months of 2022.
There
were
no
changes in
the carrying
amount of
goodwill during
the quarter
and
nine-month
period ended
September 30,
2022.
The
changes
in
the
carrying
amount
of
goodwill
attributable
to
operating
segments
during
2020
and
the
nine-month
period
ended
September 30, 2021 are reflected in the following table:
Mortgage Banking
Consumer (Retail)
Banking
Commercial and
Corporate
Banking
United States
Operations
Total
(In thousands)
Goodwill, January 1, 2020
$
-
$
1,406
$
-
$
26,692
$
28,098
Merger and acquisitions
(1)
574
794
4,935
-
6,303
Measurement period adjustment
(1)
385
533
3,313
-
4,231
Goodwill, December 31, 2020
$
959
$
2,733
$
8,248
$
26,692
$
38,632
Measurement period adjustment
(2)
53
74
(148)
-
(21)
Goodwill, September 30, 2021
$
1,012
$
2,807
$
8,100
$
26,692
$
38,611
(1) Recognized in connection with the BSPR acquisition on September
1, 2020. Refer to Note 2 - Business Combination included
in the 2021 Annual Report on Form 10-K for additional
information.
(2) Relates to the fair value estimate update performed within one
year of the closing of the BSPR acquisition, in accordance
with ASC Topic 805, "Business
Combinations"("ASC 805").
46
The
following
table
shows
the
gross
amount
and
accumulated
amortization
of
the
Corporation’s
intangible
assets
subject
to
amortization as of the indicated dates:
As of
As of
September 30,
December 31,
2022
2021
(Dollars in thousands)
Core deposit intangible:
Gross amount
$
87,544
$
87,544
Accumulated amortization
(64,726)
(58,973)
Net carrying amount
$
22,818
$
28,571
Remaining amortization period (in years)
7.3
8.0
Purchased credit card relationship intangible:
Gross amount
$
3,800
$
3,800
Accumulated amortization
(3,424)
(2,602)
Net carrying amount
$
376
$
1,198
Remaining amortization period (in years)
0.9
1.7
Insurance customer relationship intangible:
Gross amount
$
1,067
$
1,067
Accumulated amortization
(1,016)
(902)
Net carrying amount
$
51
$
165
Remaining amortization period (in years)
0.3
1.1
During
the quarter
and
nine-month
period
ended
September
30,
2022,
the
Corporation recognized
$
2.2
million
and $
6.7
million,
respectively,
in amortization
expense
on its
other intangibles
subject to
amortization,
compared to
$
2.8
million
and $
8.7
million for
the same periods
in 2021, respectively.
The Corporation
amortizes core deposit
intangibles and
customer relationship
intangibles based on
the projected useful
lives of the
related deposits in the case
of core deposit intangibles,
and over the projected
useful lives of the related
client relationships in the
case
of customer relationship intangibles.
The Corporation analyzes core deposit
intangibles and customer relationship
intangibles annually
for
impairment,
or
sooner
if
events
and
circumstances
indicate
possible
impairment.
Factors
that
may
suggest
impairment
include
customer attrition
and run-off. Management
is unaware of
any events and/or
circumstances that would
indicate a possible
impairment
to the core deposit intangibles or customer relationship intangibles as of
September 30, 2022.
The estimated
aggregate annual
amortization expense
related to the
intangible assets
subject to amortization
for future periods
was
as follows as of September 30, 2022:
Amount
(In thousands)
2022
$
2,126
2023
7,736
2024
6,416
2025
3,509
2026
872
2027 and after
2,586
47
NOTE 7 – 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 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 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.
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
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 September 30,
2022 and December 31, 2021, these Junior Subordinated Deferrable Debentures amounted to $183.8 million.
The Collins Amendment to the Dodd
-Frank Wall
Street Reform and Consumer Protection
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 September 30,
2022, the Corporation
was current on all
interest payments due on its subordinated debt.
48
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 the 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.
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
September
30,
2022,
the
amortized
cost
and
fair
value
of
these
private
label
MBS
amounted
to
$
8.6
million
and
$
6.2
million,
respectively,
with
a
weighted
average
yield
of
5.93
%,
which
is
included
as
part
of
the
Corporation’s
available-for-sale
debt
securities
portfolio.
As
described
in
Note
2
–
Debt
Securities,
above,
the
ACL
on
these
private
label
MBS
amounted to $
0.3
million as of September 30, 2022.
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
September
30,
2022,
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.
49
The changes in MSRs are shown below for the indicated periods:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
(In thousands)
2022
2021
2022
2021
Balance at beginning of period
$
30,277
$
32,335
$
30,986
$
33,071
Capitalization of servicing assets
679
1,146
2,637
4,046
Amortization
(1,247)
(1,817)
(3,850)
(5,374)
Temporary impairment
recoveries, net
1
12
65
49
Other
(1)
(20)
9
(148)
(107)
Balance at end of period
$
29,690
$
31,685
$
29,690
$
31,685
(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
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Balance at beginning of period
$
14
$
165
$
78
$
202
Recoveries
(1)
(12)
(65)
(49)
Balance at end of period
$
13
$
153
$
13
$
153
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
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Servicing fees
$
2,758
$
3,213
$
8,398
$
9,146
Late charges and prepayment penalties
201
87
614
543
Adjustment for loans repurchased
(20)
(32)
(148)
(148)
Servicing income, gross
2,939
3,268
8,864
9,541
Amortization and impairment of servicing assets
(1,246)
(1,764)
(3,785)
(5,284)
Servicing income, net
$
1,693
$
1,504
$
5,079
$
4,257
50
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
Nine-Month Period Ended September 30, 2022:
Constant prepayment rate:
Government-guaranteed mortgage loans
6.6
%
18.3
%
4.8
%
Conventional conforming mortgage loans
6.6
%
18.4
%
3.4
%
Conventional non-conforming mortgage loans
6.0
%
21.9
%
3.8
%
Discount rate:
Government-guaranteed mortgage loans
11.8
%
12.0
%
11.5
%
Conventional conforming mortgage loans
9.8
%
10.0
%
9.5
%
Conventional non-conforming mortgage loans
12.4
%
14.5
%
11.5
%
Nine-Month Period Ended September 30, 2021:
Constant prepayment rate:
Government-guaranteed mortgage loans
6.1
%
17.4
%
3.7
%
Conventional conforming mortgage loans
6.2
%
17.4
%
2.8
%
Conventional non-conforming mortgage loans
-
%
-
%
-
%
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
-
%
-
%
-
%
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 September
30, 2022 and
December 31, 2021 were as follows:
September 30,
December 31,
(Dollars in thousands)
2022
2021
Carrying amount of servicing assets
$
29,690
$
30,986
Fair value
$
44,621
$
42,132
Weighted-average
expected life (in years)
7.86
7.96
Constant prepayment rate (weighted-average annual
rate)
6.45
%
6.55
%
Decrease in fair value due to 10% adverse change
$
1,048
$
1,027
Decrease in fair value due to 20% adverse change
$
2,052
$
2,011
Discount rate (weighted-average annual rate)
10.68
%
11.17
%
Decrease in fair value due to 10% adverse change
$
1,923
$
1,852
Decrease in fair value due to 20% adverse change
$
3,700
$
3,561
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.
51
NOTE 8 – DEPOSITS
The following table summarizes deposit balances as of the indicated dates:
September 30, 2022
December 31, 2021
(In thousands)
Type of account:
Non-interest-bearing deposit accounts
$
6,235,782
$
7,027,513
Interest-bearing saving accounts
4,089,664
4,729,387
Interest-bearing checking accounts
4,076,258
3,492,645
Certificates of deposit ("CDs")
2,122,713
2,434,932
Brokered CDs
45,164
100,417
Total
$
16,569,581
$
17,784,894
The following table presents the contractual maturities of CDs, including brokered
CDs, as of September 30, 2022:
Total
(In thousands)
Three months or less
$
572,661
Over three months to six months
374,963
Over six months to one year
555,086
Over one year to two years
369,054
Over two years to three years
174,360
Over three years to four years
47,133
Over four years to five years
67,846
Over five years
6,774
Total
$
2,167,877
The following were the components of interest expense on deposits for the
indicated periods:
Quarter Ended September 30,
Nine-Month Period Ended
September 30,
2022
2021
2022
2021
(In thousands)
Interest expense on deposits
$
10,045
$
9,876
$
25,619
$
33,718
Accretion of premiums from acquisitions
(92)
(243)
(384)
(1,089)
Amortization of broker placement fees
25
49
89
177
Total interest expense on deposits
$
9,978
$
9,682
$
25,324
$
32,806
Total
U.S. time deposits
with balances
of more
than $250,000
amounted to
$
911.6
million and
$
990.2
million as of
September 30,
2022 and December
31, 2021, respectively.
This amount does not
include brokered CDs
that are generally
participated out by
brokers
in shares of less than
the FDIC insurance limit. As
of September 30, 2022
and December 31, 2021 unamortized
broker placement fees
amounted to $
0.1
million and $
0.2
million, respectively,
which are amortized over
the contractual maturity of
the brokered CDs under
the interest method.
52
NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Securities sold under agreements to repurchase (repurchase agreements)
as of the indicated dates consisted of the following:
September 30, 2022
December 31, 2021
(In thousands)
Long-term fixed-rate repurchase agreements
(1)
$
200,000
$
300,000
(1)
Weighted-average interest rate of
3.90
% and
3.35
% as of September 30, 2022 and December 31, 2021, respectively.
The repurchase agreements mature as follows as of the indicated date:
September 30, 2022
(In thousands)
Over one year to three years
$
200,000
As of
September
30,
2022 and
December
31, 2021,
the securities
underlying
such agreements
were delivered
to the
dealers with
which
the
repurchase
agreements
were
transacted.
In
accordance
with
the
master
agreements,
in
the
event
of
default,
repurchase
agreements
have
a
right
of
set-off
against
the
other
party
for
amounts
owed
under
the
related
agreement
and
any
other
amount
or
obligation owed with
respect to any other
agreement or transaction between
them. As of September
30, 2022 and December
31, 2021,
repurchase agreements were overcollateralized.
The repurchase agreements as of September 30, 2022, grouped by counterparty,
were as follows:
Weighted-Average
Counterparty
Amount
Maturity (In months)
(Dollars in thousands)
Credit Suisse First Boston
$
200,000
28
53
NOTE 10 – ADVANCES
FROM THE FEDERAL HOME LOAN BANK
The following is a summary of the advances from the FHLB as of the indicated
dates:
September 30,
December 31,
2022
2021
(In thousands)
Long-term rate advances from FHLB
(1)
$
-
$
200,000
(1)
Weighted-average interest rate
of
2.16
% as of December 31, 2021. The $
200
million in FHLB advances outstanding as of December 31, 2021
matured and were repaid in August 2022.
NOTE 11 – OTHER BORROWINGS
Other borrowings, as of the indicated dates, consisted of:
September 30,
December 31,
2022
2021
(In thousands)
Floating rate junior subordinated debentures (FBP Statutory Trust I)
(1)
$
65,205
$
65,205
Floating rate junior subordinated debentures (FBP Statutory Trust II)
(2)
118,557
118,557
$
183,762
$
183,762
(1)
Amount represents junior subordinated interest-bearing
debentures due in 2034 with a floating
interest rate of
2.75
% over
3-month LIBOR
(
6.28
% as of September 30, 2022
and
2.97
% as
of December 31, 2021).
(2)
Amount represents junior subordinated interest-bearing
debentures due in 2034 with a floating
interest rate of
2.50
% over
3-month LIBOR
(
6.03
% as of September 30, 2022
and
2.71
% as
of December 31, 2021).
54
NOTE 12 – EARNINGS PER COMMON SHARE
The calculations of earnings per common share for the quarters and nine-month periods
ended September 30, 2022 and 2021 are as
follows:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands, except per share information)
Net income
$
74,603
$
75,678
$
231,898
$
207,386
Less: Preferred stock dividends
-
(669)
-
(2,007)
Net income attributable to common stockholders
$
74,603
$
75,009
$
231,898
$
205,379
Weighted-Average
Shares:
Average common
shares outstanding
187,236
206,725
193,217
212,406
Average potential
dilutive common shares
1,083
1,071
1,151
1,117
Average common
shares outstanding - assuming dilution
188,319
207,796
194,368
213,523
Earnings per common share:
Basic
$
0.40
$
0.36
$
1.20
$
0.97
Diluted
$
0.40
$
0.36
$
1.19
$
0.96
Earnings
per
common
share
is
computed
by
dividing
net
income
attributable
to
common
stockholders
by
the
weighted-average
number of common shares issued and outstanding. Net income attributable
to common stockholders represents net income adjusted for
any preferred
stock dividends,
including any
dividends declared
but not
yet paid,
and any cumulative
dividends related
to the
current
dividend period
that have
not been
declared as
of the
end of
the period.
Basic weighted-average
common shares
outstanding exclude
unvested shares of restricted stock that do not contain non-forfeitable
dividend rights.
Potential dilutive
common shares
consist of
unvested shares
of restricted
stock that
do not
contain
non-forfeitable dividend
rights
using the
treasury stock
method. This
method assumes
that proceeds
equal to
the amount
of compensation
cost attributable
to future
services
is
used
to
repurchase
shares
on
the
open
market
at
the
average
market
price
for
the
period.
The
difference
between
the
number
of
potential
dilutive
shares
issued
and
the
shares
purchased
is
added
as
incremental
shares
to
the
actual
number
of
shares
outstanding
to
compute
diluted
earnings
per
share.
Unvested
shares
of
restricted
stock
outstanding
during
the
period
that
result
in
lower potentially
dilutive shares issued
than shares purchased
under the
treasury stock method
are not included
in the computation
of
dilutive
earnings
per
share
since
their
inclusion
would
have an
antidilutive
effect
on
earnings
per
share.
There
were
no
antidilutive
shares
of
common
stock
in
the
quarters
and
nine-month
periods
ended
September
30,
2022
and
2021.
Potential
dilutive
common
shares also include
performance units
that do not
contain non-forfeitable
dividend rights if
the performance
condition is met
as of the
end of the reporting period.
55
NOTE 13 – STOCK-BASED COMPENSATION
On
April
29,
2008,
the
Corporation’s
stockholders
approved
the
First
Bancorp.
2008
Omnibus
Incentive
Plan
(the
“Omnibus
Plan”).
An amended
and restated
Omnibus Plan
was subsequently
approved
by the
Corporation’s
stockholders on
May 24,
2016 to,
among other things, increase
the number of shares of
common stock reserved for issuance
under the Omnibus Plan,
extend the term of
the Omnibus
Plan to May
24, 2026
and re-approve
the material terms
of the performance
goals under
the Omnibus Plan
for purposes
of the then-effective
Section 162(m) of
the U.S. Internal
Revenue Code of
1986, as amended.
The Omnibus Plan
provides for equity-
based and
non equity-based
compensation
incentives (the
“awards”). The
Omnibus Plan
authorizes the
issuance of
up to
14,169,807
shares of
common stock,
subject to
adjustments for
stock splits,
reorganizations
and other
similar events.
As of
September 30,
2022,
there were
3,833,996
authorized shares of
common stock available
for issuance
under the Omnibus
Plan. The Corporation’s
Board of
Directors, based
on the
recommendation of
the Corporation’s
Compensation and
Benefits Committee,
has the
power and
authority to
determine
those
eligible
to
receive
awards
and
to
establish
the
terms
and
conditions
of
any
awards,
subject
to
various
limits
and
vesting restrictions that apply to individual and aggregate awards.
Restricted
Stock
Under the Omnibus Plan, the
Corporation may grant restricted stock to plan participants, subject to forfeiture upon the occurrence of
certain events
until the dates specified
in the participant’s award
agreement. While
the restricted
stock is subject to forfeiture
and does not
contain non-forfeitable
dividend rights,
participants
may exercise full voting
rights with respect
to the shares of restricted
stock granted to
them.
The fair
value of the
shares of
restricted
stock granted
was based
on the market
price of
the Corporation’s
outstanding
common stock
on the date of
the respective grant. The shares of restricted stocks
granted to employees are subject to the following vesting period: fifty
percent (
50
%) of those shares
vest on the
two-year
anniversary
of the grant
date and the remaining
50
% vest on the
three-year
anniversary
of the grant
date. The
shares of
restricted
stocks granted
to directors
are generally
subject
to vesting
on the
one-year
anniversary
of the grant
date. Common shares issued during the first nine months of 2022 in connection with restricted
stock awards were reissued from treasury
shares.
The following table summarizes the restricted stock activity in the first nine months of 2022
and 2021 under the Omnibus Plan:
Nine-Month Period Ended
Nine-Month Period Ended
September 30, 2022
September 30, 2021
Number of shares
Weighted-Average
Number of shares
Weighted-Average
of restricted
Grant Date
of restricted
Grant Date
stock
Fair Value
stock
Fair Value
Unvested shares outstanding at beginning of period
1,148,775
$
6.61
1,320,723
$
5.74
Granted
(1)
323,364
13.18
316,430
11.40
Forfeited
(15,108)
8.79
(24,792)
6.32
Vested
(510,007)
6.05
(407,659)
7.70
Unvested shares outstanding at end of period
947,024
$
9.12
1,204,702
$
6.55
(1)
Includes for the nine-month period ended
September 30, 2022,
24,972
shares of restricted stock awarded to independent
directors and
298,392
shares of restricted stock awarded
to employees, of which
6,084
shares were granted to
retirement-eligible employees and thus
charged to earnings as
of the grant date.
Includes for the nine-month
period ended September 30,
2021,
26,361
shares of restricted
stock awarded to independent directors and
290,069
shares of restricted stock awarded to
employees, of which
19,271
shares were granted to retirement-eligible employees
and thus charged to earnings
as of the grant date.
For
the
quarter
and
nine-month
period
ended
September
30,
2022,
the
Corporation
recognized
$
0.9
million
and
$
2.7
million,
respectively, of stock-based compensation expense related to restricted stock awards, compared to $
0.8
million and $
2.6
million for the
same periods in 2021, respectively.
As of September
30, 2022, there was $
4.6
million of total unrecognized
compensation
cost related to
unvested shares
of restricted stock.
The weighted average
period over which the Corporation
expects to recognize
such cost was
1.6
years
as of September 30, 2022.
Stock-based compensation
accounting guidance
requires the
Corporation to
reverse compensation
expense for
any awards
that are
forfeited due
to employee
or director
turnover.
Changes in
the estimated
forfeiture rate
may have
a significant
effect on
stock-based
compensation,
as the
Corporation
recognizes
the
effect
of adjusting
the rate
for
all expense
amortization
in the
period
in
which
the
forfeiture estimate is changed. If the actual forfeiture
rate is higher than the estimated forfeiture rate, an adjustment
is made to increase
the
estimated
forfeiture
rate,
which
will
decrease
the
expense
recognized
in
the
financial
statements.
If
the
actual
forfeiture
rate
is
lower
than
the
estimated
forfeiture
rate,
an
adjustment
is
made
to
decrease
the
estimated
forfeiture
rate,
which
will
increase
the
expense recognized in the financial statements.
56
Performance
Units
Under the Omnibus Plan, the Corporation may award performance
units to Omnibus Plan participants, with each unit representing
the value of one share of the Corporation’s
common stock. These awards, which are granted to executives, do not contain non-
forfeitable rights to dividend equivalent amounts and can only be settled in shares
of the Corporation’s common
stock.
The
performance units will vest on the third anniversary of the effective date of the awards, subject to the achievement of a pre-established
tangible book value per share target, adjusted for certain allowable non-recurring transactions. All the performance units will vest if
performance is at the pre-established performance target level or above. However, the participants may vest with respect to 50% of
the awards to the extent that performance is below the target but not less than 80% of the pre-established performance target level (the
“80% minimum threshold”), which is measured based upon the growth in the tangible book value during the performance cycle. If
performance is between the 80% minimum threshold and the pre-established performance target level, the participants will vest on a
proportional amount. No performance units will vest if performance is below the 80% minimum threshold. The performance units
granted in the first nine months of 2022 are for the performance period beginning January 1, 2022 and ending on December 31, 2024.
The following table summarizes the performance units activity under the
Omnibus Plan in the first nine months of 2022 and 2021:
Nine-Month Period Ended
Nine-Month Period Ended
(Number of units)
September 30, 2022
September 30, 2021
Performance units at beginning of year
814,899
1,006,768
Additions
166,669
160,485
Vested
(1)
(189,645)
(304,408)
Performance units at end of period
791,923
862,845
(1)
Units vested during the nine-month period ended September 30,
2022 are related to performance units granted in 2019 that
met the pre-established target and were
settled with shares of common stock reissued from treasury
shares.
Units vested during the nine-month period ended September
30, 2021 are related to performance
units granted in 2018 that met the pre-established target and were
settled with new shares of common stock.
The fair values
of the performance
units awarded
were based
on the market
price of the
Corporation’s
outstanding
common stock
on the
respective date of the grant.
For the quarter and nine-month period ended September 30, 2022,
the Corporation recognized
$
0.5
million
and
$
1.3
million, respectively, of
stock-based compensation expense related to
performance units, compared
to
$
0.5
million and
$
1.5
million for the same periods
in 2021, respectively.
As of September 30,
2022, there was $
3.0
million of total unrecognized
compensation
cost
related to
unvested performance units
that
the
Corporation expects
to
recognize over
the
next
three years.
The
total
amount
of
compensation
expense recognized
reflects management’s
assessment of the
probability that
the pre-established
performance goal
will
be
achieved.
The Corporation
will recognize
a
cumulative
adjustment
to
compensation
expense
in the
then-current
period
to reflect
any changes in the probability of achievement of the performance goals.
Shares withheld
During the
first nine
months of
2022, the
Corporation withheld
202,649
shares (first
nine months
of 2021
–
213,757
shares) of
the
restricted
stock
and
performance
units
that
vested
during
such
period
to
cover
the
officers’
payroll
and
income
tax
withholding
liabilities;
these
shares
are
held
as
treasury
shares.
The
Corporation
paid
in
cash
any
fractional
share
of
salary
stock
to
which
an
officer
was entitled.
In
the consolidated
financial
statements,
the
Corporation
presents shares
withheld
for
tax purposes
as common
stock repurchases.
57
NOTE 14 – STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
On April
27, 2022,
the Corporation
announced that
its Board
of Directors
approved a
stock repurchase
program, under
which the
Corporation
may
repurchase
up
to
$
350
million
of
its
outstanding
common
stock,
expected
to
be
executed
through
four
quarters,
which commenced
in the
second quarter
of 2022.
Repurchases under
the program
may be
executed through
open market
purchases,
accelerated share repurchases
and/or privately negotiated
transactions or plans, including
plans complying with Rule
10b5-1 under the
Exchange Act.
The Corporation’s
common stock repurchase
program is subject
to various factors,
including the
Corporation’s
capital
position,
liquidity,
financial
performance
and
alternative
uses
of
capital,
stock
trading
price,
and
general
market
conditions.
The
repurchase
program
may
be modified,
extended,
suspended,
or terminated
at
any
time at
the
Corporation’s
discretion.
The program
does
not
obligate
the
Corporation
to
acquire
any
specific
number
of
shares.
During
the
third
quarter
of
2022,
the
Corporation
repurchased
5,385,138
shares of common stock
through open market transactions
at an average purchase
price of $
13.93
per share for
a total price of
approximately $
75
million, under this stock
repurchase program. The
shares received are held
as treasury stock.
As of
September 30, 2022, the Corporation
has remaining authorization to
repurchase approximately $
175
million of common stock. For
the
nine-month period
ended September
30, 2022,
First BanCorp. has
repurchased approximately
15.9
million shares for
a total purchase
price of $
225.0
million under all stock repurchase programs.
Common Stock
The following table shows the change in shares of common stock outstanding in
the first nine months of 2022:
Total
Number of Shares
Common stock outstanding, beginning balance
201,826,505
Common stock repurchased
(1)
(16,066,747)
Common stock reissued from treasury stock
513,009
Restricted stock forfeited
(15,108)
Common stock outstanding, ending balance
186,257,659
(1)
Consisted
of
12,454,401
shares
of
common
stock
repurchased
in
the
open
market
at
an
average
price
of
$
14.05
per
share
for
a
total
purchase
price
of
approximately $
175
million under
the $
350
million stock
repurchase program
announced in
April 2022;
3,409,697
shares of
common stock
repurchased in
the
open market at
an average price
of $
14.66
for a total
purchase price of
approximately $
50
million under the prior
$
300
million stock repurchase
program which
was completed during the first quarter of 2022 and;
202,649
shares of common stock surrendered to cover officers' payroll and
income taxes.
For
the
quarter
and
nine-month
period
ended
September
30,
2022,
total
cash
dividends
declared
on
shares
of
common
stock
amounted to $
22.7
million and $
65.9
million, respectively,
compared to $
14.6
million and $
44.9
million for the same
periods in 2021.
On
October 27, 2022
the
Corporation’s
Board
of
Directors
declared
a
quarterly
cash
dividend
of
$
0.12
per
common
share
payable
on
December 9, 2022
to shareholders of record at the
close of business on
November 25, 2022
. The Corporation intends to continue
to
pay
quarterly
dividends
on common
stock.
However,
the
Corporation’s
common
stock dividends,
including
the declaration,
timing,
and amount, remain subject to consideration and approval by the Corporation’s
Board Directors at the relevant times.
58
Preferred Stock
The
Corporation
has
50,000,000
authorized
shares
of preferred
stock
with
a
par value
of $
1.00
,
redeemable
at
the
Corporation’s
option, subject to certain terms. This stock may be issued in series and
the shares of each series have such rights and preferences
as are
fixed by the Board of Directors when authorizing the issuance of that particular series.
On November
30, 2021,
the Corporation
redeemed
all of
its
1,444,146
outstanding
shares of
Series A
through
Series E
Preferred
Stock for
its liquidation
value of
$
25
per share
totaling $
36.1
million. The
difference
between the
liquidation value
and net
carrying
value was $
1.2
million, which was recorded
as a reduction to retained earnings
in 2021. The redeemed preferred
stock shares were not
listed on any
securities exchange
or automated
quotation system.
No
shares of preferred
stock have
been subsequently
issued or were
outstanding as of September 30, 2022. For the quarter
and nine-month period ended September 30, 2021, total cash dividends
declared
on shares of preferred stock amounted to $
0.7
million and $
2.0
million, respectively.
Treasury stock
During the first
nine months of
2022 and 2021,
the Corporation withheld
and recognized in
treasury stock an
aggregate of
202,649
shares and
213,757
shares, respectively,
of the restricted
stock and performance
units that vested
during those periods,
for income tax
withholding purposes.
Also recorded
as treasury
stock for
the first
nine months
of 2022
are the
15,864,098
shares of
common stock
repurchased as
part of
the stock
repurchase programs
described above
and
15,108
restricted shares
of common
stock awarded
under
the
Omnibus
Plan
that
were
forfeited
prior
to
vesting.
As
of
September
30,
2022
and
December
31,
2021,
the
Corporation
had
37,405,457
and
21,836,611
shares held as treasury
stock, respectively.
See Note 1 –
Basis of Presentation
and Significant Accounting
Policies
above
for
information
on
the
change
in
accounting
method
for
accounting
for
the
Corporation’s
treasury
stock
from
a
par
value to a cost method.
FirstBank Statutory Reserve (Legal Surplus)
The Banking Law
of the Commonwealth
of Puerto Rico requires
that a minimum of
10
% of FirstBank’s
net income for the
year be
transferred
to a
legal surplus
reserve
until such
surplus
equals the
total of
paid-in-capital
on common
and preferred
stock. Amounts
transferred
to
the
legal
surplus
reserve
from
retained
earnings
are
not
available
for
distribution
to
the
Corporation,
including
for
payment
as dividends
to the
stockholders,
without
the prior
consent
of the
Puerto Rico
Commissioner
of Financial
Institutions.
The
Puerto Rico Banking Law provides that, when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess
of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, must be
charged against the legal surplus reserve, as a reduction thereof. If the legal surplus reserve is not sufficient to cover such balance in
whole or in part, the outstanding amount must be charged against the capital account and the Bank cannot pay dividends until it can
replenish the legal surplus reserve to an amount of at least 20% of the original capital contributed.
FirstBank’s
legal surplus
reserve,
included as
part of
retained earnings
in the
Corporation’s
consolidated statements
of financial
condition, amounted
to $
137.6
million
as of
each of
September 30,
2022 and
December 31,
2021. There
were
no
transfers to
the legal
surplus reserve
during the
first nine
months of 2022.
59
NOTE 15 – OTHER COMPREHENSIVE LOSS
Changes in Accumulated Other Comprehensive
Loss by Component
(1)
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
September 30,
September 30,
2022
2021
2022
2021
(in thousands)
Unrealized net holding losses on available-for-sale
debt securities:
Beginning balance
$
(595,147)
$
(14,708)
$
(87,390)
$
55,725
Other comprehensive loss
(270,937)
(18,740)
(778,694)
(89,173)
Ending balance
$
(866,084)
$
(33,448)
$
(866,084)
$
(33,448)
Adjustment of pension and postretirement
benefit plans:
Beginning balance
$
3,391
$
(270)
$
3,391
$
(270)
Other comprehensive loss
-
-
-
-
Ending balance
$
3,391
$
(270)
$
3,391
$
(270)
(1)
All amounts presented are net of tax.
60
NOTE 16 – EMPLOYEE BENEFIT PLANS
The Corporation
maintains two
frozen qualified
noncontributory
defined benefit
pension plans
(the “Pension
Plans”), and
a related
complementary
post-retirement
benefit
plan
(the
“Postretirement
Benefit
Plan”)
covering
medical
benefits
and
life
insurance
after
retirement that it
obtained in the BSPR
acquisition on September
1, 2020. One
defined benefit pension
plan covers substantially
all of
BSPR’s
former employees
who were
active before
January 1,
2007, while
the other
defined benefit
pension plan
covers personnel
of
an
institution
previously
acquired
by
BSPR.
Benefits
are
based
on
salary
and
years
of
service.
The
accrual
of
benefits
under
the
Pension Plans is frozen to all participants.
The
Corporation
requires
recognition
of
a
plan’s
overfunded
and
underfunded
status
as
an
asset
or
liability
with
an
offsetting
adjustment to accumulated other comprehensive loss pursuant to ASC Topic
715, “Compensation-Retirement Benefits.”
The following
table presents
the components
of net
periodic benefit
income for
the Pension
Plans and
Postretirement Benefit
Plan
for the indicated periods:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
Location
2022
2021
2022
2021
(In thousands)
Net periodic benefit income:
Interest cost
Other expenses
$
656
$
619
$
1,967
$
1,858
Estimated return on plan assets
Other expenses
(1,040)
(1,130)
(3,119)
(3,392)
Net periodic benefit income
$
(384)
$
(511)
$
(1,152)
$
(1,534)
The Corporation does not expect to contribute to the Pension Plans during 2022.
61
NOTE 17 - INCOME TAXES
Income
tax
expense
includes
Puerto
Rico
and
USVI
income
taxes,
as
well
as
applicable
U.S.
federal
and
state
taxes.
The
Corporation is subject
to Puerto Rico income
tax on its income
from all sources.
As a Puerto Rico
corporation, FirstBank
is treated as
a foreign corporation for U.S. and
USVI income tax purposes and, accordingly,
is generally subject to U.S. and USVI
income tax only
on its income from
sources within the U.S.
and USVI or income
effectively connected with
the conduct of a
trade or business in those
jurisdictions. Any
such tax
paid in
the U.S.
and USVI
is also
creditable against
the Corporation’s
Puerto Rico
tax liability,
subject to
certain conditions and limitations.
Under the
Puerto Rico Internal
Revenue Code
of 2011,
as amended (the
“2011 PR
Code”), the
Corporation and
its subsidiaries are
treated
as
separate
taxable
entities
and
are
not
entitled
to
file
consolidated
tax
returns
and,
thus,
the
Corporation
is
generally
not
entitled to utilize
losses from one
subsidiary to offset
gains in another
subsidiary.
Accordingly,
in order to
obtain a tax
benefit from
a
net operating
loss (“NOL”),
a particular
subsidiary must
be able
to demonstrate
sufficient taxable
income within
the applicable
NOL
carry-forward
period.
Pursuant
to
the
2011
PR
Code,
the
carry-forward
period
for
NOLs
incurred
during
taxable
years
that
commenced
after
December
31,
2004
and
ended
before
January
1,
2013
is
12
years;
for
NOLs
incurred
during
taxable
years
commencing after December 31,
2012, the carryover period is
10 years.
The 2011
PR Code provides a dividend
received deduction of
100
% on
dividends
received
from
“controlled”
subsidiaries
subject
to
taxation
in
Puerto
Rico
and
85
% on
dividends
received
from
other taxable domestic corporations.
The
Corporation
has
maintained
an
effective
tax
rate
lower
than
the
maximum
statutory
rate
of
37.5
%
mainly
by
investing
in
government
obligations
and
MBS
exempt
from
U.S.
and
Puerto
Rico
income
taxes
and
by
doing
business
through
an
international
banking
entity
(“an
IBE”)
unit
of
the
Bank,
and
through
the
Bank’s
subsidiary,
FirstBank
Overseas
Corporation,
whose
interest
income
and
gains
on
sales
are
exempt
from
Puerto
Rico
income
taxation.
The
IBE
unit
and
FirstBank
Overseas
Corporation
were
created under
the International Banking
Entity Act of
Puerto Rico, which
provides for total
Puerto Rico tax
exemption on net
income
derived by
IBEs operating in
Puerto Rico on
the specific activities
identified in
the IBE Act.
An IBE that
operates as a
unit of a
bank
pays income
taxes at
the corporate
standard rates
to the
extent that
the IBE’s
net income
exceeds
20
% of
the bank’s
total net
taxable
income.
For the
third quarter
of 2022,
the Corporation
recorded an
income tax
expense of
$
32.0
million compared
to $
37.1
million in
the
third quarter of 2021. The variance was primarily related
to lower pre-tax income and a lower estimated
effective tax rate as a result of
a higher
proportion of
exempt to
taxable income
when compared
to the
same period
in 2021.
For the
first nine
months of
2022, the
Corporation recorded
an income tax
expense of $
109.2
million compared
to $
105.2
million for the
same period in
2021. The increase
in income tax expense for the nine-month period ended
September 30, 2022, as compared to the same period a year
ago, was related to
higher pre-tax
income, partially offset
by a higher
proportion of exempt
to taxable income
resulting in a
lower estimated effective
tax
rate.
62
For
the
quarter
and
nine-month
period
ended
September
30,
2022,
the
Corporation
calculated
the
provision
for
income
taxes
by
applying
the
estimated
annual
effective
tax
rate
for
the
full
fiscal
year
to
ordinary
income
or
loss.
In
the
computation
of
the
consolidated
worldwide
annual
estimated
effective
tax
rate,
ASC
Topic
740-270,
“Income
Taxes”
(“ASC
740-270”),
requires
the
exclusion
of
legal
entities
with
pre-tax
losses
from
which
a
tax
benefit
cannot
be
recognized.
The
Corporation’s
estimated
annual
effective tax rate in
the first nine months of
2022, excluding entities from which
a tax benefit cannot be recognized
and discrete items,
was
31.8
%, compared
to
33.2
% for
the first
nine months
of 2021.
The estimated
annual effective
tax rate,
including all
entities, for
2022
was
32.0
% (
32.4
% excluding
discrete items),
compared
to
33.6
% for
the first
nine months
of 2021
(
33.8
% excluding
discrete
items).
The
Corporation’s
net
deferred
tax
asset
amounted
to
$
166.1
million
as
of
September
30,
2022,
net
of
a
valuation
allowance
of
$
195.8
million, and
management concluded,
based upon
the assessment
of all
positive and
negative evidence,
that it was
more likely
than not
that the Corporation
will generate suff
icient taxable income
within the applicable
NOL carry-forward
periods to realize
such
amount.
The net
deferred tax
asset of
the Corporation’s
banking subsidiary,
FirstBank, amounted
to $
166.0
million as
of September
30,
2022, net
of a
valuation
allowance of
$
158.7
million, compared
to a
net deferred
tax asset
of $
208.4
million, net
of a
valuation
allowance of $
69.7
million, as of December 31, 2021. The
decrease in the deferred tax assets was
mainly driven by the usage of
NOLs
as well as the
credit losses reserve
release. The increase
in the valuation allowance
during the first nine
months of 2022 was
primarily
related to the change in the market
value of available-for-sale debt
securities. The Corporation maintains a
full valuation allowance for
its
deferred
tax
assets
associated
with
capital
losses
carry
forward,
thus,
the
change
in
the
market
value
of
available-for-sale
debt
securities resulted
in a
change in
the deferred
tax asset
and
an equal
change in
the valuation
allowance
without having
an effect
on
earnings.
In
2017,
the
Corporation
completed
a
formal
ownership
change
analysis
within
the
meaning
of
Section
382
of
the
U.S.
Internal
Revenue Code
(“Section 382”)
covering a
comprehensive period
and concluded
that an
ownership
change had
occurred during
such
period.
The
Section
382
limitation
has
resulted
in
higher
U.S.
and
USVI
income
tax
liabilities
than
we
would
have
incurred
in
the
absence of such limitation. The Corporation has mitigated
to an extent the adverse effects associated with the
Section 382 limitation as
any
such
tax
paid
in
the
U.S.
or
USVI
can
be
creditable
against
Puerto
Rico
tax
liabilities
or
taken
as
a
deduction
against
taxable
income. However,
our ability
to reduce
our Puerto
Rico tax
liability through
such a
credit or
deduction depends
on our
tax profile
at
each annual
taxable period,
which is
dependent on
various factors.
For the
third quarter
and nine-month
period ended
September 30,
2022, the Corporation
incurred current income
tax expense of
approximately $
3.0
million and $
7.1
million, respectively,
related to its
U.S. operations,
compared to
$
2.1
million and
$
4.5
million, respectively,
for the
comparable periods
in 2021.
The limitation
did not
impact the USVI operations in the third quarter and nine-month periods ended September
30, 2022 and 2021.
On August 16, 2022, the
“Inflation Reduction Act of 2022” (the
“IRA”) was signed into law in
the United States. The IRA includes
various tax provisions, including
an excise tax on stock
repurchases, and a corporate
alternative minimum tax that
generally applies to
U.S.
corporations
with
average
adjusted
financial
statement
income
over
a
three-year
period
in
excess
of
$1
billion.
We
do
not
currently expect
the IRA to
have a material
impact on
our financial
results, including
on our annual
estimated effective
tax rate or
on
our liquidity.
The Corporation
accounts for uncertain
tax positions under
the provisions of
ASC Topic
740. The Corporation’s
policy is to
report
interest
and
penalties
related
to
unrecognized
tax positions
in
income
tax
expense.
As
of
September
30,
2022,
the
Corporation
had
$
0.2
million
of
accrued
interest
and
penalties
related
to
uncertain
tax
positions
in
the
amount
of
$
0.8
million
that
it acquired
from
BSPR, which,
if recognized,
would decrease
the effective
income tax
rate in
future periods.
During the
quarter ended
September 30,
2022, a
$
0.4
million benefit
was recognized
as a
result of
the expiration
of uncertain
tax positions
acquired from
BSPR. The
amount
of unrecognized tax
benefits may increase
or decrease in
the future for
various reasons, including
adding amounts for
current tax year
positions, expiration of open income
tax returns due to the statute of limitations,
changes in management’s
judgment about the level of
uncertainty,
the status
of examinations,
litigation,
and
legislative activity,
and
the addition
or elimination
of uncertain
tax positions.
The statute
of limitations
under the
2011
PR code
is four
years; the
statute of
limitations for
U.S. and
USVI income
tax purposes
is
three years after a tax return is
due or filed, whichever is later.
The completion of an audit by the
taxing authorities or the expiration of
the
statute
of
limitations
for
a
given
audit
period
could
result in
an
adjustment
to
the Corporation’s
liability
for
income
taxes.
Any
such adjustment
could be material
to the results
of operations for
any given quarterly
or annual period
based, in part,
upon the results
of
operations
for
the
given
period.
For
U.S.
and
USVI
income
tax
purposes,
all
tax
years
subsequent
to
2018
remain
open
to
examination. For Puerto Rico tax purposes, all tax years subsequent to
2017 remain open to examination.
63
NOTE 18 – FAIR VALUE
Fair Value
Measurement
ASC Topic
820,
“Fair Value
Measurement,” defines
fair value as
the exchange
price that would
be received for
an asset or
paid to
transfer
a
liability
(an
exit
price)
in
the
principal
or
most
advantageous
market
for
the
asset
or
liability
in
an
orderly
transaction
between market
participants on
the measurement
date. This
guidance also
establishes a
fair value
hierarchy for
classifying assets
and
liabilities, which is based on
whether the inputs to
the valuation techniques used
to measure fair value are
observable or unobservable.
One of three levels of inputs may be used to measure fair value:
Level 1
Valuations
of
Level
1
assets
and
liabilities
are
obtained
from
readily-available
pricing
sources
for
market
transactions involving identical assets or liabilities in active markets.
Level 2
Valuations
of Level
2 assets
and liabilities
are based
on observable
inputs other
than Level
1 prices,
such as
quoted
prices for similar assets or
liabilities, or other inputs
that are observable or
can be corroborated by
observable market
data for substantially the full term of the assets or liabilities.
Level 3
Valuations
of Level 3 assets
and liabilities are
based on unobservable
inputs that are supported
by little or no
market
activity and
are significant
to the
fair value
of the
assets or liabilities.
Level 3
assets and
liabilities include
financial
instruments
whose
value
is determined
by using
pricing
models
for
which
the
determination
of
fair
value
requires
significant management judgment as to the estimation.
See Note
30 -
Fair Value
included in
the 2021
Annual Report
on Form
10-K for
information regarding
valuation techniques
and
inputs used to measure financial instruments at fair value on a recurring
basis.
Assets and liabilities measured at fair value on a recurring basis are summarized below as of
September 30, 2022 and December 31,
2021:
As of September 30, 2022
As of December 31, 2021
Fair Value Measurements Using
Fair Value Measurements Using
(In thousands)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets:
Debt securities available for sale:
U.S. Treasury securities
$
138,258
$
-
$
-
$
138,258
$
148,486
$
-
$
-
$
148,486
Noncallable U.S. agencies debt securities
-
249,798
-
249,798
-
285,028
-
285,028
Callable U.S. agencies debt securities
-
2,086,221
-
2,086,221
-
1,971,954
-
1,971,954
MBS
-
3,185,549
6,170
(1)
3,191,719
-
4,037,209
7,234
(1)
4,044,443
Puerto Rico government obligations
-
-
2,193
2,193
-
-
2,850
2,850
Other investments
-
-
500
500
-
-
1,000
1,000
Equity securities
4,924
-
-
4,924
5,378
-
-
5,378
Derivative assets
-
1,212
-
1,212
-
1,505
-
1,505
Liabilities:
Derivative liabilities
-
452
-
452
-
1,178
-
1,178
(1)
Related to private label MBS.
64
The table below presents
a reconciliation of the
beginning and ending balances
of all assets and
liabilities measured at fair
value on
a recurring
basis using
significant unobservable
inputs (Level
3) for
the quarters
and nine-month
periods ended
September 30,
2022
and 2021:
Quarter Ended September 30,
2022
2021
Level 3 Instruments Only
Debt Securities
Debt Securities
(In thousands)
Available For Sale
(1)
Available For Sale
(1)
Beginning balance
$
10,180
$
11,481
Total (losses) gains:
Included in other comprehensive income (unrealized)
(177)
191
Included in earnings (unrealized) (2)
12
9
Purchases
-
1,000
Principal repayments and amortization
(1,152)
(1,213)
Ending balance
$
8,863
$
11,468
(1)
Amounts mostly related to private label MBS.
(2)
Changes in unrealized gains included in earnings were recognized
within provision for credit losses - expense (benefit) and relate
to assets still held as of the
reporting date.
Nine-Month Period Ended September 30,
2022
2021
Level 3 Instruments Only
Debt Securities
Debt Securities
(In thousands)
Available For Sale
(1)
Available For Sale
(1)
Beginning balance
$
11,084
$
11,977
Total (losses) gains:
Included in other comprehensive income (unrealized)
(570)
896
Included in earnings (unrealized) (2)
435
136
Purchases
-
1,000
Principal repayments and amortization
(2,086)
(2,541)
Ending balance
$
8,863
$
11,468
(1)
Amounts mostly related to private label MBS.
(2)
Changes in unrealized gains included in earnings were recognized
within provision for credit losses - expense (benefit) and relate
to assets still held as of the
reporting date.
65
The tables below present quantitative information for significant assets and liabilities measured
at fair value on a recurring basis
using significant unobservable inputs (Level 3) as of September 30, 2022 and December
31, 2021:
September 30, 2022
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
(Dollars in thousands)
Minimum
Maximum
Available-for-sale debt securities:
Private label MBS
$
6,170
Discounted cash flows
Discount rate
16.4%
16.4%
16.4%
Prepayment rate
1.9%
17.4%
12.6%
Projected cumulative loss rate
0.2%
17.3%
6.9%
Puerto Rico government obligations
2,193
Discounted cash flows
Discount rate
13.0%
13.0%
13.0%
Projected cumulative loss rate
19.0%
19.0%
19.0%
December 31, 2021
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
(Dollars in thousands)
Minimum
Maximum
Available-for-sale debt securities:
Private label MBS
$
7,234
Discounted cash flows
Discount rate
12.9%
12.9%
12.9%
Prepayment rate
7.6%
24.9%
15.2%
Projected cumulative loss rate
0.2%
15.7%
7.6%
Puerto Rico government obligations
2,850
Discounted cash flows
Discount rate
6.6%
8.4%
7.9%
Projected cumulative loss rate
8.6%
8.6%
8.6%
Information about Sensitivity to Changes in Significant Unobservable Inputs
Private label
MBS: The
significant unobservable
inputs in
the valuation
include probability
of default,
the loss
severity
assumption,
and prepayment
rates. Shifts
in those
inputs would
result in different
fair value
measurements. Increases
in the probability
of default,
loss
severity
assumptions,
and
prepayment
rates
in
isolation
would
generally
result
in
an
adverse
effect
on
the
fair
value
of
the
instruments. The Corporation modeled meaningful and possible
shifts of each input to assess the effect on the fair value estimation.
Puerto Rico
Government Obligations:
The significant
unobservable input
used in
the fair value
measurement is
the assumed
loss rate
of the
underlying
residential
mortgage
loans that
collateralize
these obligations,
which
are guaranteed
by the
PRHFA.
A significant
increase (decrease) in
the assumed rate
would lead to
a (lower) higher
fair value estimate.
The fair value
of these bonds
was based on
a
discounted
cash
flow
methodology
that
considers
the
structure
and
terms
of
the
debt
security.
The
Corporation
utilizes
PDs
and
LGDs that
consider,
among other
things, historical
payment performance,
loan-to-value
attributes
and
relevant current
and
forward-
looking
macroeconomic
variables,
such
as
regional
unemployment
rates,
the
housing
price
index
and
the
expected
recovery
of
PRHFA guarantee.
Under this approach, expected cash
flows (interest and principal) were discounted
at the Treasury yield
curve plus
a
spread as of the reporting date and compared to the amortized cost.
66
Additionally,
fair value
is used
on a
nonrecurring basis
to evaluate
certain assets
in accordance
with GAAP.
As of
September 30,
2022,
the Corporation
recorded
losses or
valuation
adjustments
for
assets recognized
at fair
value
on a
non-recurring
basis and
still
held at September 30, 2022, and categorized as Level 3, as shown in
the following table:
Carrying value as of September 30, 2022
Related to losses recorded
for the Quarter Ended
September 30, 2022
Related to losses recorded
for the Nine-Month Period
Ended September 30, 2022
Losses recorded for the
Quarter Ended September
30, 2022
Losses recorded for the
Nine-Month Period Ended
September 30, 2022
(In thousands)
Loans receivable
(1)
$
4,207
$
27,531
$
(227)
$
(2,978)
OREO
(2)
1,234
2,913
(57)
(34)
Loans held for sale
12,169
12,169
(177)
(177)
Premises and equipment (3)
-
1,242
-
(218)
(1)
Consists mainly of
collateral dependent commercial and
construction loans. The
Corporation generally measured
losses based on
the fair value
of the
collateral.
The Corporation
derived the
fair values
from external
appraisals that
took into
consideration prices
in observed
transactions involving
similar assets
in similar
locations but adjusted for specific characteristics and assumptions
of the collateral (e.g., absorption rates), which are
not market observable.
(2)
The Corporation derived the fair values from appraisals that took into consideration prices in observed transactions involving similar
assets in similar locations but
adjusted for specific characteristics and assumptions of
the properties (e.g., absorption rates and net
operating income of income producing properties), which
are
not market observable. Losses were related to market valuation
adjustments after the transfer of the loans to the OREO
portfolio.
(3)
Relates to a banking facility reclassified to held-for-sale and measured
at the fair value of the collateral.
As of September 30, 2021, the Corporation recorded losses or valuation adjustments
for assets recognized at fair value on a non-
recurring basis and still held as of September 30, 2021 as shown in the following
table:
Carrying value as of September 30, 2021
Related to losses recorded
for the Quarter Ended
September 30, 2021
Related to losses recorded
for the Nine-Month Period
Ended September 30, 2021
Losses recorded for the
Quarter Ended September
30, 2021
Losses recorded for the
Nine-Month Period Ended
September 30, 2021
(In thousands)
Loans receivable
(1)
$
25,240
$
37,154
$
(1,612)
$
(5,285)
OREO
(2)
5,631
8,370
(53)
(210)
(1)
Consists mainly of
collateral dependent commercial and
construction loans. The
Corporation generally measured
losses based on
the fair value
of the
collateral.
The Corporation
derived the
fair values
from external
appraisals that
took into
consideration prices
in observed
transactions involving
similar assets
in similar
locations but adjusted for specific characteristics and assumptions
of the collateral (e.g., absorption rates), which are
not market observable.
(2)
The Corporation derived the fair values from appraisals that took into consideration prices in observed transactions involving similar
assets in similar locations but
adjusted for specific characteristics and assumptions of
the properties (e.g., absorption rates and net
operating income of income producing properties), which are
not market observable. Losses were related to market valuation
adjustments after the transfer of the loans to the OREO
portfolio.
See Note
30 -
Fair Value
included
in the
2021 Annual
Report on
Form 10-K
for qualitative
information
regarding the
fair value
measurements for Level 3 financial instruments.
67
Fair Value
of Financial Instruments
The
following
tables
present
the
carrying
value,
estimated
fair
value
and
estimated
fair value
level
of
the
hierarchy
of
financial
instruments as of September 30, 2022 and December 31, 2021:
Total Carrying
Amount in
Statement of
Financial
Condition as of
September 30,
2022
Fair Value
Estimate as of
September 30,
2022
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money
market investments (amortized cost)
$
554,990
$
554,990
$
554,990
$
-
$
-
Debt securities available
for sale (fair value)
5,668,689
5,668,689
138,258
5,521,568
8,863
Debt securities held to maturity (amortized
cost)
445,862
Less: allowance for credit losses on
held-to-maturity debt securities
(8,257)
Debt securities held to maturity, net of allowance
$
437,605
429,530
-
268,552
160,978
Equity securities (amortized cost)
19,803
19,803
-
19,803
(1)
-
Other equity securities (fair value)
4,924
4,924
4,924
-
-
Loans held for sale (lower of cost or market)
12,169
12,169
-
12,169
-
Loans held for investment (amortized cost)
11,298,618
Less: allowance for credit losses for loans
and finance leases
(257,859)
Loans held for investment, net of allowance
$
11,040,759
10,986,720
-
-
10,986,720
MSRs (amortized cost)
29,690
44,621
-
-
44,621
Derivative assets (fair value)
(2)
1,212
1,212
-
1,212
-
Liabilities:
Deposits
(amortized cost)
$
16,569,581
$
16,553,140
$
-
$
16,553,140
$
-
Securities sold under agreements
to repurchase (amortized cost)
200,000
202,510
-
202,510
-
Other borrowings (amortized cost)
183,762
181,761
-
-
181,761
Derivative liabilities (fair value)
(2)
452
452
-
452
-
(1)
Includes FHLB stock with a carrying value of $
12.3
million.
(2)
Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
68
Total Carrying
Amount in
Statement of
Financial
Condition as of
December 31,
2021
Fair Value
Estimate as of
December 31,
2021
Level 1
Level 2
Level 3
(In thousands)
Assets:
Cash and due from banks and money
market investments (amortized cost)
$
2,543,058
$
2,543,058
$
2,543,058
$
-
$
-
Debt securities available
for sale (fair value)
6,453,761
6,453,761
148,486
6,294,191
11,084
Debt securities held to maturity (amortized
cost)
178,133
Less: allowance for credit losses on
held-to-maturity debt securities
(8,571)
Debt securities held to maturity, net of allowance
169,562
167,147
-
-
167,147
Equity securities (amortized cost)
26,791
26,791
-
26,791
(1)
-
Other equity securities (fair value)
5,378
5,378
5,378
-
-
Loans held for sale (lower of cost or market)
35,155
36,147
-
36,147
-
Loans held for investment (amortized cost)
11,060,658
Less: allowance for credit losses for loans
and finance leases
(269,030)
Loans held for investment, net of allowance
$
10,791,628
10,900,400
-
-
10,900,400
MSRs (amortized cost)
30,986
42,132
-
-
42,132
Derivative assets (fair value)
(2)
1,505
1,505
-
1,505
-
Liabilities:
Deposits (amortized cost)
$
17,784,894
$
17,800,706
$
-
$
17,800,706
$
-
Securities sold under
agreements to repurchase (amortized cost)
300,000
322,105
-
322,105
-
Advances from FHLB (amortized cost)
200,000
202,044
-
202,044
-
Other borrowings (amortized cost)
183,762
177,689
-
-
177,689
Derivative liabilities (fair value)
(2)
1,178
1,178
-
1,178
-
(1)
Includes FHLB stock with a carrying value of $
21.5
million.
(2)
Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
The short-term nature
of certain assets and
liabilities result in their
carrying value approximating
fair value. These include
cash and
cash
due
from
banks
and
other
short-term
assets,
such
as
FHLB
stock.
Certain
assets,
the
most
significant
being
premises
and
equipment,
goodwill
and
other
intangible
assets, are
not
considered
financial
instruments
and
are
not
included
above. Accordingly,
this fair
value
information
is not
intended
to, and
does not,
represent
the Corporation’s
underlying
value.
Many of
these assets
and
liabilities that
are subject
to the
disclosure requirements
are not
actively traded,
requiring management
to estimate
fair values.
These
estimates
necessarily
involve
the
use
of
assumptions
and
judgment
about
a
wide
variety
of
factors,
including
but
not
limited
to,
relevancy of market prices of comparable instruments, expected futures
cash flows, and appropriate discount rates.
69
NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
In accordance with
ASC Topic
606, “Revenue from
Contracts with Customers” (“ASC
Topic
606”), revenues are
recognized when
control
of
promised
goods
or
services
is
transferred
to
customers
and
in
an
amount
that
reflects
the
consideration
to
which
the
Corporation expects to be
entitled in exchange for those
goods or services. At contract
inception, once the contract is
determined to be
within the
scope of
ASC Topic
606, the
Corporation assesses
the goods
or services
that are
promised within
each contract,
identifies
the
respective
performance
obligations,
and
assesses
whether
each
promised
good
or
service
is
distinct.
The
Corporation
then
recognizes
as revenue
the amount
of the
transaction price
that is
allocated to
the respective
performance obligation
when (or
as) the
performance obligation is satisfied.
Disaggregation of Revenue
The following
table summarizes
the Corporation’s
revenue, which
includes net
interest income
on financial
instruments and
non-
interest income,
disaggregated by
type of
service and
business segment
for the quarters
and nine-month
periods ended
September 30,
2022 and 2021:
(In thousands)
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
Quarter Ended September 30, 2022:
Net interest income
(1)
$
24,338
$
118,408
$
22,861
$
14,827
$
21,494
$
5,982
$
207,910
Service charges and fees on deposit accounts
-
5,744
3,169
-
151
756
9,820
Insurance commissions
(2)
-
2,485
-
-
16
123
2,624
Merchant-related income
-
1,458
347
-
32
330
2,167
Credit and debit card fees
-
7,209
21
-
(2)
439
7,667
Other service charges and fees
85
1,228
340
-
595
195
2,443
Not in scope of ASC Topic 606
(1)
3,648
997
399
33
(19)
(86)
4,972
Total non-interest income
3,733
19,121
4,276
33
773
1,757
29,693
Total Revenue
$
28,071
$
137,529
$
27,137
$
14,860
$
22,267
$
7,739
$
237,603
(In thousands)
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
Quarter Ended September 30, 2021:
Net interest income
(1)
$
26,535
$
75,343
$
46,358
$
12,756
$
17,255
$
6,496
$
184,743
Service charges and fees on deposit accounts
-
5,076
2,855
-
128
631
8,690
Insurance commissions
(2)
-
2,183
-
-
25
109
2,317
Merchant-related income
-
1,878
263
-
14
266
2,421
Credit and debit card fees
-
6,897
22
-
-
394
7,313
Other service charges and fees
211
1,018
715
-
462
150
2,556
Not in scope of ASC Topic 606
(1)
5,710
492
39
61
336
11
6,649
Total non-interest income
5,921
17,544
3,894
61
965
1,561
29,946
Total Revenue
$
32,456
$
92,887
$
50,252
$
12,817
$
18,220
$
8,057
$
214,689
70
(In thousands)
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
Nine-Month Period Ended September 30, 2022:
Net interest income
(1)
$
76,452
$
310,351
$
94,655
$
33,702
$
56,664
$
17,896
$
589,720
Service charges and fees on deposit accounts
-
16,778
9,214
-
446
2,211
28,649
Insurance commissions
(2)
-
10,176
-
-
65
604
10,845
Merchant-related income
-
4,991
1,101
-
54
1,046
7,192
Credit and debit card fees
-
21,271
58
-
(6)
1,298
22,621
Other service charges and fees
287
4,404
2,329
-
1,579
509
9,108
Not in scope of ASC Topic 606
(1)
12,865
1,747
576
(130)
57
(38)
15,077
Total non-interest income
13,152
59,367
13,278
(130)
2,195
5,630
93,492
Total Revenue
$
89,604
$
369,718
$
107,933
$
33,572
$
58,859
$
23,526
$
683,212
(In thousands)
Mortgage
Banking
Consumer
(Retail) Banking
Commercial and
Corporate
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
Nine-Month Period Ended September 30, 2021:
Net interest income
(1)
$
78,106
$
198,577
$
146,837
$
53,378
$
48,684
$
20,209
$
545,791
Service charges and fees on deposit accounts
-
14,518
8,813
-
412
2,039
25,782
Insurance commissions
(2)
-
9,137
-
-
82
555
9,774
Merchant-related income
-
4,710
776
-
39
752
6,277
Credit and debit card fees
-
19,163
62
-
14
1,168
20,407
Other service charges and fees
561
2,729
1,927
-
1,351
438
7,006
Not in scope of ASC Topic 606
(1)
18,613
1,256
352
202
1,110
7
21,540
Total non-interest income
19,174
51,513
11,930
202
3,008
4,959
90,786
Total Revenue
$
97,280
$
250,090
$
158,767
$
53,580
$
51,692
$
25,168
$
636,577
(1)
Most of the Corporation’s revenue is not within the scope of ASC Topic 606. The guidance explicitly excludes net interest income from financial assets and liabilities, as well as other non-interest income from loans,
leases, investment securities and derivative financial instruments.
(2)
Contingent commission income is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or payments are
received. For the nine-month period ended September 30, 2022, the Corporation recognized revenue at the time that payments were confirmed and constraints were released of $
3.2
million, compared to $
3.3
million
for the nine-month period ended September 30, 2021.
No
revenue was recognized during the quarters ended September 30, 2022 and 2021.
71
For the nine-month periods
ended September 30, 2022 and
2021, most of the Corporation’s
revenue within the scope
of ASC Topic
606 was related to performance obligations satisfied at a point in time.
See
Note
31
–
Revenue
from
Contracts
with
Customers
included
in
the
2021
Annual
Report
on
Form
10-K
for
a
discussion
of
major revenue streams under the scope of ASC Topic
606.
Contract Balances
As of September
30, 2022 and 2021,
there were
no
contract assets from
contracts with customers
or contract assets
recorded on the
Corporation’s consolidated
financial statements.
The following table shows
the activity of contract
liabilities for the quarters
and nine-month periods
ended
September 30, 2022 and
2021:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
(In thousands)
2022
2021
2022
2021
Beginning Balance
$
1,049
$
1,989
$
1,443
$
2,151
Less:
Revenue recognized
(104)
(433)
(498)
(595)
Ending balance
$
945
$
1,556
$
945
$
1,556
Other
Except
for
the
contract
liabilities
noted
above,
the
Corporation
did
not
have
any
significant
performance
obligations
as
of
September
30,
2022.
The
Corporation
also
did
not
have
any
material
contract
acquisition
costs
and
did
not
make
any
significant
judgments or estimates in recognizing revenue for financial reporting purposes.
72
NOTE 20 –
SUPPLEMENTAL STATEMENT OF
CASH FLOWS
INFORMATION
Supplemental
cash flow
information
is as follows
for the
indicated
periods:
Nine-Month Period Ended September 30,
2022
2021
(In thousands)
Cash paid for:
Interest on borrowings
$
41,205
$
53,659
Income tax
22,943
13,448
Operating cash flow from operating leases
13,759
14,655
Non-cash investing and financing activities:
Additions to OREO
13,653
14,748
Additions to auto and other repossessed assets
33,119
25,647
Capitalization of servicing assets
2,637
4,046
Loan securitizations
113,757
148,223
Loans held for investment transferred to held for sale
3,893
32,858
Right-of-use ("ROU") assets obtained in exchange for operating lease
liabilities
2,297
5,518
Unsettled purchases of investment securities
-
46,720
Unsettled common stock shares repurchases
467
517
73
NOTE 21 –
SEGMENT
INFORMATION
Based upon
the Corporation’s
organizational
structure and
the information
provided to
the Chief
Executive
Officer,
the operating
segments
are
based
primarily
on
the
Corporation’s
lines
of
business
for
its
operations
in
Puerto
Rico,
the
Corporation’s
principal
market,
and
by
geographic
areas
for
its
operations
outside
of
Puerto
Rico.
As
of
September
30,
2022,
the
Corporation
had
six
reportable segments: Commercial and
Corporate Banking; Mortgage Banking;
Consumer (Retail) Banking; Treasury
and Investments;
United
States
Operations;
and
Virgin
Islands
Operations.
Management
determined
the
reportable
segments
based
on
the
internal
structure
used
to
evaluate
performance
and
to
assess
where
to
allocate
resources.
Other
factors,
such
as
the
Corporation’s
organizational
chart,
nature
of
the
products,
distribution
channels,
and
the
economic
characteristics
of
the
products,
were
also
considered in the determination of the reportable segments.
The
Commercial
and
Corporate
Banking
segment
consists
of
the
Corporation’s
lending
and
other
services
for
large
customers
represented
by specialized
and middle-market
clients and
the public
sector.
The Commercial
and Corporate
Banking segment
offers
commercial loans,
including commercial
real estate
and construction
loans, and
floor plan financings,
as well
as other
products, such
as
cash
management
and
business
management
services.
The
Mortgage
Banking
segment
consists
of
the
origination,
sale,
and
servicing
of
a
variety
of
residential
mortgage
loans.
The
Mortgage
Banking
segment
also
acquires
and
sells
mortgages
in
the
secondary
markets.
In
addition,
the
Mortgage
Banking
segment
includes
mortgage
loans
purchased
from
other
local
banks
and
mortgage
bankers.
The
Consumer
(Retail)
Banking
segment
consists
of
the
Corporation’s
consumer
lending
and
deposit-taking
activities conducted mainly
through its branch network
and loan centers. The
Treasury and Investments
segment is responsible
for the
Corporation’s
investment
portfolio
and
treasury
functions
that
are
executed
to
manage
and
enhance
liquidity.
This
segment
lends
funds
to
the
Commercial
and
Corporate
Banking,
Mortgage
Banking,
Consumer
(Retail)
Banking
and
United
States
Operations
segments
to
finance
their
lending
activities
and
borrows
from
those
segments.
The
Consumer
(Retail)
Banking
segment
also
lends
funds to
other segments.
The interest
rates charged
or credited
by the
Treasury
and Investments
and the
Consumer (Retail)
Banking
segments are
allocated based
on market
rates. The
difference between
the allocated
interest income
or expense
and the Corporation’s
actual
net
interest income
from
centralized
management
of funding
costs is
reported
in the
Treasury
and Investments
segment.
The
United States
Operations segment
consists of
all banking
activities conducted
by FirstBank
in the
United States
mainland,
including
commercial and consumer banking
services. The Virgin
Islands Operations segment consists of all
banking activities conducted by the
Corporation in the USVI and BVI, including commercial and consumer
banking services.
The
accounting
policies
of
the
segments
are
the
same
as
those
referred
to
in
Note
1
–
Nature
of
Business
and
Summary
of
Significant
Accounting
Policies,
in
the audited
consolidated
financial
statements,
which are
included
in
the 2021
Annual Report
on
Form 10-K.
The
Corporation
evaluates
the
performance
of
the
segments
based
on
net
interest
income,
the
provision
for
credit
losses,
non-
interest
income
and
direct
non-interest
expenses.
The
segments
are
also
evaluated
based
on
the
average
volume
of
their
interest-
earning assets less the ACL.
74
The following tables present information about the reportable segments for
the indicated periods:
(In thousands)
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
For the Quarter Ended September 30, 2022:
Interest income
$
32,349
$
77,576
$
53,506
$
28,203
$
24,804
$
6,245
$
222,683
Net (charge) credit for transfer of funds
(8,011)
47,577
(30,645)
(8,447)
(474)
-
-
Interest expense
-
(6,745)
-
(4,929)
(2,836)
(263)
(14,773)
Net interest income
24,338
118,408
22,861
14,827
21,494
5,982
207,910
Provision for credit losses - expense (benefit)
2,092
16,705
(3,519)
(12)
(624)
1,141
15,783
Non-interest income (loss)
3,733
19,121
4,276
33
773
1,757
29,693
Direct non-interest expenses
6,489
42,080
9,295
942
8,479
7,097
74,382
Segment income (loss)
$
19,490
$
78,744
$
21,361
$
13,930
$
14,412
$
(499)
$
147,438
Average earnings assets
$
2,211,675
$
2,974,894
$
3,622,907
$
7,095,503
$
2,040,656
$
365,743
$
18,311,378
(In thousands)
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
For the Quarter Ended September 30, 2021:
Interest income
$
35,722
$
68,883
$
48,558
$
19,342
$
20,847
$
6,820
$
200,172
Net (charge) credit for transfer of funds
(9,187)
13,094
(2,200)
(909)
(798)
-
-
Interest expense
-
(6,634)
-
(5,677)
(2,794)
(324)
(15,429)
Net interest income
26,535
75,343
46,358
12,756
17,255
6,496
184,743
Provision for credit losses expense - (benefit) expense
(10,210)
6,532
(8,332)
(9)
(1,158)
1,095
(12,082)
Non-interest income
5,921
17,544
3,894
61
965
1,561
29,946
Direct non-interest expenses
6,792
40,130
7,916
803
8,343
7,120
71,104
Segment income (loss)
$
35,874
$
46,225
$
50,668
$
12,023
$
11,035
$
(158)
$
155,667
Average earnings assets
$
2,446,111
$
2,590,938
$
3,655,172
$
8,751,623
$
2,177,681
$
425,872
$
20,047,397
(In thousands)
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
Nine-Month Period Ended September 30, 2022
Interest income
$
98,625
$
221,500
$
148,046
$
77,530
$
64,742
$
18,719
$
629,162
Net (charge) credit for transfer of funds
(22,173)
105,898
(53,391)
(29,101)
(1,233)
-
-
Interest expense
-
(17,047)
-
(14,727)
(6,845)
(823)
(39,442)
Net interest income
76,452
310,351
94,655
33,702
56,664
17,896
589,720
Provision for credit losses - (benefit) expense
(5,216)
42,904
(20,611)
(435)
(5,849)
1,191
11,984
Non-interest income (loss)
13,152
59,367
13,278
(130)
2,195
5,630
93,492
Direct non-interest expenses
19,076
121,897
27,202
2,732
25,195
20,835
216,937
Segment income
$
75,744
$
204,917
$
101,342
$
31,275
$
39,513
$
1,500
$
454,291
Average earnings assets
$
2,249,203
$
2,865,610
$
3,654,906
$
7,642,121
$
2,047,375
$
371,468
$
18,830,683
(In thousands)
Mortgage
Banking
Consumer
(Retail)
Banking
Commercial
and Corporate
Banking
Treasury and
Investments
United States
Operations
Virgin Islands
Operations
Total
Nine-Month Period Ended September 30, 2021
Interest income
$
109,727
$
200,853
$
153,849
$
48,812
$
61,830
$
21,202
$
596,273
Net (charge) credit for transfer of funds
(31,621)
20,050
(7,012)
22,216
(3,633)
-
-
Interest expense
-
(22,326)
-
(17,650)
(9,513)
(993)
(50,482)
Net interest income
78,106
198,577
146,837
53,378
48,684
20,209
545,791
Provision for credit losses - (benefit) expense
(9,966)
11,285
(53,263)
(136)
(535)
(874)
(53,489)
Non-interest income
19,174
51,513
11,930
202
3,008
4,959
90,786
Direct non-interest expenses
22,314
124,476
27,752
3,164
25,740
21,826
225,272
Segment income
$
84,932
$
114,329
$
184,278
$
50,552
$
26,487
$
4,216
$
464,794
Average earnings assets
$
2,555,476
$
2,508,777
$
3,855,854
$
7,535,752
$
2,120,144
$
438,024
$
19,014,027
75
The
following
table
presents
a
reconciliation
of
the
reportable
segment
financial
information
to
the
consolidated
totals
for
the
indicated periods:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(In thousands)
Net income:
Total income
for segments
$
147,438
$
155,667
$
454,291
$
464,794
Other operating expenses (1)
40,807
42,932
113,237
152,237
Income before income taxes
106,631
112,735
341,054
312,557
Income tax expense
32,028
37,057
109,156
105,171
Total consolidated
net income
$
74,603
$
75,678
$
231,898
$
207,386
Average assets:
Total average
earning assets for segments
$
18,311,378
$
20,047,397
$
18,830,683
$
19,014,027
Average non-earning
assets
835,740
1,024,385
873,911
1,105,223
Total consolidated
average assets
$
19,147,118
$
21,071,782
$
19,704,594
$
20,119,250
(1)
Expenses pertaining to corporate administrative functions
that support the operating segment, but are not specifically
attributable to or managed by any segment,
are not included in the reported financial results of the operating
segments. The unallocated corporate expenses include
certain general and administrative expenses
and related depreciation and amortization expenses.
76
NOTE 22 –
REGULATORY MATTERS, COMMITMENTS
AND CONTINGENCIES
The
Corporation
and
FirstBank
are
each
subject
to
various
regulatory
capital
requirements
imposed
by
the
U.S.
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.
As
of
September
30,
2022
and
December
31,
2021,
the
Corporation
and
FirstBank
exceeded
the
minimum
regulatory capital ratios
for capital adequacy purposes
and FirstBank exceeded the
minimum regulatory capital
ratios to be considered
a
well
capitalized
institution
under
the regulatory
framework
for
prompt
corrective
action.
As of
September
30,
2022,
management
does not believe that any condition has changed or event has occurred that would
have changed the institution’s status.
The Corporation and FirstBank
compute risk-weighted assets
using the standardized approach
required by the U.S.
Basel III capital
rules (“Basel III rules”).
The
Basel
III
rules
require
the
Corporation
to
maintain
an
additional
capital
conservation
buffer
of
2.5
%
on
certain
regulatory
capital
ratios
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.
As part
of its
response to
the impact
of COVID-19,
on March
31, 2020,
the federal
banking agencies
issued an
interim final
rule
that
provided
the
option
to
temporarily
delay
the
effects
of
CECL
on
regulatory
capital
for
two
years,
followed
by
a
three-year
transition period.
The interim final
rule provides
that, at the
election of
a qualified
banking organization,
the day 1
impact to retained
earnings plus
25
% of the change
in the ACL (as
defined in the final
rule) from January
1, 2020 to December
31, 2021 will be
delayed
for
two
years
and
phased-in
at
25
%
per
year
beginning
on
January
1,
2022
over
a
three-year
period,
resulting
in
a
total
transition
period
of
five
years.
Accordingly,
as
of
September
30,
2022,
the
capital
measures
of
the
Corporation
and
the
Bank
included
$
16.2
million associated
with the CECL
day one impact
to retained earnings
plus
25
% of the
increase in the
ACL (as defined
in the interim
final rule) from January 1,
2020 to December 31, 2021, and
$
48.6
million remains excluded to be phased-in
during the next two years.
The federal financial regulatory agencies may take other measures
affecting regulatory capital to address the COVID-19
pandemic and
related macroeconomic conditions, although the nature and impact of
such actions cannot be predicted at this time.
77
The regulatory
capital positions of
the Corporation
and FirstBank as
of September
30, 2022 and
December 31, 2021,
which reflect
the delay in the effect of CECL on regulatory capital, were as follows:
Regulatory Requirements
Actual
For Capital Adequacy
Purposes
To be Well
-Capitalized-
Thresholds
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of September 30, 2022
Total Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,364,266
19.38
%
$
976,183
8.0
%
N/A
N/A
FirstBank
$
2,326,477
19.07
%
$
975,810
8.0
%
$
1,219,762
10.0
%
CET1 Capital (to Risk-Weighted Assets)
First BanCorp.
$
2,033,421
16.66
%
$
549,103
4.5
%
N/A
N/A
FirstBank
$
2,073,940
17.00
%
$
548,893
4.5
%
$
792,845
6.5
%
Tier I Capital (to Risk-Weighted Assets)
First BanCorp.
$
2,033,421
16.66
%
$
732,137
6.0
%
N/A
N/A
FirstBank
$
2,173,940
17.82
%
$
731,857
6.0
%
$
975,810
8.0
%
Leverage ratio
First BanCorp.
$
2,033,421
10.36
%
$
785,379
4.0
%
N/A
N/A
FirstBank
$
2,173,940
11.08
%
$
785,053
4.0
%
$
981,316
5.0
%
As of December 31, 2021
Total Capital (to Risk-Weighted
Assets)
First BanCorp.
$
2,433,953
20.50
%
$
949,637
8.0
%
N/A
N/A
FirstBank
$
2,401,390
20.23
%
$
949,556
8.0
%
$
1,186,944
10.0
%
CET1 Capital (to Risk-Weighted Assets)
First BanCorp.
$
2,112,630
17.80
%
$
534,171
4.5
%
N/A
N/A
FirstBank
$
2,150,317
18.12
%
$
534,125
4.5
%
$
771,514
6.5
%
Tier I Capital (to Risk-Weighted Assets)
First BanCorp.
$
2,112,630
17.80
%
$
712,228
6.0
%
N/A
N/A
FirstBank
$
2,258,317
19.03
%
$
712,167
6.0
%
$
949,556
8.0
%
Leverage ratio
First BanCorp.
$
2,112,630
10.14
%
$
833,091
4.0
%
N/A
N/A
FirstBank
$
2,258,317
10.85
%
$
832,773
4.0
%
$
1,040,967
5.0
%
78
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
and
standby
letters
of
credits.
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 September
30, 2022,
commitments to
extend credit
amounted to
approximately $
1.9
billion, of
which $
1.0
billion relates
to credit
card loans. Commercial and financial standby letters of credit amounted
to approximately $
94.0
million.
As of September
30, 2022, First
BanCorp. and
its subsidiaries were
defendants in
various legal proceed
ings, claims, and
other loss
contingencies
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
proceedings, claims, and other
loss contingencies utilizing the
latest
information available.
For legal
proceedings, claims,
and other
loss contingencies
where it
is both
probable that
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
legal
proceedings,
claims,
and
other
loss
contingencies
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
proceedings,
claims,
and
other
loss
contingencies
is
inherently
uncertain,
based
on
information
currently
available,
management
believes
that
the
final
disposition
of
the
Corporation’s
legal
proceedings,
claims,
and
other
loss
contingencies,
to
the
extent
not
previously
provided
for,
will
not
have
a
material
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 material
loss in
excess
of
any
accrual)
will
be
incurred
in
connection
with
any
legal
contingencies,
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 September 30, 2022, no such disclosures were necessary.
79
NOTE 23 –
FIRST BANCORP.
(HOLDING
COMPANY ONLY) FINANCIAL
INFORMATION
The following
condensed
financial information
presents the
financial
position of First
BanCorp. at the
holding company
level only as
of
September
30, 2022 and
December 31,
2021, and the
results of
its operations
for the quarters
and nine-month
periods ended
September
30,
2022 and
2021:
Statements of Financial Condition
(Unaudited)
As of September 30,
As of December 31,
2022
2021
(In thousands)
Assets
Cash and due from banks
$
18,298
$
20,751
Other investment securities
735
285
Investment in First Bank Puerto Rico, at equity
1,408,435
2,247,289
Investment in First Bank Insurance Agency,
at equity
24,501
19,521
Investment in FBP Statutory Trust I
1,951
1,951
Investment in FBP Statutory Trust II
3,561
3,561
Dividend receivable
523
295
Other assets
155
71
Total assets
$
1,458,159
$
2,293,724
Liabilities and Stockholdersʼ Equity
Liabilities:
Other borrowings
$
183,762
$
183,762
Accounts payable and other liabilities
9,064
8,195
Total liabilities
192,826
191,957
Stockholdersʼ equity
1,265,333
2,101,767
Total liabilities and stockholdersʼ
equity
$
1,458,159
$
2,293,724
80
Statements of Income
(Unaudited)
Quarter Ended September
30,
Nine-Month Period Ended
September 30,
2022
2021
2022
2021
(In thousands)
Income:
Interest income on money market investments
$
19
$
13
$
33
$
37
Dividend income from banking subsidiaries
49,728
15,555
292,000
50,684
Dividend income from non-banking subsidiaries
-
30,000
-
30,000
Other income
68
39
159
116
Total income
49,815
45,607
292,192
80,837
Expense:
Other borrowings
2,273
1,277
5,304
3,856
Other operating expenses
422
358
1,295
1,494
Total expenses
2,695
1,635
6,599
5,350
Income before income taxes and equity in undistributed
earnings of subsidiaries
47,120
43,972
285,593
75,487
Income tax expense
735
556
2,634
2,344
Equity in undistributed earnings of subsidiaries
(distributions in excess of earnings)
28,218
32,262
(51,061)
134,243
Net income
$
74,603
$
75,678
$
231,898
$
207,386
Other comprehensive loss, net of tax
(270,937)
(18,740)
(778,694)
(89,173)
Comprehensive (loss) income
$
(196,334)
$
56,938
$
(546,796)
$
118,213
81
ITEM 2. MANAGEMENT’S
DISCUSSION
AND ANALYSIS OF
FINANCIAL
CONDITION
AND RESULTS OF
OPERATIONS (“MD&A”)
The
following
MD&A
relates
to
the
accompanying
unaudited
consolidated
financial
statements
of
First
BanCorp.
(the
“Corporation,” “we,” “us,”
“our,” or “First
BanCorp.”) and should be
read in conjunction with
such financial statements and
the notes
thereto and our
Annual Report on
Form 10-K for the
year ended December
31, 2021 (the “2021
Annual Report on
Form 10-K”). This
section
also
presents
certain
financial
measures
that
are
not
based
on
generally
accepted
accounting
principles
in
the United
States
(“GAAP”).
See
“Special
Items”
and
“Basis
of
Presentation”
below
for
information
about
why
non-GAAP
financial
measures
are
presented
and
the
reconciliation
of non
-GAAP
financial
measures
to
the
most
comparable
GAAP
financial
measures
for
which
the
reconciliation is not presented earlier.
EXECUTIVE SUMMARY
First BanCorp.
is a diversified
financial holding
company headquartered
in San Juan,
Puerto Rico offering
a full range
of financial
products to
consumers and
commercial customers
through various
subsidiaries. First
BanCorp.
is the
holding company
of FirstBank
Puerto
Rico
(“FirstBank”
or the
“Bank”)
and
FirstBank
Insurance
Agency.
Through
its wholly
-owned
subsidiaries,
the Corporation
operates
in
Puerto
Rico,
the
United
States
Virgin
Islands
(“USVI”),
the
British
Virgin
Islands
(“BVI”),
and
the
State
of
Florida,
concentrating on
commercial banking, residential
mortgage loans, finance
leases, credit cards,
personal loans, small
loans, auto loans,
and insurance agency activities.
Recent Developments
Natural Disaster Affecting First BanCorp. In the Third
Quarter Of 2022
On
September
17,
2022,
Hurricane
Fiona
made
landfall
in
the
southwestern
part
of
Puerto
Rico
as
a
Category
1
storm.
The
hurricane principally caused major flooding, property damage, power
outages and water service interruptions.
Disaster Response Plan
The Bank was able to
resume operations the day
after Hurricane Fiona made
landfall in Puerto Rico,
and two days after the
passing
of the
hurricane, the
Bank had
already reopened
approximately 75%
of its
branches while
headquarters and
main buildings
remained
fully operational
throughout the events.
By September 28,
2022, 98% of
its branches had
resumed operations.
Only one branch
in the
southern part of Puerto Rico, which was a leased premise, suffered
major damages and is expected to reopen in 2023.
In response
to this
event, the
Corporation established
a Natural
Disaster Deferral
or Extension
Program, with
a term
not to
extend
beyond
December
31,
2022,
for
residents
of
Puerto
Rico
that
were
directly
impacted
by
the
passing
of
the
hurricane
and
whose
accounts were no
more than 60 days
past due. This
program provides payment
deferral or term
extension on a
one payment basis,
not
to
exceed
three
payments,
to
retail
borrowers
(i.e.
borrowers
with
personal
loans,
auto
loans,
finance
leases,
credit
cards
and
residential
mortgage
loans)
that
contacted
the
Corporation
by
October
31,
2022
to
request
the
payment
extension
(for
additional
information about
this program, refer
to “Financial Condition
and Operating Data
Analysis – Early
Delinquency”). As of
October 31,
2022,
the
Corporation
has
entered
into
deferral
or
extension
payment
agreements
on
3,366
retail
loans
totaling
$63.6
million. In
addition,
the
Corporation
waived
any
late charges
assessed
as a
result
of the
delinquency
caused
by the
hurricane
for
all borrowers
affected
by
Hurricane
Fiona
from
September
16th
to
September
30th.
It
also
waived
withdrawal
fees
assessed
to
its
customers
at
automatic teller
machines (“ATMs
”) outside
its network
and ATM
withdrawal fees
for customers
of other
banking institutions
from
September 22
nd
to September 30th.
In
addition,
the
Corporation
established
the
following
disaster
relief
efforts
to
provide
assistance
to
the
communities
and
clients
affected by Hurricane Fiona:
●
Donations of $0.3 million to non-profit organizations
in the municipalities most affected by the Hurricane
●
Collection of essential supplies and monetary donations
FDIC Final Rule to Increase Deposit Insurance
Assessment Rate
On October
18, 2022,
the Federal
Deposit Insurance
Corporation (“FDIC”)
adopted a
final rule
to increase
the initial
base deposit
insurance
assessment
rate
schedules
uniformly
by
2
basis
points
beginning
in
the
first
quarterly
assessment
period
of
2023.
The
Corporation is awaiting final regulatory instructions to finalize the estimate.
82
Stock Repurchase Program
On April
27, 2022,
the Corporation
announced that
its Board
of Directors
approved a
stock repurchase
program, under
which the
Corporation may
repurchase up
to $350
million of
its outstanding
common stock,
expected to
be executed
over four
quarters, which
commenced
in
the
second
quarter
of
2022.
Repurchases
under
the
program
may
be
executed
through
open
market
purchases,
accelerated
share
repurchases,
and/or
privately
negotiated
transactions
or
plans,
including
under
plans
complying
with
Rule
10b5-1
under the Exchange Act.
The Corporation’s
stock repurchase program is
subject to various factors,
including the Corporation’s
capital
position, liquidity,
financial performance
and alternative uses
of capital, stock
trading price, and
general market conditions.
The stock
repurchase program
may be modified,
extended, suspended,
or terminated
at any time
at the Corporation’s
discretion.
As of
October
31,
2022,
the
Corporation
has
repurchased
approximately
14.1
million
shares
of
common
stock
for
a
total
purchase
price
of
$200
million under
the $350 million
stock repurchased
program. For the
nine-month period
ended September 30,
2022, First BanCorp.
has
repurchased approximately 15.9 million shares for a total purchase price
of $225.0 million under all stock repurchase programs.
LIBOR Transition
In March
2021, the
United Kingdom’s
Financial
Conduct Authority
(the “FCA”)
confirmed that
publication
of the
overnight and
one-month,
three-month, six-month
and twelve-month
U.S. Dollar
LIBOR settings
will cease
or become
no longer
representative of
the
market
the
rates
seek
to
measure
(i.e.,
non-representative)
immediately
after
June
30,
2023,
and
all
other
U.S.
Dollar
LIBOR
settings, including the one week and two-month U.S.
Dollar LIBOR settings, became non-representative after December 31,
2021. See
“Executive
Summary
—
Recent
Developments
—
LIBOR
Transition”
in
the
MD&A
of
the
Corporation’s
2021
Annual
Report
on
Form 10-K for additional information.
On March 15, 2022, President Biden
signed the Adjustable Interest Rate Act (the
“LIBOR Act”) into law.
The LIBOR Act provides
a nationwide framework
for transitioning legacy
contracts that either lack
or contain insufficient
contractual provisions
addressing the
permanent cessation
of LIBOR to
a benchmark interest
rate. Under the
LIBOR Act, references
to the most
common tenors of
LIBOR
(overnight,
one-month,
three-month,
six-month,
and
twelve-month
tenors)
in
these
contracts
will
be
replaced
as
a
matter
of
law,
without
the
need
to be
amended,
to
a
replacement
benchmark
interest
rate.
Any
Federal
Reserve-identified
replacement
benchmark
interest rate will be based
on the SOFR and will
include an appropriate “tenor
spread adjustment” to reflect historical
spreads between
LIBOR
and
SOFR.
The
statute
also
provides
a
“safe
harbor,”
under
which
a
party
that
has
discretion
to
select
a
replacement
for
LIBOR may choose
to adopt
the replacement
benchmark identified
by the Federal
Reserve. The
LIBOR Act preempts
state and
local
laws
(including
any
territory
or
possession)
that
limit
the
manner
interest
is
calculated
with
respect
to
the
replacement
benchmark
interest rate.
As
of
September
30,
2022,
the
Corporation’s
LIBOR
exposure
consisted
of
the
following:
(i)
$1.7
billion
of
variable
rate
commercial
and
construction
loans
(including
unused
commitments),
(ii)
$46.6
million
of
U.S.
agencies
debt
securities
and
private
label MBS held as
part of the
available-for-sale debt securities
portfolio, (iii) $124.1
million of Puerto
Rico municipalities bonds
held
as part
of the held-to-maturity
debt securities
portfolio, and
(iv) $183.8
million of
junior subordinated
debentures (other
borrowings).
Of
the
Corporation’s
total
LIBOR
exposure
as
of
September
30,
2022,
approximately
$359.4
million
does
not
contain
fallback
language
and
is
mostly
comprised
of
$124.1
million
of
Puerto
Rico
municipalities
bonds
held
as
part
of
the
held-to-maturity
debt
securities portfolio
and $183.8
million of
other borrowings.
The Corporation
expects to
follow the
provisions of
the LIBOR
Act for
the transition of any residual exposure after June 30, 2023.
The Corporation
continues to
execute its
LIBOR transition
workplan. Effective
December 31,
2021, the
Corporation discontinued
originations
that
use
U.S.
Dollar
LIBOR
as
a
reference
rate.
In
addition,
the
Corporation
continues
working
with
the
update
of
systems, processes, documentation, and models, with additional updates expected
through 2023.
83
CRITICAL ACCOUNTING POLICIES AND PRACTICES
The
accounting
principles
of
the
Corporation
and
the
methods
of
applying
these
principles
conform
to
GAAP.
In
preparing
the
consolidated
financial
statements,
management
is
required
to
make
estimates,
assumptions,
and
judgments
that
affect
the
amounts
recorded for assets,
liabilities and contingent
liabilities as of
the date of
the financial statements
and the reported
amounts of revenues
and
expenses during
the reporting
periods.
Except
for the
change
in accounting
method for
accounting of
treasury stock
from a
par
value
to
a
cost
method
as
described
in
Note
1-
Basis
of
Presentation
and
Significant
Accounting
Policies
of
the
accompanying
financial statements, the
Corporation’s
significant accounting
policies are
described in
Note 1
– Nature
of Business
and Summary
of
Significant Accounting Policies to the consolidated financial statements included
in the 2021 Annual Report on Form 10-K.
Not all significant
accounting policies require
management to make
difficult, subjective
or complex judgments.
The Corporation’s
critical accounting
estimates that
are particularly
susceptible
to significant
changes include,
but are
not limited
to, the
following:
(i)
the allowance
for credit
losses (“ACL”);
(ii) valuation
of financial
instruments; (iii)
acquired loans;
and (iv)
income taxes.
For more
information,
see
“Critical
Accounting
Policies
and
Practices”
in
the
MD&A
of
the
2021
Annual
Report
on
Form
10-K
and
“Risk
Management - Credit Risk
Management” below for
information on the ACL estimation
methodology.
Actual results could differ
from
estimates and assumptions if different outcomes or conditions prevail.
Overview of Results of Operations
First
BanCorp.'s
results
of
operations
depend
primarily
on
its
net
interest
income,
which
is
the
difference
between
the
interest
income
earned
on
its
interest-earning
assets,
including
investment
securities
and
loans,
and
the
interest
expense
incurred
on
its
interest-bearing
liabilities,
including
deposits
and
borrowings.
Net
interest
income
is
affected
by
various
factors,
including
the
following:
the interest
rate environment;
the volumes,
mix and
composition of
interest-earning
assets and
interest-bearing
liabilities;
and the re-pricing characteristics of these assets and liabilities. The
Corporation's results of operations also depend on the provision
for
credit
losses,
non-interest
expenses
(such
as
personnel,
occupancy,
the
deposit
insurance
premium
and
other
costs),
non-interest
income (mainly
service charges
and fees on
deposits, and
insurance income),
gains (losses) on
sales of investments,
gains (losses)
on
mortgage banking activities, and income taxes.
The Corporation
had net
income of
$74.6 million,
or $0.40
per diluted
common share,
for the
quarter ended
September 30,
2022,
compared
to
$75.7
million,
or
$0.36
per
diluted
common
share,
for
the
same
period
in
2021.
Other
relevant
selected
financial
indicators for the periods presented is included below:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2022
2021
2022
2021
Key Performance Indicators:
(1)
Return on Average
Assets
(2)
1.55
%
1.42
%
1.57
%
1.38
%
Return on Average
Total Equity
(3)
19.00
13.43
17.73
12.28
Efficiency Ratio
(4)
48.48
53.12
48.33
59.30
(1)
These financial ratios are used by Management to monitor the Corporation’s
financial performance and whether it is using its assets
efficiently.
(2)
Indicates how profitable the Corporation is in relation to its total assets
and is calculated by dividing net income on an annualized basis
by its average total assets.
(3)
Measures the Corporation’s performance
based on its average stockholders’ equity and is calculated
by dividing net income on an annualized basis by its average
total stockholders’
equity.
(4)
Measures how much the Corporation incurred to generate a
dollar of revenue and is calculated by dividing non-interest expenses
by total revenue.
84
The
key
drivers
of
the
Corporation’s
GAAP
financial
results
for
the
quarter
ended
September
30,
2022,
compared
to
the
same
period in 2021, include the following:
●
Net
interest income for
the quarter
ended September 30,
2022 was
$207.9 million,
compared to
$184.7 million
for
the
third
quarter of
2021. The
increase
was mainly
driven by
the positive
impact of
upward repricing
of variable-rate
commercial
loans and
interest-bearing
cash balances
maintained
at the FED, growth
in the consumer
loans and finance
leases portfolio
and a lower U.S.
agencies MBS premium amortization
expense, partially
offset by lower interest and realized deferred fees from SBA PPP loans
and higher
cost of
funds.
The net
interest margin
increased by
71 basis
points to
4.31%
for the
third quarter
of 2022,
compared
to 3.60%
for the third
quarter
of
2021.
The
increase
was
primarily
attributable
to
the
aforementioned
higher
interest
rate
environment
driving
an
increase
in
loans
and
investment
securities
yields,
as well
as a
decrease
in
long-term
debt
and
changes
in the
overall
asset
mix. See “Net Interest Income” below for additional information.
●
The provision for credit losses on loans, finance leases, unfunded loan commitments
and debt securities for the third
quarter of
2022 was an
expense of
$15.8 million,
compared
to a net
benefit of
$12.1 million
for the third
quarter of
2021. The
increase
in the
overall provision was driven in part by the increase in
the provision for the consumer loans
and finance leases portfolio for the
third quarter of 2022 which reflects
an overall increase in the size of this portfolio,
an increase in charge-off levels associated
to
the overall
portfolio
growth,
and a deterioration
in the long-term
outlook
of certain
macroeconomic
variables.
Net
charge-offs
totaled
$8.6
million
for
the
third
quarter
of
2022,
or
0.31%
of
average
loans
on
an
annualized
basis,
compared to $27.9
million, or 0.99%
of average loans
for the same period
in 2021. Total
net charge-offs
for the third quarter
of 2021
included $23.1
million in
net charge
-offs related
to a
bulk sale
of $52.5
million of
residential mortgage
nonaccrual
loans and
related servicing
advance receivables.
Adjusted for
those net
charge-offs,
total net
charge-offs
in the
third quarter
of 2021 were $4.9
million, or an annualized
0.17% of average loans. Excluding
the aforementioned bulk sale,
net charge-offs
increased by
$3.7 million
mainly in
consumer loans
driven by
loan portfolio
growth. See
“Provision for
Credit Losses”
and
“Risk
Management”
below
for
analyses
of
the
allowance
for
credit
losses
(“ACL”)
and
non-performing
assets
and
related
ratios.
●
Non-interest income
amounted to
$29.7 million
for the third
quarter of
2022, compared
to $29.9 million
for the same
period
in 2021.
The $0.2
million decrease
was primarily
driven by:
(i) a
$2.7 million
decrease in
revenues from
mortgage banking
activities, primarily
related to a
lower volume
of sales; partially
offset by
(ii) a $1.1
million increase
in services
charges and
fees on deposit accounts and
(iii) a $1.1 million increase
in revenues from other non
-interest income, mainly driven
by a $0.8
million
benefit
related
to
income
tax
credits
purchased
in
the
third
quarter
of
2022.
See
“Non-Interest
Income”
below
for
additional information.
●
Non-interest expenses
for the
third quarter
of 2022
were $115.2
million, compared
to $114.0
million for
the same
period in
2021.
Non-interest expenses
for the
third quarter
of 2021
included $2.3
million of
merger and
restructuring costs
associated
with
the
acquisition
and
integration
of
Banco
Santander
Puerto
Rico
(“BSPR”)
and
$0.6
million
of
COVID-19
pandemic-
related
expenses,
primarily
related
to
cleaning
and
security
protocols.
Adjusted
for
the
above-mentioned
costs,
total
non-
interest
expenses
for
the
third quarter
of
2022
increased
by $4.1
million,
compared
to
the same
period
in 2021,
reflecting,
among
other
things,
increases
in
employees’
compensation
and
benefits
expenses,
business
promotion
expenses,
and
a
decrease in net gains on OREO operations.
The results for the third quarter of
2022 included $0.4 million in
hurricane-related
expenses. The efficiency
ratio for the third quarter of
2022 was 48.48%, as compared
to 53.12% for the third quarter
of 2021.
See “Non-Interest Expenses” and “Special Items”
below for additional information.
●
For the
third quarter
of 2022,
the Corporation
recorded an
income tax
expense of
$32.0 million,
compared to
$37.1 million
for the
same period
in 2021. The
variance was
primarily related
to lower
pre-tax income
and a
lower estimated
effective tax
rate
as
a
result
of
a
higher
proportion
of
exempt
to
taxable
income
when
compared
to
the
same
period
in
2021.
As
of
September
30,
2022,
the
Corporation’s
net
deferred
tax
asset amounted
to
$166.1
million
(net
of
a
valuation
allowance
of
$195.8
million,
including
a
valuation
allowance
of
$158.7
million
of
the
Corporation’s
banking
subsidiary,
FirstBank),
compared to
a net
deferred tax
asset of
$208.4
million as
of December
31, 2021.
See “Income
Taxes”
below and
Note 17
-
Income Taxes above
for additional information.
85
●
As
of
September
30,
2022,
total
assets
were
$18.4
billion,
down
$2.3
billion
from
December
31,
2021.
The
decrease
was
primarily
related
to a
$2.0
billion
decrease
in
cash and
cash
equivalents
mainly
attributable
to
the overall
decrease
in total
deposits, the
repurchase of
approximately 15.9
million shares
of common
stock for
a total purchase
price of
$225.0 million,
the repayment at maturity of $200 million in FHLB advances and a $100
million repurchase agreement. These variances were
partially offset
by a $215.0
million increase in
total loans. See
“Financial Condition and
Operating Data Analysis”
below for
additional information.
●
As of September
30, 2022, total
liabilities were $17.2
billion, down $1.5
billion from December
31, 2021. The
decrease was
mainly driven by
a $1.2 billion
decrease in total
deposits, the repayment
at maturity of
both $200 million
in FHLB advances
and a $100
million repurchase agreement
during the
first nine months
of 2022. See
“Risk Management
– Liquidity Risk
and
Capital Adequacy” below for additional information about the Corporation’s
funding sources.
●
The Bank’s
primary
sources of
funding are
consumer and
commercial
core deposits.
As of
September
30, 2022,
these core
deposits funded
90% of
total assets.
Other sources
of liquidity
include non-core
deposits, such
as brokered
CDs, as
well as
repurchase
agreements
and
FHLB
advances.
The
Bank
maintains
borrowing
capacity
at
the
FHLB
and
the
FED
Discount
Window.
Although currently
not in
use, as of
September 30,
2022, the
Corporation had
approximately $1.2
billion available
for funding under
the FED’s
Borrower-in-Custody (“BIC”) Program
and $1.3 billion fully
available for additional
borrowing
capacity on FHLB lines of credit.
●
As
of
September
30,
2022,
the
Corporation’s
stockholders’
equity
was
$1.3
billion,
a
decrease
of
$836.4
million
from
December 31, 2021. The decline was driven by a $778.7
million decrease in the fair value of available-for-sale
debt securities
recorded as part
of accumulated other
comprehensive loss in
the consolidated statements
of financial condition,
as a result of
changes in market
interest rates. The decrease
in total stockholders’
equity also reflects the
repurchase of approximately
15.9
million
shares of
common
stock for
a total
purchase
price of
approximately
$225.0
million
and $65.9
million
in dividends
declared
to common
stock shareholders
in the
first nine
months
of 2022.
These variances
were partially
offset
by earnings
generated
in the
first nine
months of
2022. The
Corporation’s
common
equity tier
1 capital,
tier 1
capital, total
capital and
leverage ratios under
the Basel III rules
were 16.66%, 16.66%, 19.38%,
and 10.36%, respectively,
as of September 30,
2022,
compared
to common
equity tier
1 capital,
tier 1
capital, total
capital and
leverage
ratios of
17.80%,
17.80%,
20.50%, and
10.14%, respectively,
as of December 31, 2021. See “Risk Management – Capital” below for additional
information.
●
Total
loan
production,
including
purchases,
refinancings,
renewals,
and
draws
from
existing
revolving
and
non-revolving
commitments,
but
excluding
the
utilization
activity
on
outstanding
credit
cards,
increased
by
$30.3
million
to
$1.1
billion
when compared to
the same period
in 2021. The
increase consisted of
a $40.7 million
increase in consumer
loan originations
and a
$32.9 million
increase in commercial
and construction
loan originations,
partially offset by a
$43.3 million decrease in
residential mortgage loan originations.
●
Total
non-performing assets
were $143.3
million as
of September
30, 2022,
a decrease
of $14.8
million from
December 31,
2021.
The decrease
was driven
by (i)
a $12.1
million reduction
in nonaccrual
residential mortgage
loans,
mostly driven
by
loans restored to accrual
status, collections, foreclosures,
and charge-offs recorded
during the first nine months
of 2022; (ii) a
$3.4 million
decrease in nonaccrual
commercial and
construction loans;
and (iii) a
$1.6 million decrease
in OREO and
other
assets.
These
variances
were
partially
offset
by
an
increase
of
$2.3
million
in
nonaccrual
consumer
loans.
See
“Risk
Management – Non-Accruing and Non-Performing
Assets” below for additional
information.
●
Adversely
classified
commercial
and
construction
loans
decreased
by
$23.9
million
to $153.4
million
as of
September
30,
2022, compared to
December 31, 2021.
The decrease was mostly
driven by $11.4
million in payoffs
of loans associated
with
three commercial
and industrial
relationships in
the Puerto
Rico region,
each in
excess of
$1 million,
and the upgrade
in the
credit
risk
classification
of
loans
totaling
$6.0
million
related
to
a
commercial
and
industrial
relationship
in
the
Florida
region. The
Corporation monitors its
loan portfolio
to identify potential
at-risk segments, payment
performance, the need
for
permanent modifications,
and the
performance of
different sectors
of the
economy in
all the
markets where
the Corporation
operates.
86
Special Items
The financial
results for
the third
quarter and
first nine
months of
2022 did
not include
any significant
special item
that management
believes
is not
reflective
of
core
operating
performance,
is not
expected
to
reoccur
with any
regularity
or
may
reoccur
at
uncertain
times and in uncertain
amounts (the “Special Items”).
The Corporation’s
financial results for the
third quarter and first
nine months of
2021 included the following Special Items:
Quarter and Nine-Month Period Ended September 30, 2021
●
Merger and restructuring
costs of $2.3 million ($1.4 million
after-tax) and $24.6 million
($15.4 million after-tax) for
the third
quarter
of
2021
and
nine-month
period
ended
September
30,
2021,
respectively,
in
connection
with
the
BSPR
acquisition
integration
process
and
related
restructuring
initiatives.
Merger
and
restructuring
costs
in
the
third
quarter
of
2021
were
primarily
related
to systems
conversions
completed
early in
the third
quarter
and other
integration
related
efforts.
The first
nine months
of 2021
included approximately
$6.5 million
related to a
Voluntary
Employee Separation
Program (the
“VSP”)
as well
as involuntary
separation actions
implemented in
the Puerto
Rico region.
In addition,
merger and
restructuring costs
in the
first nine
months
of 2021
included
accelerated
depreciation
charges
related
to planned
closures and
consolidation
of
branches in accordance with the Corporation’s
integration and restructuring plan.
●
Costs of
$0.6
million
($0.4
million after-tax)
and $3.0
million
($1.8
million
after-tax)
for the
third
quarter
and nine
-month
period
ended
September
30, 2021,
respectively,
related
to COVID-19
pandemic
response
efforts,
primarily
costs related
to
additional cleaning, safety materials, and security measures.
The following table shows
the net income reported
for the quarter and
nine-month period ended
September 30, 2022 and
reconciles
for
the
quarter
and
nine-month
period
ended
September
30,
2021
the
reported
net
income
to
adjusted
net
income,
a
non-GAAP
financial measure that excludes the Special Items identified above:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2022
2021
2022
2021
(In thousands)
Net income, as reported (GAAP)
$
74,603
$
75,678
$
231,898
$
207,386
Adjustments:
Merger and restructuring costs
-
2,268
-
24,582
COVID-19 pandemic-related expenses
-
640
-
2,954
Income tax impact of adjustments
(1)
-
(1,091)
-
(10,327)
Adjusted net income (Non-GAAP)
$
74,603
$
77,495
$
231,898
$
224,595
(1)
See "Special Items" above for the tax impact related to the
above adjustments that was based on the Puerto Rico statutory
tax rate of 37.5%.
87
Adjusted non-interest
expenses – The
following table reconciles
for the third
quarter and first
nine months of
2021 the non-interest
expenses to adjusted non-interest expenses, which is a non-GAAP financial
measure that excludes the relevant Special Items identified
above:
(In thousands)
Quarter Ended September 30, 2021
Non-Interest
Expenses (GAAP)
Merger and
Restructuring
Costs
COVID 19
Pandemic-Related
Expenses
Adjusted (Non-
GAAP)
Non-interest expenses
$
114,036
$
2,268
$
640
$
111,128
Employees' compensation and benefits
50,220
-
10
50,210
Occupancy and equipment
23,306
-
576
22,730
Business promotion
3,370
-
-
3,370
Professional service fees
13,554
-
-
13,554
Taxes, other than income taxes
5,238
-
49
5,189
FDIC deposit insurance
1,381
-
-
1,381
Net gain on OREO and OREO expenses
(2,288)
-
-
(2,288)
Credit and debit card processing expenses
5,573
-
-
5,573
Communications
2,250
-
-
2,250
Merger and restructuring costs
2,268
2,268
-
-
Other non-interest expenses
9,164
-
5
9,159
(In thousands)
Nine-Month Period Ended September 30, 2021
Non-Interest
Expenses (GAAP)
Merger and
Restructuring
Costs
COVID 19
Pandemic-Related
Expenses
Adjusted (Non-
GAAP)
Non-interest expenses
$
377,509
$
24,582
$
2,954
$
349,973
Employees' compensation and benefits
150,776
-
47
150,729
Occupancy and equipment
71,664
-
2,607
69,057
Business promotion
9,565
-
22
9,543
Professional service fees
48,019
-
-
48,019
Taxes, other than income taxes
17,013
-
271
16,742
FDIC deposit insurance
5,291
-
-
5,291
Net gain on OREO and OREO expenses
(529)
-
-
(529)
Credit and debit card processing expenses
16,646
-
-
16,646
Communications
7,119
-
-
7,119
Merger and restructuring costs
24,582
24,582
-
-
Other non-interest expenses
27,363
-
7
27,356
Management believes
that
the
presentation of
adjusted net
income,
adjusted non-interest
expenses and
adjustments to
the
various
components of non-interest expenses enhances the
ability of analysts and
investors to analyze trends
in the
Corporation’s business and
understand the
performance
of the Corporation.
In addition,
the Corporation
may utilize these
non-GAAP financial
measures as a guide
in
its budgeting
and long-term
planning
process.
Any analysis
of these
non-GAAP
financial
measures
should be
used only
in conjunction
with
results
presented
in accordance
with GAAP.
88
RESULTS OF OPERATIONS
Net Interest
Income
Net
interest income is
the excess
of
interest earned by
First BanCorp. on
its interest-earning assets over
the interest
incurred on
its
interest-bearing
liabilities.
First BanCorp.’s
net interest
income is subject
to interest
rate risk due
to the repricing
and maturity
mismatch of
the Corporation’s assets and liabilities.
Net
interest income for the quarter and nine-month
period ended September 30, 2022 was $207.9
million and $589.7 million, respectively, compared to $184.7 million and $545.8 million for
the comparable periods in 2021.
On a
tax-
equivalent basis and excluding
the changes in the fair value of derivative instruments,
net interest income for the quarter and nine-month
period ended September 30, 2022 was $217.0
million and $615.4 million, respectively, compared to $191.6 million and $563.3 million,
respectively,
for the
comparable
periods
in 2021.
The
following
tables
include a
detailed
analysis
of net
interest income
for
the
indicated periods.
Part I
presents
average
volumes
(based
on
the
average
daily
balance)
and
rates
on
an
adjusted
tax-equivalent
basis
and
Part II
presents,
also
on
an
adjusted
tax-
equivalent basis,
the extent
to which
changes in
interest rates
and changes
in the
volume of
interest-related assets
and liabilities
have
affected
the Corporation’s
net interest
income. For
each category
of interest-earning
assets and
interest-bearing
liabilities, the
tables
provide
information
on
changes
in
(i)
volume
(changes
in
volume
multiplied
by
prior
period
rates),
and
(ii) rate
(changes
in
rate
multiplied by
prior period
volumes). The
Corporation has
allocated rate-volume
variances (changes
in rate
multiplied by
changes in
volume) to either the changes in volume or the changes in rate based upon the
effect of each factor on the combined totals.
Net interest
income on
an adjusted
tax-equivalent
basis and
excluding the
change in
the fair
value of
derivative
instruments is
a
non-GAAP
financial
measure.
For
the
definition
of
this
non-GAAP
financial
measure,
refer
to
the
discussion
in
“Basis
of
Presentation” below.
Part I
Average Volume
Interest income
(1)
/ expense
Average Rate
(1)
Quarter ended September 30,
2022
2021
2022
2021
2022
2021
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
882,759
$
2,514,882
$
4,654
$
968
2.09
%
0.15
%
Government obligations
(2)
2,912,130
2,325,835
10,325
7,044
1.41
%
1.20
%
MBS
4,113,870
4,255,171
22,028
17,091
2.12
%
1.59
%
FHLB stock
16,677
27,080
292
327
6.95
%
4.79
%
Other investments
13,094
11,153
45
30
1.36
%
1.07
%
Total investments
(3)
7,938,530
9,134,121
37,344
25,460
1.87
%
1.11
%
Residential mortgage loans
2,855,927
3,193,918
39,874
43,901
5.54
%
5.45
%
Construction loans
118,794
171,088
1,831
2,178
6.12
%
5.05
%
Commercial and Industrial ("C&I")
and Commercial mortgage loans
5,085,257
5,104,362
73,518
64,835
5.74
%
5.04
%
Finance leases
647,586
528,893
11,751
9,945
7.20
%
7.46
%
Consumer loans
2,511,300
2,225,665
67,504
60,713
10.66
%
10.82
%
Total loans
(4) (5)
11,218,864
11,223,926
194,478
181,572
6.88
%
6.42
%
Total interest-earning assets
$
19,157,394
$
20,358,047
$
231,822
$
207,032
4.80
%
4.03
%
Interest-bearing liabilities:
Brokered certificates of deposit (“CDs”)
$
63,524
$
126,775
$
333
$
664
2.08
%
2.08
%
Other interest-bearing deposits
10,481,863
10,788,020
9,645
9,018
0.37
%
0.33
%
Other borrowed funds
383,762
483,762
4,266
3,848
4.41
%
3.16
%
FHLB advances
97,826
320,000
529
1,899
2.15
%
2.35
%
Total interest-bearing liabilities
$
11,026,975
$
11,718,557
$
14,773
$
15,429
0.53
%
0.52
%
Net interest income on a tax equivalent
basis and excluding valuations
$
217,049
$
191,603
Interest rate spread
4.27
%
3.51
%
Net interest margin
4.49
%
3.73
%
89
Average Volume
Interest income
(1)
/ expense
Average Rate
(1)
Nine-Month Period Ended September
30,
2022
2021
2022
2021
2022
2021
(Dollars in thousands)
Interest-earning assets:
Money market and other short-term investments
$
1,412,802
$
1,898,678
$
8,347
$
1,750
0.79
%
0.12
%
Government obligations
(2)
2,857,462
1,890,437
28,647
19,627
1.34
%
1.39
%
MBS
4,079,403
4,029,794
64,252
41,173
2.11
%
1.36
%
FHLB stock
19,788
28,917
830
1,094
5.61
%
5.06
%
Other investments
12,496
9,813
78
45
0.83
%
0.61
%
Total investments
(3)
8,381,951
7,857,639
102,154
63,689
1.63
%
1.08
%
Residential mortgage loans
2,902,542
3,347,186
121,134
135,114
5.58
%
5.40
%
Construction loans
119,214
186,998
5,123
10,530
5.75
%
7.53
%
C&I and Commercial mortgage loans
5,081,049
5,295,346
200,022
198,131
5.26
%
5.00
%
Finance leases
617,946
504,379
34,073
28,137
7.37
%
7.46
%
Consumer loans
2,422,337
2,181,738
192,379
178,195
10.62
%
10.92
%
Total loans
(4)(5)
11,143,088
11,515,647
552,731
550,107
6.63
%
6.39
%
Total interest-earning assets
$
19,525,039
$
19,373,286
$
654,885
$
613,796
4.48
%
4.24
%
Interest-bearing liabilities:
Brokered CDs
$
77,239
$
153,984
$
1,214
$
2,421
2.10
%
2.10
%
Other interest-bearing deposits
10,627,862
10,874,337
24,110
30,385
0.30
%
0.37
%
Other borrowed funds
397,315
483,762
11,451
11,248
3.85
%
3.11
%
FHLB advances
165,568
371,685
2,667
6,428
2.15
%
2.31
%
Total interest-bearing liabilities
$
11,267,984
$
11,883,768
$
39,442
$
50,482
0.47
%
0.57
%
Net interest income on a tax equivalent
basis and excluding valuations
$
615,443
$
563,314
Interest rate spread
4.01
%
3.67
%
Net interest margin
4.21
%
3.89
%
(1)
On an adjusted tax-equivalent basis. The Corporation estimated the
adjusted tax-equivalent yield by dividing the interest rate
spread on exempt assets by 1 less the Puerto Rico statutory tax
rate of 37.5% and adding to it the cost of interest-bearing liabilities.
The tax-equivalent adjustment recognizes the income tax savings
when comparing taxable and tax-exempt assets.
Management believes that it is a standard practice in the banking industry
to present net interest income, interest rate spread and net
interest margin on a fully tax-equivalent basis.
Therefore, management believes these measures provide useful information
to investors by allowing them to make peer comparisons.
The Corporation excludes changes in the fair value of
derivatives from interest income and interest expense
because the changes in valuation do not affect interest received
or paid.
(2)
Government obligations include debt issued by government-sponsored
agencies.
(3)
Unrealized gains and losses on available-for-sale debt securities
are excluded from the average volumes.
(4)
Average loan balances include
the average of nonaccrual loans.
(5)
Interest income on loans includes $2.9 million and $2.7 million for
the quarters ended September 30, 2022 and 2021, respectively,
and $8.5 million and $7.8 million for the nine-month
periods ended September 30, 2022 and 2021, respectively,
of income from prepayment penalties and late fees related to
the Corporation’s loan portfolio.
90
Part II
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2022 compared to 2021
2022 compared to 2021
Increase (decrease)
Increase (decrease)
Due to:
Due to:
(In thousands)
Volume
Rate
Total
Volume
Rate
Total
Interest income on interest-earning assets:
Money market and other short-term investments
$
(4,564)
$
8,250
$
3,686
$
(1,673)
$
8,270
$
6,597
Government obligations
1,956
1,325
3,281
9,882
(862)
9,020
MBS
(637)
5,574
4,937
513
22,566
23,079
FHLB stock
(153)
118
(35)
(365)
101
(264)
Other investments
6
9
15
14
19
33
Total investments
(3,392)
15,276
11,884
8,371
30,094
38,465
Residential mortgage loans
(4,661)
634
(4,027)
(18,284)
4,304
(13,980)
Construction loans
(731)
384
(347)
(3,270)
(2,137)
(5,407)
C&I and Commercial mortgage loans
(222)
8,905
8,683
(17,445)
19,336
1,891
Finance leases
2,232
(426)
1,806
6,308
(372)
5,936
Consumer loans
7,699
(908)
6,791
19,413
(5,229)
14,184
Total loans
4,317
8,589
12,906
(13,278)
15,902
2,624
Total interest income
925
23,865
24,790
(4,907)
45,996
41,089
Interest expense on interest-bearing liabilities:
Brokered CDs
(330)
(1)
(331)
(1,206)
(1)
(1,207)
Non-brokered interest-bearing deposits
(259)
886
627
(675)
(5,600)
(6,275)
Other borrowed funds
(944)
1,362
418
(2,257)
2,460
203
FHLB advances
(1,215)
(155)
(1,370)
(3,347)
(414)
(3,761)
Total interest expense
(2,748)
2,092
(656)
(7,485)
(3,555)
(11,040)
Change in net interest income
$
3,673
$
21,773
$
25,446
$
2,578
$
49,551
$
52,129
Portions
of
the
Corporation’s
interest-earning
assets,
mostly
investments
in
obligations
of
some
U.S.
government
agencies
and
U.S.
government-sponsored
entities
(“GSEs”),
generate
interest
that
is
exempt
from
income
tax,
principally
in
Puerto
Rico.
Also,
interest
and
gains
on
sales
of
investments
held
by
the
Corporation’s
international
banking
entities
(“IBEs”)
are
tax-exempt
under
Puerto Rico
tax law
(see Note
17 –
Income
Taxes,
in the
Corporation’s
unaudited
consolidated financial
statements for
the quarter
ended September
30, 2022
for additional
information). Management
believes that
the presentation
of interest
income on
an adjusted
tax-equivalent basis facilitates the
comparison of all interest data related
to these assets. The Corporation
estimated the tax equivalent
yield by
dividing the
interest rate
spread on
exempt assets
by 1
less the
Puerto Rico
statutory
tax rate
(37.5%) and
adding to
it the
average cost
of interest-bearing
liabilities. The
computation considers
the interest
expense disallowance
required by
Puerto Rico
tax
law.
Management
believes
that
the
presentation
of
net
interest
income
excluding
the
effects
of
the
changes
in
the
fair
value
of
the
derivative
instruments
(“valuations”)
provides
additional
information
about
the
Corporation’s
net
interest
income
and
facilitates
comparability
and
analysis
from
period
to
period.
The
changes
in
the
fair
value
of
the
derivative
instruments
have
no
effect
on
interest due on interest-bearing liabilities or interest earned on interest-earning
assets.
91
The following
table reconciles
net interest
income in
accordance with
GAAP to
net interest
income, excluding
valuations, and
net
interest
income
on
an
adjusted
tax-equivalent
basis
for
the
indicated
periods.
The
table
also
reconciles
net
interest
spread
and
net
interest margin on a GAAP basis to these items excluding valuations, and
on an adjusted tax-equivalent basis:
Quarter Ended
Nine-Month Period Ended
(Dollars in thousands)
September 30, 2022
September 30, 2021
September 30, 2022
September 30, 2021
Interest Income - GAAP
$
222,683
$
200,172
$
629,162
$
596,273
Unrealized gain on derivative instruments
(11)
(4)
(35)
(22)
Interest income excluding valuations
222,672
200,168
629,127
596,251
Tax-equivalent adjustment
9,150
6,864
25,758
17,545
Interest income on a tax-equivalent basis and excluding valuations
$
231,822
$
207,032
$
654,885
$
613,796
Interest Expense - GAAP
$
14,773
$
15,429
$
39,442
$
50,482
Net interest income - GAAP
$
207,910
$
184,743
$
589,720
$
545,791
Net interest income excluding valuations
$
207,899
$
184,739
$
589,685
$
545,769
Net interest income on a tax-equivalent basis and excluding
valuations
$
217,049
$
191,603
$
615,443
$
563,314
Average Balances
Loans and leases
$
11,218,864
$
11,223,926
$
11,143,088
$
11,515,647
Total securities, other short-term investments and interest-bearing
cash balances
7,938,530
9,134,121
8,381,951
7,857,639
Average Interest-Earning Assets
$
19,157,394
$
20,358,047
$
19,525,039
$
19,373,286
Average Interest-Bearing Liabilities
$
11,026,975
$
11,718,557
$
11,267,984
$
11,883,768
Average Yield/Rate
Average yield on interest-earning assets - GAAP
4.61
%
3.90
%
4.31
%
4.12
%
Average rate on interest-bearing liabilities - GAAP
0.53
%
0.52
%
0.47
%
0.57
%
Net interest spread - GAAP
4.08
%
3.38
%
3.84
%
3.55
%
Net interest margin - GAAP
4.31
%
3.60
%
4.04
%
3.77
%
Average yield on interest-earning assets excluding valuations
4.61
%
3.90
%
4.31
%
4.11
%
Average rate on interest-bearing liabilities
0.53
%
0.52
%
0.47
%
0.57
%
Net interest spread excluding valuations
4.08
%
3.38
%
3.84
%
3.54
%
Net interest margin excluding valuations
4.31
%
3.60
%
4.04
%
3.77
%
Average yield on interest-earning assets on a tax-equivalent basis
and excluding valuations
4.80
%
4.03
%
4.48
%
4.24
%
Average rate on interest-bearing liabilities
0.53
%
0.52
%
0.47
%
0.57
%
Net interest spread on a tax-equivalent basis and excluding
valuations
4.27
%
3.51
%
4.01
%
3.67
%
Net interest margin on a tax-equivalent basis and excluding valuations
4.49
%
3.73
%
4.21
%
3.89
%
On
a
GAAP
basis,
for
the
quarter
ended
September
30,
2022,
net
interest
income
amounted
to
$207.9
million,
a
$23.2
million
increase
compared
to
net
interest
income
of
$184.7
million
for
the
same
period
in
2021.
The
increase
in
net
interest
income
was
primarily due to:
●
An $8.6 million
increase in interest income
on consumer loans and
finance leases, mainly due
to a $404.3 million
increase in
the average balance of this portfolio, mostly related to growth in the auto loans
and finance leases portfolios.
●
An
$8.3
million
increase
in
interest
income
on
commercial
and
construction
loans,
mainly
due
to:
(i)
the
effect
of
higher
market interest
rates in the
repricing of variable-rate
commercial and construction
loans, (ii) an
increase of $160.0
million in
the
average
balance
of
this
portfolio,
excluding
SBA
PPP
loans,
which
resulted
in
an
increase
in
interest
income
of
approximately
$1.8 million,
(iii) partially
offset
by a
$4.4 million
decrease
in interest
and realized
deferred fees
from SBA
PPP loans.
As of September
30, 2022, the interest
rate on approximately
42% of the Corporation’s
commercial and construction
loans is
based upon LIBOR, SOFR
and other short
-term indexes and
16% is based upon
the Prime rate index.
For the third quarter
of
2022, the average
one-month LIBOR increased
239 basis points, the
average three-month LIBOR increased
288 basis points,
the average
Prime rate
increased 211
basis points,
and the
average three-month
SOFR increased
278 basis
points, compared
to the average rates for such indexes during the third quarter of 2021.
●
A
$6.0
million
increase
in
interest
income
on
investment
securities,
mainly
related
to
a
$3.7
million
increase
in
interest
income
recognized
on
U.S.
agencies
MBS
mainly
due
to a
decrease
in
premium
amortization
expense
associated
to
lower
92
prepayments,
and an
increase of
approximately $2.4
million in
interest income
related to
the $577.8
million increase
in the
average balance of other
investment securities, primarily U.S.
agencies debentures, and to
a lesser extent the effects
of higher
reinvestment
yields,
and
the
upward
repricing
of
Puerto
Rico
municipal
bonds
held
as
part
of
the
held-to-maturity
debt
securities portfolio.
●
A
$3.7
million
increase
in
interest
income
from
interest-bearing
cash
balances,
which
consisted
primarily
of
deposits
maintained at the
Federal Reserve Bank,
with an average yield
of 2.09% during
the third quarter
of 2022 compared
to 0.15%
in the
third quarter
of 2021,
mainly attributable
to increases
in the
federal funds
target rate,
partially offset
by the
effects of
the $1.6 billion decrease in the average balance.
●
A $0.7 million decrease in total interest expense, including:
-
A
$1.4
million
decrease
in
interest
expense
on
FHLB
advances,
associated
with
the
$320
million
repayment
of
FHLB advances that matured over the last 12 months,
and
-
A $0.3
million
decrease
in
interest expense
on brokered
CDs, primarily
related
to a
$63.3
million
decrease
in
the
average balance.
Partially offset by:
-
A
$0.6
million
net
increase
in
interest
expense
on
non-brokered
interest-bearing
deposits,
mainly
associated
with
higher average rates
paid, partially offset
by the effects
of a $306.2
million reduction in
the average balance
of such
deposits;
and
-
A
$0.4
million
increase
in
interest
expense
on
other
borrowed
funds,
driven
by
the
upward
repricing
of
junior
subordinated
debentures
tied
to
the
increase
in
the
three-month
LIBOR
index,
partially
offset
by
the
effects
associated with the repayment of a $100 million repurchase agreement
that matured in the first quarter of 2022.
The aforementioned benefits in net interest income were partially offset
by:
●
A $4.1
million decrease
in interest
income on
residential mortgage
loans, primarily
related to
a $338.0
million reduction
in
the average balance of this portfolio.
93
For
the nine-month
period ended
September
30,
2022,
net interest
income increased $43.9
million to
$589.7 million, compared
to
$545.8 million
for the same
period in
2021.
The increase
in net
interest
income was
primarily
due to:
●
A $23.3
million
increase
in
interest
income
on
investment
securities,
mainly
related
to
a
$16.7
million
increase
in
interest
income
recognized
on
U.S.
agencies
MBS
mainly
due
to a
decrease
in
premium
amortization
expense
associated
to
lower
prepayments,
and an
increase of
approximately $6.6
million in
interest income
related to
the $960.6
million increase
in the
average balance of other investment securities, primarily U.S. agencies
debentures.
●
A $20.1 million
increase in interest income
on consumer loans and
finance leases, mainly
due to a $354.2
million increase in
the average
balance of
this portfolio,
mostly related
to growth
in the
auto loans
and finance
leases portfolios,
partially offset
by lower average yields.
●
An
$11.0
million
decrease
in
total
interest
expense,
primarily
due
to:
(i)
a
$6.3
million
decrease
in
interest
expense
on
interest-bearing
deposits,
excluding
brokered
CDs,
primarily
reflecting
the
effect
of
time
deposits
that
matured
and
were
renewed at lower rates and, to some extent, lower rates paid on
savings and interest bearing checking accounts during the first
half
of
2022;
(ii)
a
$3.8
million
decrease
in
interest
expense
on
FHLB
advances,
primarily
related
to
a
$206.1
million
decrease
in the
average balance
of FHLB
advances;
and (iii)
a $1.2
million
decrease
in
interest expense
on brokered
CDs,
primarily related to a $76.7 million decrease in the average balance.
●
A
$6.6
million
increase
in
interest
income
from
interest-bearing
cash
balances,
which
consisted
primarily
of
deposits
maintained
at the
Federal Reserve
Bank, with
an average
yield of
0.79% during
the first
nine months
of 2022
compared to
0.12%
for
the
same
period
of
2021,
mainly
attributable
to increases
in
the
federal
funds
target
rate,
partially
offset
by
the
effects associated with the $485.9 million decrease in the
average balance of interest-bearing cash balances.
Partially offset by:
●
A $14.2
million decrease
in interest income
on residential
mortgage loans,
primarily related
to a $444.6
million reduction
in
the average balance of this portfolio, partially offset by
higher yields.
●
A $2.9
million decrease
in interest
income on
commercial and
construction loans,
mainly due
to an
$8.7 million
decrease in
interest
income
from
SBA
PPP
loans,
associated
with
the
overall
decrease
in
the
size of
this
portfolio,
and
a
$5.4
million
decrease
in
interest
income
recognized
on
construction
loans,
mainly
associated
to
the
benefit
of
$2.9
million
of
interest
income realized from deferred interest recognized on a construction loan
paid-off during the first nine months of 2021 and the
effects associated with a $67.8 million reduction
in the average balance of this portfolio. These variances were
partially offset
by the effect of higher market interest rates in the repricing
of variable-rate commercial and construction loans.
As of September
30, 2022, the interest
rate on approximately
42% of the Corporation’s
commercial and construction
loans is
based upon LIBOR,
SOFR and other
indexes and 16% is
based upon the
Prime rate index. For
the first nine months
of 2022,
the average
one-month
LIBOR increased
115
basis points,
the average
three-month
LIBOR increased
154
basis points,
the
average Prime rate
increased 96 basis points,
and the average three
-month SOFR increased
147 basis points, compared
to the
average rates for such indexes during the same period of 2021.
The net
interest margin
increased by
71 basis
points to
4.31% for
the third
quarter of
2022, compared
to the
same period
of 2021,
and by
27 basis
points to
4.04% for
the first
nine months
of 2022,
compared to
the same
period of
2021. The
improved margin
was
primarily attributable
to a
combination of
the following:
(i) higher
market interest
rates and
its effect
in the
repricing of
variable-rate
commercial
loans
and
interest-bearing
cash
balances
maintained
at
the
Federal
Reserve;
(ii)
lower
U.S.
agencies
MBS
premium
amortization expense;
(iii) a
lower cost
of funding
driven by
lower rates
paid on
interest-bearing deposits
(excluding brokered
CDs);
and (iv) a decrease in long-term debt.
94
Provision
for Credit
Losses
The provision for
credit losses consists of
provisions for credit
losses on loans and
finance leases and
unfunded loan commitments,
as
well
as
held-to-maturity
and
available-for-sale
debt
securities.
The
principal
changes
in
the
provision
for
credit
losses
by
main
categories follow:
Provision for credit losses for
loans and finance leases
The provision for credit
losses for loans and
finance leases was an expense
of $14.4 million for
the third quarter of 202
2, compared
to a net benefit of $8.7 million for the third quarter of 2021. The variances
by major portfolio category were as follows:
●
Provision for credit losses for the
consumer loans and finance leases portfolio
was $17.4 million for the third
quarter of 2022,
compared
to $6.1
million
in
the third
quarter
of
2021.
The increase
in
the
provision
in
the
third
quarter
of
2022
primarily
reflect the effect
of the increase
in the size
of the consumer
loan portfolios,
an increase in
charge-off
levels associated to
the
overall
portfolio
growth,
and
a
deterioration
in
the
long-term
outlook
of
certain
macroeconomic
variables,
such
as
the
regional unemployment rate.
●
Provision for
credit losses
for the
residential mortgage
loan portfolio
was an
expense of
$0.8 million
for the
third quarter
of
2022,
compared to a net
benefit of $6.2 million
in the third quarter
of 2021. The expense
recorded during the
third quarter of
2022
was primarily
related
to a
deterioration
in the
long-term outlook
of forecasted
macroeconomic
variables,
primarily in
the housing
price index,
partially offset
by the
overall decrease
in the
size of
the residential
mortgage portfolio.
Meanwhile,
the net benefit
recorded in the
third quarter of
2021 was primarily
related to improvements
in the outlook
of macroeconomic
variables
and
the overall
decrease in
the size
of the
portfolio, partially
offset
by an
incremental
charge
to the
provision
for
credit
losses
of
$2.1
million
related
to
the
bulk
sale
of
$52.5
million
of
residential
mortgage
nonaccrual
loans
and
related
servicing advances.
●
Provision for
credit losses
for the
commercial and
construction loan
portfolio was
a net
benefit of
$3.8 million
for the
third
quarter of 2022, compared to a
net benefit of $8.6 million in the
third quarter of 2021. The net
benefit for the commercial and
construction loan portfolio
for the third quarter of
2022 was related mostly to
a reduction in reserves
due to updated financial
information
received
during
the
third
quarter
of
2022.
The
net
benefit
recorded
in
the
third
quarter
of
2021
reflected
improvements
in
forecasted
macroeconomic
variables,
primarily
in
the
commercial
real
estate
price
index,
and
the
overall
decrease in the size of this portfolio.
95
The
provision
for
credit
losses
for
loans
and
finance
leases
was
an
expense
of
$10.0
million
for
the
first
nine
months
of
2022,
compared to a net benefit of $49.5 million for the first nine months of 2021.
●
Provision for
credit losses for
the consumer
loans and
finance leases
portfolio was
$43.5 million
for the first
nine months of
2022,
compared to
$11.2
million for
the first
nine months
of 2021.
The increase
in charges
to the
provision in
the first
nine
months of
2022 primarily
reflect the
effect of
the increase
in the size
of the
consumer loan
portfolios,
an increase in
charge-
off levels, and a deterioration in macroeconomic variables,
such as the regional unemployment rate.
●
Provision for
credit losses
for the
commercial and
construction loan
portfolio was
a net
benefit of
$26.6 million
for the first
nine months
of 2022,
compared to
a net
benefit of
$51.1
million for
the first
nine months
of 2021.
The net
benefit recorded
during
the
first
nine
months
of
2022
mainly
reflects
reductions
in
qualitative
reserves
associated
with
reduced
COVID-19
uncertainties
and
updated
borrowers’
financial
information,
partially
offset
by
a
deterioration
in
the
long-term
outlook
of
forecasted
macroeconomic
variables.
The
net
benefit
recorded
in
the
first
nine
months
of
2021
reflects
improvements
in
forecasted macroeconomic
variables, primarily
in the commercial
real estate price
index and
unemployment rate
variables at
that time, and the overall decrease in the size of this portfolio in the Puerto Rico region.
●
Provision
for
credit
losses
for
the
residential
mortgage
loan
portfolio
was
a
net
benefit
of
$6.9
million
for
the
first
nine
months of
2022, compared
to a net
benefit of
$9.6 million
for the
first nine
months of
2021. The
net benefit
in both
periods
reflects the effect of a continued decrease in the size of the residential
mortgage loan portfolio.
During
the
first
nine
months
of
2022,
the
Corporation
applied
probability
weights
to
the
baseline
and
alternative
downside
economic
scenarios
to
estimate
the
ACL
with
the
baseline
scenario
carrying
the
highest
weight.
For
periods
prior
to
2022,
the
Corporation calculated the
ACL using the baseline
scenario. See “Risk Management
– Credit Risk Management”
below for additional
information on the
ACL estimation methodology
and for an analysis
of the ACL,
non-performing assets,
and related information,
and
“Financial Condition
and Operating
Data Analysis –
Loan Portfolio”
and “Risk Management
— Credit Risk
Management” below
for
additional
information
concerning
the
Corporation’s
loan
portfolio
exposure
in
the
geographic
areas
where
the
Corporation
does
business.
Provision for credit losses for
unfunded loan commitments
The provision
for credit
losses for
unfunded
commercial
and construction
loan commitments
and standby
letters of
credit was
an
expense of $2.0 million
and $2.7 million for
the third quarter and
first nine months of
2022, respectively,
compared to a net
benefit of
$1.0 million
and $3.4
million, for
the third
quarter and
first nine
months of
2021, respectively.
The expense
recorded during
the first
nine months
of 2022
was mainly
driven by
an increase
in unfunded
loan commitments
principally due
to newly
originated facilities
which remained undrawn as of September 30, 2022.
Provision for credit losses for
held-to-maturity and available-for-sale debt
securities
The provision
for credit
losses for
held-to-maturity debt
securities was
a net
benefit of
$0.6 million
and $0.3
million for
the third
quarter and first nine months of
2022, respectively,
compared to a net benefit of
$2.4 million and $0.5 million for
the third quarter and
first
nine
months
of
2021,
respectively.
The
net
benefit
recorded
during
the
first
nine
months
of
2022
was
mainly
due
to
the
Corporation’s
reduction
in
qualitative
reserves
driven
by
improvements
in
updated
financial
information
of
certain
bond
issuers
received
during
the
second
quarter
of
2022.
Meanwhile,
the
net
benefit
recorded
during
the
first
nine
months
of
2021
was
mainly
related
to
improvements
in
forecasted
macroeconomic
variables
and
the
repayment
of
certain
bonds,
partially
offset
by
changes
in
some issuers’ financial metrics based on their most recent financial statements.
The
provision
for
credit
losses
for
available-for-sale
debt
securities
was
a
net
benefit
of
$0.4
million
recorded
for
the
first
nine
months of 2022, compared to a net benefit of $0.1 million recorded
for the first nine months of 2021.
96
Non-Interest
Income
Non-interest
income
for
the
third
quarter
of
2022
amounted
to
$29.7
million,
compared
to
$29.9
million
for
the
same
period
in
2021.
The $0.2 million decrease in non-interest income was primarily related to:
●
A
$2.7
million
decrease
in
revenues
from
mortgage
banking
activities,
mainly
driven
by
a
$3.0
million
decrease
in
net
realized
gain
on sales
of residential
mortgage
loans in
the secondary
market due
to a
lower volume
of sales.
During the
third
quarters
of 2022
and
2021, net
gains
of $1.5
million and
$4.5
million,
respectively,
were recognized
as a
result of
GNMA
securitization
transactions
and
whole
loan
sales
to
U.S.
GSEs
amounting
to
$48.4
million
and
$109.6
million,
respectively.
Partially offset by:
●
A $1.1
million increase
in service
charges and
fees on
deposit accounts,
mainly due
to an
increase in
the number
of cash
management
transactions
of
commercial
clients.
The
variance
included
approximately
$0.1
million
of
waived
fees
associated with the passing of Hurricane Fiona through Puerto Rico.
●
A $1.1
million increase
in other
non-interest income
mainly driven
by a $0.8
million benefit
related to
income tax
credits
purchased
in
the
third
quarter
of
2022
and
a
$0.4
million
increase
in
fees
and
commissions
from
insurance
referrals.
During
the
third
quarter
of
2022
the
Corporation
was
impacted
by
the
passing
of
Hurricane
Fiona,
which
resulted
in
a
decrease
in
transactional
fee
income
from
point-of-sale
terminals
(“POS”)
and
merchant
transactions
of
approximately
$0.5 million.
●
A $0.3 million increase in insurance commission income.
Non-interest income
for the nine-month
period ended
September 30, 2022
amounted to $93.5
million, compared to
$90.8 million
for the same period in 2021. The $2.7 million increase in non-interest income
was primarily due to:
●
A $5.9 million
increase in other
non-interest income driven
by (i) a
$3.1 million increase
in transactional fee
income from
credit and
debit cards,
POS and
merchant
transactions;
(ii) a
$1.3 million
increase related
to higher
benefit of
purchased
income tax credits;
(iii) a $1.2 million
increase in fees
and commissions from
insurance referrals; and
(iv) the effect
in the
second
quarter
of 2022
of
a
$0.9
million
gain
recorded
on the
sale of
a
banking
facility
related
to
branch
consolidation
efforts.
●
A $2.8
million increase
in service
charges and
fees on
deposit accounts,
in part
due to
an increase
in the
number of
cash
management transactions of commercial clients and an increase in the monthly
service fee charged on certain checking and
savings products which was effective in the third quarter of 2021.
●
A $1.1 million increase in insurance commission income.
Partially offset by:
●
A $7.1
million decrease
in revenues
from mortgage
banking activities,
mainly
driven by
an
$8.8 million
decrease in
net
realized
gain
on
sales
of
residential
mortgage
loans
in
the
secondary
market
due
to
a
lower
volume
of
sales
and
a $0.7
million decrease
in service
fee income,
partially offset
by $1.5
million in
lower amortization
expense related
to mortgage
servicing rights
and a
$0.6 million
net increase
in mark-to-market
gains from
To-Be-Announced
(“TBA”) MBS
forward
contracts. During
the first
nine months
of 2022
and 2021,
net gains
of $7.2
million and
$16.0 million,
respectively,
were
recognized
as
a
result
of
GNMA
securitization
transactions
and
whole
loan
sales
to
U.S.
GSEs
amounting
to
$206.5
million and $406.9 million, respectively.
97
Non-Interest
Expenses
Non-interest
expenses increased
by $1.2
million to
$115.2
million for
the quarter
ended September
30, 2022,
compared to
$114.0
million for
the third
quarter of 2021.
On a non-GAAP
basis, excluding
$2.3 million
in merger
and restructuring
costs associated with
the acquisition
of BSPR and
costs of
$0.6 million
related to the
COVID-19 pandemic
response efforts
which were
recognized during
the third quarter
of 2021, non-interest
expenses increased
by $4.1 million
when compared with
the same quarter
of the previous
year.
See “Special
Items”
above for
additional information.
Some of
the most
significant variances
in adjusted
non-interest expenses
were
as follows:
●
A
$2.7
million
increase
in
adjusted
employees’
compensation
and
benefits
expenses,
primarily
reflecting
a
$1.7
million
increase
in
compensation
expense due
to annual
salary
merit increa
ses and
a $0.7
million
increase
in medical
insurance
premiums.
●
A $1.8
million increase
in adjusted
business promotion
expenses, mainly
related to
a $0.9
million increase
in advertising,
marketing and
sponsorship activities;
and $0.3
million in
donations to
non-profit organizations
in the
municipalities most
affected by Hurricane Fiona.
●
A
$1.2
million
decrease
in
net
gains
on
OREO
operations,
mainly
due
to
lower
net
realized
gains
on
sales
of
OREO
properties, primarily residential properties in the Puerto Rico region.
●
A $0.8 million increase in credit and debit card processing expenses,
in part due to higher credit card association fees when
compared to the same period of
the previous year.
The third quarter of 2021 includes
the effect of $1.4 million in
incentive
payments and cost reimbursements recorded in connection with a debit
card processing contract.
Partially offset by:
●
A $1.6
million decrease
in adjusted
other non
-interest expenses,
mainly driven
by a
$1.5 million
decrease in
charges
for
legal and
operational reserves
and a
$0.6 million
decrease in
amortization of
intangible assets
mainly associated
with the
purchased
credit card
relationship
intangible
asset recognized
in
connection
with
the
acquisition
of
a
FirstBank-branded
credit card loan portfolio in 2012 which became fully amortized at the
end of 2021.
●
A
$1.0 million
decrease in
adjusted professional
service fees,
primarily
related to
a $1.3
million decrease
in outsourcing
technology service fees
primarily related to
incremental temporary
technology costs recognized
during the third
quarter of
2021 associated with the
BSPR acquired operations, partially
offset by a $0.5
million increase in consulting
fees driven by
various technology projects.
98
Non-interest
expenses
for
the first
nine
months
of
2022
were $330.2
million,
compared
to
$377.5
million
for
the same
period
in
2021. On
a non-GAAP
basis, excluding
$24.6 million
in merger
and restructuring
costs associated
with the
acquisition of
BSPR and
costs of
$3.0 million
related to
the COVID-19
pandemic response
efforts which
were recognized
during 2021,
non-interest expenses
decreased
by
$19.7
million
when
compared
with
the
same
period
of
the
previous
year.
See
“Special
Items”
above
for
additional
information. Some of the most significant variances in adjusted non
-interest expenses were as follows:
●
A
$12.8
million
decrease
in
adjusted
professional
service
fees,
driven
by
a
$11.1
million
decrease
in
outsourcing
technology service
fees, mainly
associated with
the effect
in 2021
of approximately
$7.0 million
of temporary
processing
costs incurred
in connection
with
the
acquired
BSPR operations
prior
to system
conversions and
costs of
approximately
$1.5 million incurred in connection with the platform used for SBA PPP loan originations
and forgiveness funding.
●
A $4.4 million decrease in adjusted other non-interest
expenses mainly due to (i) a $2.0 million decrease in
amortization of
intangible
assets mainly
associated
with
the
purchased
credit card
relationship
intangible asset
recognized
in connection
with the
acquisition of
a FirstBank-branded
credit card
loan portfolio
in 2012
which became fully
amortized at
the end of
2021;
(ii) a $2.8 million
decrease in charges
for legal and operational
reserves, in part due
to the reversal of
a $1.0 million
reserve
upon
resolution
of
an
operational
loss
during
the
second
quarter
of
2022;
and
(iii)
a
$0.6
million
decrease
in
supplies and printing expenses.
●
A $2.8
million increase
in net
gains on
OREO operations,
primarily reflecting:
(i) a $2.4
million decrease
in write-downs
to the value
of OREO properties,
in part related
to a write-down
to the value
of a commercial
property in
the Puerto
Rico
region
recorded
during
the
first
quarter
of
2021;
and
(ii)
a
$2.2
million
decrease
in
OREO-related
operating
expenses,
primarily
taxes,
repairs
and
insurance.
These
variances
were
partially
offset
by
a
$2.1
million
decrease
in
income
recognized
from rental
payments
mainly
associated to
a sale
of an
OREO income
-producing
property
during
the second
half of 2021.
●
A $2.6 million
decrease in adjusted occupancy
and equipment expenses,
primarily related to a
reduction in rental
expense,
equipment related depreciation charges,
and maintenance charges associated
with branch consolidation efforts
during 2021
and 2022.
●
A $1.7 million decrease in adjusted taxes, other than
income taxes, primarily related to lower municipal license taxes, sales
and use taxes, and property taxes.
Partially offset by:
●
A
$3.1
million
increase
in
adjusted
employees’
compensation
and
benefits
expenses,
primarily
reflecting
a
$3.0
million
decrease in deferred loan origination costs driven by the effect of SBA PPP loan
originations closed during 2021.
●
A $3.1
million increase
in adjusted
business promotion
expenses, mainly
related to
a $1.8
million increase
in advertising,
marketing and sponsorship
activities; and a
$0.6 million increase
in donations, of
which $0.3 million
were granted to non-
profit organizations in the municipalities most affected
by Hurricane Fiona.
99
Income Taxes
For the
third quarter
of 2022,
the Corporation
recorded an
income tax
expense of
$32.0 million
compared to
$37.1 million
in the
third quarter of 2021. The variance was primarily related
to lower pre-tax income and a lower estimated
effective tax rate as a result of
a higher
proportion of
exempt to
taxable income
when compared
to the
same period
in 2021.
For the
first nine
months of
2022, the
Corporation recorded
an income tax
expense of $109.2
million compared
to $105.2 million
for the same
period in 2021.
The increase
in income
tax expense
for the
nine-month
period ended
September 30,
2022, as
compared
to the
same period
in the
prior year,
was
related
to
higher pre
-tax income,
partially
offset
by a
higher
proportion
of exempt
to taxable
income
resulting
in
a
lower estimated
effective tax rate.
The Corporation’s
estimated annual
effective tax
rate in
the first
nine months
of 2022,
excluding entities
from which
a tax
benefit
cannot
be
recognized
and
discrete
items,
was
31.8%,
compared
to
33.2%
for
the
first
nine
months
of
2021.
The
estimated
annual
effective
tax rate,
including all
entities, for
2022 was
32.0% (32.4%
excluding discrete
items), compared
to 33.6%
for the
first nine
months of 2021
(33.8% excluding discrete
items). See Note
17 - Income
Taxes,
in the Corporation’s
unaudited consolidated
financial
statements
for
the
quarter
ended
September
30,
2022
for
additional
information
on
the
Corporation’s
net
deferred
tax
asset
as
of
September 30, 2022 and December 31, 2021.
100
FINANCIAL
CONDITION
AND OPERATING DATA ANALYSIS
Assets
The Corporation’s total assets
were $18.4 billion as of September 30, 2022, a decrease of $2.3
billion from December 31, 2021. The
decrease
was primarily
related
to
a $2.0
billion
decrease
in cash
and
cash
equivalents mainly
attributable
to
the overall
decrease
in
total deposits,
the repurchase
of approximately
15.9 million
shares of
common stock
for a
total purchase
price of
$225.0 million,
the
repayment
at
maturity
of
$200
million
in
FHLB
advances
and
a
$100
million
repurchase
agreement.
In
addition,
total
investment
securities
decreased
by
$524.5
million,
mainly
related
to
the
decrease
in
the
fair
value
of
available-for-sale
debt
securities
and
prepayments,
partially
offset
by
purchases
of
U.S.
agencies
and
MBS.
As
further
discussed
below,
these
variances
were
partially
offset by a $215.0 million increase in total loans.
The following
table presents
the composition
of the
Corporation’s
loan portfolio,
including loans
held for
sale, as
of the
indicated
dates:
September 30,
December 31,
2022
2021
(In thousands)
Residential mortgage loans
$
2,830,974
$
2,978,895
Commercial loans:
Commercial mortgage loans
2,265,614
2,167,469
Construction loans
123,994
138,999
Commercial and Industrial loans
(1)
2,858,286
2,887,251
Total commercial
loans
5,247,894
5,193,719
Consumer loans and finance leases
3,219,750
2,888,044
Total loans held
for investment
11,298,618
11,060,658
Less:
Allowance for credit losses for loans and finance leases
(257,859)
(269,030)
Total loans held
for investment, net
$
11,040,759
$
10,791,628
Loans held for sale
12,169
35,155
Total loans, net
$
11,052,928
$
10,826,783
(1)
As of September 30, 2022 and December 31, 2021, includes
$17.9 million and $145.0 million, respectively, of SBA PPP loans.
As of
September 30,
2022, the
Corporation’s
total loan
portfolio before
the ACL
amounted to
$11.3
billion, an
increase of
$215.0
million compared to December
31, 2021. The growth reflects increases
of $131.1 million in the Puerto
Rico region and $101.9 million
in
the
Florida
region,
partially
offset
by
a
decrease
of $18.0
million
in
the
Virgin
Islands region.
On
a
portfolio
basis,
the
increase
consisted of a $331.7
million increase in consumer
loans, including a $276.9
million increase in auto loans
and leases, and an increase
of $54.2
million in
commercial and
construction
loans (net
of a
$127.1 million
decrease in
the carrying
value of
the SBA
PPP loan
portfolio),
partially offset by
a reduction of $170.9
million in residential
mortgage loans. Excluding the
$127.1 million decrease in
the
carrying value of
SBA PPP loans,
commercial and construction
loans increased by
$181.3 million mainly
reflecting the origination
of
loans
related
to
multiple
commercial
relationships,
each
in
excess
of
$10
million,
that
increased
the
portfolio
amount
by
$418.7
million, partially offset
by payoffs and
paydowns of large
commercial and constructions
relationships totaling $199.2
million, and the
sale of a $35.2 million commercial and industrial loan participation in
the Puerto Rico region, as further explained below.
101
As of September
30, 2022,
loans held for
investment were
comprised of
commercial and construction
loans (46%),
residential real
estate loans (25%),
and consumer and finance
leases (29%). Of the
total gross loan portfolio
held for investment
of $11.3 billion
as of
September
30,
2022,
the
Corporation
had
a
credit
risk
concentration
of
approximately
79%
in
the
Puerto
Rico
region,
18%
in
the
United States region (mainly
in the state of Florida), and 3% in the Virgin
Islands region, as shown in the following table:
As of September 30, 2022
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,240,466
$
174,766
$
415,742
$
2,830,974
Commercial mortgage loans
1,688,345
66,102
511,167
2,265,614
Construction loans
23,595
4,121
96,278
123,994
Commercial and Industrial loans
(1)
1,772,418
69,748
1,016,120
2,858,286
Total commercial
loans
3,484,358
139,971
1,623,565
5,247,894
Consumer loans and finance leases
3,149,526
58,911
11,313
3,219,750
Total loans held
for investment, gross
$
8,874,350
$
373,648
$
2,050,620
$
11,298,618
Loans held for sale
12,169
-
-
12,169
Total loans, gross
$
8,886,519
$
373,648
$
2,050,620
$
11,310,787
(1)
As of September 30, 2022, includes $17.9 million of SBA PPP
loans consisting of $13.7 million in the Puerto Rico region,
$0.4 million in the Virgin Islands region,
and $3.8 million in the United States region.
As of December 31, 2021
Puerto Rico
Virgin Islands
United States
Total
(In thousands)
Residential mortgage loans
$
2,361,322
$
188,251
$
429,322
$
2,978,895
Commercial mortgage loans
1,635,137
67,094
465,238
2,167,469
Construction loans
38,789
4,344
95,866
138,999
Commercial and Industrial loans
(1)
1,867,082
79,515
940,654
2,887,251
Total commercial
loans
3,541,008
150,953
1,501,758
5,193,719
Consumer loans and finance leases
2,820,102
52,282
15,660
2,888,044
Total loans held
for investment, gross
$
8,722,432
$
391,486
$
1,946,740
$
11,060,658
Loans held for sale
33,002
177
1,976
35,155
Total loans, gross
$
8,755,434
$
391,663
$
1,948,716
$
11,095,813
(1)
As of December 31, 2021, includes $145.0 million of SBA PPP
loans consisting of $102.8 million in the Puerto Rico region,
$8.2 million in the Virgin Islands
region, and $34.0 million in the United States region.
102
Residential Real Estate Loans
As
of
September
30,
2022,
the
Corporation’s total
residential mortgage loan
portfolio, including loans
held
for
sale, decreased
by
$170.9 million,
as compared to the balance
as of December 31,
2021. The residential
mortgage loan
portfolio decreased
by $141.7 million
in the Puerto
Rico region,
$15.6 million
in the Florida
region, and
$13.6 million
in the Virgin Islands
region. The
decline in
all regions
was
driven by
repayments,
foreclosures,
and charge-offs,
which more
than offset
the volume
of new loan
originations
kept on
the balance
sheet.
The
majority
of
the
Corporation’s
outstanding
balance
of
residential
mortgage
loans
in
the
Puerto
Rico
and
the
Virgin
Islands
regions consisted
of fixed-rate loans
that traditionally
carry higher
yields than
residential mortgage
loans in
the Florida
region. In
the
Florida
region,
approximately
49%
of
the
residential
mortgage
loan
portfolio
consisted
of
hybrid
adjustable-rate
mortgages.
In
accordance with
the Corporation’s
underwriting guidelines,
residential mortgage
loans are
primarily fully
documented loans,
and the
Corporation does not originate negative amortization loans.
Commercial and Construction Loans
As
of
September
30,
2022,
the
Corporation’s
commercial
and
construction
loan
portfolio
increased
by
$54.2
million
(net
of
a
$127.1 million decrease in the SBA PPP loan portfolio), as compared to
the balance as of December 31, 2021.
In the Puerto Rico region, commercial and construction
loans decreased by $56.7 million (including
a $89.1 million decrease in the
SBA PPP loan portfolio)
,
as compared to the
balance as of December
31, 2021. Excluding the
$89.1 million decrease
in the SBA PPP
loan portfolio
,
commercial and
construction loans
in the
Puerto Rico
region increased
by $32.4
million, driven
by the
origination of
loans
related
to
six
commercial
relationships,
each
in
excess of
$10
million,
that
increased
the
portfolio
amount by
$133.8
million,
partially
offset
by
the
early
payoff
of
two
commercial
and
construction
loans
totaling
$41.9
million,
the
sale
of
a
$35.2
million
commercial and industrial loan participation, and the repayment of a $20.6
million commercial and industrial loan.
In the
Florida region,
commercial and
construction loans
increased by
$121.8 million
(net of
a $30.2 million
decrease in
the SBA
PPP loan portfolio)
,
as compared to
the balance as
of December 31,
2021. Excluding the
$30.2 million decrease
in the SBA PPP
loan
portfolio,
commercial
and
construction
loans
in
the
Florida
region
increased
by
$152.0
million,
driven
by
the
origination
of
loans
related
to
fifteen
commercial
relationships,
each
in
excess
of
$10
million,
that
increased
the
portfolio
amount
by
$284.9
million,
partially offset by the
payoff of three commercial
and construction loans totaling $87.3
million and the repayments of
two commercial
and industrial loans totaling $49.4 million.
In the
Virgin
Islands region,
commercial and
construction loans
decreased by
$10.9 million,
driven by
a $7.8
million decrease
in
the SBA PPP loan portfolio, as compared to the balance as of December 31, 2021.
As of
September
30,
2022,
the Corporation
had $158.4
million outstanding
in loans
extended
to the
Puerto
Rico government,
its
municipalities,
and
public
corporations,
compared
to
$178.4
million
as
of
December
31,
2021.
See
“Exposure
to
Puerto
Rico
Government” below for additional information.
The
Corporation
also
has
credit
exposure
to
USVI
government
entities.
As
of
September
30,
2022,
the
Corporation
had
$37.6
million
in
loans
to
USVI
government
public
corporations,
compared
to
$39.2
million
as
of
December
31,
2021.
See
“Exposure
to
USVI Government” below for additional information.
As
of
September
30,
2022,
the
Corporation’s
total
exposure
to
shared
national
credit
(“SNC”)
loans
(including
unused
commitments)
amounted
to
$1.0
billion,
compared
to
$918.6
million
as
of
December
31,
2021.
As
of
September
30,
2022,
approximately
$144.4
million
of
the
SNC
exposure
is
related
to
the
portfolio
in
Puerto
Rico
and
$884.4
million
is
related
to
the
portfolio in the Florida region.
103
Consumer Loans and Finance Leases
As of September
30, 2022, the Corporation’s
consumer loan and finance
lease portfolio increased by
$331.7 million to $3.2
billion,
as
compared
to
the
portfolio
balance
of
$2.9
billion
as
of
December
31,
2021.
The
increase
was
reflected
in
all
classes
within
the
consumer
loan
portfolio
segment,
including
increases
of
$182.8
million
and
$94.1
million
in
the
auto
loans
and
finance
leases
portfolios, respectively
.
The growth
in consumer
loans is
mainly reflected
in the
Puerto Rico
region and
was driven
by an
increased
level of loan originations during the first nine months of 2022.
Loan Production
First BanCorp.
relies primarily on
its retail
network of
branches to
originate residential and
consumer loans.
The Corporation
may
supplement its residential
mortgage originations
with wholesale servicing
released mortgage loan purchases
from mortgage bankers. The
Corporation manages its construction
and commercial loan originations
through centralized
units and most of its
originations come from
existing
customers,
as well
as through
referrals
and direct
solicitations.
The following table provides
a breakdown of First BanCorp.’s loan production,
including purchases,
refinancings,
renewals and draws
from existing
revolving
and non-revolving
commitments,
for the indicated
periods:
Quarter Ended September 30,
Nine-Month Period Ended September 30,
2022
2021
2022
2021
(In thousands)
Residential mortgage
$
103,897
$
147,212
$
352,942
$
468,306
Commercial mortgage
96,894
113,789
430,599
246,223
Commercial and Industrial
(1)
562,828
510,551
1,675,838
1,911,230
Construction
21,892
24,367
88,758
71,009
Consumer
459,402
405,305
1,368,121
1,121,386
Total loan production
$
1,244,913
$
1,201,224
$
3,916,258
$
3,818,154
(1) For the nine-month period ended September 30, 2021,
includes $283.7 million
in originations of SBA PPP loans.
104
During the quarter and nine-month
period ended September 30, 2022,
total loan originations, including purchases, refinancings,
and
draws from existing revolving and
non-revolving commitments, amounted to
approximately $1.2 billion and $3.9
billion, respectively,
compared
to
$1.2
billion
and
$3.8
billion,
respectively,
for
the
comparable
periods
in
2021.
Total
loans
originations
increased
by
$43.7 million for
the third quarter
of 2022, compared
to the same period
of 2021. During
the nine-month period
ended September 30,
2021,
the Corporation originated SBA PPP loans totaling $283.7 million.
Excluding SBA PPP loans originated in the first nine months
of 2021, total loan originations increased by $381.8 million for
the first nine months of 2022, compared to the same period of 2021.
Residential
mortgage
loan
originations
for
the
quarter
and
nine-month
period
ended
September
30,
2022
amounted
to
$103.9
million and
$352.9 million,
respectively,
compared to
$147.2 million
and $468.3
million, respectively,
for the
comparable periods
in
2021.
The decrease
of $43.3
million in
the third
quarter of
2022,
as compared
to the
same period
in 2021,
reflects
declines of
$35.6
million, $7.3 million, and
$0.4 million in the Puerto
Rico, Florida,
and Virgin
Islands regions, respectively.
For the nine-month period
ended September 30,
2022, the decrease
of $115.4
million consisted of
declines of $92.5
million and $22.8
million in the Puerto
Rico
and Florida regions,
respectively.
The decrease in
the 2022 periods
reflects
lower levels of
refinancings driven by
the effect of
higher
market
interest
rates.
Approximately
58%
of
the
$281.2
million
residential
mortgage
loan
originations
in
the
Puerto
Rico
region
during the
first nine
months of
2022 were
of conforming
loans, compared
to 89%
of $373.8
million for
the nine-month
period ended
September 30, 2021. The
decrease during 2022 is related
to lower volume of conforming
loan originations and refinancings,
driven by
the effect of lower mortgage loan interest rates and increased
home purchase activity during 2021.
Commercial
and
construction
loan
originations
(excluding
government
loans)
for
the
quarter
and
nine-month
period
ended
September
30,
2022
amounted
to
$679.7
million
and
$2.2
billion,
respectively,
compared
to
$607.4
million
and
$2.2
billion,
respectively,
for the
comparable periods
in 2021.
Commercial and
construction
loan originations
increased by
$72.3 million,
for the
third quarter
of 2022,
compared to
the same
period in
2021. The
increase in
the third
quarter of
2022 consisted
of increases
of $45.2
million
and
$32.8
million
in the
Puerto
Rico
and
Florida
regions,
respectively,
partially
offset
by
a
decrease
of
$5.7
million
in
the
Virgin
Island
region.
Total
commercial
and
construction
loan
originations
in
the
nine-month
period
ended
September
30,
2021
includes
SBA
PPP
loan
originations
of
$283.7
million.
Excluding
SBA
PPP
loan
originations,
commercial
and
construction
loan
originations increased by $274.2 million in the first nine
months of 2022, compared to the same period in 2021.
The increase consisted
of increases of $144.7
million and $136.1 million
in the Puerto Rico and Florida
regions, respectively,
partially offset by a decrease
of
$6.6 million in the Virgin
Island region.
Government loan originations for the quarter
and nine-month period ended September
30, 2022 amounted to $1.8 million
and $36.6
million,
respectively,
compared
to
$41.2
million
and
$60.4
million,
respectively,
for
the
comparable
periods
in
2021.
Government
loan
originations
during
the first
nine
months of
2022 are
mainly
related
to the
renewal of
a public
corporation
line of
credit in
the
Virgin
Islands regions,
the renewal
of a
municipal loan
in the
Puerto Rico
region,
and the
utilization of
an arranged
overdraft line
of
credit
of
a
government
entity
in
the
Virgin
Islands
region.
On
the
other
hand,
government
loan
originations
during
the
first
nine
months of
2021 were driven
by the refinancing
of several loans
of a government
unit in the
Virgin
Islands, as well
as the
refinancing
of several loans to municipalities in the Puerto Rico region.
Originations of auto
loans (including finance
leases) for the
quarter and nine-month
period ended September
30, 2022 amounted
to
$244.9
million
and
$775.7
million,
respectively,
compared
to
$248.4
million
and
$691.9
million,
respectively,
for
the
comparable
periods in
2021. The
decrease in
the third
quarter of
2022, as
compared to
the same
quarter of
2021, consisted
of a
decrease of
$5.6
million in the Puerto
Rico region, partially offset
by an increase of $2.1
million in the Virgin
Islands regions.
The increase in the first
nine months
of 2022,
as compared
to the
same period of
2021, consisted
of increases
of $80.5
million and
$3.3 million,
respectively,
in the Puerto Rico
and Virgin
Island regions. Personal
loan originations,
other than credit cards,
for the quarter and
nine-month period
ended September 30, 2022 amounted
to $90.2 million and $233.0 million,
respectively,
compared to $45.9 million and $123.9 million,
respectively,
for
the
comparable
periods
in 2021.
Most
of the
increase
in
personal
loan
originations
for
the quarter
and
nine-month
period ended
September 30, 2022,
as compared with
the same period
s
in 2021, was
in the Puerto
Rico region. The
utilization activity
on the outstanding
credit card portfolio
for the quarter
and nine-month
period ended
September 30,
2022 amounted
to $124.3 million
and $359.3 million, respectively,
compared to $110.9 million and $305.5
million, respectively, for the comparable
periods in 2021.
105
Investment Activities
As
part
of
its
liquidity,
revenue
diversification
and
interest
rate
risk
management
strategies,
First
BanCorp.
maintains
a
debt
securities portfolio classified as available for sale or held to maturity.
The
Corporation’s
total
available-for-sale
debt
securities
portfolio
as
of
September
30,
2022
amounted
to
$5.7
billion,
a
$785.0
million decrease
from December
31, 2021.
The decrease
was mainly
driven by
a $778.7
million decrease
in fair
value attributable
to
changes
in
market
interest
rates
and
the
prepayments
of
approximately
$513.9
million
of
U.S.
agencies
MBS,
partially
offset
by
purchases of U.S. agencies debentures and MBS totaling $521.9 million
during the first nine months of 2022.
As
of
September
30,
2022,
substantially
all
of
the
Corporation’s
available-for-sale
debt
securities
portfolio
was
invested
in
U.S.
government and
agencies debentures
and fixed-rate
GSEs’ MBS. In
addition, as
of September
30, 2022,
the Corporation
held a
bond
issued
by
the
PRHFA,
classified
as available
for
sale,
specifically
a
residential
pass-through
MBS in
the
aggregate
amount
of $3.4
million
(fair
value
-
$2.2
million).
This
residential
pass-through
MBS
issued
by
the
PRHFA
is
collateralized
by
certain
second
mortgages originated
under a program
launched by the
Puerto Rico government
in 2010 and
had an unrealized
loss of $1.2
million as
of September
30, 2022,
of which
$0.4 million
is due
to credit
deterioration.
During 2021,
the Corporation
placed
this instrument
in
nonaccrual status based on the delinquency status of the underlying
second mortgage loans collateral.
As
of
September
30,
2022,
the
Corporation’s
held-to-maturity
debt
securities
portfolio,
before
the
ACL,
increased
to
$445.9
million,
compared
to
$178.1
million
as
of
December
31,
2021,
mainly
driven
by
purchases
of
GSEs’
MBS
totaling
$289.8
million
during the first
nine months of
2022. Held-to-maturity
debt securities consisted
of fixed-rate GSEs’
MBS and financing
arrangements
with Puerto Rico municipalities issued
in bond form, which the
Corporation accounts for as securities,
but which were underwritten
as
loans with features
that are typically
found in commercial
loans. Puerto Rico
municipal bonds
typically are not
issued in bearer
form,
are
not
registered
with
the
Securities
and
Exchange
Commission,
and
are
not
rated
by
external
credit
agencies.
These
bonds
have
seniority to the payment of operating costs and expenses of the
municipality and, in most cases, are supported by assigned property
tax
revenues.
Approximately
74%
of
the
Corporation’s
municipality
bonds
consisted
of
obligations
issued
by
four
of
the
largest
municipalities in Puerto Rico. The municipalities are required
by law to levy special property taxes in such amounts
as are required for
the
payment
of
all
of
their
respective
general
obligation
bonds
and
loans.
Given
the
uncertainties
as
to
the
effects
that
the
fiscal
position of the Puerto Rico central government, the COVID-19 pandemic,
and the measures taken, or to be taken, by other government
entities may
have on
municipalities, the
Corporation cannot
be certain
whether future
charges to
the ACL
on these
securities will
be
required.
As of
September
30, 2022
,
the ACL
for
held-to-maturity
debt
securities was
$8.3
million,
compared
to $8.6
million
as of
December 31, 2021.
See
“Risk Management
–
Exposure
to Puerto
Rico
Government”
below
for information
and
details
about the
Corporation’s
total
direct exposure
to the
Puerto Rico
government,
including municipalities
and “Credit
Risk Management”
below for
the ACL
of these
direct exposures.
106
The following table presents the carrying value of investments as of the indicated dates:
September 30,
December 31,
2022
2021
(In thousands)
Money market investments
$
2,057
$
2,682
Debt securities available for sale, at fair value:
U.S. government and agencies obligations
2,474,277
2,405,468
Puerto Rico government obligations
2,193
2,850
MBS:
Residential
3,007,069
3,803,933
Commercial
184,650
240,510
Other
500
1,000
Total debt securities available
for sale, at fair value
5,668,689
6,453,761
Debt securities held-to-maturity,
at amortized cost:
MBS:
Residential
174,241
-
Commercial
106,235
-
Puerto Rico municipal bonds
165,386
178,133
ACL for Puerto Rico municipal bonds held to maturity
(8,257)
(8,571)
437,605
169,562
Equity securities, including $12.3 million and $21.5 million of FHLB stock,
as of September 30, 2022 and December 31, 2021, respectively
24,727
32,169
Total money market
investments and investment securities
$
6,133,078
$
6,658,174
107
The carrying values of debt securities as of September 30, 2022, by contractual maturity
(excluding MBS), are shown below:
Carrying
Weighted
(Dollars in thousands)
Amount
Average Yield
%
U.S. government and agencies obligations:
Due within one year
71,188
0.28
Due after one year through five years
$
2,219,918
0.81
Due after five years through ten years
170,194
1.01
Due after ten years
12,977
3.46
2,474,277
0.82
Puerto Rico government and municipalities obligations:
Due within one year
1,200
4.49
Due after one year through five years
42,426
5.51
Due after five years through ten years
55,737
4.82
Due after ten years
68,216
5.36
167,579
5.21
Other debt securities:
Due within one year
500
0.84
Total
2,642,356
1.08
MBS
3,472,195
1.63
ACL on held-to-maturity debt securities
(8,257)
-
Total debt securities
$
6,106,294
1.40
Net
interest
income
in
future
periods
could
be
affected
by
prepayments
of
MBS.
Any
acceleration
in
the
prepayments
of
MBS
purchased
at
a
premium
would
lower
yields
on
these
securities,
since
the
amortization
of
premiums
paid
upon
acquisition
would
accelerate. Conversely,
acceleration of the
prepayments of MBS would
increase yields on
securities purchased at
a discount, since
the
amortization of
the discount
would accelerate.
These risks
are directly
linked to
future period
market interest
rate fluctuations.
Also,
net interest income in future periods might be affected by
the Corporation’s investment in callable
debt securities. As of September 30,
2022,
the Corporation had approximately
$2.1 billion in callable debt
securities (U.S. agencies government
securities) with an average
yield of
0.83%, of which
approximately 56%
were purchased
at a discount
and 6%
at a premium.
See “Risk Management”
below for
further
analysis
of the
effects
of changing
interest rates
on the
Corporation’s
net
interest income
and
the Corporation’s
interest
rate
risk management
strategies. Also
see Note
2 –
Debt Securities,
in the
Corporation’s
unaudited
consolidated
financial statements
for
the quarter ended September 30, 2022 for additional information regarding
the Corporation’s debt securities portfolio.
RISK MANAGEMENT
Risks
are
inherent
in
virtually
all
aspects
of
the
Corporation’s
business
activities
and
operations.
Consequently,
effective
risk
management
is
fundamental
to
the
success
of
the
Corporation.
The
primary
goals
of
risk
management
are
to
ensure
that
the
Corporation’s
risk-taking activities are
consistent with the
Corporation’s
objectives and risk
tolerance, and that
there is an appropriate
balance between risk and reward in order to maximize stockholder value.
The
Corporation
has
in
place
a
risk
management
framework
to
monitor,
evaluate
and
manage
the
principal
risks
assumed
in
conducting its activities. First BanCorp.’s
business is subject to eleven
broad categories of risks: (i) liquidity
risk; (ii) interest rate risk;
(iii) market risk; (iv)
credit risk; (v) operational
risk; (vi) legal and
regulatory risk; (vii) reputational
risk; (viii) model risk;
(ix) capital
risk; (x)
strategic risk;
and (xi)
information technology
risk. First
BanCorp. has
adopted policies
and procedures
designed to
identify
and manage the risks to which the Corporation is exposed.
The Corporation’s
risk management
policies are
described
below, as well as in Part II,
Item 7, “Management’s
Discussion
and Analysis
of Financial
Condition
and Results
of Operations,”
in the
2021 Annual
Report
on Form
10-K.
Liquidity Risk and Capital Adequacy
Liquidity risk
involves the ongoing
ability to accommodate
liability maturities
and deposit withdrawals,
fund asset growth
and business
operations, and meet contractual obligations through unconstrained
access to funding at
reasonable market rates. Liquidity management
involves forecasting funding requirements and maintaining sufficient capacity to meet
liquidity needs and
accommodate fluctuations in
asset and
liability
levels due
to changes
in the Corporation’s
business
operations
or unanticipated
events.
108
The Corporation manages liquidity at two levels. The
first is the
liquidity of the parent company,
which is the
holding company that
owns the
banking
and non-banking
subsidiaries.
The second
is the liquidity
of the banking
subsidiary. During
the first
nine months
of 2022,
the Corporation continued to pay quarterly interest payments
on the subordinated debentures associated
with its trust preferred securities
(“TRuPs”) and
quarterly dividends on
its
common
stock.
For
the
nine-month period
ended September
30,
2022,
First BanCorp.
has
repurchased
approximately
15.9 million
shares
for a total
purchase
price of
$225.0 million.
The
Asset
and
Liability
Committee
of
the
Corporation’s
Board
of
Directors
is
responsible
for
overseeing
management’s
establishment
of
the
Corporation’s
liquidity
policy,
as
well
as
approving
operating
and
contingency
procedures
and
monitoring
liquidity
on
an
ongoing
basis.
The
Management’s
Investment
and
Asset
Liability
Committee
(“MIALCO”),
which
reports
to
the
Board
of
Directors’
Asset
and
Liability
Committee,
uses
measures
of
liquidity
developed
by
management
that
involve
the
use
of
several assumptions
to review the
Corporation’s
liquidity position
on a monthly
basis. The MIALCO
oversees liquidity
management,
interest rate risk and other related matters.
The MIALCO
is composed
of senior
management officers,
including the
Chief Executive
Officer,
the Chief
Financial Officer,
the
Chief Risk Officer,
the Business Group Director,
the Strategy Management
Director, the
Treasury and
Investments Risk Manager,
the
Financial
Planning
and
ALM
Director,
and
the
Treasurer.
The
Treasury
and
Investments
Division
is
responsible
for
planning
and
executing the
Corporation’s
funding activities
and strategy,
monitoring liquidity
availability on
a daily
basis, and
reviewing liquidity
measures
on
a
weekly
basis.
The
Treasury
and
Investments
Accounting
and
Operations
area
of
the
Comptroller’s
Department
is
responsible
for
calculating
the
liquidity
measurements
used
by
the
Treasury
and
Investment
Division
to
review
the
Corporation’s
liquidity
position
on
a
monthly
basis.
The
Financial
Planning
and
ALM
Division
is responsible
for
estimating
the
liquidity
gap
for
longer periods.
To
ensure
adequate
liquidity
through
the
full
range
of
potential
operating
environments
and
market
conditions,
the
Corporation
conducts
its
liquidity
management
and
business
activities
in
a
manner
that
is
intended
to
preserve
and
enhance
funding
stability,
flexibility and diversity.
Key components of
this operating strategy
include a strong
focus on the continued
development of customer-
based funding,
the maintenance of
direct relationships
with wholesale market
funding providers, and
the maintenance of
the ability to
liquidate certain assets when, and if, requirements warrant.
The Corporation develops and maintains contingency funding
plans. These plans evaluate the Corporation’s
liquidity position under
various operating
circumstances and
are designed to
help ensure that
the Corporation
will be able
to operate through
periods of
stress
when
access
to
normal
sources
of
funds
could
be
constrained.
The
plans
project
funding
requirements
during
a
potential
period
of
stress, specify
and quantify
sources of
liquidity,
outline actions
and procedures
for effectively
managing liquidity
through a
difficult
period,
and define
roles and
responsibilities for
the Corporation’s
employees.
Under the
contingency
funding plans,
the Corporation
stresses the balance sheet and the liquidity
position to critical levels that mimic difficulties
in generating funds or even maintaining
the
current funding
position of
the Corporation
and the Bank
and are designed
to help ensure
the ability of
the Corporation
and the Bank
to
honor
their
respective
commitments.
The
Corporation
has
established
liquidity
triggers
that
the
MIALCO
monitors
in
order
to
maintain
the
ordinary
funding of
the banking
business. The
MIALCO
developed
contingency
funding
plans
for
the following
three
scenarios: a
credit rating
downgrade, an
economic cycle
downturn event,
and a funding
concentration event.
The Board
of Directors’
Asset and Liability Committee reviews and approves these plans on an annual
basis.
The
Corporation manages its liquidity in
a proactive manner and
in an
effort to
maintain a sound
liquidity position.
It uses
multiple
measures to monitor
the liquidity
position, including
core liquidity, basic
liquidity, and time-based
reserve measures.
As of September 30,
2022,
the estimated core
liquidity reserve (which includes cash
and free
high quality liquid
assets such
as U.S.
government and GSEs
obligations
that could be liquidated
within one day)
was $3.4 billion,
or 18.57%
of total assets,
compared to $5.6
billion, or 27.0%
of total
assets,
as
of
December 31,
2021.
The
basic
liquidity ratio
(which
adds
available secured
lines
of
credit
to
the
core
liquidity) was
approximately
25.86%
of total assets
as of September 30, 2022, compared to 32.7%
of total assets
as of December
31, 2021.
The decrease
in the core liquidity reserves
is in part due to the reduction of bank deposits
during the first nine months
of 2022 associated to the overall
interest
rate increase
environment
and the FED’s
economic
tightening
monetary
policy.
As
of
September
30,
2022,
the
Corporation
had
$1.3
billion
fully
available
for
credit
from
the
FHLB.
The
Corporation
also
maintains
borrowing
capacity
at
the
Federal
Discount
Window.
The
Corporation
does
not
consider
borrowing
capacity
from
the
Federal Reserve Discount
Window as
a primary source
of liquidity but
had approximately $1.2
billion available for
funding under the
FED’s BIC Program as of September 30, 2022 as an additional contingent
source.
Total loans pledged
to the Federal Reserve Discount
Window
amounted to
$2.1 billion
as of
September 30,
2022. The
Corporation also
does not
rely on
uncommitted inter-bank
lines of
credit (federal funds lines) to fund its operations and does not include them
in the basic liquidity measure.
As of
September 30,
2022, the
holding company
had $18.3
million in
cash and
cash equivalents.
Cash and
cash equivalents
at the
Bank
level
as
of
September
30,
2022
were
approximately
$554.3
million.
The
Bank
had
$45.2
million
in
brokered
CDs
as
of
September 30,
2022, of which
approximately $17.8
million mature over
the next twelve
months. Liquidity
at the Bank
level is highly
dependent
on
bank
deposits,
which
fund
90.1%
of
the
Bank’s
assets
(or
89.9%
excluding
brokered
CDs).
Historically,
the
use
of
brokered CDs
has been
an additional
source of
funding for
the Corporation
as it
provides an
additional efficient
channel for
funding
109
diversification
and
can
be obtained
faster
than
regular
retail
deposits.
Brokered
CDs have
been
maintained
at
low
levels due
to
the
excess liquidity and
availability of core deposits.
Funding through brokered
CDs could potentially increase
the overall cost of
funding
for the Corporation and impact the net interest margin.
Furthermore, as
a provider of
financial services,
the Corporation routinely
enters into commitments
with off-balance
sheet risk to
meet the
financial needs
of its
customers. These
financial instruments
may include
loan commitments
and standby
letters of
credit.
These
commitments
are
subject
to
the
same
credit
policies
and
approval
processes
used
for
on-balance
sheet
instruments.
These
instruments involve, to varying degrees,
elements of credit and interest rate risk
in excess of the amount recognized in the
statements
of financial
condition. As
of September
30, 2022,
the Corporation’s
commitments to
extend credit
amounted to
approximately $1.9
billion.
Commitments
to
extend
credit
are
agreements
to
lend
to
a
customer
as
long
as
there
is
no
violation
of
any
condition
established
in
the
contract.
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.
There
have
been
no
significant
or
unexpected
draws
on
existing commitments. 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.
110
The following table summarizes commitments to extend credit and standby letters
of credit as of the indicated dates:
September 30,
December 31
2022
2021
(In thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Construction undisbursed funds
$
194,104
$
197,917
Unused personal lines of credit
975,949
1,180,824
Commercial lines of credit
709,140
725,259
Commercial letters of credit
84,724
151,140
Standby letters of credit
9,238
4,342
The Corporation engages in the ordinary course of business
in other financial transactions that are not recorded on the
balance sheet,
or
may
be
recorded
on
the
balance
sheet
in
amounts
that
are
different
from
the
full
contract
or
notional
amount
of
the
transaction,
affecting the Corporation’s
liquidity position. These
transactions are designed
to (i) meet the
financial needs of customers,
(ii) manage
the Corporation’s credit,
market and liquidity risks, (iii) diversify the Corporation’s
funding sources, and (iv) optimize capital.
In addition to the
aforementioned off-balance
sheet debt obligations
and unfunded commitments
to extend credit, the
Corporation
has
obligations
and
commitments
to
make
future
payments
under
contracts,
amounting
to
approximately
$2.6
billion
as
of
September 30,
2022. Our
material cash
requirements comprise
primarily of
contractual obligations
to make future
payments related
to
time
deposits,
short-term
borrowings,
long-term
debt,
and
operating
lease
obligations.
We
also
have
other
contractual
cash
obligations
related
to
certain
binding
agreements
we
have
entered
into
for
services
including
outsourcing
of
technology
services,
security,
advertising
and
other
services
which
are
not
material
to
our
liquidity
needs.
We
currently
anticipate
that
our
available
funds, high-quality unpledged government
and agency securities, credit facilities,
and cash flow from
operations will be sufficient
to
meet our operational cash needs for the foreseeable future.
Off-balance sheet
transactions are continuously
monitored to consider
their potential impact
to our liquidity
position and changes
are applied to the balance between sources and uses of funds as deemed appropriate
to maintain a sound liquidity position.
Sources of Funding
The
Corporation
utilizes
different
sources
of
funding
to
help
ensure
that
adequate
levels
of
liquidity
are
available
when
needed.
Diversification of
funding sources is
of great importance
to protect the
Corporation’s
liquidity from market
disruptions. The
principal
sources of
short-term funds
are deposits,
including brokered
CDs, securities
sold under
agreements to
repurchase, and
lines of
credit
with the FHLB. Consistent with its strategy,
the Corporation has been seeking to add core deposits.
The Asset and Liability Committee
reviews credit availability on
a regular basis. The Corporation
has also sold mortgage loans
as a
supplementary
source
of
funding
and
participates
in
the
BIC
Program
of
the
FED.
The
Corporation
has
also
obtained
long-term
funding in the past through the issuance of notes and long-term brokered CDs.
The
Corporation
continues
to
have
access
to
financing
through
counterparties
to
repurchase
agreements,
the
FHLB,
and
other
agents, such
as wholesale funding
brokers. While liquidity
is an ongoing
challenge for all
financial institutions,
management believes
that
the
Corporation’s
available
borrowing
capacity
and
efforts
to
grow
retail
deposits
will
be
adequate
to
provide
the
necessary
funding for the Corporation’s business
plans in the foreseeable future.
The Corporation’s principal
sources of funding are:
Retail
deposits
–
The
Corporation’s
deposit
products
include
regular
savings
accounts,
demand
deposit
accounts,
money
market
accounts
and
retail
CDs. As
of
September
30,
2022,
the
Corporation’s
deposits,
excluding
government
deposits
and
brokered
CDs,
decreased
by
$835.4
million
to
$13.6
billion,
compared
to
$14.4
billion
as
of
December
31,
2021.
Certain
non-maturity
deposits
previously
reported
as
brokered
deposits,
which
amounted
to
$144.3
million
and
$247.5
million,
as
of
September
30,
2022
and
December 31,
2021, respectively,
were recharacterized
as non-brokered
deposits for
both periods
presented based
on exclusions
and
clarifications of
the deposit
broker definition
included in
the FDIC
Brokered
Deposits Final
Rule. The
above-mentioned
decrease of
$835.4
million
was
primarily
related
to
lower
balances
in
commercial
savings
accounts,
retail
CDs,
and
retail
demand
deposits
accounts
primarily
in
the
Puerto
Rico
region,
in
part due
to the
overall
interest
rate
increase
environment
and
the
FED’s
economic
tightening policy.
111
Government deposits –
As of September
30, 2022, the
Corporation had $2.5
billion of Puerto Rico
public sector deposits
($2.3 billion
in
transactional
accounts
and
$170.4
million
in
time
deposits),
compared
to
$2.7
billion
as
of
December
31,
2021,
which
are
fully
collateralized.
Approximately
25%
of
the
public
sector
deposits
as
of
September
30,
2022
was
from
municipalities
and
municipal
agencies
in Puerto
Rico
and 75%
was from
public
corporations,
the central
government
and
agencies,
and U.S.
federal government
agencies
in
Puerto
Rico.
The
decrease
was
primarily
related
to
decreases
in
transactional
account
balances
of
government
public
corporations that reflect, among other things, utilization of federal
funding allocated to Puerto Rico.
In
addition,
as
of
September
30,
2022,
the
Corporation
had
$458.8
million
of
government
deposits
in
the
Virgin
Islands
region
(December 31, 2021 - $568.4 million) and $10.1 million in the Florida
region (December 31, 2021 - $9.6 million).
Estimate
of
Uninsured
Deposits
–
As of
September
30,
2022
and
December
31,
2021,
the estimated
amount
of uninsured
deposits,
excluding brokered
CDs, totaled
$7.9 billion
and $8.9
billion, respectively,
generally representing
the portion
of deposits in
domestic
offices that exceed
the FDIC insurance limit
of $250,000 and amounts
in any other uninsured
deposit account. The balances
presented
as
of
September
30,
2022
and
December
31,
2021
include
government
deposits,
which
are
uninsured
but
fully
collateralized
as
previously mentioned. The
amount of uninsured deposits
is calculated based
on the same methodologies
and assumptions used for
our
bank regulatory reporting requirements adjusted for cash held by
wholly-owned subsidiaries at the Bank.
The following
table presents
by contractual
maturities the
amount of
U.S. time
deposits in
excess of
FDIC insurance
limits (over
$250,000) and other time deposits that are otherwise uninsured as of
September 30, 2022:
(In thousands)
3 months
or less
3 months to
6 months
6 months to
1 year
Over 1
year
Total
U.S. time deposits in excess of FDIC insurance limits
$
256,295
$
109,465
$
134,216
$
142,877
$
642,853
Other uninsured time deposits
$
21,721
$
9,519
$
10,702
$
9,305
$
51,247
Brokered
CDs
–
Total
brokered
CDs
decreased
by
$55.2
million
to
$45.2
million
as
of
September
30,
2022,
compared
to
$100.4
million as of December 31, 2021.
The average remaining term to maturity of the brokered CDs outstanding
as of September 30, 2022 was approximately 1.4 years.
The use of
brokered CDs provides
an efficient
channel for funding
diversification and interest
rate management. Brokered
CDs are
insured by the FDIC up to regulatory limits and can be obtained faster than regular
retail deposits.
Refer to
Net Interest Income
above for information about average balances
of interest-bearing deposits, and the
average interest rate
paid on deposits for the quarters and nine-month periods ended September
30, 2022 and 2021.
Securities
sold
under
agreements
to
repurchase
-
The
Corporation’s
investment
portfolio
is
funded
in
part
with
repurchase
agreements. The Corporation’s outstanding
securities sold under repurchase agreements amounted to $200 million as of September
30,
2022 and
mature on
January 19,
2025
(December 31,
2021 -
$300 million).
One of
the Corporation’s
strategies has
been the
use of
structured
repurchase agreements
and long-term
repurchase agreements
to reduce
liquidity risk
and manage
exposure to
interest rate
risk
by
lengthening
the
final
maturities
of
its
liabilities
while
keeping
funding
costs
at
reasonable
levels.
In
addition
to
these
repurchase
agreements,
the
Corporation
has
been
able
to
maintain
access
to
credit
by
using
cost-effective
sources
such
as
FHLB
advances.
See
Note
9
–
Securities
Sold
Under
Agreements
to
Repurchase,
in
the
Corporation’s
unaudited
consolidated
financial
statements for the
quarter ended September
30, 2022, for further
details about repurchase agreements
outstanding by counterparty
and
maturities.
Under the
Corporation’s
repurchase agreements,
as is the
case with derivative
contracts, the Corporation
is required to
pledge cash
or qualifying securities to meet margin requirements.
To the extent that the value of
securities previously pledged as collateral declines
due to changes in interest
rates, a liquidity crisis or
any other factor, the
Corporation is required to deposit
additional cash or securities
to meet
its margin
requirements, thereby
adversely affecting
its liquidity.
Given the
quality of
the collateral
pledged, the
Corporation
has not experienced margin calls from counterparties
arising from credit-quality-related write-downs in valuations.
Advances from
the FHLB –
The Bank is
a member of
the FHLB system
and obtains advances
to fund its
operations under a
collateral
agreement with the FHLB that requires the Bank to maintain qualifying
mortgages and/or investments as collateral for advances taken.
As of December
31, 2021, the outstanding
balance of long-term
fixed rate FHLB adva
nces was $200 million.
During the third
quarter
of 2022,
the $200
million in
FHLB advances
outstanding as
of December
31, 2021
matured and
were fully
repaid. As
of September
30, 2022, the Corporation had $1.3 billion fully available for additional
borrowing capacity on FHLB lines of credit.
112
Trust-Preferred
Securities –
In 2004, FBP Statutory
Trusts I and
II, statutory trusts
that are wholly-owned
by the Corporation
and not
consolidated
in
the
Corporation’s
financial
statements,
sold
to
institutional
investors
variable-rate
TRuPs
and
used
the
proceeds
of
these issuances, together
with the proceeds
of the purchases by
the Corporation of
variable rate common
securities, to purchase
junior
subordinated
deferrable
debentures.
The
subordinated
debentures
are
presented
in
the
Corporation’s
consolidated
statements
of
financial condition as
other borrowings. As of
each of September
30, 2022 and December
31, 2021, the
Corporation had subordinated
debentures
outstanding
in
the
aggregate
amount
of
$183.8
million
with
maturity
dates
from
June
17,
2034
through
September
20,
2034. See Note 11
– Other Borrowings and
Note 7 – Non-Consolidated Variable
Interest Entities (“VIE”) and Servicing
Assets, in the
Corporation’s unaudited
consolidated financial statements for the quarter ended September 30, 2022
for additional information.
Other Sources of
Funds and Liquidity
- The Corporation’s
principal uses of funds are for
the origination of loans and the repayment
of
maturing deposits and
borrowings. In connection
with its mortgage banking
activities, the Corporation
has invested in
technology and
personnel to enhance the Corporation’s
secondary mortgage market capabilities.
The enhanced
capabilities improve
the Corporation’s
liquidity profile
as they
allow the
Corporation to
derive liquidity,
if needed,
from the sale
of mortgage loans
in the secondary
market. The U.S. (including
Puerto Rico) secondary
mortgage market is
still highly-
liquid, in
large part
because of
the sale
of mortgages
through guarantee
programs of
the FHA,
VA,
U.S. Department
of Housing
and
Urban Development
(“HUD”), FNMA and
FHLMC. During
the first nine
months of
2022, loans pooled
into GNMA MBS
amounted
to
approximately
$115.7
million.
Also,
during
the
first
nine
months
of
2022,
the
Corporation
sold
approximately
$90.8
million
of
performing residential mortgage loans to FNMA and FHLMC.
The Primary
Credit FED Discount
Window Program
is a cost-efficient
contingent source
of funding
for the Corporation
in highly-
volatile
market
conditions.
As previously
mentioned,
although
currently
not
in
use,
as of
September
30,
2022,
the
Corporation
had
approximately $1.2 billion available for funding under the FED’s
BIC Program.
Effect of Credit Ratings on Access to Liquidity
The
Corporation’s
liquidity
is
contingent
upon
its
ability
to
obtain
external
sources
of
funding
to
finance
its
operations.
The
Corporation’s
current credit
ratings and any
downgrade in credit
ratings can hinder
the Corporation’s
access to new
forms of external
funding
and/or
cause
external
funding
to
be
more
expensive,
which
could,
in
turn,
adversely
affect
its
results
of
operations.
Also,
changes in
credit ratings
may further
affect the
fair value
of unsecured
derivatives whose
value takes
into account
the Corporation’s
own credit risk.
The Corporation
does not
have any
outstanding debt
or derivative
agreements that
would be
affected by
credit rating
downgrades.
Furthermore, given the Corporation’s
non-reliance on corporate debt or
other instruments directly linked in
terms of pricing or volume
to credit
ratings, the
liquidity of
the Corporation
has not been
affected in
any material
way by downgrades.
The Corporation’s
ability
to access new non-deposit sources of funding, however,
could be adversely affected by credit downgrades.
As of
the date
hereof, the
Corporation’s
credit as
a long-term
issuer is
rated BB+
by S&P
and BB
by Fitch.
As of
the date
hereof,
FirstBank’s credit
ratings as a
long-term issuer are
Ba2 by Moody’s,
two notches below Moody’s
minimum Baa3 level required
to be
considered investment grade; BB+ by S&P,
one notch below S&P’s minimum
BBB- level required to be considered investment grade;
and
BB
by
Fitch,
two
notches
below
Fitch’s
minimum
BBB-
level
required
to
be
considered
investment
grade.
The
Corporation’s
credit
ratings
are
dependent
on
a
number
of
factors,
both
quantitative
and
qualitative,
and
are
subject
to
change
at
any
time.
The
disclosure of
credit ratings
is not a
recommendation to
buy,
sell or
hold the
Corporation’s
securities. Each
rating should
be evaluated
independently of any other rating.
Cash Flows
Cash and cash
equivalents were $555.0
million as of
September 30, 2022,
a decrease of $2.0
billion when compared
to the balance
as
of
December
31,
2021.
The
following
discussion
highlights
the
major
activities
and
transactions
that
affected
the
Corporation’s
cash flows during the first nine months of 2022 and 2021.
Cash Flows from Operating Activities
First BanCorp.’s
operating assets and
liabilities vary significantly
in the normal course
of business due
to the amount and
timing of
cash flows.
Management
believes that
cash flows
from operations,
available
cash balances
and
the Corporation’s
ability to
generate
cash through short- and
long-term borrowings will be sufficient
to fund the Corporation’s
operating liquidity needs for
the foreseeable
future.
113
For
the
first
nine
months
of
2022
and
2021,
net
cash
provided
by
operating
activities
was
$334.8
million
and
$303.6
million,
respectively.
Net cash
generated from
operating activities
was higher
than reported
net income
largely as
a result
of adjustments
for
items such as depreciation and amortization, as well as cash generated from
sales of loans held for sale.
Cash Flows from Investing Activities
The Corporation’s
investing activities
primarily relate
to originating
loans to
be held
for investment,
as well
as purchasing,
selling
and
repaying
available-for-sale
and
held-to-maturity debt
securities. For
the nine
-month period
ended September
30, 2022
,
net cash
used
in
investing
activities
was
$508.2
million,
primarily
due
to
purchases
of
U.S.
agencies
debentures
and
MBS
and
net
disbursements
on
loans
held
for
investment,
partially
offset
by
prepayments
of
U.S.
agencies
MBS
and
proceeds
from
sales
of
commercial loan participations.
For
the
nine-month
period
ended
September
30,
2021,
net
cash
used
in
investing
activities
was
$1.5
billion,
primarily
due
to
purchases
of
U.S.
agencies
investment
securities
and
liquidity
used
to
fund
commercial
and
consumer
loan
originations,
partially
offset by principal
collected on loans and
U.S. agencies MBS prepayments,
as well as proceeds
from U.S. agencies
bonds called prior
to maturity and the bulk sale of residential mortgage nonaccrual loans.
Cash Flows from Financing Activities
The Corporation’s
financing activities primarily
include the receipt
and withdrawals
of deposits and
the issuance of
brokered CDs,
the issuance of and
payments on long-term debt,
the issuance of equity
instruments and activities related
to its short-term funding.
For
the first
nine months of
2022, net
cash used
in financing
activities was $1.8
billion, mainly
reflecting a
decrease in
total deposits,
the
repayment
at maturity
of a
$100 million
repurchase agreement
and
$200 million
of FHLB
advances,
the repurchase
of 15.9
million
shares of common
stock for a
total purchase
price of
approximately $225.0
million, and the
payment of
$65.8 million
in dividends to
common stock shareholders.
For the
first nine
months of
2021, net
cash provided
by financing
activities was
$2.3 billion,
mainly reflecting
an increase
in non-
brokered deposits,
partially offset
by dividends
paid on
common and
preferred stock,
repurchases of
outstanding common
stock, and
repayment of matured brokered CDs and FHLB advances.
114
Capital
As of
September 30,
2022, the
Corporation’s
stockholders’ equity
was $1.3
billion, a
decrease of
$836.4 million
from December
31, 2021. The decrease
was driven by a $778.7
million decline in the fair
value of available-for-sale debt securities
recorded as part of
accumulated other
comprehensive loss
in the
consolidated statements
of financial
condition, as
a result
of changes
in market
interest
rates. The
decrease
also reflects
the repurchase
of approximately
15.9
million
shares of
common
stock for
a total
purchase price
of
$225 million, and common
stock dividends declared during the
first nine months of 2022 totaling
$65.9 million (or $0.34 per common
share), partially offset by earnings generated in the
first nine months of 2022.
On October 27,
2022 the
Corporation’s
Board of
Directors declared
a quarterly
cash dividend
of $0.12 per
common share
payable
on December 9, 2022 to shareholders
of record at the close of business
on November 25, 2022. The
Corporation intends to continue to
pay quarterly dividends
on common stock.
The Corporation’s
common stock dividends,
including the declaration,
timing and amount,
remain subject to the consideration and approval by the Corporation’s
Board of Directors at the relevant times.
During the first
quarter of 2022,
the Corporation completed
its prior $300
million stock repurchase
program announced in
2021 by
purchasing through open market
transactions 3.4 million shares
of its common stock
for the $50 million remaining
in the program. On
April
27,
2022,
the
Corporation
announced
that
its
Board
of
Directors
approved
a
new
stock
repurchase
program,
under
which
the
Corporation may
repurchase up
to $350
million of
its outstanding
common stock,
expected to
be executed
over four
quarters, which
commenced
in
the
second
quarter
of
2022.
Repurchases
under
the
program
may
be
executed
through
open
market
purchases,
accelerated
share
repurchases
and/or
privately
negotiated
transactions
or
plans,
including
under
plans
complying
with
Rule
10b5-1
under the Exchange Act.
The Corporation’s
stock repurchase program is
subject to various factors,
including the Corporation’s
capital
position,
liquidity,
financial
performance
and
alternative
uses
of
capital,
stock
trading
price,
and
general
market
conditions.
The
repurchase
program
may
be
modified,
extended,
suspended,
or
terminated
at
any
time
at
the
Corporation’s
discretion.
The
Corporation’s
share
repurchase
program
does not
obligate
it to
acquire
any
specific
number
of
shares.
As of
October
31,
2022,
the
Corporation has
repurchased approximately
14.1 million
shares of common
stock for
a total purchase
price of $200
million under
the
$350
million
stock repurchase
program
approved
in April
2022.
The Parent
Company
has no
operations
and depends
on dividends,
distributions and
other payments
from its
subsidiaries to
fund dividend
payments, stock
repurchases, and
to fund
all payments
on its
obligations, including debt obligations.
The tangible common
equity ratio and
tangible book value
per common share
are non-GAAP financial
measures generally used
by
the
financial
community
to
evaluate
capital
adequacy.
Tangible
common
equity
is
total
equity
less
preferred
equity,
goodwill,
and
other
intangible
assets.
Tangible
assets
are
total
assets
less
the
previously
mentioned
intangible
assets.
See
“Basis
of
Presentation”
below for additional information.
115
The
following
table
is
a
reconciliation
of
the
Corporation’s
tangible
common
equity
and
tangible
assets,
non
GAAP
financial
measures, to total equity and total assets, respectively,
as of September 30, 2022 and December 31, 2021, respectively:
September 30, 2022
December 31, 2021
(In thousands, except ratios and per share information)
Total equity
- GAAP
$
1,265,333
$
2,101,767
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(376)
(1,198)
Core deposit intangible
(22,818)
(28,571)
Insurance customer relationship intangible
(51)
(165)
Tangible common
equity
$
1,203,477
$
2,033,222
Total assets - GAAP
$
18,442,034
$
20,785,275
Goodwill
(38,611)
(38,611)
Purchased credit card relationship intangible
(376)
(1,198)
Core deposit intangible
(22,818)
(28,571)
Insurance customer relationship intangible
(51)
(165)
Tangible assets
$
18,380,178
$
20,716,730
Common shares outstanding
186,258
201,827
Tangible common
equity ratio
6.55%
9.81%
Tangible book
value per common share
$
6.46
$
10.07
See
Note
22
–
Regulatory Matters,
Commitments and
Contingencies for
the
regulatory capital
positions of
the
Corporation and
FirstBank
as of September 30, 2022 and
December
31, 2021,
respectively.
The Banking Law
of the Commonwealth of
Puerto Rico requires that
a minimum of 10%
of FirstBank’s
net income for the
year be
transferred
to a
legal surplus
reserve
until such
surplus
equals the
total of
paid-in-capital
on common
and preferred
stock. Amounts
transferred
to
the
legal
surplus
reserve
from
retained
earnings
are
not
available
for
distribution
to
the
Corporation,
including
for
payment
as dividends
to the
stockholders,
without
the prior
consent
of the
Puerto Rico
Commissioner
of Financial
Institutions.
The
Puerto Rico Banking Law
provides that, when the
expenditures of a Puerto
Rico commercial bank are
greater than receipts, the excess
of
the
expenditures
over
receipts
must
be
charged
against
the
undistributed
profits
of
the
bank,
and
the
balance,
if
any,
must
be
charged against
the legal
surplus reserve,
as a
reduction thereof.
If the
legal surplus
reserve is
not sufficient
to cover
such balance
in
whole or
in part,
the outstanding
amount must
be charged
against the
capital account
and the
Bank cannot
pay dividends
until it
can
replenish the
legal surplus
reserve to
an amount
of at
least 20%
of the
original capital
contributed. FirstBank’s
legal surplus
reserve,
included as
part of
retained earnings
in the
Corporation’s
consolidated statements
of financial
condition, amounted
to $137.6
million
as of
each of
September 30,
2022 and
December 31,
2021. There
were no
transfers to
the legal
surplus reserve
during the
first nine
months of 2022.
116
Interest
Rate Risk
Management
First
BanCorp.
manages
its
asset/liability
position
to
limit
the
effects
of
changes
in
interest
rates
on
net
interest
income
and
to
maintain
stability
of
profitability
under
varying
interest
rate
scenarios.
The
MIALCO
oversees
interest
rate
risk
and
MIALCO
meetings focus on, among other things, current and expected conditions
in world financial markets, competition and prevailing rates in
the local
deposit market,
liquidity,
loan originations
pipeline, securities
market values,
recent or
proposed changes
to the
investment
portfolio, alternative
funding sources
and related
costs, hedging
and the possible
purchase of
derivatives such
as swaps and
caps, and
any
tax
or
regulatory
issues
which
may
be
pertinent
to
these
areas.
The
MIALCO
approves
funding
decisions
considering
the
Corporation’s overall strategies and
objectives.
On
a
quarterly
basis,
the
Corporation
performs
a
consolidated
net
interest
income
simulation
analysis
to
estimate
the
potential
change
in
future
earnings
from
projected
changes
in
interest
rates.
These
simulations
are
carried
out
over
a
one-to-five-year
time
horizon, assuming upward
and downward yield
curve shifts. The
rate scenarios considered
in these disclosures
reflect gradual upward
and downward
interest rate
movements of
200 basis points
(“bps”) during
a twelve-month
period. Simulations
are carried
out in
two
ways:
(1) Using a static balance sheet, as the Corporation had on the simulation date,
and
(2) Using a dynamic balance sheet based on recent patterns and current strategies.
The balance sheet
is divided into
groups of assets
and liabilities by
maturity or re-pricing
structure and their
corresponding interest
rate
yields
and
costs. As
interest
rates
rise
or fall,
these
simulations
incorporate
expected
future
lending rates,
current and
expected
future funding sources and
costs, the possible exercise of options,
changes in prepayment rates,
deposit decay and other factors,
which
may be important in projecting net interest income.
The
Corporation
uses a
simulation
model
to
project
future
movements
in
the
Corporation’s
balance
sheet
and
income
statement.
The
starting
point
of
the
projections
corresponds
to
the
actual
values
on
the
balance
sheet
on
the
date
of
the
simulations.
These
simulations
are highly
complex
and
are based
on many
assumptions that
are intended
to reflect
the general
behavior of
the balance
sheet components over
the modeled periods. It
is unlikely that actual
events will match these
assumptions in all cases.
For this reason,
the results
of these
forward-looking computations
are only
approximations of
the true
sensitivity of
net interest
income to
changes in
market
interest
rates.
Several
benchmark
and
market
rate
curves
were
used
in
the
modeling
process,
primarily
the
LIBOR/SWAP
curve,
SOFR
curve,
Prime
Rate,
U.S.
Treasury
yield
curve,
FHLB
rates,
brokered
CD
rates,
repurchase
agreement
rates,
and
the
mortgage commitment rate of 30 years.
As of September 30,
2022, the Corporation forecasted
the 12-month net interest
income assuming September
30, 2022 interest rate
curves remain
constant. Net interest
income was then
estimated under rising
and falling rate
scenarios. For
the rising rates
scenario, a
gradual
(ramp)
parallel
upward
shift
of
the
yield
curve
is assumed
during
the
first
twelve
months
(the
“+200
bps
ramp”
scenario).
Conversely,
for
the
falling
rates
scenario,
a
gradual
(ramp)
parallel
downward
shift
of
the
yield
curve
is
assumed
during
the
first
twelve months (the “-200 bps ramp” scenario).
The
LIBOR/Swap
rates
for
September
30,
2022,
as
compared
to
the
January
31,
2022
rates
used
for
the
December
31,
2021
sensitivity,
reflected an
increase in
the short-term
sector of
the curve,
that is
between one
to twelve
months, of
355 bps
on average;
while market rates
increased in the
medium-term sector of
the curve, that is
between 2 to 5
years, by 276
bps. In the long-term
sector,
that
is
over
5-year
maturities,
market
rates
increased
198
bps
as
compared
to
January
31,
2022.
A
similar
pattern
on
market
rates
changes were
observed in the
Treasury curve
for both the
short and long-term
maturities as mentioned
above with a
317 bps increase
in the short-term
sector and a 190
bps increase in the
long-term sector.
This results in a
projected increase in
the base simulation
used
for the sensitivity.
117
The following table presents the results of the simulations as of September 30,
2022 and December 31, 2021.
Consistent with prior
years, these exclude non-cash changes in the fair value of derivatives:
September 30, 2022
December 31, 2021
Net Interest Income Risk
Net Interest Income Risk
(Projected for the next 12 months)
(Projected for the next 12 months)
Static Simulation
Growing Balance Sheet
Static Simulation
Growing Balance Sheet
(Dollars in millions)
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
+ 200 bps ramp
$
19.1
2.28
%
$
22.9
2.67
%
$
34.5
4.81
%
$
39.1
5.17
%
- 200 bps ramp
$
(24.8)
(2.96)
%
$
(26.9)
(3.14)
%
$
(12.2)
(1.70)
%
$
(13.5)
(1.78)
%
The Corporation
continues to
manage
its balance
sheet structure
to control
and limit
the overall
interest rate
risk
by managing
its
asset
composition
and
improving
the
funding
mix,
mainly
by
pursuing
stable
core
deposits,
and
reducing
wholesale
funds,
while
maintaining
a
sound
liquidity
position.
As
of
September
30,
2022
and
December
31,
2021,
the
simulations
showed
that
the
Corporation continues to have an asset-sensitive position.
As of September 30,
2022, the net interest income
for the next twelve months
under a non-static
balance sheet scenario
is estimated to
increase
by $22.9
million
in the
rising rate
scenario,
when compared
against
the base
simulation.
The
decrease
in net
interest
income
sensitivity
for
the
+200
bps
ramp
scenario,
as compared
to December
31,
2021,
is primarily
driven by the size and mix of the
balance sheet and the changes in market
interest rates. As of September 30, 2022
the starting point of
the simulation
reflects lower
balances in
more sensitive
assets such
as cash
and cash
equivalents as
a result
of the
overall decline
in
total
deposits,
the
deployment
of
liquidity
to
fund
the
investment
securities
portfolio,
the
loan
portfolio
growth,
the
repayment
of
wholesale funding, and the repurchase of shares of common stock.
Under the falling rate,
non-static scenario the net interest income is
estimated to decrease $26.9 million. As
market
rates
shift
away
from
historically
low,
near
zero
interest
rate
levels,
it
allows
for
full
downward
interest
rate
shifts
under
the
-200
bps
scenario
resulting in the increase in net interest income sensitivity for the -200
bps ramp.
Derivatives
First
BanCorp.
uses derivative
instruments
and
other
strategies
to
manage
its exposure
to
interest
rate
risk
caused
by
changes
in
interest
rates
beyond
management’s
control.
The
use
of
derivatives
involves
market
and
credit
risk.
The
market
risk
of
derivatives
stems principally
from the potential
for changes
in the value
of derivative
contracts based on
changes in interest
rates. The credit
risk
of
derivatives
arises
from
the
potential
for
default
of
the
counterparty.
To
manage
this
credit
risk,
the
Corporation
deals
with
counterparties
that
it
considers
to
be
of
good
credit
standing,
enters
into
master
netting
agreements
whenever
possible
and,
when
appropriate, obtains collateral.
As
of
September
30,
2022
and
December
31,
2021,
the
Corporation
considered
all
of
its derivative
instruments
as
undesignated
economic hedges. As
of September 30, 2022,
the aggregate balance
of derivative assets was
$1.2 million, compared
to $1.5 million as
of December
31, 2021.
As of
September 30,
2022, the
aggregate balance
of derivative
liabilities was
$0.5 million,
compared to
$1.2
million as
of December
31, 2021.
Derivative instruments
include interest
rate swap
agreements, interest
rate caps,
forward contracts,
interest
rate
lock
commitments,
and
forward
loan
sales
commitments.
For
detailed
information
regarding
the
volume
of
derivative
activities
(e.g.,
notional
amounts),
location
and
fair
values
of
derivative
instruments
in
the
consolidated
statements
of
financial
condition as of December 31,
2021 and the amount of
gains and losses reported in
the consolidated statements of income
during 2021,
see Note 34 – Derivative Instruments and Hedging Activities included in
the 2021 Annual Report on Form 10-K.
118
Credit Risk
Management
First
BanCorp. is
subject to
credit
risk
mainly
with
respect to
its
portfolio of
loans
receivable and
off-balance-sheet instruments,
principally
loan commitments.
Loans receivable
represents
loans that First
BanCorp. holds
for investment
and, therefore,
First BanCorp.
is
at risk
for the
term of
the loan.
Loan commitments represent commitments to extend
credit, subject to
specific conditions, for specific
amounts and maturities. These commitments
may expose the Corporation to credit risk and are
subject to the same review and approval
process as
for loans made
by the Bank.
See “Liquidity
Risk and Capital
Adequacy”
above for further
details.
The Corporation
manages its
credit
risk
through
its
credit
policy,
underwriting,
independent
loan
review
and
quality
control
procedures,
statistical
analysis,
comprehensive financial analysis,
and established management committees. The Corporation also employs proactive collection and loss
mitigation
efforts.
Furthermore, personnel
performing
structured
loan
workout
functions
are
responsible for
mitigating defaults
and
minimizing
losses upon
default
within each
region and
for each business
segment.
In the case
of the commercial
and industrial,
commercial
mortgage and construction loan portfolios, the Special Asset Group (“SAG”) focuses on
strategies for the accelerated reduction
of non-
performing assets through note sales,
short sales, loss
mitigation programs, and sales of
OREO.
In addition to
the management of
the
resolution process
for
problem loans,
the
SAG
oversees collection efforts
for
all
loans to
prevent migration
to
the
nonaccrual and/or
adversely
classified
status.
The SAG
utilizes
relationship
officers,
collection
specialists
and attorneys.
The Corporation
may also
have risk
of default
in the securities
portfolio.
The securities
held by the
Corporation
are principally
fixed-rate
U.S. agency MBS and
U.S. Treasury and agencies securities. Thus, a substantial portion of these instruments is backed by mortgages, a
guarantee
of a U.S.
GSE or the
full faith
and credit
of the U.S.
government.
Management, consisting of the
Corporation’s Commercial Credit Risk
Officer, Retail
Credit Risk Officer,
Chief Credit Officer,
and
other senior executives, has the primary responsibility
for setting strategies to achieve the Corporation’s credit risk goals and objectives.
Management
has documented
these goals
and objectives
in the
Corporation’s
Credit Policy.
119
Allowance
for Credit
Losses and
Non-performing
Assets
Allowance
for Credit
Losses for
Loans and
Finance Leases
The ACL
for loans
and finance
leases represents
the estimate
of the
level of
reserves appropriate
to absorb
expected credit
losses
over the estimated life of the
loans. The amount of the allowance
is determined using relevant available
information, from internal and
external sources, relating to past events, current conditions, and
reasonable and supportable forecasts.
Historical credit loss experience
is
a
significant
input
for
the
estimation
of
expected
credit
losses,
as
well
as
adjustments
to
historical
loss
information
made
for
differences in current loan-specific
risk characteristics, such as differences
in underwriting standards, portfolio mix,
delinquency level,
or
term.
Additionally,
the
Corporation’s
assessment
involves
evaluating
key
factors,
which
include
credit
and
macroeconomic
indicators,
such as
changes in
unemployment
rates, property
values, and
other relevant
factors to
account for
current and
forecasted
market
conditions that are
likely to cause
estimated credit losses
over the life
of the loans
to differ
from historical credit
losses.
Such
factors are
subject to
regular review
and may
change to
reflect updated
performance trends
and expectations,
particularly in
times of
severe
stress.
The
process
includes
judgments
and
quantitative
elements
that
may
be
subject
to
significant
change.
Further,
the
Corporation periodically considers the need for qualitative
reserves to the ACL. Qualitative adjustments may be
related to and include,
but are
not limited
to, factors
such as
the following:
(i) management’s
assessment of
economic forecasts
used in
the model
and how
those
forecasts
align
with
management’s
overall
evaluation
of
current
and
expected
economic
conditions;
(ii)
organization
specific
risks such
as credit
concentrations,
collateral
specific risks,
nature
and
size of
the portfolio
and
external
factors that
may
ultimately
impact credit quality,
and (iii) other limitations associated
with factors such as
changes in underwriting
and loan resolution strategies,
among others.
The ACL
for loans
and finance
leases is
reviewed at
least on
a quarterly
basis as
part of
the Corporation’s
continued
evaluation of its asset quality.
As
previously
mentioned,
on
September
17,
2022,
Hurricane
Fiona
made
landfall
in
the
southwestern
part
of
Puerto
Rico
as
a
Category 1
storm. As
part of
its ACL
calculation, the
Corporation
considers the
need for
qualitative adjustments
that include
factors
such as
natural disasters.
As of
September 30,
2022, management
determined
that no
separate
qualitative reserves
of the
ACL were
required.
Notwithstanding,
estimates
of
the
storm’s
effect
on
loan
losses
may
change
over
time
as
additional
information
becomes
available and any related revisions in the ACL calculation will be reflected in the provision
for credit losses as they occur.
During
the
first
nine
months
of
2022,
the
Corporation
applied
probability
weights
to
the
baseline
and
alternative
downside
economic
scenarios
to estimate
the ACL
with the
baseline
scenario
carrying
the highest
weight.
In weighting
these
macroeconomic
scenarios, the Corporation
applied judgment based
on a variety
of factors such
as economic uncertainties
including continued
conflict
in
Ukraine,
the
overall
inflationary
environment,
and
a
potential
slowdown
in
economic
activity
as
a
result
of
the
FED’s
policy
to
control inflationary
economic conditions.
For periods
prior to
2022, the
Corporation calculated
the ACL
using the
baseline scenario.
As
of
September
30,
2022,
the
Corporation’s
ACL
model
considered
the
following
assumptions
for
key
economic
variables
in
the
probability-weighted economic scenarios:
●
Average
commercial real
estate price
index forecast
for the
remainder of
2022 and
year 2023
stands at
2.93%, compared
to
5.16% in the previous forecast.
●
A deterioration of approximately
10.61% in the forecast of
average housing price index
in Puerto Rico (purchase only prices)
for the remainder of 2022 and year 2023, when compared to the previous
forecast.
●
Slight
increase
in
levels
of
regional
unemployment
in
Puerto
Rico
to
8.15%
for
the
remainder
of
2022
and
year
2023,
compared to
the previous
forecast of
7.99%. For
the Florida
region and
the U.S.
mainland, slight
increase in
unemployment
rate to 3.90% and 4.60%, respectively,
for the remainder of 2022 and year 2023,
compared to 3.57% and 4.30%, respectively,
in the previous forecast.
●
A slight decrease
in real gross
domestic product
(“GDP”) in the
U.S. mainland
to 0.59%
for the remainder
of 2022
and year
2023,
compared to the previous forecast of 1.83%.
It is difficult to estimate how potential changes
in one factor or input might affect the overall ACL because
management considers a
wide variety of
factors and inputs in
estimating the ACL.
Changes in the
factors and inputs considered
may not occur
at the same rate
and may not be consistent
across all geographies or product
types, and changes in factors
and inputs may be directionally
inconsistent,
such that improvement
in one factor
or input may
offset deterioration
in others. However,
to demonstrate the
sensitivity of credit
loss
estimates to macroeconomic
forecasts as of
September 30, 2022,
management compared the
modeled estimates under
the probability-
weighted
economic
scenarios
against
a
more
adverse
scenario.
Under
this
more
adverse
scenario,
as
an
example,
average
unemployment
rate
for
the
Puerto
Rico
region
increases
to
8.74%
for
the
remainder
of
2022
and
year
2023,
compared
to
8.15%,
respectively, for the
same periods on the probability-weighted economic scenario projections.
120
To
demonstrate the sensitivity to
key economic parameters used
in the calculation of
our ACL at September
30, 2022, management
calculated
the
difference
between
our
quantitative
ACL
and
this
more
adverse
scenario.
Excluding
consideration
of
qualitative
adjustments,
this sensitivity
analysis would
result in
a hypothetical
increase
in our
ACL of
approximately
$33 million
at September
30, 2022. This
analysis relates only
to the modeled
credit loss estimates and
is not intended
to estimate changes
in the overall
ACL as
it
does
not
reflect
any
potential
changes
in
other
adjustments
to
the
qualitative
calculation,
which
would
also
be
influenced
by
the
judgment
management
applies
to
the
modeled
lifetime
loss
estimates
to
reflect
the
uncertainty
and
imprecision
of
these
estimates
based
on
current
circumstances
and
conditions.
Recognizing
that
forecasts
of
macroeconomic
conditions
are
inherently
uncertain,
particularly in light
of the recent economic
conditions, management believes
that its process to
consider the available
information and
associated
risks
and
uncertainties
is
appropriately
governed
and
that
its
estimates
of
expected
credit
losses
were
reasonable
and
appropriate for the period ended September 30, 2022.
As of September 30,
2022, the ACL for loans
and finance leases was $257.9
million, down $11.1
million from December 31,
2021.
The
reduction
of
the
ACL
for
commercial
and
construction
loans
was
$23.5
million,
primarily
reflecting
reduced
COVID-19
uncertainties and, to a lesser extent, a reduction in qualitative reserves due
to updated borrowers’ financial information received during
the third
quarter of
2022. In
addition, the
ACL for
residential mortgage
loans decreased
by $9.7
million, primarily
due to
the overall
reduction in the
size of this
portfolio. The aforementioned
ACL reductions
were partially offset
by an increase
of $22.1 million
in the
ACL for consumer loans, mainly reflecting the effect
of the increase in the size of the consumer loan portfolios,
the increase in charge-
off levels
associated to the
overall portfolio
growth and
a less positive
long-term outlook
of certain
macroeconomic variables
such as
the regional
unemployment rate,
as a
result of
the aforementioned
economic uncertainties.
Refer to
Note 1
- Nature
of Business
and
Summary of Significant Accounting Policies, in the 2021
Annual Report on Form 10-K for a description of
the methodologies used by
the Corporation to determine the ACL.
The ratio
of the ACL
for loans and
finance leases
to total
loans held
for investment
decreased to
2.28% as
of September
30, 2022,
compared to 2.43% as of December 31, 2021. An explanation for the change for
each portfolio follows:
●
The ACL to total
loans ratio for the
residential mortgage loan
portfolio decreased from
2.51% as of December
31, 2021 to
2.30%
as of
September 30,
2022, primarily
due to
improvements in
the long-term
outlook of
forecasted macroeconomic
variables, such
as the
housing price
index, during
the first
six months
of 2022,
partially offset
by a
slight deterioration
of
these variables during the third quarter of 2022.
●
The ACL
to total
loans ratio
for the
commercial mortgage
loan portfolio
decreased from
2.43% as
of December
31, 2021
to
1.34%
as
of
September
30,
2022,
primarily
reflecting
reduced
COVID-19
uncertainties
and,
to
a
lesser
extent,
a
reduction in qualitative reserves due to updated borrowers’ financial information
received during the third quarter of 2022.
●
The ACL
to total
loans ratio
for the
commercial and
industrial portfolio
was 1.24%
as of
September 30,
2022, remained
relatively flat when compared to 1.19% as of December 31, 2021.
●
The ACL
to total
loans ratio for
the construction
loan portfolio
decreased from
2.91% as
of December
31, 2021
to 1.47%
as of September
30, 2022, primarily
reflecting reductions in
qualitative reserves mostly
associated to previously
-identified
specific risks for a construction project in Florida that were resolved during the first quarter
of 2022.
●
The ACL
to total
loans ratio
for the
consumer loan
portfolio increased
from 3.57%
as of December
31, 2021
to 3.89% as
of September
30, 2022, primarily
associated to
a less positive
long-term outlook
on certain
macroeconomic variables
as a
result of economic uncertainties previously discussed.
The ratio
of the
total ACL
to nonaccrual
loans held
for investment
was 264.43%
as of
September 30,
2022, compared
to 242.99%
as of December 31, 2021.
Substantially all of
the Corporation’s
loan portfolio is
located within the
boundaries of the
U.S. economy.
Whether the collateral
is
located in Puerto Rico, the U.S. and British Virgin
Islands or the U.S. mainland (mainly in the state of
Florida), the performance of the
Corporation’s
loan
portfolio
and
the
value
of
the
collateral
supporting
the
transactions
are
dependent
upon
the
performance
of
and
conditions
within each
specific area’s
real estate
market. The
Corporation believes
it sets
adequate loan-to-value
ratios following
its
regulatory and credit policy standards.
As shown
in the
following tables,
the ACL
for loans
and finance
leases amounted
to $257.9
million as
of September
30, 2022,
or
2.28% of
total loans,
compared with
$288.4 million,
or 2.59% of
total loans,
as of
September 30,
2021 and
$269.0 million,
or 2.43%
of total loans, as of December 31, 2021. See “Results of Operations -
Provision for Credit Losses” above for additional information.
121
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
(Dollars in thousands)
2022
2021
2022
2021
ACL for loans and finance leases, beginning of period
$
252,152
$
324,958
$
269,030
$
385,887
Provision for credit losses - expense (benefit):
Residential mortgage
755
(6,206)
(6,913)
(9,556)
Commercial mortgage
(2,383)
(4,660)
(23,758)
(40,779)
Commercial and Industrial
(1,228)
(4,449)
(575)
(10,187)
Construction
(179)
527
(2,242)
(125)
Consumer and finance leases
17,387
6,054
43,516
11,168
Total provision for credit losses - expense (benefit)
$
14,352
$
(8,734)
$
10,028
$
(49,479)
Charge-offs:
Residential mortgage
(1,466)
(25,418)
(1)
(6,073)
(31,170)
(1)
Commercial mortgage
(3)
(429)
(42)
(1,304)
Commercial and Industrial
(8)
(167)
(366)
(1,036)
Construction
(63)
(7)
(123)
(52)
Consumer and finance leases
(12,522)
(8,345)
(32,765)
(34,904)
Total charge-offs
$
(14,062)
$
(34,366)
$
(39,369)
$
(68,466)
Recoveries:
Residential mortgage
559
1,968
3,228
3,641
Commercial mortgage
57
43
1,319
147
Commercial and Industrial
494
494
2,118
6,627
Construction
43
42
138
116
Consumer and finance leases
4,264
3,955
11,367
9,887
Total recoveries
$
5,417
$
6,502
$
18,170
$
20,418
Net charge-offs
$
(8,645)
$
(27,864)
$
(21,199)
$
(48,048)
ACL for loans and finance leases, end of period
$
257,859
$
288,360
$
257,859
$
288,360
ACL for loans and finance leases to period-end total loans
held for investment
2.28
%
2.59
%
2.28
%
2.59
%
Net charge-offs (annualized) to average loans outstanding during the period
0.31
%
0.99
%
(2)
0.25
%
0.56
%
(2)
Provision for credit losses - expense (benefit) for loans and finance
leases to net
charge-offs during the period
1.66x
-0.31x
0.47x
-1.03x
(1)
Includes net charge-offs totaling $23.1 million associated with the bulk sale of residential mortgage nonaccrual loans and related servicing advance receivables.
(2)
Excluding net charge-offs associated with the bulk sale, total net charge-offs for the third quarter and first nine months of 2021 was 0.17% and 0.29%, respectively.
122
The following table
sets forth information
concerning the allocation
of the Corporation's ACL
for loans and
finance leases by loan
category and the percentage of loan balances in each category to the total of
such loans as of the indicated dates:
As of
As of
September 30, 2022
December 31, 2021
(Dollars in thousands)
Amount
Percent of loans in
each category to
total loans
Amount
Percent of loans in
each category to
total loans
Residential mortgage loans
$
65,079
25
%
$
74,837
27
%
Commercial mortgage loans
30,290
20
%
52,771
20
%
Commercial and Industrial loans
35,461
25
%
34,284
26
%
Construction loans
1,821
1
%
4,048
1
%
Consumer loans and finance leases
125,208
29
%
103,090
26
%
$
257,859
100
%
$
269,030
100
%
The following tables set forth information concerning the composition of the
Corporation's loan portfolio and related ACL as of
September 30, 2022 and December 31, 2021 by loan category:
As of September 30, 2022
Residential
Mortgage Loans
Commercial
Mortgage Loans
Consumer and
Finance Leases
Construction
Loans
(Dollars in thousands)
C&I Loans
Total
Total loans held for investment:
Amortized cost of loans
$
2,830,974
$
2,265,614
$
2,858,286
$
123,994
$
3,219,750
$
11,298,618
Allowance for credit losses
65,079
30,290
35,461
1,821
125,208
257,859
Allowance for credit losses to amortized
cost
2.30
%
1.34
%
1.24
%
1.47
%
3.89
%
2.28
%
As of December 31, 2021
Residential
Mortgage Loans
Commercial
Mortgage Loans
Consumer and
Finance Leases
Construction
Loans
(Dollars in thousands)
C&I Loans
Total
Total loans held for investment:
Amortized cost of loans
$
2,978,895
$
2,167,469
$
2,887,251
$
138,999
$
2,888,044
$
11,060,658
Allowance for credit losses
74,837
52,771
34,284
4,048
103,090
269,030
Allowance for credit losses to amortized
cost
2.51
%
2.43
%
1.19
%
2.91
%
3.57
%
2.43
%
123
Allowance
for Credit
Losses for
Unfunded
Loan Commitments
The Corporation estimates
expected credit losses
over the contractual
period in which
the Corporation is
exposed to credit
risk as a
result
of
a
contractual
obligation
to
extend
credit,
such as
pursuant
to unfunded
loan
commitments
and
standby
letters of
credit
for
commercial and
construction loans,
unless the
obligation is
unconditionally cancellable
by the
Corporation. The
ACL for
off-balance
sheet
credit
exposures
is
adjusted
as
a
provision
for
credit loss
expense.
As
of
September
30,
2022,
the
ACL
for
off-balance
sheet
credit
exposures
was
$4.2
million,
up
$2.7
million
from
$1.5
million
as
of
December
31,
2021,
mainly
driven
by
an
increase
in
unfunded loan commitments principally due to newly originated facilities which
remained undrawn as of September 30, 2022.
Allowance for Credit Losses for Held-to-Maturity
Debt Securities
As
of
September
30,
2022,
the
ACL
for
held-to-maturity
debt
securities
portfolio
was
entirely
related
to
financing
arrangements
with Puerto Rico municipalities issued
in bond form, which the
Corporation accounts for as securities,
but which were underwritten
as
loans
with
features
that
are
typically
found
in
commercial
loans.
As
of
September
30,
2022,
the
ACL
for
held-to-maturity
debt
securities was $8.3 million, compared to $8.6 million as of December 31,
2021.
Allowance for Credit Losses for Available
-for-Sale Debt Securities
The
ACL
for
available-for-sale
debt
securities,
which
is
associated
with
private
label
MBS
and
a
residential
pass-through
MBS
issued by the PRHFA, was $0.7
million as of September 30, 2022, compared to $1.1 million as of December 31,
2021. The decrease in
the ACL is mostly related to a continued positive long-term outlook
of forecasted macroeconomic variables.
124
Nonaccrual Loans and Non-performing Assets
Total
non-performing
assets consist
of
nonaccrual
loans (generally
loans held
for
investment
or loans
held
for
sale on
which
the
recognition of
interest income
was discontinued
when the
loan became
90 days
past due
or earlier
if the
full and
timely collection
of
interest or principal
is uncertain), foreclosed
real estate and
other repossessed properties,
and non-performing
investment securities,
if
any.
When a
loan is placed
in nonaccrual
status, any
interest previously
recognized and
not collected
is reversed
and charged
against
interest
income.
Cash
payments
received
are
recognized
when
collected
in
accordance
with
the
contractual
terms
of
the
loans.
The
principal
portion
of the
payment is
used to
reduce
the principal
balance
of the
loan,
whereas the
interest portion
is recognized
on a
cash basis
(when collected).
However,
when management
believes that
the ultimate
collectability of
principal is
in doubt,
the interest
portion
is
applied
to
the
outstanding
principal.
The
risk
exposure
of
this
portfolio
is
diversified
as
to
individual
borrowers
and
industries, among other factors. In addition, a large portion
is secured with real estate collateral.
Nonaccrual Loans Policy
Residential Real Estate Loans
— The Corporation generally classifies real estate loans in nonaccrual
status when it has not received
interest and principal for a period of 90 days or more.
Commercial
and
Construction
Loans
—
The
Corporation
classifies
commercial
loans
(including
commercial
real
estate
and
construction loans) in nonaccrual
status when it has not
received interest and principal
for a period of 90
days or more or when
it does
not expect to collect all of the principal or interest due to deterioration in the financial condition
of the borrower.
Finance Leases
— The Corporation
classifies finance leases
in nonaccrual status
when it has not
received interest and
principal for
a period of 90 days or more.
Consumer Loans
— The Corporation
classifies consumer
loans in nonaccrual
status when it
has not received
interest and
principal
for a period of 90 days or more. Credit card loans continue to accrue
finance charges and fees until charged-off
at 180 days delinquent.
Purchased
Credit Deteriorated
(“PCD”) Loans
— For
PCD loans,
the nonaccrual
status is
determined in
the same
manner as
for
other loans,
except for
PCD loans
that prior
to the
adoption of
CECL were
classified as
purchased credit
impaired (“PCI”)
loans and
accounted
for
under
ASC
Subtopic
310-30,
“Receivables
–
Loans
and
Debt
Securities
Acquired
with
Deteriorated
Credit
Quality”
(ASC Subtopic 310
-30). As allowed
by CECL, the
Corporation elected
to maintain pools
of loans accounted
for under ASC
Subtopic
310-30 as “units of accounts,” conceptually treating
each pool as a single asset. Regarding interest income recognition,
the prospective
transition approach for PCD loans was applied at a pool level, which
froze the effective interest rate of the pools as of January
1, 2020.
According
to
regulatory
guidance,
the
determination
of
nonaccrual
or
accrual
status
for
PCD
loans
with
respect
to
which
the
Corporation
has
made
a
policy
election
to
maintain
previously
existing
pools
upon
adoption
of
CECL
should
be
made
at
the
pool
level,
not
the
individual
asset
level.
In
addition,
the
guidance
provides
that
the
Corporation
can
continue
accruing
interest
and
not
report
the PCD
loans as
being
in nonaccrual
status if
the following
criteria
are met:
(i) the
Corporation
can reasonably
estimate the
timing and amounts of
cash flows expected to
be collected; and (ii)
the Corporation did not
acquire the asset primarily
for the rewards
of ownership
of the
underlying collateral,
such as
the use
in operations
or improving
the collateral
for resale.
Thus, the
Corporation
continues to exclude these pools of PCD loans from nonaccrual loan statistics.
Other Real Estate Owned
OREO
acquired
in
settlement
of
loans
is
carried
at
the
lower
of
cost
or
fair
value
less
estimated
costs
to
sell
off
the
real
estate.
Appraisals are obtained periodically,
generally on an annual basis.
125
Other Repossessed Property
The
other
repossessed
property
category
generally
included
repossessed
boats
and
autos
acquired
in
settlement
of
loans.
Repossessed boats and autos are recorded at the lower of cost or estimated fair value.
Other Non-Performing Assets
This
category
consisted
of a
residential
pass-through
MBS
issued
by
the
PRHFA placed
in
non-performing
status
in
the
second
quarter of 2021 based on the delinquency status of the underlying second
mortgage loans.
Loans Past-Due 90 Days and Still Accruing
These are accruing loans
that are contractually delinquent
90 days or more. These
past-due loans are either
current as to interest but
delinquent
as to
the payment
of
principal
or are
insured
or guaranteed
under
applicable FHA,
VA,
or
other
government-guaranteed
programs for residential mortgage loans. Furthermore,
as required by instructions in regulatory reports, loans past due
90 days and still
accruing
include
loans
previously
pooled
into
GNMA
securities
for
which
the
Corporation
has
the
option
but
not
the
obligation
to
repurchase loans
that meet
GNMA’s
specified delinquency
criteria (
e.g.
, borrowers
fails to
make any
payment for
three consecutive
months).
For accounting
purposes,
these
GNMA
loans
subject to
the repurchase
option are
required
to be
reflected
on the
financial
statements with
an offsetting
liability.
In addition,
loans past
due 90
days and
still accruing
include PCD
loans, as
mentioned above,
and credit cards that continue accruing interest until charged-off
at 180 days.
TDRs are
classified
as either
accrual
or nonaccrual
loans. A
loan
on nonaccrual
status and
restructured
as a
TDR will
remain
on
nonaccrual
status until
the borrower
has proven
the ability
to perform
under the
modified structure,
generally
for a
minimum
of six
months,
and there
is evidence
that
such payments
can and
are
likely to
continue
as agreed.
The Corporation
considers performance
prior to the restructuring, or significant events that coincide with the restructuring,
in assessing whether the borrower can meet the new
terms,
which
may
result
in
the
loan
being
returned
to
accrual
status
at
the
time
of
the
restructuring
or
after
a
shorter
performance
period. If the borrower’s ability to meet the revised payment schedule
is uncertain, the loan remains classified as a nonaccrual loan.
126
The following table presents non-performing assets as of the indicated dates:
September 30,
December 31,
(Dollars in thousands)
2022
2021
Nonaccrual loans held for investment:
Residential mortgage
$
43,036
$
55,127
Commercial mortgage
23,741
25,337
Commercial and Industrial
15,715
17,135
Construction
2,237
2,664
Consumer and finance leases
12,787
10,454
Total nonaccrual loans held for investment
$
97,516
$
110,717
OREO
38,682
40,848
Other repossessed property
4,936
3,687
Other assets
(1)
2,193
2,850
Total non-performing assets
(2) (3)
$
143,327
$
158,102
Past due loans 90 days and still accruing
(2) (4) (5)
$
81,790
$
115,448
Non-performing assets to total assets
0.78
%
0.76
%
Nonaccrual loans held for investment to total loans held for investment
0.86
%
1.00
%
ACL for loans and finance leases
$
257,859
$
269,030
ACL for loans and finance leases to total nonaccrual loans held for investment
264.43
%
242.99
%
ACL for loans and finance leases to total nonaccrual loans held for investment,
excluding residential real estate loans
473.31
%
483.95
%
(1)
Residential pass-through MBS issued by the PRHFA held as part of the available-for-sale debt securities
portfolio.
(2)
Excludes PCD loans previously accounted for under ASC Subtopic
310-30 for which the Corporation made the accounting
policy election of maintaining pools of
loans
as “units of account” both at the time of adoption
of CECL on January 1, 2020 and on an ongoing basis for
credit loss measurement. These loans will
continue to be excluded from nonaccrual loan statistics
as long as the Corporation can reasonably estimate the timing
and amount of cash flows expected to be
collected on the loan pools. The portion of such loans
contractually past due 90 days or more amounted to $12.8
million and $20.6 million as of September 30,
2022 and December 31, 2021, respectively.
(3)
Nonaccrual loans exclude $340.1 million and $363.4 million
of TDR loans that were in compliance with the modified
terms and in accrual status as of September
30, 2022 and December 31, 2021, respectively.
(4)
Includes FHA/VA government-guaranteed residential mortgage loans as loans past-due 90 days and still accruing
as opposed to nonaccrual loans. The Corporation
continues accruing interest on these loans until they have
passed the 15 months delinquency mark, taking into consideration
the FHA interest curtailment process.
These balances include $31.0 million and $46.6 million of FHA
government-guaranteed residential mortgage loans that were
over 15 months delinquent as of
September 30, 2022 and December 31, 2021, respectively.
(5)
Includes rebooked loans, which were previously pooled into GNMA
securities, amounting to $8.0 million and $7.2 million
as of September 30, 2022 and
December 31, 2021, respectively. Under the GNMA program, the Corporation has the option but
not the obligation to repurchase loans that meet GNMA’s
specified delinquency criteria. For accounting purposes, the
loans subject to the repurchase option are required to
be reflected on the financial statements with an
offsetting liability.
127
Total
nonaccrual loans
were $97.5
million as
of September
30, 2022.
This represents
a net
decrease of
$13.2 million
from $110.7
million
as
of
December
31,
2021.
The
net
decrease
was
primarily
related
to
a
$12.1
million
decrease
in
nonaccrual
residential
mortgage
loans,
mostly
driven
by
loans
restored
to
accrual
status
and
collections,
including
the
payoff
of
an
individual
loan
of
approximately $1.3 million
during the first nine months
of 2022. In addition, nonaccrual
commercial and construction loans decreased
by $3.4
million. These
variances were
partially offset
by a
$2.3 million
increase in
nonaccrual consumer
loans, mostly
related to
the
continued trend of growth in the auto loan and finance leases portfolios.
The following table shows non-performing assets by geographic segment
as of the indicated dates:
September 30,
December 31,
(In thousands)
2022
2021
Puerto Rico:
Nonaccrual loans held for investment:
Residential mortgage
$
30,988
$
39,256
Commercial mortgage
15,269
15,503
Commercial and Industrial
13,564
14,708
Construction
854
1,198
Consumer and finance leases
12,510
10,177
Total nonaccrual loans held for investment
73,185
80,842
OREO
34,626
36,750
Other repossessed property
4,789
3,456
Other assets
2,193
2,850
Total non-performing assets
$
114,793
$
123,898
Past due loans 90 days and still accruing
$
80,249
$
114,001
Virgin Islands:
Nonaccrual loans held for investment:
Residential mortgage
$
6,530
$
8,719
Commercial mortgage
8,472
9,834
Commercial and Industrial
1,313
1,476
Construction
1,383
1,466
Consumer
143
144
Total nonaccrual loans held for investment
17,841
21,639
OREO
4,025
3,450
Other repossessed property
98
187
Total non-performing assets
$
21,964
$
25,276
Past due loans 90 days and still accruing
$
1,541
$
1,265
United States:
Nonaccrual loans held for investment:
Residential mortgage
$
5,518
$
7,152
Commercial and Industrial
838
951
Consumer
134
133
Total nonaccrual loans held for investment
6,490
8,236
OREO
31
648
Other repossessed property
49
44
Total non-performing assets
$
6,570
$
8,928
Past due loans 90 days and still accruing
$
-
$
182
128
Nonaccrual commercial mortgage loans decreased by
$1.5 million to $23.8 million as of September 30, 2022,
from $25.3 million as
of December 31,
2021. The decrease was
primarily associated to
collections, loans transferred
to OREO, and loans
restored to accrual
status
during
the
first
nine
months
of
2022,
partially
offset
by
the
migration
to
nonaccrual
status
of
a
$2.9
million
commercial
mortgage loan related to the health care industry in the Puerto Rico region.
Nonaccrual
commercial
and
industrial
loans
decreased
by
$1.4
million
to
$15.7
million
as
of
September
30,
2022,
from
$17.1
million as
of December
31, 2021.
The decrease
was primarily
associated with
collections and
loans restored
to accrual
status during
the
first
nine
months
of
2022,
partially
offset
by
inflows,
including
a
$1.1
million
commercial
and
industrial
loan
related
to
the
entertainment industry in the Puerto Rico region.
Nonaccrual
construction
loans
decreased
by
$0.5
million
to
$2.2
million
as
of
September
30,
2022
from
$2.7
million
as
of
December 31, 2021.
The
following
tables
present
the
activity
of
commercial
and
construction
nonaccrual
loans
held
for
investment
for
the
indicated
periods:
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
(In thousands)
Quarter Ended September 30, 2022
Beginning balance
$
24,753
$
17,079
$
2,375
$
44,207
Plus:
Additions to nonaccrual
-
179
2
181
Less:
Loans returned to accrual status
(189)
(75)
-
(264)
Nonaccrual loans transferred to OREO
-
-
(50)
(50)
Nonaccrual loans charge-offs
(2)
(8)
(58)
(68)
Loan collections
(821)
(1,460)
(32)
(2,313)
Ending balance
$
23,741
$
15,715
$
2,237
$
41,693
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
(In thousands)
Nine-month period ended September 30, 2022
Beginning balance
$
25,337
$
17,135
$
2,664
$
45,136
Plus:
Additions to nonaccrual
2,934
2,337
20
5,291
Less:
Loans returned to accrual status
(547)
(539)
(48)
(1,134)
Nonaccrual loans transferred to OREO
(549)
(273)
(130)
(952)
Nonaccrual loans charge-offs
(41)
(335)
(114)
(490)
Loan collections
(2,991)
(3,012)
(155)
(6,158)
Reclassification
(402)
402
-
-
Ending balance
$
23,741
$
15,715
$
2,237
$
41,693
129
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
(In thousands)
Quarter Ended September 30, 2021
Beginning balance
$
27,242
$
18,835
$
6,175
$
52,252
Plus:
Additions to nonaccrual
347
1,228
22
1,597
Less:
Loans returned to accrual status
(187)
(4)
-
(191)
Nonaccrual loans transferred to OREO
-
(125)
-
(125)
Nonaccrual loans charge-offs
(375)
(136)
(7)
(518)
Loan collections and others
(264)
(1,721)
(89)
(2,074)
Reclassification
49
913
-
962
Nonaccrual loans sold
-
-
(8)
(8)
Ending balance
$
26,812
$
18,990
$
6,093
$
51,895
Commercial
Mortgage
Commercial &
Industrial
Construction
Total
(In thousands)
Nine-month period ended September 30, 2021
Beginning balance
$
29,611
$
20,881
$
12,971
$
63,463
Plus:
Additions to nonaccrual
4,401
3,603
23
8,027
Less:
Loans returned to accrual status
(2,090)
(282)
(173)
(2,545)
Nonaccrual loans transferred to OREO
(1,011)
(1,127)
(135)
(2,273)
Nonaccrual loans charge-offs
(1,249)
(280)
(52)
(1,581)
Loan collections
(2,483)
(5,134)
(6,533)
(14,150)
Reclassification
(367)
1,329
-
962
Nonaccrual
loans sold
-
-
(8)
(8)
Ending balance
$
26,812
$
18,990
$
6,093
$
51,895
130
Nonaccrual
residential mortgage
loans decreased
by $12.1
million to
$43.0 million
as of
September 30,
2022, compared
to $55.1
million as of December 31, 2021.
The decrease was primarily related to
loans restored to accrual status of $12.4
million, collections of
$10.3 million,
including the
payoff of
an individual
loan of approximately
$1.3 million,
foreclosures of
$2.6 million,
and charge-offs
of $1.3 million during the first nine months of 2022, partially offset
by inflows.
The following table presents the activity of residential nonaccrual loans held for
investment for the indicated periods:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
(In thousands)
2022
2021
2022
2021
Beginning balance
$
44,588
$
121,695
$
55,127
$
125,367
Plus:
Additions to nonaccrual
4,782
6,303
14,513
29,987
Less:
Loans returned to accrual status
(3,630)
(2,620)
(12,411)
(14,127)
Nonaccrual loans transferred to OREO
(495)
(1,827)
(2,617)
(6,282)
Nonaccrual loans charge-offs
(356)
(21,449)
(1)
(1,306)
(25,786)
(1)
Loan collections
(1,853)
(9,036)
(10,270)
(16,093)
Reclassification
-
(962)
-
(962)
Nonaccrual loans sold
-
(31,515)
-
(31,515)
Ending balance
$
43,036
$
60,589
$
43,036
$
60,589
(1)
For the quarter and nine-month period ended September 30, 2021, includes net charge-offs totaling $23.1 million associated with the bulk sale of
residential mortgage nonaccrual loans and related servicing advance receivables.
The amount of nonaccrual
consumer loans, including finance
leases, increased by $2.3
million to $12.8 million
as of September 30,
2022,
compared to
$10.5 million
as of
December 31,
2021. The
increase was
associated with
the overall
portfolio growth,
especially
in the auto loans and finance leases portfolio.
As of
September
30, 2022,
approximately
$24.2 million
of the
loans placed
in nonaccrual
status, mainly
commercial
loans, were
current,
or
had
delinquencies
of
less
than
90
days
in
their
interest
payments,
including
$15.1
million
of
TDRs
maintained
in
nonaccrual
status
until
the
restructured
loans
meet
the
criteria
of
sustained
payment
performance
under
the
revised
terms
for
reinstatement to
accrual status
and there
is no
doubt about
full collectability.
Collections on
these loans
are being
recorded on
a cash
basis through earnings, or on a cost-recovery basis, as conditions warrant.
During
the
nine-month
period
ended
September
30,
2022,
interest
income
of
approximately
$1.0
million
related
to
nonaccrual
loans
with
a
carrying
value
of $32.6
million
as of
September
30,
2022,
mainly
nonaccrual
construction
and
commercial
loans,
was
applied against the related principal balances under the cost-recovery
method.
131
Total loans in early
delinquency (
i.e.
, 30-89 days past due loans, as defined in regulatory reporting
instructions) amounted to $113.9
million as of September 30, 2022, an increase of $23.6 million, compared
to $90.3 million as of December 31, 2021.
The variances by
major portfolio categories were as follows:
●
Consumer loans in early
delinquency increased by $24.5
million to $73.9 million as
of September 30, 2022,
mainly due to an
increase in
auto loans
in early
delinquency,
in part
reflecting disruptions
in regular
payments streams
due to
the passing
of
Hurricane Fiona through Puerto Rico,
●
Residential mortgage loans in early delinquency decreased by $2.4
million to $31.8 million as of September 30, 2022.
●
Commercial and construction
loans in early
delinquency increased by
$1.5 million to
$8.2 million as of
September 30, 2022,
in part due to a
$1.4 million matured
loan that is in the
process of renewal but
for which the Corporation
continues to receive
principal and interest payments from the borrower.
In addition,
the Corporation
provides
homeownership
preservation
assistance to
its customers
through
a loss
mitigation
program.
Depending
upon
the
nature
of
borrowers’
financial
condition,
restructurings
or
loan
modifications
through
this
program,
as
well
as
other restructurings of
individual commercial, commercial
mortgage, construction, and
residential mortgage loans,
fit the definition
of
a
TDR.
A
restructuring
of
a
debt
constitutes
a
TDR
if
the
creditor,
for
economic
or
legal
reasons
related
to
the
debtor’s
financial
difficulties,
grants a
concession to
the debtor
that it
would not
otherwise consider.
Modifications involve
changes in
one or
more of
the
loan
terms
that
bring
a
defaulted
loan
current
and
provide
sustainable
affordability.
Changes
may
include,
among
others,
the
extension of the
maturity of the loan
and modifications of
the loan rate. As
of September 30,
2022, the Corporation’s
total TDR loans
held
for
investment
amounted
to
$387.7
million,
a
decrease
of
$27.0
million
from
$414.7
million
as
of
December
31,
2021.
The
decrease
was
mainly
related
to
payoffs
and
paydowns,
partially
offset
by
inflows
of
$18.6
million
mainly
concentrated
in
the
commercial mortgage and residential mortgage loan portfolios during the first
nine months of 2022.
See
Note
3
-
Loans
Held
for
Investment
to
the
Corporation’s
unaudited
consolidated
financial
statements
for
the
quarter
ended
September 30, 2022 for additional information and statistics about
the Corporation’s TDR loans.
To
assist
borrowers
affected
by
the
passing
of
Hurricane
Fiona
through
Puerto
Rico
on
September
17,
2022,
the
Corporation
established a
Natural Disaster
Deferral or
Extension Program,
with a
term not
to extend
beyond December
31, 2022,
for residents
of
Puerto Rico that were
directly impacted by the
passing of the hurricane.
This program provides payment
deferral or term extension
on
a one payment
basis, not to
exceed three payments,
to retail borrowers
(
i.e.
, borrowers with
personal loans, auto
loans, finance leases,
credit
cards
and
residential
mortgage
loans)
that
contacted
the
Corporation
by
October
31,
2022,
to
request
the
payment
extension.
Loans will
continue to
accrue interest
during the
deferral or
extension period.
For credit cards,
borrowers who
were 30 days
past due
or
less
as
of
September
16,
2022
are
eligible
for
this
program.
For
residential
mortgage
loans
and
consumer
loans,
borrowers
who
were
60
days
past
due
or
less
as of
September
16,
2022
are eligible
for
this program.
For
both
consumer
and
residential
mortgage
loans subject to the deferral
programs, each borrower
is required to opt in
on a monthly basis to
the program and must
resume making
their
regularly
scheduled
loan
payments
at
the
end
of
the
deferral
period.
For
consumer
loans,
deferred
amounts
will
extend
the
maturity
date by
the number
of
deferred
periods.
For residential
mortgage
loans, deferred
amounts
will be
moved
to the
end
of the
loan term.
Borrowers that
make a
payment during
any given
month are
not eligible
for the
program during
that month.
Furthermore,
for customers
that opted
into the program,
the delinquency
status of
loans subject
to the
deferral or
extension program
will be
frozen
in the status that existed in the month prior to the relief granted.
Loans subject
to the above-described
program are not
considered TDRs since
the deferral or
extension is not
considered more than
insignificant.
Borrowers
were
eligible
for
payment
deferral
or
extension
of
three
payments
only
if
cumulative
payment
extensions
granted during
the last 12
months did not
exceed six payments,
including the
extensions granted through
this program. As
of October
31, 2022, the Corporation has entered into deferral or extension payment
agreements on 3,366 retail loans totaling $63.6 million.
The OREO portfolio,
which is part
of non-performing assets,
decreased by $2.1
million to $38.7
million as of
September 30, 2022,
compared
to
$40.8
million
as
of
December
31,
2021.
The
following
tables
show
the
composition
of
the
OREO
portfolio
as
of
September 30,
2022 and December
31, 2021, as
well as the
activity of
the OREO portfolio
by geographic
area during the
nine-month
period ended September 30, 2022.
132
OREO Composition by Region
(In thousands)
As of September 30, 2022
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
28,971
$
1,034
$
31
$
30,036
Commercial
3,223
2,810
-
6,033
Construction
2,432
181
-
2,613
$
34,626
$
4,025
$
31
$
38,682
(In thousands)
As of December 31, 2021
Puerto Rico
Virgin Islands
Florida
Consolidated
Residential
$
28,396
$
489
$
648
$
29,533
Commercial
4,521
2,810
-
7,331
Construction
3,833
151
-
3,984
$
36,750
$
3,450
$
648
$
40,848
OREO Activity by Region
(In thousands)
Nine-Month Period Ended September 30, 2022
Puerto Rico
Virgin Islands
Florida
Consolidated
Beginning Balance
$
36,750
$
3,450
$
648
$
40,848
Additions
12,842
780
31
13,653
Sales
(13,520)
(311)
(648)
(14,479)
Write-downs and other adjustments
(1,446)
106
-
(1,340)
Ending Balance
$
34,626
$
4,025
$
31
$
38,682
133
Net Charge-offs and Total
Credit Losses
Net charge
-offs totaled
$8.6 million
for the
third quarter
of 2022,
or 0.31%
of average
loans on
an annualized
basis, compared
to
$27.9 million, or
an annualized 0.99%
of average loans
for the third
quarter of 2021.
For the nine-month
period ended September
30,
2022,
net
charge-offs
totaled
$21.1
million,
or
0.25%
of
average
loans
on
an
annualized
basis,
compared
to
$48.0
million,
or
an
annualized 0.56%
of average
loans for
the same
period in
2021. The
bulk sale
of nonaccrual
residential mortgage
loans added
$23.1
million in
net charge-offs
in the
2021 periods.
Excluding the
effect of
net charge-offs
related to
the bulk
sale, total
net charge-offs
in
the third quarter
of 2021 were
$4.8 million, or
an annualized 0.17%
of average loans,
and in the first
nine months of
2021 were $25.0
million, or an annualized 0.29% of average loans.
Residential
mortgage
loans
net
charge-offs
in
the
third
quarter
of
2022
were
$0.9
million,
or
an
annualized
0.13%
of
average
residential
loans,
compared
to $23.5
million,
or an
annualized
2.94%
of average
residential
mortgage
loans, for
the third
quarter of
2021.
Residential
mortgage
loans
net
charge-offs
in
the
first
nine
months
of
2022
were
$2.8
million,
or
an
annualized
0.13%
of
average
residential
mortgage
loans,
compared
to
$27.5
million,
or
an
annualized
1.10%
of
related
average
loans,
for
the
first
nine
months of
2021. Excluding
the effect
of net
charge-offs
related to
the bulk
sale of
nonaccrual residential
mortgage loans,
residential
mortgage loans net
charge-offs in the
third quarter of 2021 were
$0.4 million, or an
annualized 0.05% of average
residential mortgage
loans,
and
in
the
first
nine
months
of
2021
were
$4.5
million,
or
an
annualized
0.18%
of
average
residential
mortgage
loans.
Approximately $0.3 million
in net charge-offs
for the third quarter
of 2022 and $1.2
million for the
first nine months
of 2022 resulted
from valuations
of collateral
dependent residential
mortgage loans
given high
delinquency levels,
compared to
$0.4 million
and $4.8
million for the comparable
periods in 2021,
respectively. Net
charge-offs on
residential mortgage loans
also included $0.6 million
and
$2.4 million related
to foreclosures recorded
in the third quarter
and first nine
months of 2022,
respectively,
compared to $1.2
million
and $2.0 million recorded for the comparable periods in 2021, respectively.
Commercial
mortgage
loans
net
recoveries
in
the
third
quarter
of
2022
were
$0.1
million,
or
an
annualized
0.01%
of
average
commercial
mortgage
loans,
compared
to
net
charge-offs
of
$0.4
million,
or
an
annualized
0.07%
of
related
average
loans,
for
the
third
quarter
of
2021.
For
the
nine-month
period
ended
September
30,
2022,
commercial
mortgage
loans
net
recoveries
were
$1.3
million, or an annualized
0.08% of average commercial
mortgage loans, compared to
net charge-offs of
$1.2 million, or an annualized
0.07% of
related average
loans, for
the same
period in
2021. Commercial
mortgage loans
net recoveries
for the
first nine
months of
2022
included recoveries totaling $1.2 million associated with two commercial
mortgage relationships.
Commercial and
industrial loans
net recoveries
in the
third quarter
of 2022
were $0.5
million, or
an annualized
0.07%
of average
commercial
and industrial
loans, compared
to $0.3
million, or
an annualized
0.04% of
related average
loans, for
the same
period in
2021.
Commercial and
industrial loans
net recoveries
in the
first nine
months of
2022 were
$1.8 million,
or an
annualized 0.08%
of
average commercial and
industrial loans, compared
to $5.6
million, or an
annualized 0.24% of
related average loans
,
for the first nine
months of 2021.
The net recoveries in
the first nine
months of 2021
included a $5.2
million recovery in
connection with the
paydown
of a nonaccrual commercial and industrial loan participation in
the Puerto Rico region.
Construction loans
net charge-offs
in the third
quarter of
2022 were $20
thousand, or an
annualized 0.07%
of average construction
loans,
compared
to
net
recoveries
of
$35
thousand,
or
an
annualized
0.08%
of
related
average
loans,
for
the
same
period
in
2021.
Construction loans net
recoveries in the first
nine months of 2022
were $15 thousand, or
an annualized 0.02% of
average construction
loans, compared to $64 thousand, or an annualized 0.05% of related average
loans, for the first nine months of 2021.
Net
charge-offs
of
consumer
loans
and
finance
leases in
the
third
quarter
of 2022
were $8.3
million,
or
an annualized
1.05%
of
related
average loans,
compared to
$4.4 million,
or an
annualized 0.64%
of related
average loans,
in the
third quarter
of 2021.
Net
charge-offs
of
consumer
loans
and
finance
leases
in
the
first
nine
months
of
2022
were
$21.4
million,
or
an
annualized
0.94%
of
related average
loans, compared
to $25.0
million, or
an annualized
1.24% of
related average
loans, in
the first
nine months
of 2021.
The increas
e
for
the third
quarter of
2022
was primarily
reflected in
the auto
loans portfolio,
when
compared to
the same
period
in
2021, and
the decrease
for the nine
-month period
ended September
30, 2022
was reflected in
the auto and
credit card
loan portfolios,
when compared to the same period in 2021.
134
The following table presents annualized net charge-offs
(or recoveries) to average loans held-in-portfolio for the indicated
periods:
Quarter Ended
Nine-Month Period Ended
September 30, 2022
September 30, 2021
September 30, 2022
September 30, 2021
Residential mortgage
(1)
0.13
%
2.94
%
(1)
0.13
%
1.10
%
(1)
Commercial mortgage
(0.01)
%
0.07
%
(0.08)
%
0.07
%
Commercial and industrial
(0.07)
%
(0.04)
%
(0.08)
%
(0.24)
%
Construction
0.07
%
(0.08)
%
(0.02)
%
(0.05)
%
Consumer and finance leases
1.05
%
0.64
%
0.94
%
1.24
%
Total loans
(1)
0.31
%
0.99
%
(1)
0.25
%
0.56
%
(1)
(1)
For the quarter and nine-month period ended
September 30, 2021, includes net charge-offs totaling
$23.1 million associated with the bulk sale
of residential mortgage
nonaccrual loans and related servicing advance
receivables. Excluding net charge-offs associated
with the bulk sale, residential mortgage and
total net charge offs to
related average loans for the third quarter
of 2021 was 0.05% and 0.17%, respectively, and for the first
nine months of 2021 was 0.18% and 0.29%,
respectively.
The following table presents the ratio of annualized net charge-offs
(or recoveries) to average loans held in various portfolios
by geographic segment for the indicated periods:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
September 30,
September 30,
2022
2021
2022
2021
PUERTO RICO:
Residential mortgage
(1)
0.15
%
3.71
%
(1)
0.16
%
1.39
%
(1)
Commercial mortgage
-
%
0.10
%
(0.05)
%
0.10
%
Commercial and Industrial
(0.11)
%
(0.07)
%
(0.13)
%
(0.40)
%
Construction
0.53
%
(0.20)
%
0.09
%
(0.06)
%
Consumer and finance leases
1.04
%
0.64
%
0.94
%
1.23
%
T
ot
al
lo
an
s
Total loans
(1)
0.38
%
1.27
%
(1)
0.32
%
0.69
%
(1)
VIRGIN ISLANDS:
Residential mortgage
0.30
%
-
%
0.19
%
(0.16)
%
Commercial mortgage
(0.22)
%
(0.22)
%
(0.22)
%
(0.24)
%
Commercial and Industrial
-
%
-
%
-
%
-
%
Construction
-
%
-
%
-
%
-
%
Consumer and finance leases
1.67
%
0.70
%
1.35
%
1.38
%
T
ot
al
lo
an
s
(5)
Total loans
0.36
%
0.05
%
0.24
%
0.06
%
FLORIDA:
Residential mortgage
(0.05)
%
(0.08)
%
(0.03)
%
0.01
%
Commercial mortgage
-
%
-
%
(0.14)
%
(0.01)
%
Commercial and Industrial
-
%
-
%
-
%
0.06
%
Construction
(0.04)
%
(0.03)
%
(0.06)
%
(0.04)
%
Consumer and finance leases
0.47
%
(0.15)
%
(0.16)
%
2.76
%
Total loans
(0.01)
%
(0.02)
%
(0.05)
%
0.06
%
(1)
For the quarter and nine-month period ended
September 30, 2021, includes net charge-offs totaling
$23.1 million associated with the bulk sale
of residential mortgage
nonaccrual loans and related servicing advance
receivables. Excluding net charge-offs associated
with the bulk sale, residential mortgage and
total net charge offs to
related average loans for the third quarter
of 2021 was 0.08% and 0.22%, respectively, and for the first
nine months of 2021 was 0.23% and 0.35%,
respectively.
The above ratios are
based on annualized charge
-offs and are not
necessarily indicative of the
results expected for the
entire year or
in subsequent periods.
Total
net charge-offs
plus losses on OREO
operations for the
first nine months
of 2022 amounted
to $17.9 million, or
a loss rate of
0.21% on an
annualized basis to average
loans and repossessed assets,
compared to losses
of $47.5 million,
or a loss rate
of 0.55% on
an annualized basis, for the same period in 2021.
135
The following table presents information about the OREO inventory and credit
losses for the indicated periods:
Quarter Ended
Nine-Month Period Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
OREO
OREO balances, carrying value:
Residential
$
30,036
$
29,707
$
30,036
$
29,707
Commercial
6,033
9,695
6,033
9,695
Construction
2,613
4,396
2,613
4,396
Total
$
38,682
$
43,798
$
38,682
$
43,798
OREO activity (number of properties):
Beginning property inventory
431
471
418
513
Properties acquired
30
56
139
130
Properties disposed
(49)
(80)
(145)
(196)
Ending property inventory
412
447
412
447
Average holding period (in days)
Residential
656
600
656
600
Commercial
2,420
2,035
2,420
2,035
Construction
2,192
1,874
2,192
1,874
Total average holding period (in days)
1,035
1,046
1,035
1,046
OREO operations gain (loss):
Market adjustments and gains (losses) on sales:
Residential
$
1,159
$
1,741
$
4,139
$
2,552
Commercial
408
1,078
329
(1,068)
Construction
(7)
157
107
422
Total gains on sales
1,560
2,976
4,575
1,906
Other OREO operations expenses
(496)
(688)
(1,306)
(1,377)
Net Gain on OREO operations
$
1,064
$
2,288
$
3,269
$
529
(CHARGE-OFFS) RECOVERIES
Residential charge-offs, net
(1)
(907)
(23,450)
(2,845)
(27,529)
Commercial recoveries (charge-offs), net
540
(59)
3,029
4,434
Construction (charge-offs) recoveries, net
(20)
35
15
64
Consumer and finance leases charge-offs, net
(8,258)
(4,390)
(21,398)
(25,017)
Total charge-offs,
net
(8,645)
(27,864)
(21,199)
(48,048)
TOTAL CREDIT LOSSES
(2)
$
(7,581)
$
(25,576)
$
(17,930)
$
(47,519)
LOSS RATIO PER CATEGORY
(3)
:
Residential
(0.03)
%
2.69
%
(0.06)
%
0.99
%
Commercial
(0.07)
%
(0.08)
%
(0.09)
%
(0.08)
%
Construction
0.09
%
(0.43)
%
(0.13)
%
(0.34)
%
Consumer
1.04
%
0.64
%
0.94
%
1.24
%
TOTAL CREDIT LOSS RATIO
(4)
0.27
%
0.91
%
0.21
%
0.55
%
(1)
For the quarter and nine-month period ended September 30,
2021, includes net charge-offs totaling $23.1 million associated with the bulk sale
of residential
nonaccrual loans and related servicing advance receivables.
(2)
Equal to net gain on OREO operations plus charge-offs, net.
(3)
Calculated as net charge-offs plus market adjustments, and gains (losses) on sales
of OREO divided by average loans and repossessed assets.
(4)
Calculated as net charge-offs plus net gain on OREO operations divided by
average loans and repossessed assets.
136
Operational Risk
The
Corporation
faces
ongoing
and
emerging
risk
and
regulatory
pressure
related
to
the
activities
that
surround
the
delivery
of
banking
and
financial
products.
Coupled
with
external
influences,
such
as
market
conditions,
security
risks,
and
legal
risks,
the
potential for
operational and
reputational loss
has increased.
To
mitigate and
control operational
risk, the
Corporation has
developed,
and continues
to enhance, specific
internal controls,
policies and procedures
that are designed
to identify and
manage operational
risk
at
appropriate
levels
throughout
the
organization.
The
purpose
of
these
mechanisms
is
to
provide
reasonable
assurance
that
the
Corporation’s business operations
are functioning within the policies and limits established by management.
The
Corporation
classifies operational
risk
into
two
major
categories:
business-specific
and
corporate-wide
affecting
all business
lines.
For
business
specific
risks,
a
risk
assessment
group
works
with
the
various
business
units
to
ensure
consistency
in
policies,
processes
and
assessments.
With
respect
to
corporate-wide
risks,
such
as
information
security,
business
recovery,
and
legal
and
compliance, the
Corporation has specialized
groups, such
as the Legal
Department, Information
Security,
Corporate Compliance,
and
Operations. These groups
assist the lines of
business in the
development and implementation
of risk management
practices specific to
the needs of the business groups.
Legal and Compliance Risk
Legal and compliance risk includes
the risk of noncompliance with applicable
legal and regulatory requirements, the
risk of adverse
legal
judgments
against
the
Corporation,
and
the
risk
that
a
counterparty’s
performance
obligations
will
be
unenforceable.
The
Corporation
is
subject
to
extensive
regulation
in
the
different
jurisdictions
in
which
it
conducts
its
business,
and
this
regulatory
scrutiny has
been significantly
increasing over
the years.
The Corporation
has established,
and continues
to enhance,
procedures that
are designed
to ensure
compliance with
all applicable
statutory,
regulatory
and any
other legal
requirements.
The Corporation
has a
Compliance
Director
who
reports
to
the
Chief
Risk
Officer
and
is
responsible
for
the
oversight
of
regulatory
compliance
and
implementation
of an
enterprise-wide compliance
risk assessment
process.
The Compliance
division
has officer
roles in
each major
business area with direct reporting responsibilities to the Corporate Compliance
Group.
Concentration Risk
The Corporation conducts
its operations in
a geographically concentrated
area, as its main
market is Puerto
Rico. Of the total
gross
loan portfolio held
for investment of
$11.3 billion
as of September
30, 2022, the
Corporation had credit
risk of approximately
79% in
the Puerto Rico region, 18% in the United States region, and 3% in the Virgin
Islands region.
137
Update on the Puerto Rico Fiscal Situation
A significant
portion of
the Corporation’s
business activities
and credit
exposure is
concentrated in
the Commonwealth
of Puerto
Rico, which has experienced an economic and fiscal crisis for more than a decade.
Economic Indicators
During September
2022, the
Puerto Rico
Planning Board
(“PRPB”) published
the tables
for the
2021 Statistical
Appendix
of the
Economic Report
to the
Governor,
which include
a preliminary
estimate of
Puerto Rico’s
Gross National
Product (“GNP”)
for fiscal
year 2021,
as well
as revised
estimates for
prior fiscal
years. According
to the
PRPB, Puerto
Rico’s
real GNP
expanded by
1.0% in
fiscal year
2021, significantly
above the
PRPB’s
original baseline
projection of
a 2.0%
contraction. According
to the
data, real
GNP
growth
was
primarily
driven
by
a
sharp
increase
in
personal
consumption
expenditures
reflecting
the
relaxation
of
COVID-related
restrictions, as well as
the impact of
the substantial relief funding
deployed over the
period. To
a lesser extent, growth
in FY2021 was
also
driven
by
a
higher
level
of
investments
in
machinery,
equipment,
and
construction.
These
favorable
variances
were
partially
offset
by an
increase in
imports, a
reduction in
exports, and
a negative
change in
the level
of inventories.
For prior
fiscal years,
the
PRPB revised
its previously
published
estimates as
follows: from
-4.4% to
-4.2% for
FY2018, from
1.8% to
2.1% for
FY2019,
and
essentially unchanged for FY2020.
There
are
other
indicators
that
gauge
economic
activity
and
are
published
with
greater
frequency,
for
example,
the
Economic
Development
Bank
for
Puerto
Rico’s
Economic
Activity
Index
(“EDB-EAI”).
Although
not
a
direct
measure
of
Puerto
Rico’s
real
GNP,
the EDB-EAI
is a coincident
index for economic
activity that is
highly correlated
to Puerto Rico’s
real GNP.
For August 2022,
the
EDB-EAI
registered
a
1.5%
improvement
when
compared
to
August
2021,
marking
the
eighteenth
consecutive
month
of
year-
over-year
increases.
Similarly,
over
the
twelve-month
period
ended
August
31,
2022,
the
average
reading
for
the
index
was
3.7%
higher than the comparable figure a year earlier.
Fiscal Plan
On
January
27,
2022,
the
PROMESA
oversight
board
certified
the
2022
Fiscal
Plan
for
Puerto
Rico.
Similar
to
previous
fiscal
plans,
the
2022
Fiscal
Plan
incorporates
updated
information
related
to
the
macroeconomic
environment,
as
well
as
government
revenues,
expenditures,
structural
reform
efforts,
and
recent
increases
in
federal
funding.
More
importantly,
the
2022
Fiscal
Plan
reflects the Commonwealth
Plan of Adjustment
recently confirmed by
the U.S. District Court
for the District
of Puerto Rico.
Relative
to the
previous
fiscal plan,
the 2022
Fiscal Plan
incorporates a
new set
of expenditure
projections that
factor in
the now-established
debt
service
requirements
pursuant
to
the
Plan of
Adjustment,
as well
as additional
investments
enabled
by the
increased resources
available
to the
government.
Accordingly,
the 2022
Fiscal Plan
projects
unrestricted
surplus
after debt
service to
average $1
billion
annually
between
fiscal
years
2022
and
2031.
The
2022
Fiscal
Plan
prioritizes
resource
allocations
across
three
major
themes:
(i)
investing in
the operational
capacity of
the government
to deliver
services with
Civil Service
Reform, (ii)
prioritizing obligations
to
current and future retirees, and (iii) creating a fiscally responsible post-bankruptcy
government.
The
2022
Fiscal
Plan
contains
an
updated
macroeconomic
forecast
that
reflects
the
adverse
impact
of
the
pandemic-induced
recession at
the end of
fiscal year
2020, followed
by a
forecasted rebound
and recovery
in fiscal years
2021 through
2023. Similar
to
the
previous
fiscal
plan,
the
2022
Fiscal
Plan
incorporates
a
real
growth
series
that
was
adjusted
for
the
short-term
income
effects
resulting
from
the
extraordinary
unemployment
insurance
and
other
pandemic-related
direct
transfer
programs.
Specifically,
the
revised fiscal plan
estimates that Puerto
Rico’s GNP
will grow by
5.2% in fiscal
year 2022, followed
by a 0.6%
growth in fiscal
year
2023.
Excluding
the
effect
on
household
income
from
the
unprecedented
pandemic-related
federal
government
stimulus,
the
2022
Fiscal Plan estimates that real GNP growth would be 2.6% and 0.9% in fiscal years
2022 and 2023, respectively.
Over the past
few years, Puerto
Rico has received
an infusion
of historical
levels of federal
support, creating
new opportunities
to
address
high-priority
needs.
The
2022
Fiscal
Plan
projects
that
approximately
$84
billion
of
disaster
relief
funding
in
total,
from
federal and private
sources, will be
disbursed in
the reconstruction
process over a
period of 18
years (2018 to
2035). Moreover,
since
the previous
fiscal plan
was certified
in 2021,
the Commonwealth’s
available resources
have significantly
increased principally
as a
result
of
two
major
developments:
(i)
incremental
federal
funding
for
health
care
as
a
result
of
the
recent
guidance
issued
by
the
Centers for
Medicare and
Medicaid Services
(“CMS”), which
increases the
federal funding
cap by
over $2
billion per
year,
and (ii)
improved local
revenue collections
as a
result of
a better-than-expected
recovery,
increased local
consumption and
economic activity
enabled by
enhanced income
support programs
(e.g., incremental
funding of
approximately $460
million for
the Nutrition
Assistance
Program). The 2022
Fiscal Plan provides a
roadmap to take maximum
advantage of this unique
opportunity,
create an environment
of
fiscal stability,
and develop the
conditions
for long-term growth
and economic development.
Nonetheless, the fiscal
plan continues to
underline the need to implement structural reforms to maximize the positive
impact of federal recovery funds.
138
Debt Restructuring
After more than
four years since
the Commonwealth
entered Title
III, on January
18, 2022, the
U.S. District Court
for the District
of Puerto
Rico (the
“Court”) issued
an order
to confirm
the Plan
of Adjustment
to restructure
approximately $35
billion of
debt and
other claims
against the
Commonwealth of
Puerto Rico,
the PBA,
and the
ERS; and
more than
$50 billion
of pension
liabilities. The
Plan of Adjustment became effective
on March 15, 2022, as the Government
of Puerto Rico completed the exchange
of more than $33
billion
of
existing
bonds
and
other
claims
into
approximately
$7
billion
of
new
bonds.
As
a
result,
annual
debt
service
for
the
Commonwealth
is
anticipated
to
decrease
from
a
maximum
of
$3.9
billion
prior
to
the
restructuring
to
$1.15
billion
each
year.
In
addition,
the
Commonwealth
made
more
than
$10
billion
in
cash
payments
to
various
creditor
groups,
as
well
as
implemented
the
Pension Reserve
Trust
provisions created
in the
Plan of
Adjustment. The
Pension Reserve
Trust
is projected
to be
funded with
more
than $10 billion in contributions
over the next 10 years, and up
to $1.4 billion this year alone.
Confirmation and implementation of the
Plan
of
Adjustment
marks
a
major
milestone
in
the
overall
debt
restructuring
process
and
creates
a
foundation
for
Puerto
Rico’s
recovery and economic growth.
On October 12, 2022,
the Court issued an order
to confirm the Puerto Rico
Highway and Transportation
Authority’s (“HTA”)
plan
of
adjustment
to
restructure
approximately
$6.4
billion
in
claims.
According
to
the
PROMESA
oversight
board,
the
plan
reduces
HTA’s
$6.4 billion in claims by
more than 80% and saves Puerto
Rico more than $3 billion in debt
service payments. Confirmation of
the
HTA’s
plan
of
adjustment marks
another
significant
milestone
for
Puerto
Rico
to end
its bankruptcy
process under
PROMESA
and
enables
HTA
to
make
the
necessary
investments
to
improve
and
maintain
Puerto
Rico’s
roads
and
other
transportation
infrastructure.
On September 29, 2022, Judge Laura Taylor
Swain issued an order establishing the schedule to
continue negotiations and litigation
related to PREPA’s
Title III
case. Pursuant to
such order,
Judge Taylor
Swain directed
the PROMESA oversight
board to designate
a
lead
negotiator
to
facilitate
the
mediation
team
and
other
parties’
interaction
with
the
PROMESA
oversight
board.
Also,
the
order
directed
the
PROMESA
oversight
board
to
file,
by
December
1,
2022,
a
proposed
plan
of
adjustment
that
it
believes
could
be
confirmable,
considering
the
litigation
risk
and
economic
issues
that
are
in
dispute.
The
plan
may,
but
is
not
required
to,
include
alternative provisions addressing proposed
resolutions contingent on different outcomes
of the disputed issues. According to
the order,
the plan must be
accompanied by a disclosure
statement and proposed
confirmation schedule contemplating
a June 2023 confirmation
hearing.
Other Developments
On September
17, 2022,
Hurricane Fiona
made landfall
on the
southwestern part
of Puerto
Rico with
winds exceeding
100 miles
per
hour in
some
areas and
leaving historic
amounts
of rain,
causing
a complete
power outage
in Puerto
Rico,
which in
turn led
to
water service
interruptions for
over 778,000
residents in
the Island.
Following the
passage of
the hurricane,
President Biden
granted
the Governor’s
request for
a declaration of
a major disaster
for all 78
municipalities in
Puerto Rico, and
as a result,
all municipalities
have
access
to
FEMA’s
Public
Assistance
Programs
for
response
and
reconstruction
projects.
In
addition,
the
local government,
in
collaboration
with
the
PROMESA
oversight
board,
has
enacted
numerous
emergency
response
measures
to
provide
immediate
funding
and assistance
to municipalities
and
governmental
agencies.
As of
October
14, 2022,
99% of
both
Puerto Rico’s
water and
electric services had been restored.
Notable
progress
continues
to
be
made
as
part
of
the
ongoing
efforts
of
prioritizing
the
restoration,
improvement,
and
modernization
of
Puerto
Rico’s
infrastructure.
According
to
the
Central
Office
for
Recovery,
Reconstruction,
and
Resiliency
(“COR3”),
progress
is
evidenced
by
the
significant
increase
in
permanent
work
projects
that
have
already
started
executing
the
reconstruction
efforts
with
FEMA
obligated
funding.
As
of
June
30,
2022,
there
were
a
total
of
5,613
permanent
work
projects
reported,
more than
twice the
comparable
amount reported
as of
December 31,
2021, of
2,650 projects.
Furthermore, on
October 5,
2022, COR3
announced that
during the
first nine
months of
2022, the
Government had
already reached
its goal
for the entire
year of
disbursing approximately $1
billion in advances and
reimbursements for projects
led by municipalities,
government dependencies
and
non-profit organizations,
through FEMA’s
Public Assistance
program. Such
progress has
been mainly
driven by
the implementation
of the
Working
Capital Advance
(“WCA”) program
during June
2022.
The WCA
program,
which
was originally
made available
to
municipalities
and
more
recently
extended
to
PREPA,
PRASA
and
other
government
agencies,
advances
25%
of
the
total
cost
of
obligated projects
that have
not commenced
due to lack
of funding. According
to COR3, the
extension of
the WCA program
to these
additional entities is expected to accelerate the pace of disbursements going
forward.
139
Exposure to Puerto Rico Government
As of September
30, 2022, the Corporation
had $327.2 million
of direct exposure
to the Puerto Rico
government, its municipalities
and
public
corporations,
compared
to
$360.1
million
as
of
December
31,
2021.
As
of
September
30,
2022,
approximately
$170.4
million of the
exposure consisted of loans
and obligations of municipalities
in Puerto Rico that
are supported by assigned
property tax
revenues
and
for
which,
in
most
cases,
the
good
faith,
credit
and
unlimited
taxing
power
of
the
applicable
municipality
have
been
pledged
to
their
repayment,
and
$113.9
million
of
loans
and
obligations
which
are
supported
by
one
or
more
specific
sources
of
municipal
revenues.
Approximately
71%
of
the
Corporation’s
exposure
to
Puerto
Rico
municipalities
consisted
primarily
of
senior
priority
obligations
concentrated
in four
of the
largest
municipalities in
Puerto
Rico. The
municipalities
are required
by law
to levy
special property
taxes in
such amounts
as are
required for
the payment
of all
of their
respective general
obligation bonds
and notes.
Furthermore,
municipalities
are
also
likely
to be
affected
by the
negative
economic
and other
effects
resulting
from
the COVID-19
pandemic, as well
as expense, revenue,
or cash management
measures taken to
address the Puerto
Rico government’s
fiscal problems
and measures included in fiscal plans of other government
entities. In addition to municipalities, the total direct exposure also included
$11.5
million
in
loans
to
an
affiliate
of
PREPA,
$28.0
million
in
loans
to
an
agency
of
the
Puerto
Rico
central
government,
and
obligations of the
Puerto Rico government, specifically
a residential pass-through
MBS issued by
the PRHFA,
at an amortized
cost of
$3.4 million as part of its available-for-sale debt securities portfolio (fair value of
$2.2 million as of September 30, 2022).
The
following
table
details
the
Corporation’s
total
direct
exposure
to
Puerto
Rico
government
obligations
according
to
their
maturities:
As of September 30, 2022
Investment
Portfolio
Total
(Amortized cost)
Loans
Exposure
(In thousands)
Puerto Rico Housing Finance Authority:
After 10 years
$
3,365
$
-
$
3,365
Total
Puerto Rico Housing Finance Authority
3,365
-
3,365
Puerto Rico public corporation:
After 5 to 10 years
-
28,027
28,027
Total Puerto Rico public
corporation
-
28,027
28,027
Affiliate of the Puerto Rico Electric Power Authority:
Due within one year
-
11,516
11,516
Total Puerto Rico government
affiliate
-
11,516
11,516
Total
Puerto Rico public corporations and government affiliate
-
39,543
39,543
Municipalities:
Due within one year
1,200
19,151
20,351
After 1 to 5 years
42,426
55,897
98,323
After 5 to 10 years
55,737
43,810
99,547
After 10 years
66,023
-
66,023
Total
Municipalities
165,386
118,858
284,244
Total
Direct Government Exposure
$
168,751
$
158,401
$
327,152
140
In
addition,
as
of
September
30,
2022,
the
Corporation
had
$86.7
million
in
exposure
to
residential
mortgage
loans
that
are
guaranteed by
the PRHFA,
a governmental instrumentality
that has been
designated as a
covered entity under
PROMESA (December
31,
2021
–
$92.8
million).
Residential
mortgage
loans
guaranteed
by
the
PRHFA
are
secured
by
the
underlying
properties
and
the
guarantees serve
to cover shortfalls
in collateral in
the event of
a borrower default.
The Puerto Rico
government guarantees up
to $75
million
of
the
principal
for
all
loans
under
the
mortgage
loan
insurance
program.
According
to
the
most
recently
released
audited
financial
statements
of
the
PRHFA,
as
of
June
30,
2020,
the
PRHFA’s
mortgage
loans
insurance
program
covered
loans
in
an
aggregate
amount
of
approximately
$553
million.
The
regulations
adopted
by
the
PRHFA,
requires
the
establishment
of
adequate
reserves to
guarantee
the solvency
of the
mortgage loans
insurance program.
As of
June 30,
2020, the
most recent
date as
of which
information is available, the PRHFA
had a liability of approximately $6.1 million as an estimate of the
losses inherent in the portfolio.
As of September
30, 2022, the Corporation
had $2.5 billion
of public sector
deposits in Puerto
Rico, compared to
$2.7 billion as
of
December
31,
2021.
Approximately
25%
of
the
public
sector
deposits
as
of
September
30,
2022
was
from
municipalities
and
municipal agencies
in Puerto
Rico and
75% was
from the
public corporation,
the Puerto
Rico central
government
and agencies,
and
U.S. federal government agencies in Puerto Rico.
Exposure to USVI Government
The Corporation has operations in the USVI and has credit exposure
to USVI government entities.
For
many
years,
the
USVI
has
been
experiencing
a
number
of
fiscal
and
economic
challenges
that
have
deteriorated
the
overall
financial and economic
conditions in the area.
Between 2008 and
2017, the USVI real
GDP contracted at a
compound annual rate
of -
4.2%.
On
March
4,
2022,
the
United
States
Bureau
of
Economic
Analysis
(the
“BEA”)
released
its
estimates
of
GDP
for
2020.
According
to
the
BEA,
the
USVI’s
real
GDP
decreased
2.2%.
Also,
the
BEA
revised
its
previously
published
real
GDP
growth
estimate
for
2019
from
2.2%
to
2.8%.
According
to
the
BEA,
the
decline
in
real
GDP
for
2020
reflected
decreases
in
exports
of
services, private fixed investment,
personal consumption expenditures,
and government spending
primarily as a result of
the effects of
the COVID-19
pandemic. Exports
of services, which
consists primarily
of spending
by visitors, decreased
43.5%, while
private fixed
investment decreased
27.7%. These decreases
were partly offset
by an increase
in private inventory
investment, reflecting
an increase
in
crude
oil
and
other
petroleum
products
imported
and
store
in
the
islands.
In
addition,
imports
declined
by
10.6%
as
a
result
of
reductions
in
imports
of
goods
including
consumer
goods
and
equipment,
and
in
import
of
services.
According
to
the
BEA,
expenditures funded
by the
various federal
grants and
transfer payments
are reflected
in the
GDP estimates;
however,
the full
effects
of the
pandemic cannot
be quantified
in the
GDP statistics
for the
USVI because
the impacts
are generally
embedded in
source data
and cannot be separately identified.
PROMESA
does
not
apply
to the
USVI
and,
as such,
there
is currently
no federal
legislation
permitting
the restructuring
of
the
debts of
the USVI
and
its public
corporations
and instrumentalities.
To
the extent
that the
fiscal condition
of the
USVI government
continues to
deteriorate, the
U.S. Congress
or the government
of the
USVI may enact
legislation allowing
for the restructuring
of the
financial
obligations
of
the
USVI
government
entities
or
imposing
a
stay
on
creditor
remedies,
including
by
making
PROMESA
applicable to the USVI.
As of September 30, 2022, the Corporation had $37.6
million in loans to USVI public corporations, compared to $39.2 million
as of
December 31, 2021. As of September 30, 2022, all loans were currently performing
and up to date on principal and interest payments.
Impact of Inflation and Changing Prices
The
financial
statements
and
related
data
presented
herein
have
been
prepared
in
conformity
with
GAAP,
which
requires
the
measurement
of the
financial position
and operating
results in
terms of
historical dollars
without considering
changes in
the relative
purchasing power of money over time due to inflation.
Regulatory Developments in Response to Climate Change
Federal
and
state governments
and
government
agencies have
demonstrated
increased attention
to the
impacts and
potential risks
associated
with
climate
change.
For
example,
federal
banking
regulators
are
reviewing
the
implications
of
climate
change
on
the
financial
stability
of
the
United
States
and
the
identification
and
management
by
large
banks
of
climate-related
financial
risks.
In
addition,
the SEC
has proposed
rules that
would
require public
companies
to disclose
certain
climate-related
information,
including
greenhouse
gas
emissions,
climate-related
targets
and
goals,
and
governance
of
climate-related
risks
and
relevant
risk
management
processes.
The
approaches
taken
by
various
governments
and
government
agencies
can
vary
significantly,
evolve
over
time,
and
sometimes conflict. Any current
or future rules, regulations, and
guidance related to climate change
and its impacts could require
us to
change certain of our business
practices, reduce our revenue and
earnings, impose additional costs on
us, or otherwise adversely
affect
our business operations and/or competitive position.
141
BASIS OF
PRESENTATION
The Corporation
has included in
this Form 10-Q the
following
financial
measures that
are not recognized
under GAAP, which are referred
to as non-GAAP
financial
measures:
1.
Net
interest
income,
interest
rate
spread,
and
net
interest
margin
excluding
the
changes
in
the
fair
value
of
derivative
instruments
and
on
a
tax-equivalent
basis
are
reported
in
order
to
provide
to
investors
additional
information
about
the
Corporation’s
net
interest
income
that
management
uses
and
believes
should
facilitate
comparability and
analysis
of
the
periods presented.
The changes in the
fair value of
derivative instruments have
no effect on
interest due or
interest earned on
interest-bearing
liabilities
or
interest-earning
assets,
respectively.
The
tax-equivalent
adjustment
to
net
interest
income
recognizes
the income
tax savings
when comparing
taxable and
tax-exempt
assets and
assumes a
marginal
income tax
rate.
Income
from tax-exempt
earning assets
is increased
by an
amount equivalent
to the
taxes that
would have
been paid
if this
income
had
been
taxable
at
statutory
rates.
Management
believes
that
it
is
a
standard
practice
in
the
banking
industry
to
present net
interest income,
interest rate spread,
and net interest
margin on
a fully tax-equivalent
basis. This
adjustment puts
all earning assets, most notably
tax-exempt securities and tax-exempt
loans, on a common basis that
facilitates comparison of
results to
the results
of peers.
See “Results
of Operations
- Net
Interest
Income”
above for
the table
that reconciles
the net
interest
income
calculated
and
presented
in
accordance
with
GAAP
with
the
non-GAAP
financial
measure
“net
interest
income
on
a
tax-equivalent
basis
and
excluding
valuations.”
The
table
also
reconciles
net
interest
spread
and
margin
calculated and
presented in
accordance with
GAAP with
the non-GAAP
financial measures
“net interest
spread and
margin
on a tax-equivalent basis and excluding valuations.”
2.
The
tangible
common
equity
ratio
and
tangible
book
value
per
common
share
are
non-GAAP
financial
measures
that
management believes
are generally
used by
the financial
community to
evaluate capital
adequacy.
Tangible
common equity
is total
equity
less preferred
equity,
goodwill,
and other
intangibles.
Similarly,
tangible
assets are
total assets
less goodwill
and other
intangibles. Management
and many
stock analysts
use the
tangible common
equity ratio
and tangible
book value
per
common
share
in
conjunction
with
more
traditional
bank
capital
ratios
to
compare
the
capital
adequacy
of
banking
organizations
with
significant
amounts
of
goodwill
or
other
intangible
assets,
typically
stemming
from
the
use
of
the
purchase method
of accounting for
mergers and
acquisitions. Accordingly,
the Corporation
believes that disclosures
of these
financial measures
may be
useful to
investors. Neither
tangible common
equity nor
tangible assets,
or the
related measures,
should be
considered in
isolation or
as a
substitute for
stockholders’
equity,
total assets,
or any
other measure
calculated in
accordance
with
GAAP.
Moreover,
the
manner
in
which
the
Corporation
calculates
its
tangible
common
equity,
tangible
assets, and
any other
related measures
may differ
from that
of other
companies reporting
measures with
similar names.
See
“Risk Management – Capital” above for a reconciliation of the Corporation’s
tangible common equity and tangible assets.
3.
To
supplement
the
Corporation’s
financial
statements
presented
in
accordance
with
GAAP,
the
Corporation
uses,
and
believes that investors would benefit
from disclosure of, non-GAAP financial measures
that reflect adjustments to net income
and non
-interest expenses
to exclude
items that
management
identifies as
Special Items
because management
believes they
are not
reflective of
core operating
performance, are
not expected
to reoccur with
any regularity or
may reoccur
at uncertain
times and in uncertain
amounts.
See “Special Items” above
for non-GAAP financial measures
for the quarter and
nine-month
period ended September 30, 2021 that reflect the described items that were excluded
for one of those reasons.
142
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
For
information
regarding
market
risk
to
which
the
Corporation
is
exposed,
see
the
information
contained
in
Part
I,
Item
2.
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results of
Operations
— Risk
Management”
in
this Quarterly
Report on Form 10-Q.
ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
First
BanCorp.’s
management,
including
its
Chief
Executive
Officer
and
Chief
Financial
Officer,
evaluated
the
effectiveness
of
First
BanCorp.’s
disclosure
controls
and
procedures
(as
defined
in
Rules
13a-15(e)
and
15d-15(e)
under
the
Exchange
Act)
as
of
September 30, 2022.
Based on this evaluation
as of the end
of the period
covered by this Form
10-Q, the Chief
Executive Officer
and
Chief
Financial
Officer
concluded
that
the
Corporation’s
disclosure
controls
and
procedures
were
effective
and
provide
reasonable
assurance
that the
information
required to
be disclosed
by the
Corporation in
reports that
the Corporation
files or
submits under
the
Exchange
Act
is
recorded,
processed,
summarized
and
reported
within
the
time
periods
specified
in
SEC
rules
and
forms
and
is
accumulated
and
reported
to
the
Corporation’s
management,
including
the
Chief
Executive
Office
and
Chief
Financial
Officer,
as
appropriate, to allow timely decisions regarding required disclosures.
Internal Control over Financial Reporting
There have
been no
changes to
the Corporation’s
internal control
over financial
reporting (as
defined in
Rules 13a-15(f)
and 15d-
15(f)
under
the
Exchange
Act)
during
our
most
recent
quarter
ended
September
30,
2022
that
have
materially
affected,
or
are
reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
143
PART II - OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
For a discussion of legal proceedings,
see Note 22 – Regulatory Matters,
Commitments
and Contingencies,
to the Corporation’s unaudited
consolidated
financial
statements
for the
quarter
ended September 30, 2022, which is incorporated by reference in this Item 1.
ITEM 1A.
RISK FACTORS
The Corporation’s
business,
operating
results
and/or the
market price
of our common
stock may
be significantly
affected by
a number of
factors. For a detailed discussion
of certain risk factors that could affect the Corporation’s
future operations,
financial condition
or results
for future
periods are
set forth in
Part I, Item
1A., “Risk
Factors,”
in the 2021
Annual Report
on Form 10-K.
These risk
factors,
and others,
could
cause
actual
results
to
differ
materially from
historical results
or
the
results
contemplated by
the
forward-looking statements
contained in
this report.
Also, refer
to the discussion
in “Forward
Looking Statements”
and Part I, Item
2., “Management’s
Discussion and
Analysis of Financial Condition and Results of Operations,” in this Quarterly Report on Form 10-Q
for additional information that may
supplement
or update
the discussion
of risk
factors in
the 2021
Annual Report
on Form
10-K.
There have
been no
material changes
from those
risk factors
previously disclosed
in Part
I, Item
1A., “Risk
Factors,” in
the 2021
Annual
Report
on
Form
10-K.
Additional
risks
and
uncertainties
that
are
not
currently
known
to
the
Corporation
or
are
currently
deemed
by the
Corporation
to be
immaterial
also may
materially
adversely
affect
the Corporation’s
business, financial
condition
or
results of operations.
144
ITEM 2.
UNREGISTERED
SALES OF
EQUITY SECURITIES
AND USE OF
PROCEEDS
The Corporation
did not
have any
unregistered
sales of
equity
securities
during the
quarter
ended September
30, 2022.
Issuer Purchases
of Equity
Securities
The following table provides information in relation to
the Corporation’s purchases of shares of
its common stock during the
quarter
ended September 30, 2022:
Period
Total Number of Shares
Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar Value
of Shares That May Yet
be
Purchased Under These
Plans or Programs (In
thousands)
(1)
July 1, 2022 - July 31, 2022
3,636,269
$
13.75
3,636,269
$
200,000
August 1, 2022 - August 31, 2022
290,000
14.68
290,000
195,743
September 1, 2022 - September 30, 2022
1,459,588
14.22
1,458,869
175,000
Total
5,385,857
(2)(3)
5,385,138
(1)
As of
September 30,
2022, the
Corporation was
authorized to
purchase up
to $350
million of
the Corporation’s
common stock
under the
stock repurchase
program, that
was publicly
announced
on
April
27,
2022,
of
which
$175.0
million
had
been
utilized.
The
remaining
$175.0
million
in
the
table
represents
the
remaining
amount
authorized
under
the
stock
repurchase program as of September 30, 2022.
The stock repurchase program does not obligate the
Corporation to acquire any specific number of
shares and may be modified, suspended,
or terminated at
any time at
the Corporation's
discretion. Under
the stock repurchase
program, shares
may be repurchased
through open
market purchases,
accelerated share
repurchases
and/or privately negotiated transactions, including under plans
complying with Rule 10b5-1 under the Exchange Act.
(2)
Includes 5,385,138
shares of common stock repurchased in the open market at an
average price of $13.93 for a total purchase price of approximately
$75.0 million.
(3)
Includes 719 shares of common
stock withheld by the Corporation to
cover minimum tax withholding obligations
upon the vesting of restricted stock.
The Corporation intends to continue
to satisfy statutory tax withholding obligations in connection with the
vesting of outstanding restricted stock and performance units
through the withholding of shares.
145
ITEM 6.
EXHIBITS
See the
Exhibit Index
below, which
is incorporated
by reference
herein:
Exhibit Index
10.1
18
Revised Non-Management and Non-Employee Directors of the Board of Directors Compensation Structure
Preferability letter from Crowe, LLP regarding a change in accounting method dated November 8, 2022
31.1
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance
Document, filed
herewith. The
instance document
does not
appear in
the interactive
data file
because its
XBRL
tags are embedded within the inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document,
filed herewith
101.CAL
XBRL Taxonomy Extension Calculation
Linkbase Document, filed herewith
101.DEF
XBRL Taxonomy Extension Definitions
Linkbase Document, filed herewith
101.LAB
XBRL Taxonomy Extension Label Linkbase
Document, filed herewith
101.PRE
XBRL Taxonomy Extension Presentation
Linkbase Document, filed herewith
104
The cover
page of
First BanCorp.
Quarterly Report
on Form 10-Q
for the
quarter ended
September 30,
2022, formatted
in Inline
XBRL (included within the Exhibit 101 attachments)
146
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the
Corporation has duly caused this report to
be signed on
its
behalf by
the undersigned
hereunto
duly authorized:
First BanCorp.
Registrant
Date:
November
8, 2022
By:
/s/ Aurelio
Alemán
Aurelio Alemán
President
and Chief
Executive
Officer
Date: November
8, 2022
By:
/s/ Orlando
Berges
Orlando
Berges
Executive
Vice President
and Chief
Financial
Officer